Foreign Assistance: Selected Donors' Approaches for Managing Aid Programs
(Letter Report, 02/23/95, GAO/NSIAD-95-37).

Congress and the executive branch have been deliberating on how to
reform the U.S. foreign assistance program given the rapidly changing
global environment and recurring management problems. This report
provides information on how six other bilateral donors--Canada, Germany,
Japan, Sweden, the Netherlands, and the United Kingdom--and the European
Union, a multilateral donor, manage their foreign aid programs.  GAO
discusses (1) the difficulty of planning in an uncertain environment,
(2) common structural dilemmas in foreign aid programs, and (3) common
management weaknesses.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  NSIAD-95-37
     TITLE:  Foreign Assistance: Selected Donors' Approaches for 
             Managing Aid Programs
      DATE:  02/23/95
   SUBJECT:  Foreign aid programs
             Foreign governments
             Comparative analysis
             Foreign policies
             Federal aid to foreign countries
             Strategic planning
             Intergovernmental relations
             International cooperation
             Economic development
             International relations
IDENTIFIER:  Canada
             Germany
             Japan
             Sweden
             Netherlands
             United Kingdom
             European Union
             
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Cover
================================================================ COVER


Report to Congressional Committees

February 1995

FOREIGN ASSISTANCE - SELECTED
DONORS' APPROACHES FOR MANAGING
AID PROGRAMS

GAO/NSIAD-95-37

Foreign Assistance


Abbreviations
=============================================================== ABBREV

  BITS - Swedish Agency for International Technical and Economic
     Cooperation
  BMZ - Federal Ministry for Economic Cooperation
  CIDA - Canadian International Development Agency
  DAC - Development Assistance Committee
  GTZ - German Agency for Technical Cooperation
  JICA - Japan International Cooperation Agency
  KfW - The Reconstruction Loan Corporation
  NGO - nongovernmental organization
  ODA - Official Development Assistance
  OECD - Organization for Economic Cooperation and Development
  OECF - Overseas Economic Cooperation Fund
  SIDA - Swedish Agency for International Development
  USAID - U.S.  Agency for International Development

Letter
=============================================================== LETTER


B-259004

February 23, 1995

The Honorable Jesse A.  Helms, Chairman
The Honorable Claiborne Pell
Ranking Minority Member
Committee on Foreign Relations
United States Senate

The Honorable Mitch McConnell, Chairman
The Honorable Patrick J.  Leahy
Ranking Minority Member
Subcommittee on Foreign Operations
Committee on Appropriations
United States Senate

The Honorable Benjamin A.  Gilman, Chairman
The Honorable Lee H.  Hamilton
Ranking Minority Member
Committee on International Relations
House of Representatives

The Honorable Sonny Callahan, Chairman
The Honorable Charles Wilson
Ranking Minority Member
Subcommittee on Foreign Operations,
 Export Financing and Related Programs
Committee on Appropriations
House of Representatives

The Congress and the executive branch have been deliberating how to
reform the U.S.  foreign assistance program in light of the rapidly
changing global environment and recurring management problems.  The
purpose of this report is to provide U.S.  decisionmakers information
about how six other bilateral donors (Canada, Germany, Japan, Sweden,
the Netherlands, and the United Kingdom) and the European Union, a
multilateral donor, manage their foreign aid programs.  Specifically,
the report deals with the issues of (1) the difficulty of planning in
an uncertain environment, (2) common structural dilemmas in foreign
aid programs, and (3) common management weaknesses. 


   BACKGROUND
------------------------------------------------------------ Letter :1

The Congress and the executive branch have indicated that the U.S. 
Agency for International Development (USAID), the primary agency for
providing foreign economic assistance, and its program need to be
reformed.  They agreed that the objectives of the United States were
outdated and that the management of the program had been inadequate
(e.g., the lack of central direction, inadequate management controls,
and poor personnel practices).  As part of this reform effort, in
1994, the President sent to the Congress a legislative proposal
entitled "Peace, Prosperity, and Democracy Act," which would have
repealed most of the 1961 authorizing legislation\1 and formed a new
basis for a restructured U.S.  aid program.  The proposed legislation
was not enacted by the
103rd Congress. 

Recognizing the need for proactive change to address the concerns of
USAID's critics, the USAID Administrator declared the agency a
reinvention laboratory under the President's National Performance
Review.\2 In doing so, the Administrator committed the entire agency
to rethink, streamline, and improve its operations. 


--------------------
\1 The Foreign Assistance Act of 1961, as amended, establishes the
legal framework for the U.S.  aid program. 

\2 The National Performance Review is a governmentwide management
reform exercise initiated by the administration under the leadership
of the vice president. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :2

All six governments and the European Union, to varying degrees, have
begun reexamining their foreign aid programs for many of the same
reasons as the United States.  These reasons are the need to reassess
the rationale of post-Cold War aid programs; increased demands for
aid, including those from former communist countries in Eastern
Europe and the former Soviet Union that currently are considered
transitional, not developing countries; diminished financial or staff
resources; charges of mismanagement; and, except for Japan,
diminishing public support.  The experiences of the seven donors we
studied offer the following insights: 

The desired balance among the commercial, security, and development
objectives of a foreign assistance program is ultimately a political
decision that will involve government bodies other than aid agencies
and will need to be revisited as conditions change. 

While strategic planning can be a useful internal management tool, as
shown by the Canadians, its effectiveness would be greatly enhanced
if policymakers addressed the desired balance among multiple
objectives through a central, broad-based, and integrated foreign
policy. 

Supporting commercial self-interests continues to be an important
objective of donors' foreign aid programs, in spite of an
Organization for Economic Cooperation and Development (OECD)
agreement to restrict the use of trade-distorting tied aid--an
agreement initiated by the United States.\3

Devising effective intragovernmental coordination systems that strive
for an integrated, coherent policy, acceptable governmentwide, may be
a more critical factor in aid effectiveness than the organizational
placement of aid agencies because all of the donors' lead aid
agencies, including those with cabinet status, lack the political
clout of foreign, trade, and finance ministries. 

The growing complexity of aid programs and the proliferation of
agencies involved, as seen most recently in the aid programs of
Sweden, the European Union, the United Kingdom, and Germany, further
reinforces the need for central policy-setting and interagency
coordination systems.\4

While several of the donor officials we talked with acknowledged some
operational advantages of USAID's vast network of overseas offices,
all seven of the donors we studied have pragmatically targeted their
overseas presence based on the type of program and recipient, their
overall foreign policy interests, and the budgetary resources
available to staff and support these offices. 

The governments of Canada, the Netherlands, Sweden, and the United
Kingdom recognize that the changing role of aid agencies from
implementers to brokers of development assistance requires new
approaches for accountability, program management, performance
measurement, and personnel management. 

A commonality of management weaknesses exists among most of the aid
agencies in the countries we studied. 


--------------------
\3 OECD was established in 1961 to promote economic growth and world
trade among member states as well as nonmember states.  The
Development Assistance Committee (DAC), one of a number of
specialized committees, was set up by OECD to increase the flow of
financial resources to developing countries and to establish common
guidelines for implementing the aid programs. 

\4 Sweden, for example, has four different agencies, each of which
specialize in providing one of the following:  (1) development
assistance to a select group of countries with which the donor has a
long-term relationship; (2) aid to commercial and industrial sectors
in developing countries; (3) technical cooperation, concessionary
credits, and training; and (4) research cooperation between Sweden
and developing countries. 


   AID PLANNING IN AN UNCERTAIN
   ENVIRONMENT
------------------------------------------------------------ Letter :3

The worldwide recession, growing deficits, and the resulting budget
cuts force most donors to make choices among aid programs and
recipients.  This has reinforced the donors' realization that careful
planning is becoming increasingly important.  Aid agencies must
balance their governments' development assistance goals with newer
foreign aid goals associated with the environment, U.N. 
peacekeeping, and democracy.  The balancing of these goals is then
weighed against their governments' self-interests and domestic needs,
placing additional pressure on declining aid budgets.  In recognition
of this dynamic environment, aid agencies are attempting to improve
planning procedures. 

Until recently, linking development assistance plans to budgets was
relatively easy for most donors.  Program- and country-level funding
was based on incremental changes to the previous year's budget, while
funding for new recipients and programs was added to the budget. 
Now, most donors are struggling with addressing new demands--
including those from middle to upper income countries in Europe
moving away from communism--with stable or declining aid budgets. 
Aid agencies have initiated the following mechanisms to manage
conflict and competition over limited aid resources: 

Establish criteria upon which to base decisions on country allocation
of development assistance funds (Canada, Germany, Japan, Sweden, and
the Netherlands). 

Structure budget allocations by region to eliminate the sense of
recipient entitlement (Canada, Sweden, and the Netherlands). 

Target assistance based on type of program and income-level of
recipient (Germany, Japan, Sweden, and the United Kingdom). 

Lead aid agencies in Canada, and aid-associated, for-profit companies
owned by the German and British governments, are adopting
corporate-style strategic planning as a way to better cope with the
dynamic environment.  Although strategic planning was viewed as a
valuable management tool by Canadian officials, their experience
indicates that planning must be balanced by realistic projections of
operating budgets and that a policy framework is needed for
agency-level strategic planning.  See appendix I for a more detailed
discussion of the planning aspects of other donors' aid programs. 


   FOUR COMMON STRUCTURAL DILEMMAS
   IN AID PROGRAMS
------------------------------------------------------------ Letter :4

The seven aid donors we studied use a variety of organizational
structures for implementing their foreign aid programs.  Tasks, such
as policy-setting, implementation, and monitoring, are distributed
differently.  Regardless of the approach, however, most donor
governments are struggling with organizational dilemmas that are
similar to those facing the U.S.  program:  (1) ensuring coordination
and relieving organizational tension among government agencies,
particularly aid agencies and foreign ministries, caused by
overlapping jurisdictions and conflicts over aid priorities; (2)
increasing institutional specialization as new development problems
or functions are turned over to newly created aid agencies; (3)
determining the most efficient and effective approaches for
in-country representation; and (4) determining how much
implementation of development activities should be carried out by
nongovernment personnel. 

The aid programs we studied generally involve agreements between
sovereign nations; that is, between the donor nation and the
recipient.  However, within the donor nation, several ministries,
sometimes with conflicting views on aid priorities, share in aid
decision-making.  Debates over the most appropriate organizational
placement of aid agencies often mirror debates over aid priorities. 
However, the experiences of Germany, the Netherlands, Sweden, and the
United Kingdom indicate that structural realignment is not a panacea
for relieving organizational antagonism over aid objectives. 
Officials in these countries and other sources indicate that a
governmentwide development strategy, coupled with effective
coordination systems, was needed.  They pointed out that even
cabinet-level status for their respective aid agencies carried little
weight within the national government hierarchy.  The growing number
of specialized aid agencies and the resulting decline in the
influence of a lead aid agency underscore the need for establishing
governmentwide strategies for development assistance. 

Officials we spoke with from seven donors we studied had some type of
representation in recipient countries, but none were as decentralized
as USAID or delegated as much management discretion to field
officers.  Most donor officials acknowledged the advantages of
USAID's overseas network, but, as a way to control the cost of
overseas operations, their governments provided different types of
field representation based on program characteristics and ties with
the recipient.  For example, (1) Canada, the European Union, the
Netherlands, Sweden, and the United Kingdom concentrate development
assistance staff in a few select target countries; (2) Canada, the
Netherlands, and Sweden use locally stationed diplomatic personnel in
all but major recipient countries as development liaisons; (3)
Germany's and Japan's development liaison efforts are typically
undertaken by aid staff temporarily assigned to diplomatic missions
or by locally stationed diplomatic personnel; (4) the United
Kingdom's development liaison efforts are carried out through
diplomatic missions, with regional offices providing technical
support; and (5) Japan and the United Kingdom use visiting missions
from headquarters to perform development-related tasks, such as data
collection and project appraisals, in recipient countries. 

We found no consensus among the seven donors on how much, to whom, or
what to decentralize.  Canada, for example, has retreated from its
recent attempt to decentralize operations because of the high cost. 
The United Kingdom's primary aid agency is currently reviewing its
operations to determine whether tasks should be located at
headquarters or in-country.  The Dutch are attempting to increase
both the number of staff members in recipient countries as well as
their decision-making authority. 

All seven donors are increasingly using contractors and
nongovernmental organizations (NGO) to implement development
assistance activities and augment their in-country presence. 
However, the donors generally lacked a structure to successfully
manage these relationships.  Our analysis of the work of public
administration experts indicates that increasing the role of
contractors and NGOs--such as using NGOs to oversee program
implementation carried out by other NGOs--calls for a recognition
among policymakers of the risks and trade-offs associated with
third-party implementation.\5

For example, a trade-off typically exists between the amount of risk
that governments will tolerate and the amount they are willing to
invest in management systems to monitor costs.  These investments may
make contractor and NGO partnerships more expensive, at least in the
short-term, than direct agency implementation.  Donor officials and
other sources also indicated that aid agencies do not have staff
members with the skills needed to determine what to finance and to
evaluate the actual delivery against what was promised.  Appendix II
presents more information about issues related to the organizational
structures of the various donors. 


--------------------
\5 See John J.  DiIulio, Jr., Gerald Garvey, and Donald F.  Kettl,
Improving Government Performance:  An Owner's Manual (The Brookings
Institution, Washington, D.C., 1993) and Donald F.  Kettl, Sharing
Power:  Public Governance and Private Markets (The Brookings
Institution, Washington, D.C., 1993). 


   COMMONALITY OF MANAGEMENT
   WEAKNESSES
------------------------------------------------------------ Letter :5

The degree to which governments engage in self-assessment of program
management and disseminate the results varies greatly.  However,
donors have reported long-standing problems with inadequate
administrative capacity among aid agencies.  Since the Cold War no
longer provides an overriding political rationale for foreign aid,
addressing management problems takes on a new urgency now that
politicians and the general public are looking for greater evidence
of development results.  The lack of criteria for measuring project
and program results, preoccupation with formulating new projects, and
inadequate monitoring of program and project implementation were
consistently cited as problems among the donors. 

Other donors echoed USAID's complaint that rapid expansion of
programming and management requirements during the 1970s and 1980s
without a corresponding increase in staff created many of their
effectiveness problems.  Aid, audit, and evaluation officials have
repeatedly raised the issue that the organizational culture (i.e.,
the underlying assumptions, beliefs, values, attitudes, and
expectations) within aid agencies has not reinforced good management
practices.  Consequently, increasing staff levels without undertaking
the arduous, long-term task of changing the way staff view their jobs
was unlikely to improve overall management. 

In Canada, Sweden, and the United Kingdom, aid agencies are using a
combination of techniques designed to improve overall management. 
They are providing training relevant to new roles and missions,
creating integrated management information systems, and changing
their reward systems to reinforce new behaviors among staff. 
However, officials in these countries indicated that operating
expense reductions must be balanced with program reductions if
management efficiencies are to be realized. 

As part of governmentwide public administration reforms, aid agencies
in Canada, Sweden, and the United Kingdom have recently begun to
develop results-oriented evaluation systems.  These systems are
expected to offer the agencies the opportunity to experiment with new
development assistance theories and delivery approaches, while
providing policymakers better assurances that final decisions will be
based on what actually works.  In the Netherlands, we were told that
the aid agency was exempt from the governmentwide requirement to
focus programs on results because of the difficulty of determining an
individual donor's impact on macroeconomic changes within a recipient
country.  A further discussion of common management weaknesses is
presented in appendix III. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :6

The seven donors--Canada, the European Union, Germany, Japan, the
Netherlands, Sweden, and the United Kingdom--were selected for this
study because they are major contributors of official development
assistance.  Together, these donors accounted for over 80 percent of
the total official development assistance disbursed in 1992,
including their contributions to the United Nations and the World
Bank.  In comparison, the United States provided about 20 percent of
total official development assistance disbursed in 1992. 
Furthermore, we had indications that their governments were
proposing, or had implemented, actions designed to address many of
the same issues facing USAID. 

In Washington, D.C., we interviewed pertinent embassy officials of
the seven donors, officials at USAID and the Department of State, and
experts in the international community.  We gathered general
information on managerial initiatives in the public sector through
literature searches of academic studies, consulting and research
firms, and GAO publications.  During our field work, we interviewed
donor representatives to OECD and officials from the Development
Assistance Committee's Secretariat in Paris, France.  We also
interviewed officials representing the governments or aid
stakeholders in each of the donor countries except Japan.  These
officials included those from the primary aid agencies, foreign
ministries, audit organizations, academia, and nongovernmental
officials.  In the case of Japan, we interviewed officials at the
Japanese Embassy in Washington, D.C.  In addition, we reviewed and
analyzed current OECD reports, assessments, and other documents,
including evaluation, policy, and management reports of the seven
donors. 

Officials we spoke with from all the donor countries and the European
Union were exceedingly supportive of our study; however, the extent
to which government information was accessible varied.  Sweden, for
example, frequently publishes management and program reviews in
English to ensure a wider distribution.  The information contained in
this study on management problems and solutions is based on the
self-reporting of the respective governments and on academic studies
undertaken in the United States and in Europe.  We did not evaluate
the quality of reforms undertaken by these donors, nor did we draw
specific conclusions about the status of these reforms. 

We conducted our study from March 1993 through August 1994 in
accordance with generally accepted government auditing standards. 
Since our study did not directly address the U.S.  aid program, we
did not obtain written agency comments.  However, we submitted this
report to officials from USAID's Office of Donor Coordination and
they had no

Please call me on (202) 512-4128 if you or your staff have questions
on this report.  Major contributors are listed in appendix IV. 

Harold J.  Johnson, Director
International Affairs Issues


AID PLANNING IN AN UNCERTAIN
ENVIRONMENT
=========================================================== Appendix I

Some foreign aid proponents argue that the moral case for aid has
remained unchanged; however, the commonly accepted political case
ended with the Cold War and the economic case is being increasingly
challenged.  As aid agencies struggle to demonstrate the benefits of
their programs to both recipient and donor, recent events, such as
diplomatic breakthroughs in the Middle East and South Africa, further
change the political environment associated with development
assistance within national governments and the international donor
community.  In recognition of this dynamic environment, aid agencies
are attempting to plan reforms that generally fall within one of two
categories.  The first category centers around improving forward
planning of the budget process by developing mechanisms to
rationalize country allocation decisions, focus programs, and reduce
the administrative burden of aid programs.  The second, which
frequently includes elements of the first, focuses on adapting
corporate-style strategic planning procedures to the public sector. 

Although a perception exists among some analysts that the end of the
Cold War and the dissolution of the former Soviet Union provide
donors the opportunity to focus primarily on the development aspects
of foreign assistance, aid agencies continue to face the need to
balance aid objectives with the self- interests of their governments. 
The continuing tug-of-war over aid goals is becoming more complicated
as most aid agencies try to manage multiple and growing demands with
diminishing resources.  For example, while using aid to promote a
donor's exports was viewed by development experts and economists as
not the most effective form of assistance to the recipient, aid
officials feel compelled to demonstrate how domestic industry
benefits from their programs.  This pressure is likely to increase
if, as predicted by many foreign policy experts, competition over
trade replaces military conflict as the greatest threat to
international cooperation. 


   MEETING THE CHALLENGES OF A
   DYNAMIC ENVIRONMENT THROUGH NEW
   AID STRATEGIES
--------------------------------------------------------- Appendix I:1

For the last 40 years, one of the rationales for providing
development assistance was to contain communism.  The Netherlands,
for example, targeted development assistance to counter the actions
of the two super powers.  In the late 1980s, the status quo within
the international donor community was jolted by the collapse of
communism in the former Soviet Union and its satellite countries.  As
a result, Cold War geopolitics no longer provided a rationale for why
aid to developing countries benefited a donor.  Former communist
adversaries became new claimants for the shrinking bilateral aid
funding levels of most Western donors. 

Concessional assistance to Central and Eastern Europe and the
countries of the former Soviet Union\1 is not considered to be
official development assistance by the Development Assistance
Committee (DAC).\2 In part, this is because countries in this region
are not among the current list of DAC recipients and some of them are
middle-income countries, which fall outside DAC's definition of
"developing countries." However, proposals to establish more
inclusive DAC definitions of "official development assistance" and
"developing countries" are politically sensitive.\3

Supporters of traditional aid programs are concerned that including
aid to the former communist countries in Europe under the rubric of
development assistance will result in a shift of emphasis from
traditional aid recipients, particularly those in Sub-Sahara Africa. 
According to U.S.  officials, some East European countries also
resist being designated as developing countries.  The U.S.  position
is that all aid that meets the criteria of concessionality and
development motivation to any, and all, countries should be counted
as official development assistance and that DAC should not try to
establish a definition for developing countries.  At the time of our
field work, a Japanese official stated that opinions within the
international development community seemed to be moving in the
direction of a more inclusive definition of official development
assistance. 

This change in opinion may reflect the shifting of U.S.  and European
national security interests from developing nations--the former
outposts of the Cold War--to the former communist countries in
Eastern and Central Europe and the former Soviet Union.  U.S. 
officials from both the executive and legislative branches have
stressed the national security importance of this region's successful
transition to market economies within democratic systems.  In
addition to viewing this assistance as being a high security priority
for the continent, West European officials have emphasized that the
collapse of communism resulted in the reunification of Europe, which
had been artificially divided by communism. 

Further challenging the development assistance status quo is the
growing skepticism over the validity of development assistance as an
engine of economic growth and, therefore, as a benefit to the
recipient.  The Dutch ambassador to OECD told us that industrialized
nations are wasting their money on foreign aid.  In his view, what
the developing world needs most from the industrialized nations are
trading opportunities, not aid.  The World Bank's chief economist for
Asia made similar observations about aid programs.  He is quoted as
saying that if trade protections were halved, the resulting increase
in exports from developing countries would equal the net aid these
countries currently receive--about $50 billion.  According to a
Swedish official, an evaluation funded by the Swedish government
found its African assistance program had little positive impact after
over 30 years of development activity.  We were also told that a
self-evaluation conducted by four Dutch nongovernmental organizations
(NGOs) concluded that the impact of their development activities had
been marginal at best. 

Other departures from the development assistance status quo include
the following: 

The U.S.  share of the world's development assistance has steadily
declined from almost 60 percent in 1960 to approximately 20 percent
today. 

Japan, once an aid recipient, has provided volumes of aid on par with
the United States since the late 1980s. 

The signing of the Maastricht Treaty established, in principle, the
concept of a political union, implying a common foreign and security
policy. 

Erupting ethnic conflict in many areas of the world resulted in the
expanding peacekeeping role of the United Nations. 

The reunification of Germany and diplomatic breakthroughs in the
Middle East and South Africa occurred. 

The timing of these historical events with a worldwide recession,
rising unemployment, and growing need for debt reduction created
fiscal constraints on most donor governments. 

Since a critical component of planning--whether budgetary or
strategic--is establishing a clear policy direction, all the donors
in our study have revised, or are reviewing, development strategies
to update and clarify policy direction.  In 1992, Japan's Cabinet
approved, for the first time, an aid charter that stated its overall
policies.  Canada and the Netherlands recently issued new development
assistance charters, while the European Union articulated its revised
aid policy through the negotiation and ratification of new trade and
development protocols and the development of new regional strategies. 

In the last few years, the concept of sustainable development has
emerged within the international donor community.  Sustainable
development strategies typically contain three types of objectives: 
(1) economic goals that include encouraging economic growth with
equity and improving the efficiency of development aid; (2) social
goals that address enhancing participation, strengthening democracy,
promoting women in development, and encouraging institutional and
human resources development; and (3) environmental goals that include
controlling population growth and protecting biodiversity.  Adopting
sustainable development, however, has meant that donors have added
new objectives to existing objectives, placing further pressure on
fixed or declining aid budgets. 


--------------------
\1 Most assistance to Central and Eastern Europe and the countries of
the former Soviet Union has been in the form of financing mechanisms,
such as loans and trade credits. 

\2 DAC, one of several specialized committees of the international
Organization for Economic Cooperation and Development (OECD), was
established to increase the flow of financial resources to developing
countries and to improve their effectiveness. 

\3 These definitions are important because they form the basis for
the international comparison of bilateral aid efforts, for explaining
basic aid rationales, and for judging the quality of bilateral
development assistance. 


      MANAGING CONFLICT AND
      COMPETITION THROUGH
      BUDGETARY PLANNING REFORMS
------------------------------------------------------- Appendix I:1.1

The majority of aid agencies for the seven donors we studied have
initiated various mechanisms to manage conflict and competition over
limited financial and operational resources.  In the days of
expanding aid budgets, we were told that bilateral donors largely
based country allocation decisions on incremental changes to the
previous year's funding level and dealt with new recipients through
add-ons to the program.  Declining aid budgets and rapid expansion in
the number of recipients, however, have forced many donors into
difficult decisions over which programs to fund and then defending
the appropriateness of these decisions.  In response, aid agencies
have developed a number of strategies to rationalize country
allocation systems, focus aid programs, and reduce the administrative
burden of traditional bilateral country programs. 

The aid agencies of Canada, Germany, the Netherlands, Sweden, and
Japan have established criteria to ensure recipient selection is
consistent with their respective development priorities (see table
I.1).  The criteria are generally based on a combination of (1)
recipient need, as defined by such indicators as income level,
agricultural production, and population growth rates and (2)
recipient performance in terms of democracy, respect for human
rights, development of free markets, and level of military
expenditures.  The assumption behind development criteria is that the
overall effectiveness of economic assistance will be increased by
tying country allocations to the economic, social, and political
conditions within the recipient country that development experts
believe are critical to the success of economic development
activities.  If the recipient government is unable or unwilling to
address the conditions that impede development, then aid agencies can
channel their resources to other countries where these resources will
be better used. 



                          Table I.1
           
            Comparison of Number of Recipients and
                   Aid Allocation Criteria

           Number of  Number of  Number of  Country
           recipient  program    program    allocation
Donor      countries  countries  regions    criteria
---------  ---------  ---------  ---------  ----------------
                                            ï¿½ Need
                                            ï¿½ Commitment and
                                            capacity to
                                            manage aid
                                            effectively
                                            ï¿½ Quality of
                                            social and
                                            economic
                                            policies
                                 1          ï¿½ Human rights
                                 (Plans     record
                                 to         ï¿½ Popular
                                 create     participation
                                 other      ï¿½ Market-
Canada     107        30\a       program    oriented
                                 regions)   economies
                                            ï¿½ Environmental
                                            conservation
                                            ï¿½ Political and
                                            economic
                                            relationship
                                            with recipient

                                            ï¿½ Human rights
                                            ï¿½ Democracy
                                            ï¿½ Legal
                                            certainty
                                            ï¿½ Economic and
                                            social order
                                            ï¿½ Development
Germany    113        n/a        n/a        orientation of
                                            state action

                                            ï¿½ Military
                                            expenditures
                                            ï¿½ Democracy and
                                            market-based
                                            economies
                                            ï¿½ Basic human
Japan      117        n/a        n/a        rights
                                            ï¿½ Social and
                                            economic need

                                            ï¿½ Need based on
                                            UNDP\b poverty
                                            indicators
                                            ï¿½ Historical
                                            relationships
                                            ï¿½ Economic and
                                            socipolitical
                                            policy
                                            performance
                                            ï¿½ Environment
Netherlan  96         3          8          ï¿½ Women-in-
ds                                          development

                                            ï¿½ Human rights,
                                            democracy, and
                                            equal
                                            opportunities
                                            ï¿½ Development of
Sweden     68         19         n/a        market economy
                                            ï¿½ Aid
                                            effectiveness

                                            ï¿½ Need
                                            ï¿½ Commonwealth
                                            countries
                                            ï¿½ Absorptive
                                            capacity
                                            ï¿½ Economic and
                                            social policies
                                            ï¿½ Human rights
United     114        n/a        n/a        ï¿½ Accountable
Kingdom                                     government

                                            ï¿½ Degree of
                                            recipient's
                                            association with
                                            Union members
                                            (historical
                                            links, aid-
                                            trade framework
European   121        n/a        3          agreements,
Union                                       other commercial
                                            interests, and
                                            security
                                            concerns)
------------------------------------------------------------
Source:  Compiled by GAO based on donor-provided data. 

\a Canada's policy is to have 30 priority countries; however, the aid
agency has had difficulty staying within this threshold. 

\b U.N.  Development Program. 

As shown in table I.1, another allocation method that some donors use
to better focus economic assistance is initiating special
relationships with certain countries--that is, establishing "program
countries."\4 For example, Sweden and the Netherlands have 19 and 3
program countries, respectively.  The Swedish government has taken
the additional step of assigning organizational responsibilities for
program and nonprogram countries functionally to different agencies. 
To illustrate, the primary aid agency is responsible for traditional
development assistance to program countries and special programs such
as emergency and balance-of-payment support, while one of two
agencies is assigned responsibility for nonprogram countries and
trade-oriented aid to program countries, based on whether the
assistance is for technical cooperation and concessionary credits or
for commercial and industrial sector activities. 

While a Swedish report concluded that the Swedish organizational
structure is unique, the German and British governments also envision
categorizing aid recipients and their corresponding aid programs into
functional categories based on their levels of development.  For
example, the British aid agency suggests that the role and future of
aid is changing, based on three categories of recipients.  The
categories are (1) trade and investment promotion programs for
recipients with prospects of becoming aid graduates; (2) traditional
economic development programs for countries lacking capital
investment, appropriate human skills, and a conducive policy
environment needed to take advantage of a good resource base; and (3)
humanitarian relief for recipients that are in such severe difficulty
(population growth, resource impoverishment, and climatic change)
that aid is a permanent subsidy. 

Although concentration on a region or a cluster of countries has been
a common practice, many donors, to some extent, have structured their
internal organizational structures and planning procedures to promote
a regional perspective and to meet a number of programming and
operational goals.  The Netherlands, for example, switched from
maintaining bilateral relationships with almost 100 countries to
placing all nonprogram countries into 8 regional programs.  Under
Dutch regional programs, each region receives a fixed allocation, but
the recipients within the region do not.  Dutch documents and OECD
officials stated that this system gives them more political and
budgetary flexibility.  They can more easily shift funds within each
region because a sense of entitlement is not created as it is with
recipients of country-specific programs and funding ceilings. 
Recipients within each region compete for project or program funding
and their success is dependent on the quality of project/program
designs.  According to an OECD official, Canada also established a
Southern Africa regional program and adopted a regional focus in
Africa as a whole.  In addition to increased flexibility, OECD
officials stated that operational costs for the aid agency were
reduced by shifting to a regional approach. 

The Canadian, German, and Swedish aid agencies seek to improve the
annual planning and budgeting cycles by focusing on a recipient
country, rather than on individual projects or sectors.\5 Moreover,
the Canadian aid agency reported that its newly created Country
Policy Frameworks increase coordination not only within the agency
but also with recipient countries, NGOs, the private sector, and
other donors.  In Sweden, country-level analyses of special program
funds, which were outside the bilateral country programs approved by
Parliament, are being developed by the foreign ministry.  Parliament
sought to become involved in these country allocation decisions
because the financing of special funds exceeded that of bilateral
programs in the late 1980s. 

Other types of budgetary planning improvements are also being
implemented.  The British aid agency is revising its annual planning
cycle to set out in one document the link between program and
operating cost estimates.  It is hoped this change will enable the
agency to address its priorities within available operating funding. 
The aid agency in Canada is also trying to increase both the quality
and quantity of information submitted to parliament and the general
public. 


--------------------
\4 Selecting "program countries," or establishing special, long-term
relationships with a recipient, should not be confused with
developing "country strategies" or articulating the types of
development activities to be undertaken within any recipient country. 

\5 The U.S.  Agency for International Development (USAID) also seeks
to improve planning and budgeting by focusing on the country as the
unit of analysis.  For example, USAID's annual budget process will
reflect programming decisions made by mission officials that are
based on country-level objectives tied to performance indicators. 


   ADAPTING STRATEGIC MANAGEMENT
   TO THE PUBLIC SECTOR
--------------------------------------------------------- Appendix I:2

Some aid agencies and associated public companies in Canada, Germany,
and the United Kingdom are adapting corporate strategic planning
concepts to the public sector.\6 The key distinctions between
strategic planning and traditional planning are emphasis on action;
consideration of a broad and diverse set of interested parties
(stakeholders); and attention to external opportunities and threats,
internal strengths and weaknesses, and actual or potential
competitors.  Figure I.1 depicts a generic framework of the strategic
management process. 

   Figure I.1:  Strategic Planning
   Model

   (See figure in printed
   edition.)

Source:  GAO. 

In the early 1990s, the Canadian aid agency undertook perhaps the
most extensive strategic management review of any of the donors we
studied.  The agency assessed its ability to meet future challenges
and recommended ways to improve its management practices and
philosophy.  It also investigated and tested various options for most
effectively fulfilling its mandate in the face of drastic changes. 

The Canadian aid agency's experience with strategic planning,
however, indicates the importance of following through with key
elements of the strategic management framework.  As part of the
review, Canadian aid officials assessed the efficiency and
cost-effectiveness of the agency's recently decentralized operation
(1988), which was modeled after USAID's overseas mission structure. 
Although the review was supportive of the success of the
decentralization, it noted that the labor-intensive and high-cost
nature of this model led the agency to reassess the decentralization. 
As a result, the agency had to return to centralize operations in
less than 4 years because it did not have a sufficient budget to
maintain an intensive network of offices. 

Although Canadian aid officials presented the results of the
strategic management review as well as other background material to
the central government, only recently with a change in governments
were they able to get foreign policymakers to set in motion the
policy review they believed was needed to provide a framework for
reform.  In 1993, the Canadian foreign ministry, outside the aid
agency's strategic management process, directed significant shifts in
Canadian aid policy without consultation.  According to a Canadian
official, a debate erupted when the policy revision was leaked to the
press, forcing the government to retract the policy and to promise a
full public consultation on aid policy before contemplating any more
changes. 

The Canadian aid agency's 1994-95 renewal plan includes a strategy
for improving relations with stakeholders and the public through the
development of a strategic communication plan.  The agency plans, for
example, to conduct attitude and opinion research with general and
special target groups.  A survey was to be undertaken in early 1994
to obtain the views of stakeholders as to improvements in the process
and substance of agency consultations.  This survey will be repeated
in 1995. 

The German Agency for Technical Cooperation (GTZ) and the British
Crown Agents, two public entities that administer development
assistance activities and contracts, are considered for-profit
operations by their governments.  According to GTZ officials, the use
of strategic planning by these two entities has lead to innovative
approaches, such as establishing a commercial partnership between the
two companies.  During its strategic planning exercise, for example,
German officials stated that the German technical cooperation company
focused on redefining its corporate identity, rather than on its
current identity as an implementer of German technical cooperation. 

A key strategic issue identified during this strategic planning
process was the increasingly important role of international
organizations in designing and financing development assistance
cooperation activities at the expense of certain bilateral programs,
including that of Germany.  We were told that management realized the
difficulty the German company would have competing for increasingly
restricted budget resources with other government programs.  The
result was a business plan to expand its market to include other
donors.  The company was able to negotiate with the cognizant
parliamentary committees and its supervisory board to allow it to
follow an independent course.  In the spring of 1993, the German
company opened an office in Brussels, indicating the increasingly
important role the development cooperation activities of the European
Union are expected to play in the company's future. 

The British Crown Agents is also on its way to meeting its key
strategic objective of income diversification.  According to a
British report, the impact of British aid funding reductions on the
company has been reduced by its contracting for the development work
of other donors, including the World Bank, the European Union, and
the Japanese and Dutch governments.\7


--------------------
\6 USAID is in the process of implementing a strategic management
process as recommended by GAO in AID Management:  Strategic
Management Can Help AID Face Current and Future Challenges
(GAO/NSIAD-92-100, Mar.  6, 1992). 

\7 Annual Report and Accounts, 1992 (Crown Agents for Oversea
Governments and Administrations, n.d.). 


   THREATS AND OPPORTUNITIES FOR
   AID AGENCIES
--------------------------------------------------------- Appendix I:3

Although aid agencies face multiple threats and opportunities, two
stand out as being particularly relevant to the U.S.  debate over
development assistance policy.  First, commercial self-interest
appears to be replacing security goals as the most important
rationale for aid programs.\8 The most common argument given for
using foreign assistance to promote donor exports is that it will win
political support for aid programs by demonstrating a direct benefit
to the donor's economy.  Second, aid programs have been, and will
remain, a tool of foreign policy.  Consequently, most aid agencies
find it just as difficult to change existing country allocation
decisions based on development criteria as they did during the Cold
War era. 


--------------------
\8 See International Trade:  Competitors Tied Aid Practices Affect
U.S.  Exports (GAO/GGD-94-81, May 25, 1994). 


      CONTINUING IMPORTANCE OF
      COMMERCIAL PAYOFFS IS LIKELY
------------------------------------------------------- Appendix I:3.1

Donors included in our study place more weight on commercial
objectives than does the United States.  Some development experts
assert that the U.S.  program has had a relative lack of emphasis on
the commercial payoffs of assistance.  In fact, the United States
motivated OECD to establish restrictions and guidelines on the tying
of aid for commercial advantage.\9 Although the amounts of official
tied aid reported to DAC have been declining, it is possible that the
reported levels do not represent the full scope of bilateral donors'
tying of assistance.  Many experts have stated that economic
assistance may remain effectively tied (informally tied) by (1)
controlling the choice of programs and projects, or commodities and
services, where the donor's businesses have a comparative advantage;
(2) creating procurement procedures that make it difficult for
nondonor country firms to compete; (3) funding feasibility studies
and joint ventures that establish conditions favorable to the donor's
business community; and (4) using business employees in an official
capacity for short-term assignments, as is reportedly occurring in
Japan, who can then advance projects beneficial for their firms. 

Anecdotal evidence provides numerous examples of the use of
informally tied aid.  Although Japan reports the lowest amount of
officially tied aid, Japanese trading houses and consulting firms
often play a leading role in helping developing countries identify
potential aid projects.  According to some experts, since the
specifications are developed by Japanese firms, these firms have a
clear advantage when bidding for projects.  Other donors, such as
Canada, are also encouraging their private sector to become involved
in aid programs by establishing contacts with domestic companies in
various industrial sectors and funding exploratory, feasibility, and
project investment studies for these companies.  The Canadian aid
agency has also set up a Business Cooperation Branch to facilitate
the private sector's role in development.  To further illustrate, an
OECD review stated that it was not clear if the Dutch reporting on
procurement tying for technical assistance corresponded to the letter
and spirit of the definition agreed to by OECD members.\10

In Sweden, a proponent of development aid for its own sake, a study
was published that claimed a fair amount of informal tying by the
Swedish government.\11 For example, projects have often been chosen
in sectors where Swedish exports are competitive (telecommunications,
water supply, hydroelectric power).  Other forms of informally tied
aid were (1) ensuring compatibility of project specifications and
Swedish export supply, (2) reducing the level of open competitive
bidding, (3) establishing special projects outside country programs
that were used to direct funding toward developing Swedish
technology, and (4) establishing procurement courses for officials of
recipient countries and funding study tours to inform them as to what
the Swedish market could supply. 

According to the President's Commission on the Management of A.I.D. 
Programs, Germany provides another variation of informally tying aid. 
It uses a practice called "advance bidding" in which a financial aid
commitment is made for a project with the stipulation that if a
German firm does not win the contract, the commitment will be
reallocated to another project. 

Aid officials in Germany and the United Kingdom told us that European
multilateral aid commitments will likely rise in the 1990s because of
the growth of Eurolateral aid--member states' contributions to the
European Union's development assistance programs.  Although
individual members of the European Union are required to report
bilateral tied aid to OECD, the OECD agreement specifically excludes
"aid programs of multilateral or regional institutions." Thus, tied
aid that is offered by the European Union is considered by OECD to be
multilateral aid and cannot officially be challenged as tied aid by
the United States.  For example, capital project loans of the
European Investment Bank, a financial institution of the European
Union, may be used in association with member state or European Union
economic assistance grants. 

A USAID official stated that European support of the European Union's
development programs is motivated by a desire to demonstrate
political support; however, some U.S.  officials have suggested that
these governments might be shifting funds as a way to circumvent the
rules of the OECD agreement.  Potentially validating the concerns of
these officials, the Dutch are on record as advocating converting aid
tying at the national level in Europe to tying at the Union level.\12

Demonstrating the political importance of commercial interests, all
seven donors we studied reportedly compile information on the amount
of aid funding used for procurement in donor countries or member
states (return flows).  German officials stated that high reflow
levels help to mitigate pressures from business interests to directly
tie aid funding.  In Sweden, the concept of return flows first made
its appearance in government aid legislation in the late 1970s.  The
government's objective was that Swedish aid, while fulfilling all its
development goals, should be managed in such a way that the amount of
return flows increased. 

According to a Swedish study, while the economic motives were similar
to those that once prompted government to suggest an expansion of
official tied aid, a return flow was, and has remained, a neutral or
even positive concept.\13 The catchword became better use of the
Swedish resource base in development assistance activities, rather
than formally tying aid.  The public's reaction to the concept of
return flows was more restrained because return flows did not
explicitly support the Swedish economy.  It did, however, offer
reassurances to members of Parliament and special interests that
Swedish businesses did benefit from bilateral economic assistance. 

The various methodologies used for collecting reflow data ranged from
making estimates based on World Bank information (Sweden) to
maintaining a reflow database built upon disbursement information
(Germany).  Although the Germans expressed the most confidence in
their statistics, most European donors noted that the accuracy of
reflow statistics was often questionable.  This condition was similar
to what we found for U.S.  reflow data.\14 Regardless of the accuracy
of the data, however, officials from each of the European donors we
visited expressed the need to meet constituents' desires to have a
general idea of the effect aid programs had on the business community
within the donor country. 


--------------------
\9 The formal definition of tied aid refers to foreign assistance
that is linked to the purchase of exports from the country extending
the assistance.  Partially tied aid consists of loans or grants that
are, in effect, tied to procurement of goods and services from the
donor country and from a restricted number of other countries,
primarily the recipient and possibly other developing countries. 

\10 Aid Review 1991/92:  Report by the Secretariat and Questions for
the Review of the Netherlands, (OECD/DAC, Jan.  13, 1992). 

\11 Pierre Frï¿½hling, Editor, Swedish Development Aid in Perspective: 
Policies, Problems, and Results Since 1952 (Varnamo, Sweden:  Falths
Tryckeri AB, 1986). 

\12 A World of Difference:  A New Framework for Development
Cooperation in the 1990s (Netherlands Development Cooperation
Information Department, The Hague, Apr.  1991). 

\13 Pierre Frï¿½hling, Swedish Development Aid in Perspective. 

\14 Foreign Assistance:  Accuracy of AID Statistics on Dollars
Flowing Back to the U.S.  Economy is Doubtful (GAO/NSIAD-93-196, Aug. 
3, 1993). 


      AID PROGRAMS REMAIN
      POLITICALLY SENSITIVE
------------------------------------------------------- Appendix I:3.2

Based on our study, it appears that policy statements and allocation
systems based on current theories of the in-country conditions needed
to achieve development results are a logical development for aid
agencies; however, they may unintentionally set the stage for further
criticism of aid agencies already under public scrutiny if implicit
commercial and political objectives of other government agencies
overrule explicit development objectives in country allocation
decisions.  The desired balance among the commercial, security, and
development objectives of a foreign assistance program is ultimately
a political decision that will need to be revisited as conditions
change over time.  It is also a decision that will inevitably involve
objectives other than those of development agencies. 

Despite developing recipient performance criteria as a way to
equitably and effectively allocate often diminishing resources, most
of the aid agencies we studied found it difficult to change existing
country allocations.  We were told, for example, that the British aid
agency would like to enforce its human rights conditionality with
India but has been unable to do so because of the foreign ministry's
intervention.  A USAID official stated further that the British
foreign ministry does not want to jeopardize the close ties between
the two countries over development criteria.  The Canadian Auditor
General's 1993 report concluded that it had been difficult for the
Canadian aid agency to concentrate on traditional development
assistance, while at the same time dealing with the commercial and
political objectives advocated by key players in the government.\15
In the view of Canadian officials, the Canadian government's practice
of targeting economic assistance to mirror the ethnic make-up of its
population has further complicated the aid agency's ability to
concentrate resources. 

Dutch officials were concerned, in one instance, that their proposed
elimination of one recipient might not be politically feasible
because of its religious ties with a powerful faction in the
Parliament.  According to a Brookings Institution study, the Japanese
prime minister told the Japanese Parliament, the Diet, that China, a
country of commercial interest to Japan, would be exempt from the new
aid charter's guiding principles on allocation of resources.\16

In Germany, officials appeared to hold different interpretations of
development criteria.  Aid officials said that the development
criteria, or "guiding principles," were among the various factors to
be considered by the government when making country allocation
decisions, while auditors told us that they fully expect the
government to demonstrate a correlation between country allocations
and development criteria. 


--------------------
\15 Report of the Auditor General of Canada to the House of Commons,
1993 (Auditor General, n.d.). 

\16 Edward, J.  Lincoln, Japan's New Global Role (Washington, D.C: 
The Brookings Institution, 1993). 


FOUR COMMON STRUCTURAL DILEMMAS IN
AID PROGRAMS
========================================================== Appendix II

Regardless of the organizational structures donors have used to
manage economic development aid, they all have had to confront four
challenges: 

ensuring coordination and relieving organizational tension among
government agencies, particularly aid agencies and foreign
ministries, caused by overlapping jurisdictional boundaries and
conflicts over aid priorities;

increasing institutional specialization as new development problems
or functions are turned over to newly created aid agencies;

determining the most efficient and effective approaches for
in-country representation; and

determining how best to manage programs that are increasingly
implemented through contractors and nongovernmental organizations as
a way to augment in-country representation. 


   TRADE-OFFS BETWEEN ORGANIZATION
   STRUCTURE AND INTERAGENCY
   COORDINATION
-------------------------------------------------------- Appendix II:1

The difficulty of establishing a clear policy direction as discussed
in appendix I is reflected in the organizational tensions evident
within donor governments.  Debates over the most appropriate
placement of aid agencies within the government are often proxies
for, or extensions of, the debate over aid priorities.  However, the
experiences and views of other donors suggest that structural
realignment is not a panacea for relieving organizational antagonism
over aid objectives. 

The formal standing of the British aid agency, for example, has
fluctuated greatly over time, but, at no time, was it allowed to
assume broader responsibility for shaping relationships with
developing countries.  The agency began as a separate ministry in
1964 and at various times in its history has had cabinet status.  In
trying to define its role, the agency ran into continued hostility
within the government over its status and demand for resources.  In
1970, with a change in governments, the agency was absorbed into the
foreign ministry.  The aid minister continued to be charged with the
task of day-to-day control of aid matters and became one of several
ministers of state within the foreign ministry.  Except for a brief
hiatus in the mid-1970s, this organizational structure has remained
in force since then. 

We were also told by German and OECD officials that although Germany
and the Netherlands have a cabinet-level development cooperation
ministry and minister, the agency and the minister seldom have the
institutional clout of other cabinet-level ministries or ministers. 
The Swedish experience suggests that aid agencies will be allowed to
operate independently only to the extent that aid programs are
complementary to the Foreign Ministry's foreign policy objectives. 
We were told by Swedish officials that their foreign ministry is
reasserting control over development policy because it views the
agenda of the aid agency as being out-of-step with the times. 
Furthermore, policy dialogue, a key component of current development
assistance strategies, is also creating turf battles between aid
agencies and foreign ministries.  Officials of the Swedish foreign
ministry told us, for example, that they see policy dialogue as a
diplomatic function that should fall under their purview. 

Another source of organizational tension is the trend toward
organizational specialization, a pragmatic approach to multiple
objectives that carries the price of coordination trade-offs.  (See
table II.1.) In some cases, new agencies were created because the
cognizant aid agency was resistant to a particular
objective--frequently, trade or private-sector development.  In other
cases, the evolving complexity of development assistance was
perceived as being beyond the administrative capacity of any one
agency. 

In Sweden, for example, the distribution of responsibilities between
aid and trade agencies was the result of a lengthy political process. 
Swedish officials believe this arrangement was the best solution to
safeguard the overall program and acknowledge specific interests,
despite its inherent conflict potential.  The United Kingdom and the
European Union also created new organizations to administer
environmental research, related to sustainable natural resources, and
humanitarian programs, respectively.  According to some donor
officials, having separate, independent agencies administer different
economic assistance objectives has led to policy coherence at the
agency level, but significant coordination trade-offs at the
interagency level. 



                                    Table II.1
                     
                        Roles and Functions of Aid-related
                           Agencies of Selected Donors

                    Organizational      Other aid-
Donor/lead aid      location within     related             Other agencies'
agency              central government  agencies            functions
------------------  ------------------  ------------------  --------------------
Canada

ï¿½ Canadian          . . Reports to      ï¿½ International     . . Supports and
International       the                 Development         conducts
Development         Ministry for        Research Centre     scientific research
Agency              External                                into
(CIDA)              Relations and                           problems of
                    International                           developing
                    Development, and    ï¿½ Petro-Canada      regions; reports to
                    to                  International       Parliament
                    the Secretary of    Assistance
                    State               Corporation         . . Assists
                    for External                            developing
                    Affairs                                 countries
                                        ï¿½ International     in reducing
                                        Centre for Ocean    dependence on
                                        Development         imported oil;
                                                            reports to
                                        ï¿½ International     Parliament through
                                        Centre for Human    Minister of
                                        Rights and          Energy, Mines and
                                        Democratic          Resources
                                        Development
                                                            . . Supports
                                                            cooperation in
                                                            ocean
                                                            development


                                                            . . Promotes
                                                            democracy and human
                                                            rights through
                                                            projects
                                                            and technical
                                                            assistance

Germany

ï¿½ Federal           . . Cabinet-level   ï¿½ Reconstruction    . . Implements BMZ
Ministry for        ministry            Loan Corporation    financial
Economic            that must           (KfW)               cooperation
Cooperation         coordinate
(BMZ)               projects with the   ï¿½ GTZ
                    foreign, economic,                      . . Implements BMZ
                    and                                     technical
                    finance             ï¿½ Carl Duisberg     assistance
                    ministries          Society
                                                            . . Implements BMZ
                                        ï¿½ German            financed
                                        Foundation for      training
                                        International
                                        Development         . . Implements BMZ
                                                            financed
                                        ï¿½ German            training
                                        Volunteer
                                        Service

                                                            . . Sends young
                                                            German
                                        ï¿½ German            professionals
                                        Institute           overseas;
                                        for Development     financed by central
                                        Policy              government

                                        ï¿½ Senior Expert     . . Conducts
                                        Service             research; jointly
                                                            financed by central
                                                            government and BMZ
                                        ï¿½ German
                                        Investment &        . . Sends German
                                        Development Co.     retirees
                                                            overseas; financed
                                                            by central
                                                            government

                                                            . . Promotes the
                                                            development of
                                                            the private sector
                                                            in
                                                            developing countries

Japan

ï¿½ Ministry of       . . Ministry        ï¿½ Japan             . . Executes the
Foreign Affairs     that jointly sets   International       bilateral grant
                    policy and          Cooperation         program for the
                    approves            Agency (JICA)       Ministry of
                    loans through                           Foreign Affairs
                    consultations       ï¿½ Overseas
                    with                Economic
                    Ministries of       Cooperation Fund    . . Executes
                    Finance             (OECF)              development loans
                    and International
                    Trade
                    and Industry, and
                    Economic Planning
                    Agency




Netherlands

ï¿½ Directorate-      . .                 ï¿½ Organization      . . Provides
General for         Organizationally    for                 technical
International       under               Development         assistance
Cooperation         Directorate         Cooperation         under its own
                    within                                  program or for
                    Foreign Ministry                        other Dutch
                    with                ï¿½ National          agencies;
                    political           Advisory            Independent entity
                    responsibility      Council on
                    being               Development         . . Provides policy
                    assigned to an      Cooperation         and scientific
                    independent                             advice to Parliament
                    cabinet-            ï¿½ Finance Company   and the
                    level Minister      for Developing      government
                    for                 Countries
                    Development
                    without                                 . . Provides project
                    portfolio                               and investment
                                                            financing, technical
                                                            aid and
                                                            investment studies

Sweden

ï¿½ Swedish           . . Quasi-          ï¿½ Swedish           . . Provides aid to
International       independent         International       the commercial
Development         agency under the    Enterprise          and industrial
Authority (SIDA)    policy              Development         sectors of
                    direction of the    Corporation         developing
                    Ministry for        (SwedeCorp)         countries;
                    Foreign                                 quasi-independent
                    Affairs,            ï¿½ Agency for        government
                    Department for      International       agency
                    International       Technical and
                    Development         Economic
                    Cooperation         Cooperation         . . Administers
                                        BITS)               technical
                                                            cooperation,
                                        ï¿½ Agency for        concessionary
                                        Research            credits and training
                                        Cooperation with    programs;
                                        Developing          quasi-independent
                                        Countries           government
                                                            agency


                                                            . . Administers
                                                            research
                                                            cooperation; quasi-
                                                            independent
                                                            government agency

United Kingdom

ï¿½ Overseas          . . Located within  ï¿½ Commonwealth      . . Provides loans
Development         the                 Development         and equity
Administration      Foreign and         Corporation         investments; quasi-
(ODA)               Commonwealth                            commercial
                    Office;             ï¿½ Crown Agents      operation
                    reports to          for
                    Foreign             Oversea             . . Acts as an agent
                    Secretary           Governments and     and
                                        Administration      independent supplier
                                                            of goods
                                                            and services
                                                            purchased by
                                                            public sector
                                        ï¿½ Natural           clients
                                        Resources           worldwide;
                                        Institute           administers British
                                                            bilateral loans;
                                                            commercial
                                                            for-profit
                                                            operation
                                        ï¿½ The British
                                        Council             . . Markets research
                                                            and
                                                            consultancy services
                                        ï¿½ Developing        designed
                                        Countries Trade     to improve
                                        Agency              sustainable
                                                            management of
                                                            natural
                                                            resources; executive
                                                            agency

                                                            . . Promotes Britain
                                                            abroad
                                                            through cultural,
                                                            educational
                                                            and technical
                                                            cooperation

                                                            . . Provides expert
                                                            advice and
                                                            training to export-
                                                            oriented
                                                            sectors; subsidiary
                                                            of the
                                                            Crown Agents

European Union

ï¿½ Directorate       . . Reports to      ï¿½ European          . . Provides
General VIII        Commissioner        Investment Bank     financing for
                    for Development                         development
ï¿½ Directorate                                               projects;
General I           . . Reports to      ï¿½ European          autonomous public
                    Commissioner        Community           institution
                    for North-South     Humanitarian
                    Relations           Office              . . Provides
                                                            emergency and
                                                            humanitarian
                                                            assistance;
                                                            independent agency
--------------------------------------------------------------------------------
Source:  Compiled by GAO based on donor-provided data. 

Note:  The degree to which an agency's mandate focuses on aid or
trade objectives is difficult to determine; thus, this table includes
agencies with commercial objectives that are reportedly
developmentally focused. 

In contrast to the Swedish approach, the Germans have recently
debated combining the two separate public companies for the
administration of technical cooperation, GTZ, and financial
cooperation, KfW.  The Germans considered this action to avoid the
types of structural problems, such as overlapping jurisdictions,
interagency competition, and coordination weaknesses, that can occur
with specialized agencies.  If the government had to make the
decision today, German officials told us that it would probably place
the activities under one entity, but to do so now would result in a
great deal of resistance from the staff and stakeholders of each
agency.  The government originally structured its program in this
manner because of the perceived incompatibility between development
projects (technical cooperation) and banking functions (financial
cooperation).  As KfW became increasingly involved in social
programs, however, the activities of the two companies began to blur
and to overlap.  KfW, for example, funds feasibility studies, hires
technical cooperation consultants to advise clients on the
administration of projects, and provides training--activities
technically under the purview of GTZ. 

The German government has decided to address the coordination issue
through an elaborate system of cooperation instead of combining the
companies.  This system of cooperation is designed to provide a
unified national strategy for each recipient of German funds.  As
part of the coordination agreement, the companies will focus on two
or three sectors in each country with GTZ providing the initial
technical cooperation and gradually shifting the country program over
to KfW for financial cooperation.  German officials believe that if
the government does not carefully follow through with implementation,
the coordination system may break down as the two companies simply
change project justifications to make technical cooperation look like
financial cooperation or vice-versa. 

The difficulties inherent in ensuring coordination of overlapping
jurisdictions are particularly acute when central direction over
development policy does not exist, or breaks down.  According to the
research branch of the Canadian government, the aid agency of Canada,
in theory, advises the government on all matters affecting
development assistance.  In practice, the perception has grown that
it is more influenced by the bureaucratic environment in which it
must operate than it is influential in the policy process.  The
report indicated that this occurs because the aid agency's overall
mandate is unclear. 

In the Swedish governmental system, policy-making is institutionally
separated from the administration of programs and thus, the foreign
ministry is set-up to assist the cabinet in setting central policy
direction for development assistance to be followed by the various
implementing agencies.  However, a Swedish report notes that the ad
hoc development of specialized organizations, while providing greater
flexibility, also made it difficult for the foreign ministry to
obtain an overview of the activities of the development organizations
and to set central policy.  Therefore, the Swedish foreign ministry
is preparing proposals that would enable it to reassert its
policy-making role and to exercise more effective coordination over
the large and growing number of independent development-related
agencies.  While the Swedish foreign ministry may be successful in
this endeavor, it is instructive to note that, according to a
high-level official, Canada tried unsuccessfully to integrate aid,
trade and investment, and foreign affairs policy-setting in the early
1980s.  This integration was to be managed by the foreign ministry,
with separate departments for each area.  He also noted that a
parliamentary committee reported in 1987 that this organizational
approach to better coordination was not working and that the foreign
ministry did not pursue trade with sufficient aggressiveness. 
Moreover, aid became less effective and foreign policy was being
subsumed. 

Recently established aid programs to Central and Eastern Europe and
the countries of the former Soviet Union further complicate the
organizational structure dilemmas of donor agencies.  Since most
donors viewed assistance to this region as reconstruction aid to
transform economies mismanaged by communist regimes and not as
development assistance activities, aid agencies were typically not
given a leadership role in the development or management of this
assistance.  In the United Kingdom, for example, a new department was
set up within the foreign ministry to administer this aid.  Some aid
officials and other sources, however, indicated that governments did
not turn to their aid agencies for leadership in this critically
important region because these agencies were perceived as lacking the
institutional capacity to address the new category of recipient and
resistant to programs that might shift the focus from more
traditional recipients. 

In the United States, various studies and task forces have proposed
restructuring the organizational structure of aid activities as a way
to improve operations.  The experience of other donors, however,
illustrates the difficulty of addressing policy issues through
structural realignment. 


   IN-COUNTRY PRESENCE
-------------------------------------------------------- Appendix II:2

All seven donors we studied had some type of in-country
representation.  This representation provides different approaches
based on specific program needs and characteristics, instead of
trying to establish a global network of aid offices like USAID's.\1
These approaches included wide variations, such as development
liaison conducted by diplomatic missions, project approval and
administrative support provided by regional offices, and the
establishment of an independent aid office in-country (see table
II.2).  The percentage of development staff--defined as civil
servants, who are citizens of the donor country, and foreign service
officers--stationed overseas by aid agencies also diverged greatly
from 51 percent to 5 percent.  Typically, development aid staff are
concentrated in target countries, which, for strategic or historical
reasons, are important to the donor country, while commercial, loan
programs administered by other government agencies have few, if any,
overseas staff.  For example, SwedCorp, Sweden's enterprise
development agency, has no staff assigned overseas. 



                                    Table II.2
                     
                      Overseas Development Offices and Staff
                            Levels of Selected Donors

                           Total         Overseas
Donor                      staff         staff         Types of overseas offices
-------------------------  ------------  ------------  -------------------------
Canada

CIDA: Development aid      1,350         140 (10%)     ï¿½ 40 missions and 9
agency                                                 regional
                                                       offices.

                                                       ï¿½ Report to the
                                                       ambassador.

Germany

BMZ: Ministry of           568           27 (5%)       ï¿½ Embassies conduct in-
Economic                                               country representation.
Cooperation provides                                   ï¿½ BMZ officials overseas
decision-making                                        are
                                                       assigned to embassies
                                                       for consultation on
                                                       projects.

Japan

Foreign Ministry:Sees      1,729\a       487 (28%)     ï¿½ Foreign ministry
itself                                                 diplomatic missions,
as the development aid                                 including some with
agency                                                 economic coordination
                                                       sections.

                                                       ï¿½ 44 overseas offices.
JICA:Grants

                                                       ï¿½ 13 field offices.
OECF:Loans
                                                       Country programming is
                                                       done through annual
                                                       missions from
                                                       headquarters.

Netherlands

DGIS\b: development aid    682           45 (7%)\c     ï¿½ 27 offices within the
agency                                                 embassy


Sweden

SIDA: development aid      507           107 (21%)     ï¿½ 17 development
agency                                                 cooperation
                                                       offices in program
                                                       countries that help the
                                                       recipient assess needs
                                                       and
                                                       identify projects.

United Kingdom             1,080         47 (4%)       Five regional offices, or
                                                       development divisions,
ODA:development aid                                    with delegated authority
agency                                                 to approve projects with
                                                       the agreement of
                                                       ambassador; also provide
                                                       the diplomatic missions
                                                       with more detailed
                                                       financial, technical, and
                                                       development expertise.

                                                       One country aid
                                                       management office, which
                                                       will do the substantive
                                                       work on country program,
                                                       while headquarters staff
                                                       will respond to
                                                       parliamentary queries on
                                                       the office's behalf.

                                                       Numerous aid sections of
                                                       embassies: often staffed
                                                       by ODA employees seconded
                                                       to the embassy and
                                                       responsible for project
                                                       identification, needs
                                                       assessment, and project
                                                       administration.

                                                       Two special coordination
                                                       groups: one in Barbados
                                                       for coordination and one
                                                       in Fiji to coordinate and
                                                       support embassies' aid
                                                       activities throughout the
                                                       South Pacific.

European Union Aid
Programs
                           211           108 (51%)     ï¿½ 19 field missions.
Directorate-General I:
Manager of aid to Asia,
Mediterranean, and Middle
Eastern Countries
                           533           242 (45%)     ï¿½61 field delegations.
Directorate-General
VIII:Manager of aid                                    Delegations mainly serve
provided under Lome                                    as facilitators; they
Convention (Africa,                                    have a limited role in
Caribbean, and Pacific                                 identifying, designing,
States)                                                and preparing projects.
--------------------------------------------------------------------------------
\a Total of all staff working on development activities. 

\b Directorate-General for International Cooperation. 

\c Estimate; exact number not available. 

Source:  Compiled by GAO based on OECD and donor-provided data. 

Note:  The total number of staff, such as local hires, embassy staff,
and so forth, involved in development activities is not available. 
This information represents estimates of development agency staff
working overseas on development activities. 

For purposes of comparison, USAID has 1,536 foreign service officers
with 998 (65 percent) stationed overseas.  It also has 25 missions
that administer major, ongoing aid programs; 21 offices of aid
representatives that administer aid programs that are moderate in
size, declining, or have limited objectives; 3 sections of embassies
that administer aid programs that are small or are being phased out;
and 4 regional offices that provide services to other overseas
organizations or administer activities involving several countries. 

To varying degrees, all seven donors we studied have been trying to
address the issue of the most appropriate level of centralization for
their development activities.  Canada is in the process of
re-centralizing its recently decentralized operations (1988), while
some donors have selectively decentralized operations.  A Canadian
aid agency report noted that, according to most Canadian officials
surveyed, the management advantages of decentralization can be
negated by high costs; low quality staff, such as the absence of
project managers who could manage complex projects; overly
bureaucratic field structures; and inflexible rules.\2

The United Kingdom's presence abroad is essentially through its
diplomatic missions with some management decision-making authority
being delegated to the field.  The United Kingdom's primary aid
agency is reviewing its aid management and organization to determine
where certain tasks should be located-- at headquarters or at the
field missions.  To run its second largest program, the United
Kingdom recently established a prototype field office in Bangladesh. 
This office will have 10 to 12 professional staff who will do almost
all the substantive work on the country program, while in London 1 to
2 people will respond to parliamentary queries on behalf of the
office.  A Dutch official stated that the Netherlands is also moving
in the direction of selectively expanding its overseas presence and
delegation of decision-making authority to the field. 

To varying degrees, all seven donors have established several types
of public-private partnerships with contractors and NGOs to augment
their in-country presence.  Their cited reasons for this approach
have been primarily pragmatic:  lack of government administrative
capacity, inflexible civil service rules and procedures, and the
increasing complexity of development assistance.  The partnerships
between donors and NGOs have become increasingly important to most
programs and have led to some innovative relationships. 

Donors have developed innovative contracting mechanisms to ensure
needed technical skills are available without making an employment
commitment.  Canada, for example, has created field support units,
contractor units financed by project funding that is designed to
provide the flexibility necessary to respond to changing requirements
and priorities of programs and to experiment with various
alternatives to headquarters administration.  The United Kingdom has
developed a corps of contractors that is expected to provide skills
needed for emerging development programs and activities under
long-term renewable contracts.  The United Kingdom is also using new
service-level agreements or contracts with service suppliers
following each market test.  These agreements specify output levels
and targets and are expected to facilitate the publication of targets
and achievements. 

The use of private for-profit companies has become common and, in
some cases, such as the British Crown Agents and GTZ, public entities
are moving into the realm of the private sector.  The British Crown
Agents, a British agency that has traditionally provided contracting,
procurement, and accounting services for aid recipients and the
British aid agency, was made an independent foundation by the British
government.  As such, the Crown Agents will be a commercial,
for-profit operation, with the profits accruing to the British aid
agency.  The Japanese, as well as the European Union, are major
clients of this agency. 

Germany's GTZ is also a publicly owned corporation.  German officials
told us that a major advantage of this approach is that all of GTZ's
employees fall under the private employment rules, rather than the
rigid civil service rules.  Another advantage is that as a for-profit
company, GTZ has an incentive to keep the costs of its subcontracting
under control.  According to these officials, the extent to which
this move has changed the organizational culture is evident from the
legal relationship GTZ has established with the British Crown Agents. 
In addition, this move is designed to enhance their competitiveness
throughout the international donor community, rather than to rely on
German contracts for stability or growth. 

The debate on decentralization versus centralization has embedded
within it a discussion of how, and to what extent, implementation of
development assistance should be carried out by nongovernment
personnel.  In practice, most of the donors, including the United
States, are moving toward a brokerage management model in which
development agencies finance the private or nonprofit sectors' design
and implementation of development assistance.  As we have previously
reported, many of USAID's current problems stem from its incapacity
to manage its public-private relationships.\3

Other donors noted the way in which these relationships fundamentally
change the role of the aid agency.  For example, according to a
Swedish report:\4 "Aid administration thus requires highly qualified
generalists, to be complemented with specialist competency primarily
contracted from outside the agency."


--------------------
\1 As we reported in Foreign Assistance:  AID Strategic Direction and
Continued Management Improvements Needed (GAO/NSIAD-93-106, June 11,
1993), the proliferation of overseas offices and the growing
complexity of the aid program are beyond the carrying capacity of
USAID.  The USAID Administrator, with the concurrence of the
Secretary of State, has recommended 21 field missions for closure as
a way to focus the U.S.  assistance program on fewer locations and
fewer objectives.  He has stated that USAID is operating programs in
more than 108 offices in 92 countries and that the agency can adopt a
more strategic approach by operating in only 50 countries. 

\2 Evaluation of CIDA Decentalization 1991 Annual Report (Canadian
International Development Agency, December 20, 1991). 

\3 Foreign Assistance:  AID Strategic Direction and Continued
Management Improvements Needed (GAO/NSIAD-93-106, June 11, 1993). 

\4 Ann Wilkens, Development Aid in the 1990s:  Swedish Experience and
Perspectives (Swedish International Development Authority, 1990). 


   PUBLIC-PRIVATE RELATIONSHIPS
   WITH NONGOVERNMENTAL
   ORGANIZATIONS
-------------------------------------------------------- Appendix II:3

The donors we studied are generally expanding the scope and role of
NGOs in bilateral development activities.  Most of the donors we
studied, except Canada, have reported increasing overall funding to
NGOs in recent years either directly through increased funding or
indirectly through stable NGO funding coupled with decreasing overall
official development assistance levels.\5 Except for Japan, these
donors have also begun to involve domestic NGOs with policy
formulation on an informal basis, programming decisions, and
administrative management of their respective bilateral programs. 
However, the degree to which donors have institutionalized the
public-private relationship varies from unstructured (Germany) to
highly structured (Canada, the Netherlands, and Sweden) with the
other donors falling in the middle range. 

Donors are increasingly turning over operational functions
traditionally done by their aid agencies to NGOs through these
public-private partnerships.  The Netherlands (co-financing program)
and Sweden (framework agreements) use large NGOs or a coalition of
NGOs to act as brokers, managing the relationship between the donor
and other NGOs--both NGOs from developed and developing countries. 
Under co-financing and framework agreements, NGOs independently
program government funds and, on a periodic basis, provide
retrospective reports on their program decisions and performance. 
According to a DAC report, the United Kingdom uses a mixed approach,
supporting larger NGOs through program agreements and smaller NGOs on
a project-by-project basis.\6 Japan, on the other hand, provides
support only on a project-by-project basis and often only for a year
at a time.  Canada--perhaps the most innovative in its support of
NGOs--is developing a new approach called "institutional funding."
Under this approach, Canada's aid agency will place less emphasis on
approving NGOs' programs for government financing and more on
assessing the fit of the NGOs' goals, capacities, and performance
with Canada's development strategy. 

The extent to which donors require NGOs to match their funding with
NGOs' own resources varies.  Although some countries such as Britain
reported attempting to keep the ratio of government support for
development activities below 50 percent, others such as Sweden and
the Netherlands provide a matching ratio for development projects of
80 percent, and for emergencies and certain sector priorities, 100
percent.  We were told by a Swedish NGO official, for example, that
only 5 percent of this organization's annual funding came from
private contributions. 

Another issue, on which donors held varying views, is whether donors
should directly finance NGOs indigenous to developing countries. 
Some donors (Canada and Sweden)\7 use NGOs from industrialized
countries as brokers between indigenous NGOs and their aid agencies
as well as having the aid agencies directly finance indigenous NGOs. 
Germany, on the other hand, never directly funds indigenous NGOs,
while Japan's and Britain's policy on direct funding is more
ambiguous.  Although the primary channel for Sweden is indirect
assistance to indigenous NGOs through Swedish NGOs, when the program
becomes too large for the Swedish NGO to handle, responsibility for
it is transferred to the aid agency. 

According to a DAC report, direct funding of developing countries'
NGOs may be viewed as an encroachment on the turf of industrialized
countries' NGOs.  An audit official reaffirmed the report's
questioning of the administrative capacity of donors' aid agencies,
which are stated to be already overextended, to effectively manage
their relationships with indigenous NGOs.  These sources also
indicated that developed countries' NGOs may not have the desire or
skills to take on this new broker role. 

Overall, most donor officials and other official sources favored the
expanding role of NGOs.  Among the reasons cited in support of these
new relationships were that NGOs are viewed as

a more effective and efficient approach than using personnel of aid
agencies, particularly at cooperating with the poorest;

an effective way to shift work from downsized government agencies to
another organization;

a less expensive way to deliver economic assistance;

a way for donors to leverage private funds through co-financing with
these organizations; and

organizations generally worthy of government support as a matter of
policy. 

In rethinking their governments' use of NGOs, however, many donor and
NGO officials, as well as other sources, raised a number of concerns. 
NGO partnerships that work in one country may not work in another
because the historical role of NGOs in relation to the country ranges
from partner to critic and is based on the political culture within
each country.  DAC reported that some officials believe that donors
are pushing these organizations into the promotion of democratic
values, without considering how the recipient government might react
to foreign funding of an activist indigenous NGO. 

Another concern is that governments may be simply shifting their
management and administrative problems onto NGOs that are unprepared
to undertake the burden.  For example, a Swedish study concluded that
the effectiveness of increased funding to NGOs was limited by their
lack of professional staff, by a limited absorptive capacity, and by
the need for stronger administrative skills.  The Swedish aid agency
apparently greatly increased funding in spite of the study's
recommendation that NGOs' funding should be increased gradually and
that NGOs may lack the organizational capacity to manage funds
because of its own resource problems.  According to other donors,
their governments have shifted funds to these organizations primarily
because of inadequate administrative capacity of aid agencies, such
as inadequate staff levels. 

The rising level of NGOs' dependency on government funds was a source
of concern.  For example, donors may be

creating semipoliticized NGO subsidy systems that are not based on
quality and relevance of NGOs' projects and programs;

establishing a situation in which the public-private partnership will
break down as increased competition for declining aid budgets
develops between aid agencies and NGOs; and

creating incentives for NGOs to move into environmental,
humanitarian, and disaster assistance, especially when these
activities receive 100 percent funding. 

Perhaps most importantly, some donor officials were concerned that no
one has tested the assumptions behind the rationale for increased use
of NGOs.  One official stated that NGOs are not as experimental as
they claim to be and that after years of experience in development,
they still use the "experiment" excuse to justify inefficiency, lack
of sustainability, and other problems.  According to an OECD issue
paper, despite the fact that governments spend 10s of millions of
dollars annually through their NGO communities, few governments have
taken evaluation seriously.\8 The issue paper also noted that some
donor officials believe that NGOs often view continued government
funding as an entitlement, unconnected to actual performance.  A way
to help rectify this situation, we were told, was for policymakers to
ensure that these organizations are held accountable for their
activities under a results-based management system. 

Building public-private partnerships, instead of doing the job
directly, may be a pragmatic solution to many of the problems facing
bilateral donors.  However, such partnerships raise important
management issues.  The aid agencies of Canada, the Netherlands, and
Sweden would like their governments to only hold them accountable for
those functions over which they have direct control.  For example,
the Netherlands has five degrees of accountability that depend on the
relationship between the aid agency and the other party, while the
Canadians reportedly no longer assume government-financed NGOs'
activities are "shared endeavors with shared responsibility," but are
solely the responsibility of NGOs.  We were also told by Dutch and
Swedish auditors that they hold aid agencies responsible for
setting-up and following-through with good management control
systems, but not for the success or failure of any individual NGO. 
While this may be good management practice, Dutch officials
acknowledged that it blurs agency accountability and may prove to be
unacceptable to their respective parliaments. 


--------------------
\5 USAID has recognized the importance of NGOs as a delivery channel
and its evaluation unit has an on-going review investigating under
what circumstances it would be in USAID's management interests to
choose a NGO to implement development activities. 

\6 The United States often uses a similar approach. 

\7 The United States often uses a similar approach. 

\8 Ian Smillie, Trends and Issues in the Evolving Relationships
Between Donor Agencies and Development NGOs, issue paper prepared for
OECD Development Centre seminar
(OECD, June 28-30, 1993). 


COMMONALITY OF MANAGEMENT
WEAKNESSES
========================================================= Appendix III

There is a growing interest worldwide in new approaches to public
administration that will likely affect how aid agencies manage
development assistance.  Even though the aid programs we studied were
administered under different rules, procedures, and organizational
structures, the aid agencies experienced the same types of management
problems, including inadequate personnel and management information
systems, inability to apply "lessons learned" and follow through on
evaluation findings, and disincentives built into public budgeting
processes, such as focusing accountability on agency spending
patterns.  These problems focus management's and stakeholder's
attention on the design and approval of aid activities but often work
against the need to focus on project and program implementation.  As
a result, policy debate over aid programs of the seven donors we
studied has not been based historically on what has actually been
achieved. 

In some of the donor countries, there have been calls for a
transition from an organizational culture focused on inputs to a
flexible organizational structure focused on results.  In Canada,
Sweden, and the United Kingdom, aid agencies are using a combination
of techniques to alter their organizational cultures, including
changes in training, the reward systems, and incentives.  The other
aid agencies are undertaking many agency-level management reforms,
such as improving evaluation and follow-up on project completion. 


   OVERVIEW OF DEVELOPMENT
   ASSISTANCE MANAGEMENT TASKS
------------------------------------------------------- Appendix III:1

Although there is a wide variation in institutional arrangements and
management practices, the conceptual underpinnings for donors'
overall aid management are similar.  In theory, most donors hold a
recipient responsible for the design and implementation of individual
projects.  In practice, a donor is usually deeply involved in most
stages of the project cycle. 

The project cycle consists of identification, preparation, design or
appraisal, negotiation and agreement, implementation and supervision,
and evaluation (see fig.  III.1).  Identification can come from
several sources, including requests from a recipient, local embassy,
or aid staff or temporary missions sent by an aid agency's
headquarters.  Preparation is developing the project idea into a
detailed project document or proposal.  Once a project has been
approved by the cognizant donor official(s), negotiations begin for
setting up the framework for cooperation on the project. 
Implementation is the process by which the project is executed and
includes implementation planning, annual work planning, periodic
progress reporting, and supervision.  All the donors have some type
of procedures to evaluate the success or failure of a project.  These
evaluations can be conducted during implementation, mid-term, prior
to launching a new phase, or after a project is completed. 

   Figure III.1:  Project Cycle

   (See figure in printed
   edition.)

Source:  Adapted from the World Bank by GAO. 

Normally, the process for determining the need for program assistance
follows a series of steps similar to that of project assistance.  DAC
defines program assistance, which is an increasingly important
instrument of development assistance, as consisting of all
contributions that are available to a recipient for general
development purposes, such as balance-of-payments support, general
budget support and commodity assistance, and is not linked to
specific project activities. 


   ORGANIZATIONAL CULTURES DO NOT
   VALUE MANAGEMENT FUNCTIONS
------------------------------------------------------- Appendix III:2

Officials from Canada, Germany, Sweden, the European Union, and the
Netherlands stated that, perhaps, the most critical problem within
their aid agencies was an organizational culture--the underlying
assumptions, beliefs, values, attitudes, and expectations held by
development staff--that emphasized project or program design and
other processes but did not value or reward good management
practices.  To illustrate, Swedish and European Union officials
stated that aid managers viewed collecting data and preparing reports
as a procedural requirement--a paperwork burden--that must be
fulfilled, but they did not analyze and follow up on these data and
reports to use them as management tools.  A Dutch official told us
that development staff in his country want "to be diplomats and doers
of good, not accountants." This attitude was so pervasive that
officials from the national audit organizations of two donors told us
that senior managers were contemplating shifting, or had shifted,
staff resources from auditing development activities to other
government activities because auditors kept coming up with the same
management findings with no apparent impact on agency practices. 


   AGENCIES EXPERIENCE STAFFING
   SHORTAGES AND POOR PERSONNEL
   PRACTICES
------------------------------------------------------- Appendix III:3

The rapid expansion of programming and management requirements and
the growing complexity of aid activities without a corresponding
increase in staff with the necessary skills are said to be major
sources of effectiveness and efficiency problems in aid programs. 
Inadequate staff levels are cited by many aid officials and auditors
as the cause of inattentiveness to implementation and monitoring.  An
auditor for the European Union told us that the Court of Auditors had
recommended that the Union increase the budget for operating expenses
so that the aid directorates could hire more staff.  The European
Union's Commission acknowledged the need for an increase in staff
resources at headquarters and in the delegations to ensure that the
desired results are achieved in its development assistance programs. 

According to aid officials of several donors, inadequate staff levels
are the driving force behind many of the programming decisions that
garner public criticism.  For the Canadian, Dutch, and Swedish aid
programs, contracting is said to be unavoidable because the number of
aid activities greatly exceeds the agency's administrative capacity. 
German officials said that their aid program is specifically
structured to use contractors, who are citizens of Germany or other
developed countries, as a substitute for the direct involvement of
German government officials.  The officials expressed confidence in
the integrity of this contracting system.  They indicated that a
clear audit trail between the government and its contractors enables
them to administer a global program with limited staff, while still
ensuring accountability over funds. 

A Swedish evaluation study also reported that the major advantage of
providing commodity aid\1 in the 1970s and 1980s was that it was
easier to administer and quicker to disburse than other aid
instruments.  Commodity aid recipients were typically those countries
for which the Swedish aid agency found it too difficult to administer
traditional aid programs.  Since these recipients were also
characterized by weak administrations and poor macroeconomic
policies, the result was that the "messier" a particular recipient
was, the more likely it was that Sweden disbursed a high percentage
of that recipient's allocation on commodity aid.\2 A 1993
Congressional Research Service report noted that understaffing
problems contributed to Japan's sectoral bias toward economic
infrastructure projects because these projects allowed a limited
staff to disburse a relatively large amount of funds.\3 According to
a 1991 Nordic study, multilateral co-financing was originally
considered a way to cope with limited bilateral capacity.\4

Officials also stated that staffing shortages can be exacerbated by
poor personnel management practices.  The responsibilities of aid
staff have typically changed from that of hands-on implementers of
aid projects to brokers of development assistance.  Officials in
Canada, Germany, the European Union, the Netherlands, Sweden, and the
United Kingdom told us that, consequently, a poor match exists
between the management skill needs of aid staff and those they
possess.  Frequent rotation of staff was also mentioned as a problem
by officials from Canada, the Netherlands, and the United Kingdom. 
They pointed out that staff turnover had caused management problems
because it resulted in a loss of corporate memory, limited the
in-depth knowledge and development of staff, and led to difficulties
in holding individuals accountable for the results of aid activities. 

In 1993, we reported that top positions in U.S.  agencies were often
filled by political appointees who generally had little incentive to
focus on long-term management issues and the agencies experience a
high turnover rate.\5 This was not identified as a concern by any of
the donor officials with whom we spoke.  One official, however, did
mention political patronage as a problem in the European Union.  In
contrast to the U.S.  system, the British aid agency had only one
political appointee--the agency head. 


--------------------
\1 Commodity import programs provide foreign exchange for the
purchase of donor goods. 

\2 Stefan De Vylder, Aid and Macroeconomics:  An Evaluation of
Swedish Import Support to Guinea-Bissau, Mozambique, Nicaragua, and
Vietnam (Swedish International Development Authority, December 1992). 

\3 Nancy J.  Hankes, Japan's Foreign Aid, Congressional Research
Service (93-494F, May 5, 1993). 

\4 The United Nations:  Issues and Options (Nordic UN Project, 1991). 

\5 Improving Government:  Need to Reexamine Organization and
Performance (GAO/T-GGD-93-9, Mar.  11, 1993). 


   BUDGET TARGETS FOCUS OF AID
   OVERSIGHT
------------------------------------------------------- Appendix III:4

Although many improvements have been made, aid agencies have
traditionally not had effective evaluation and feedback systems. 
USAID, through DAC, was instrumental in calling the development
community's attention to the importance of systematic and formal
evaluations for enhancing aid effectiveness.  All of the aid agencies
in our study have now set up independent evaluation units within
their aid agencies or foreign ministries to assess the relevance,
efficiency, and effectiveness of aid programs. 

A structure or process is also typically set up within aid agencies
to evaluate the operational performance of an on-going aid activity. 
The independent evaluation units in some countries have been
criticized for their lack of attention to the overall results of
development assistance, while the operational evaluations have been
criticized as being self-serving in that the project or the program
manager arranges for the evaluation.  At the end of the 1980s, the
weak link in the evaluation process was the lack of a feedback
mechanism to tie evaluation results to programming and allocation
decisions.  An USAID official told us that this weakness still
exists, even though donors now recognize the importance of
strengthening evaluation.  As discussed below, aid agencies in
Canada, Sweden, and the United Kingdom, as well as USAID, are now
trying to establish a linkage between evaluation results and
management decision-making through results-based management systems. 

Most of the donors' budgeting procedures focus an agency's attention
on funding and spending patterns, rather than on program results.  A
DAC report notes that since funds provided by parliaments are usually
disbursed in the year provided or committed during that year, aid
agencies operate under pressure to obligate and disburse funds.\6 The
net result is that the "obligate and spend" approach to
accountability tends to push aid managers into rapid action and makes
it difficult for them to take the time to ensure aid activities are
well-designed, -planned, or -implemented. 

Even when funds do not have to be expended in the year provided,
parliaments and others tend to focus on an overall budget target, or
the rate of disbursement of the funds.  According to Swedish sources,
the success of the Swedish aid agency is often gauged by whether
their appropriations meet the 1 percent of its national income
target, and not by whether development is occurring.  The Swedish aid
agency and the aid directorates of the European Union have been
criticized by DAC and others for the size of their pipelines of
unobligated funds from prior years' appropriations.  Unused funds are
considered a lost opportunity to redirect scarce resources to higher
priorities.  As we noted in 1991, the size of the pipeline is
important because, among other things, it can be an indicator of
management problems in delivering timely and effective economic
assistance.\7


--------------------
\6 Arthur M.  Fell, A Comparison of Management Systems for
Development Assistance in OECD/DAC Member Countries (OECD, June 7,
1993). 

\7 Foreign Assistance:  Funds Obligated Remain Unspent for Years
(GAO/NSIAD-91-123, Apr.  9, 1991). 


      WORLD BANK EXPERIENCES
      SIMILAR MANAGEMENT PROBLEMS
----------------------------------------------------- Appendix III:4.1

Corroborating the apparent universality of management problems in the
development community, the World Bank's internal task force on
management published a 1992 report that identified similar causes for
declining performance of its development assistance portfolio.\8 The
task force's basic conclusion was that the Bank had an organizational
culture that was generally preoccupied with new lending that was not
matched by an equal emphasis on implementation.  According to the
report, the Bank's personnel practices reinforced the preference
among Bank staff and managers for planning and design.  The
methodology for project performance rating was considered deficient,
lacking objective criteria and transparency.  Furthermore, the Bank's
evaluation system had not placed adequate attention on actual
development impact.  The report stated that, consequently, the Bank's
ability to learn what really works and what does not had been
impaired. 


--------------------
\8 Effective Implementation:  Key to Development Impact, prepared by
the Task Force on Portfolio Management in October 1992, under the
chairmanship of Mr.  Wapenhans. 


   EFFORTS TO IMPROVE DEVELOPMENT
   ASSISTANCE MANAGEMENT
------------------------------------------------------- Appendix III:5

Efforts to improve development assistance management by some donors
we studied are occurring under the umbrella of governmentwide
results-based management reforms, while other donors are making
management improvements under aid agency leadership.  The motivations
for these reforms are the growing public skepticism of government
programs in general and aid programs in particular and the need for
most governments "to do more with less." The Canadian government, for
example, is promoting its Public Service 2000 initiative as a way to
enhance government effectiveness.  Similar to the U.S.  National
Performance Review,\9 Public Service 2000 is designed to focus the
Canadian government on delivering quality products and services,
meeting the needs of its citizens, downsizing the public service
establishment, and ensuring greater accountability for results.  The
Netherlands' Great Efficiency Operation is also an attempt to lessen
the tasks of the central government and to downsize its operations. 
The United Kingdom's Citizen's Charter also aims to improve the
overall quality of public services.  Its principles include increased
privatization, wider competition and contracting out, and basing
rewards on performance. 

In Sweden, the Results-Based Management Initiative requires agencies'
budget presentations to cover the whole spectrum of their activities
over a 3-year period.  An appraisal will be conducted at the end of
each 3-year period to analyze the activities of each agency for
compliance with the objectives of Parliament and for efficient use of
resources.  As part of the results-based management reforms, Sweden
is trying to better define and clarify the roles of all government
participants.  At the core of their reforms is the concept of a
contract among the central government, the Parliament, and the
involved agency.  The central government and Parliament will oversee
agency operations by providing 3-year budgets that are based on
detailed guidelines that specify the direction and results they
expect from the agency. 

As its part of Sweden's initiative, the aid agency will conduct
periodic in-depth assessments of its entire operations within the
normal operational planning and budget processes.  These assessments
are expected to provide the basis for setting priorities and
reallocating resources.  A Swedish document outlining the reforms
specifically states that the central government and the Parliament
should be accountable for policy, or "for acting as contractors of
public sector production." The aid agency is to be held accountable
for indicating whether the program, or "order," is feasible and, if
so, for reporting on the results achieved at a later date. 

To date, the aid agencies of these donors have had varying degrees of
acceptance of these public administration reforms.  The aid agency of
the United Kingdom appears to have demonstrated less resistance to
these reforms than other aid agencies.  According to a British
official, the aid agency is in the process of translating the
Citizen's Charter to agency operations.  It is, however, using a
building block approach, leaving the most difficult programs for
last.  We were told that the Dutch aid agency was exempted from
performance measurement reforms because of the belief that
development assistance cannot be measured in the short term and
because it is difficult to establish causality for macroeconomic
change in the long term.  In the view of the foreign ministry and the
Swedish National Audit Board, the Swedish aid agency's first
application of performance indicators to the budget cycle was a good
"first attempt." We were told, however, that the Swedish aid agency
is requesting a waiver from the performance measurement reform
because it believes factors outside the agency's control determine
the overall outcome of development in a recipient country. 

Many donor officials and other sources expressed serious reservations
about results-based management, in general, as well as reservations
about its applicability to foreign assistance, in particular.  One
concern is whether the performance of an individual government
program can be measured and whether it is realistic to presume
parliaments will not reexamine government programs annually, in spite
of multiyear budgets.  Some Swedish officials also expect that tying
performance indicators to budget decisions will result in
bureaucratic gaming of the system. 

A U.S.  budget expert has suggested that linking performance to
budgets would work best for allocating funds within a country program
(measuring the aid agency's performance), rather than among countries
(measuring the recipient's performance).\10 Country allocation
decisions are often based more on other considerations, such as
foreign policy or trade concerns, than on a recipient's performance. 
Furthermore, aid agencies cannot ensure recipients that program
performance will necessarily lead to more aid. 

A common prescription for results-based management was the
development of new definitions of accountability, but these have not
proven acceptable to all stakeholders.  The Dutch, for example, have
established five different levels of accountability for its aid
agency, depending on the degree to which an "arms-length"
relationship exists between the government and the implementer of
development activities.  However, these varying levels of
accountability have not yet been accepted by all members of
Parliament. 

Another source of tension is between government reformers and
auditors.  In Canada, the aid agency was developing a concept of
"limited accountability" in which the agency would be held
accountable for setting up control systems over contractors,
nongovernmental organizations and other implementers, but not for
actual use of funds and outcome of an activity.  A Canadian Auditor
General official told us that limiting the aid agency's
accountability for funds and results was unacceptable to his agency
and many members of Parliament.  This rejection of "limited
accountability" can have serious implications for other aid agencies
that are also negotiating a shift from control-oriented audit systems
to early-warning, solution-based audit systems with audit
organizations. 

Aid agencies in Canada, Sweden, the Netherlands, and the United
Kingdom are using a combination of personnel management techniques to
introduce the cultural changes necessary to ensure implementation of
results-based management reforms.  Canada plans to develop a
workforce planning system that is to be used in the strategic
planning process to ensure that the use and development of staff
support the agency's overall program objectives.  Canada and Sweden
are developing "competency training programs" that are designed to
change attitudes and patterns of staff behavior.  Canada and the
United Kingdom are implementing individual reward systems so that
individuals can be held accountable for achieving development results
and meeting specific objectives. 

The aid agencies of Canada, the Netherlands, and the United Kingdom
are also attempting to address their lack of adequate financial,
management, and program information through the development of new
computerized systems.  The Dutch are working on an automated
management system that will improve controls.  The aid agency of the
United Kingdom has adopted the use of "Team Up," a project planning
and monitoring software package designed by the World Bank and USAID. 

While supportive of management reforms, officials from Canada,
Sweden, and the United Kingdom raised two issues.  In Canada and the
United Kingdom, we were told that the central government has promised
to couple operating expense reductions with program reductions;
thereby, ensuring the agency maintains its administrative capacity. 
According to a Swedish official, a fear exists within the Swedish aid
agency that the focus of public administration reforms will shift
from management improvements to justifying arbitrary budget cuts. 
The U.S.  Comptroller General has testified in support of the concept
of results-based management for the federal government.  He has
noted, however, that effective results-based budgeting requires an
investment in procurement, recruitment, budgeting, information
resources management, personnel, and agency organization and
functions. 

Germany, Japan, and the European Union have not linked management
improvements of aid programs to overall public administration
reforms, but they have undertaken management reforms designed to
improve foreign aid effectiveness and efficiency.  The aid agencies
of Germany and Japan are expanding the number of aid staff in the
field.  The German agency is also conducting "central efficiency
control assessments" to supplement and review the comprehensive
system of efficiency controls that the implementing public companies
carry out themselves.  The Japanese aid agency has developed a
process that is expected to revitalize existing projects and is
called "after care." This process consists of strengthening the
agency's monitoring activities over completed projects and providing
financial support for remedial action, if necessary. 


--------------------
\9 The National Performance Review is a governmentwide management
reform exercise, that is designed to create a government that works
better and costs less by cutting red tape, putting customers first,
empowering employees to get results, and cutting back to basics. 

\10 Allen Schick, A Performance-Based Budgeting System for the Agency
for International Development (AID Program and Operations Assessment
Report No.  4, June 1993). 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix IV

NATIONAL SECURITY AND
INTERNATIONAL AFFAIRS DIVISION,
WASHINGTON, D.C. 

Lawrence L.  Suda
Donna J.  Byers
Zina D.  Jones
James R.  Lee

EUROPEAN OFFICE

Thomas J.  Howard
George A.  Taylor
