Jonathan Glennie and Neil Bird

Developing a methodology for the assessment of country systems use by domestic and international climate finance

Jonathan Glennie and Neil Bird

November 2013

Working Paper for discussion

Summary

This paper sets out to review the lessons from a decade of efforts to streamline aid with country systems and apply it to a different category of public expenditure: climate finance, which is raised both domestically and internationally (where it is a growing source of development finance).

In the first part we introduce the concepts involved. We define country systems as national government procedures, going beyond financial management to incorporate policy, implementation and accountability mechanisms. We emphasise that their use by donors and by national governments themselves is a means to an end (better systems, better results, lower costs) not the end itself. And we look briefly at how the use and quality of country systems has been measured in developing countries.

The second part sets outsome of the key lessons to date, in particular whether donors are using country systems more now to deliver aid, and whether such use is having the desired results. Interestingly, there is often little relation between the strength of country systems and international funders’ decisions to use them, with the blockages being found in the bureaucracy and/or political considerations of the donors themselves.

We then draw upon the main lessons from the previous two sections todevelop a methodological frameworkfor country-level assessment to establish evidence on the use of country systems by climate finance. The application of this methodology would allow the situation to be monitored over time.

We recommend:

• Understanding the term ‘country systems’broadly to cover a range of government activities, i.e. not just finance and procurement functions, but also planning, reporting, M&E and accountability mechanisms.
• Looking at other areas that are related tothe quality and likely use of country systems, such as transparency.
• Building on already developed measurement tools of aid and climate finance that assess both the quality of country systems and their use.
• Defining climate finance in terms of both the source of such funding (internationally and domestically raised public finance) as well as by its use for actions that are relevant to climate change.
• Focusing on learning by highlighting stories of change, as well as quantitative indicators.

1. Introduction

Climate finance is a new, as yet ill-defined, category of expenditure the purpose of which is to resource actions that respond to climate change. All countries are beginning to incur this spending aschanging weather conditions impact upon existing infrastructure and economic activity. For the world’s poorer countries this situation has the potential to undermine recent economic growth and broader development gains.

It is important to acknowledge that expenditure on climate change can come from a variety of sources. For all countries these include national budgetary resources, other public funding and private sector finance. For Non-Annex IParties to the UNFCCC[1], i.e. those countries less responsible for historic CO2 emissions, additional sources include international climate funds, as well as bilateral and multilateral donor funds.

There is a dearth of evidence on the extent to which these different sources of climate finance make use of government systems of budgeting and planning, programme implementation, public finance management and national monitoring and evaluation. Because of the importance of this issue for effective spending, a policy dialogue has begun under the aegis of the Busan Partnership for Action on Climate Finance and Development Effectiveness[2].

This paper proposes a methodology to assess how international and domestic climate change finance is making use of country systems. The methodology is at an early stage of development and will be tested through a number of pilot country case studies.

1. Using country systems

As applied to aid

‘Using country systems’ is a term introduced into the aid lexicon to differentiate aid spent using recipient government channels from aid that works around those channels. The stipulation to ‘use country systems’ emerged as the common donor practice of working around national governments came to be viewed as unhelpful and probably harmful to putting credible institutions at the heart of development. Working through country systems was also considered important to enhance results and reduce costs. By setting targets for donor countries to achieve, it was hoped that the Paris Agenda[3] would incentivise an increase in their use of country systems.

‘Country’

Since the publication of the Paris Declaration on Aid Effectiveness, there has been some questioning of the use of the term ‘country’ which the Declaration generally uses to refer to the national government. Civil society organisations have criticised this, arguing in particular that ‘country ownership’ should go beyond governments. But there has been less controversy about what ‘country systems’ means; it has been taken to refer to state institutions, with a particular but not exclusive tendency to relate to government (i.e. the executive and civil service).

ODI’s recent Localising Aid study[4]represents one attemptto broaden the scope of ‘country systems’ to include private sector and civil society actors, arguing that external actors should seek to use their ‘systems’ as well. This picks up on a tendency that started at the Accra High Level Forum in 2008 at which donors were encouraged to support dialogue with other parts of society: ‘Donors will support efforts to increase the capacity of all development actors – parliaments, central and local governments, CSOs, research institutes, media and the private sector – to take an active role in dialogue on development policy and on the role of aid in contributing to countries’ development objectives.’[5] At Busan, new indicators were introduced to incentivise such a dialogue. Other work has introduced a focus on sub-national governments, using similar arguments and methodology.

‘Systems’

As applied by the OECD, ‘systems’ is a broad term covering national government procedures such as public financial management, accounting, auditing, procurement, results frameworks and monitoring and environmental assessments (Paris Declaration, 2005). ODI has suggested an even broader spectrum, isolating four groups of procedures carried out by national governments which donors could ‘use’ (Localising Aid, 2012): (i) national policy processes; (ii) financial management systems; (iii) implementation procedures; and (iv) accountability systems.

‘Using’

In the aid effectiveness sector, ‘using’ country systems refers to aid using government procedures. Mokoro (2008) set out the followingdiagram to demonstrate the various aspects of such procedures[6]:

Figure 1: Using partner country PFM systems at different stages of the budget cycle

Source: Mokoro (2008)

Full ‘use of country systems’ would mean not introducing any external systems for the management of foreign aid; a fully developed form of general budget support without additional external checks. However, in reality, most donors[7] use some parts of the overall system, and not others, depending on their assessments of the system and their own constraints and incentives. There is also a general recognition that the strengthening of country systems is a long-term process and may require a gradual transfer to the use of such systems[8]. Having said that, the language of the Paris process has strengthened over the years from ‘desirable’, to ‘first option’, to ‘default’.

As applied to climate finance[9]

There has been an equally strong political narrative within the UNFCCC negotiations over ‘using country systems’ to manage the international public funding element of climate change programmes and projects. This is encapsulated in the debate over ‘Direct Access’. So, for example, the Governing Instrument of the Green Climate Fund calls for:

‘The Fund will provide simplified and improved access to funding, including direct access, basing its activities on a country-driven approach and will encourage the involvement of relevant stakeholders, including vulnerable groups and addressing gender aspects.’ Para. 31.

International interest in supporting the strengthening of country systems also reflects a global concern to help national institutions re-orientate towards a climate compatible model of growth.

Although in the aid community, the term ‘using country systems’ applies necessarily to cross-border international flows arriving in a recipient country, we intend with this methodology also to assess how well domestic public climate finance uses country systems (including in developed countries). This will involve looking at domestic public funds for climate mitigation and adaptation that may be managed off-budget. Whilst recognising that private finance is a significant source of climate finance, the debate on the use of country systems by private finance is at a much earlier stage and is not covered in the present methodological approach.

Whyuse country systems?

For aid delivery

For many years, donors ensured that their aid worked around recipient government institutions either deliberately (as a policy) or by default (if there were operational requirements that recipient governments were unable to fulfil). However, it is now generally accepted that moreaid should ‘use country systems’, not for the sake of it, but fora number of broad reasons, including[10]:

• First,country ownership is now considered as being central to effective development, and use of country systems is seen as a key driver of country ownership. Accountability for effective development including aid should be within a country’s own political processes including its budget process – rather than to separate donor structures and systems.
• Second, it is now accepted that well-functioning government institutions are vital for successful development to occur. When aid uses those institutions it can help strengthen them for the future. Conversely, a failure to do so may undermine their capacity and accountability. According to the Paris Declaration, ‘Using a country’s own institutions and systems, where these provide assurance that aid will be used for agreed purposes, increases aid effectiveness by strengthening the partner country’s sustainable capacity to develop, implement and account for its policies to its citizens and parliament.’

• Third, aligning aid better with government priorities, and working more closely with government entities, has the potential to make obtaining better results more likely, not least because it allows for more cohesive planning processes and a whole-of-government approach.
• Fourth, it was hoped that working with government systems would reduce the transactional and operational costs of aid for both the funder and the recipient.
• Fifth, it is considered a matter of principle, especially by many recipient countries, that foreign entities should channel their actions through government institutions when carrying out aid projects.

It is worth emphasising that we interpret the use of country systems as a means to an end, and not the end itself. There are other means, some of which are contemplated by the Paris Agenda, by which donors can support the development of accountable and effective institutions, including working with countries to develop them. The Accra statement makes this clear, locating the use of country systems among other means of enhancing country ownership:‘Developing country governments will take stronger leadership of their own development policies, and will engage with their parliaments and citizens in shaping those policies. Donors will support them by respecting countries’ priorities, investing in their human resources and institutions, making greater use of their systems to deliver aid, and increasing the predictability of aid flows.’

It is broadly accepted that donors should expect a certain quality of country system before putting their taxpayers’ money through it (even if this is somewhat in conflict with the idea that country systems will improve in quality precisely by their use).

For climate finance delivery

Despite the fact that the UNFCCC negotiations emphasise the distinct nature of climate finance compared to aid, the same arguments on use of country systems apply to the international public component of climate finance – or at least no counter narrative has been suggested.

There is also considerable overlap at present between this source of climate finance and aid. For example, much of the USD 30 billion fast start finance has come from the official development assistance budgets of contributor countries. This strengthens the underlying rationale for the use of country systems by this source of funding.

There are additional reasons for climate finance to use country systems:

• Climate finance is intended to be transformational, leading to climate compatible development. For such a transformation to occur, it will require providing finance that changes the whole of government’s public investment profile and leverages in private investment.
• Climate finance needs to promote a cross-government, cross-sector approach to ‘mainstreaming’ the issue of climate change, for example by topping up line Ministry and local governments budgets to include the incremental costs of climate mitigation and adaptation. This may be achieved most effectively if the funds are managed through country systems around the budget process, which is where cross-government, cross-sector allocations are determined.
• Finally,there is global consensus that international climate finance flows should reach an annual level of USD 100 billion by 2020. If these volumes of funds are to be disbursed, country systems will most likely be required as a major deliverychannel (at least for publically sourced funding).

There are also some important caveats on the links between country systems and climate finance, just as for aid. First, while effective institutions are important, so is the quality of the climate change policy itself i.e. it would be possible for an effective government to have good systems but a poor policy, undermining the effective use of climate finance. And second, national investments in monitoring and evaluation of the impacts of climate change remain significantly under-developed in many countries. Both of these system elements require sustained support.

How is the use of country systems measured?

For aid delivery

Only two of the Paris Declaration indicators use the term ‘using country systems’ – 5a, on the use of PFM systems and 5b on the use of procurement systems – leading some to adopt a reductive definition closely aligned with financial systems. In reality, indicators 3 (on aligning to national priorities), 4 (on coordinating capacity development) and 6 (on reducing parallel implementation units) are also directly related to the use of country systems.Paris progress reports have also drawn on broader sources, beyond the quantitative indicators, including reports from fragile states.

Of the Busan indicators, three are directly related to key aspects of the use of country systems, while an additional four are somewhat related, meaning that the use of country systems is likely to improve the indicator score, even though it is not strictly necessary (Table 1).

Table 1: Analysis of relationship of Busan indicators with use of country systems

For climate finance delivery

A recent methodology developed by UNDP and ODI termed Climate Public Expenditure and Institutional Reviews (CPEIRs) measures the use of government systems in managing public climate finance. The systems covered by CPEIRs include national policy and planning processes, institutional structures and coordination arrangements, public finance management, and the budgeting and expenditures on climate change relevant actions. However, the CPEIRscompleted to date have not consistently quantified all financial channels and therefore have not measured the share of climate finance (both domestic and international) that has used ‘country systems’ as opposed to the share that has been disbursed through extra budgetary funds (national climate funds or international climate funds). In part, this reflects the very considerable challenge of this task, with limited availability of financial information from a variety of sources being a major constraint. Other climate readiness assessment frameworks and emerging tools (e.g. the GAIN index[11]) can also be applied to give greater insights into the use of country systems by climate finance.

An initial approximation of the use or non-use of government systems by domestic climate finance in developing countries could be ascertainedfrom PEFA[12] indicator PI-7, which measures the extent to which all government operations are recorded in the central budget.

How is the strength/quality of country systems measured?

For aid delivery

It is difficult, if not impossible, to measure objectively how ‘effective’ a government is. However, there are a range of existing indicators that aim to estimate/measure country effectiveness, including the World Bank’s ‘World Governance Indicators’ which have quantitative expert opinion surveys on areas such as economic management, regulatory quality and government effectiveness.

However, these indicators are very high level and tend not to assess how systems actually work on the ground.For example, PEFA, ROSC, World Bank Governance Indicators, and CFAA all tend to measure the existence of systems as well as giving some indication as to how these systems are implemented. They rarely measure the quality, effectiveness or impactof the system itself. In other words, they may tell whether a government has been audited, but not whether the audit was rigorous and transgressions followed up. Or they might assess whether a government has oversight of State Owned Enterprise accounts, but not whether they do anything with this information to reduce financial risk. Some tools do measure actual implementation and/or service level impact (e.g. Public Expenditure Tracking Surveys; Public Expenditure Reviews), so a suite of these surveys could be a useful step towards measuring the effectiveness of country systems. However, these tools are less commonly in use.