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STRATEGIES FOR ADDRESSING ABSORPTION CAPACITY CHALLENGES IN DONOR-

FINANCED PROJECTS WITHIN COMESA MEMBER STATES

I. INTRODUCTION

Development Aid (DA) may be defined an unrequited transfer of resources from a

donor to a recipient country with a view to promote social and economic
development of a recipient country. DA is mainly provided with the twin
objectives of financing domestic expenditures and increasing the availability of
foreign exchange.

In many Sub-Saharan African countries, DA provides crucial resources to support

crucial expansion of public investment programmes in energy, infrastructure,
education and health among other sectors. The growth in these sectors in turn
contributes to economic growth and poverty alleviation. Moreover, DA provide
foreign exchange resources that allow countries to increase imports of capital
goods, which stimulate economic output and are often associated with
productivity gains.

II. TYPES OF DEVELOPMENT AID

In many developing countries including those in the Sub-Saharan African region,

Development Aid consists of a considerable share of the total government
budget. This emanates from the fact that in most of those countries, internally
generated resources are not adequate to fully cater for huge capital investment
needs. As a result, the financing of capital investment projects from domestic
resources in form of tax revenues, user fees, and domestic borrowing is often
supplemented with external resources in the form of bi-lateral loans and grants;

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and multi-lateral loans and grants. In essence, DA involves transfer of capital,

goods, or services from donor country to recipient country. Traditionally, such
assistance includes grants and concessional loans with a grant element higher
than 25 percent.

There are four types of Development Aid which are extended to support
development projects in recipient countries, namely;

(i) Public (ODA) or private (NGOs)

(ii) Bilateral or multilateral
(iii) Balance of Payments (BoP) support which may take the form of monetary
transfers or technical assistance and training
(iv) Tied or untied which may be linked to or not linked to the purchase of
goods and services from the donor country, or in kind specific economic
or political conditions
III. IMPLICATIONS OF LOW ABSORPTION OF DONOR-FUNDED PROJECTS

Development assistance is provided through the generosity of tax payers in

Development Partner (DP) countries. To promote accountability, efficiency and
effectiveness of donor-funded projects, recipient countries must in principle
undertake to implement the agreed projects on time not only to satisfy the
“donor requirements” but also to account to their citizens who are supposed to
benefit from projects being undertaken through donor support. A number of
studies done on absorption of donor funds have found that the actual annual
absorption of these funds in many countries has been below fifty percent. These
findings underscore the importance of building capacity and undertaking public
financial reforms in COMESA member countries to ensure that externally funded

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projects are delivered or implemented in a timely, transparent and most efficient

manner.

If resources in donor-funded projects are not utilized as planned thereby resulting

in low absorption, the following are the likely implications:

(i) Opportunity cost is lost, hence slower development of economy than

planned. Since every resource (land, money, time, etc.) can be put to
alternative uses, the consequences of low absorption in donor-funded
projects has an associated opportunity cost in terms of development
outcomes. Opportunity costs are fundamental costs in economics, and
are used in computing cost benefit analysis of a project.
(ii) Payment of commitment fees to Development Partners though
resources are not absorbed. Donors should disburse aid according to
the agreed schedule and increase transparency toward recipient country
governments to minimize cases where commitment fees are paid on
loans and grants despite the DA not having been disbursed to projects.
Recipient countries on the other hand should respect the conditionality
of development aid disbursements.
(iii) Cost over-runs of projects if the resources are not utilized. Aid can play
an important role in the growth and development of recipient countries.
However, it can also have adverse macroeconomic implications. The
volatility and unpredictability of aid flows may have a negative impact
on recipient budget management and jeopardize macroeconomic
stabilization efforts. Aid recipients base spending plans on optimistic aid
commitments. If disbursement of aid is not forthcoming or stopped

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midstream, there are likelihoods of adverse macroeconomic

disturbances, including cost over-runs. Recipient countries should
therefore implement appropriate policies to properly manage aid flows,
taking into account the potential impact of aid on a country’s
competitiveness.

IV. CAUSES OF LOW DISBURSEMENT IN DONOR-FUNDED PROJECTS

Disbursement problems are the main causes of low absorption rates in donor-
funded projects. Disbursement problems mainly involve the lack of universal
understanding, political ownership, as well as capacity and institutional
shortcomings. In actual fact, low absorption in donor-funded projects can be
attributed to many factors including; lack of shared priorities, absence of
performance-based motivation, weak institutional/political ownership, poorly
designed projects, lack of centralized monitoring and tracking mechanism, weak
capacity of procurement entities, lack of clear responsibilities, poor capacity of
project management and cooperation between different government agencies.

(i) Disbursement problems related to lack of common priorities and

institutional ownership

If government agencies lack ownership partly due to the absence of implementing

sector ministries in conceptualization, feasibility studies and financial agreement
negotiations of the project, then disbursement problems are likely to arise due to
lack of common prioritization of the projects by the government and donors.

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A number of countries including those in the COMESA region lack clear policies on
external aid management. Consequently, disagreements often arise on
prioritization of development programs between the recipient government and
donors. In such scenarios, projects get approved for funding by the donors
without proper consultations with relevant government agencies and taking due
consideration of regulatory and policy requirements of recipient government. The
end result is weak institutional and political leadership which hampers project
implementation.

(ii) Accounting and reporting problems

One of the causes of low disbursement in donor-funded projects has been

slackness by the project implementers in observing cut-off dates for submitting
periodical reports as required by the development partners. In addition, existence
of inaccurate or incomplete claims hinders further disbursement of project funds.
In some cases, ineligible expenditures are incurred by project implementers
outside categories of expenditures agreed in the Financing Agreement.
Inadequate disclosures of material facts during reporting often leads to audit
qualifications, thus hindering the disbursement of funds.

(iii) Disbursement problems related to institutional shortcomings

The process of accessing funds from the donors is very lengthy and involves many
players hence time consuming. Delay by project implementers in accounting for
the advanced funds leads to withholding of further disbursements. Holding cash
balances during end of a given financial year by implementers of projects
complicates the problem as it requires re-voting of the project funds in most

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cases. In other cases, donors delay in remitting reports on disbursement of funds

to projects for ownership and accountability. This creates an impression that
nothing has been disbursed but the problem is lack reporting or publishing the
information on disbursement by donor.

(iv) Disbursement problems related to competencies, capacities and work

motivation
- Procurement related factors

Complex procurement procedures involving many prior review requirements

hinder disbursement of donor funds. Understanding and applying the recipient
countries and donor procurement rules and regulations at the same time pose
challenges to staff that may be lacking capacities in procurement processes.

Poor competency in applying national and donor procurement regulations leads

to lengthy procurement processes due to interventions in procurement decisions
from both sides and delays in obtaining “non-objection” from the donor. In
addition, issues of conflict of interest amongst key players especially where there
is lack of confidence and technical capacity in the procurement process.

- Capacity challenges

Lack of adequate capacity by project implementers to appropriately design and

prepare conceived projects may later pose challenges during the implementation
stage. This situation can be complicated if there is high turnover of staff in the
project implementation units thus negating the benefits of learning curve effect.

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V. SUGGESTED RECOMMENDATIONS

In a number of countries, there are no dedicated units to oversee project

implementation. In order to address poor absorption arising from disbursement
challenges, ministries responsible for finance should ensure that effective Project
Management Units comprising of multidisciplinary officers are established across
all Ministries/Departments/Agencies (MDAs) to improve absorption in donor-
funded projects. Project Supervision Committees chaired by Accounting Officers
in respective MDAs should also be established.

Accounting Officers should enforce compliance with rules and regulations and
financing agreements in order to minimize cases of ineligible expenditures. In
circumstances where low absorption is on account of disbursement problems
related to lack of common priorities and political ownership between the
recipient government and the donor, the following is recommended:

(i) Recipient countries and donors should develop a mutual working

relationship which is aimed at improving the alignment of donor and
Government interests and priorities in projects which may include
defining not only the sector projects but also the share of funds allocated
to each sector. Project preparation and design should be completed
before securing finances. It is advisable that project management team be
part of those formulating and designing of the project.
(ii) Develop a policy on external aid management. Such a policy should
provide guidance on donor code of conduct. Once developed, an External
Aid Management Policy will address absorption challenges arising from

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poor coordination, resource mobilization, accountability, reporting among

others.
(iii) As much as possible donors should agree to accept only projects and
programs based on recipient Government initiative to avoid promoting
their own development agenda. There should be a clear definition and
communication of donors versus government priorities. Recipient
Government should be given an option to reject project proposals if not in
their interest.
(iv) Setting up a centralized tracking mechanism and harmonization of
planning, monitoring and evaluation procedures between the donors,
ministry of finance and line ministries with respect to the donor-funded
projects. Key elements for the data base required for tracking
advancement and disbursement to projects/programs should be
developed. For instance, key performance indicators, existing financial
obligations, achievement of key activities, responsibilities, costs, time line
for completion of activities, annual planned disbursement and actual
annual disbursement.
(v) Develop models for performance based contracts using existing best
practice and a code of conduct for public servants. Officers assigned to
project implementation should sign performance contracts to commit
themselves to improve absorption of the budgeted project funds. This is
critical in improving absorption of donor-funded projects.
(vi) Ministries of Finance in Member Countries should develop common
operations manuals for use in their respective countries. Such manuals

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should outline the financial management, disbursement and procurement

procedures for all donor funded projects.

References

Aiyar, S. and U. Ruthbah (2008), ‘Where Did All the Aid Go? An Empirical Analysis
of Absorption and Spending.’ IMF Working Paper 08/34, Washington, D.C.

Isard, P., L. Lipschitz, A. Mourmouras, and B. Yontcheva, eds. (2006), The

Macroeconomic Management of Foreign Aid: Opportunities and Pitfalls,
Washington: International Monetary Fund.

Dorothy McCormick and Hubert Schmitz (2009), ‘Donor Proliferation and Co-
ordination: Experiences of Kenya and Indonesia’. Journal of Asian and African
Studies

IMF (2005), ‘The Macroeconomics of Managing Increased Aid Inflows: Experiences

of Low-Income Countries and Policy Implications,’ SM/05/306 (August 8, 2005),
unpublished, Policy Development and Review Department

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