This paper systematically records first experiences with results-based aid (RBA) for fiscal decentralisation in Ghana and Tanzania. Results-based aid is an innovative aid modality that links funding to the achievement of pre-agreed results, based on a contract between the donor and the recipient country.
The study finds that the modality holds great potential in incentivising better performance in fiscal decentralisation compared to traditional aid approaches. Yet, a number of challenges emerge during implementation, including trade-offs between country ownership and results-orientation or increased transaction costs, for instance.
The current trend in the debate on different aid modalities is that a number of donors withdraw from budget support and go back to traditional aid projects, even though budget support often is the preferred modality of partner governments. Also, negative examples concerning the effectiveness of budget support are often driven by domestic political economy issues in donor countries rather than by evidence.
Both RBA programmes, in Ghana as well as in Tanzania, face a number of similar challenges and provide first insights into the circumstances under which RBA is more likely to be successful. The experiences in fiscal decentralisation also clearly underscore the practical and political challenges encountered when implementing RBA programmes. Several lessons can be deduced.
1) Relevance: In both countries, the RBA programme is a small part of a larger set of donor-financed activities in the decentralisation sector, and both programmes are explicitly built on prior experiences gathered in development cooperation in the sector of fiscal decentralisation. Although Ghana as well as Tanzania welcomed the results-based approach, in both cases donors were the driving force in designing the RBA programme. In Ghana, the creation of new districts significantly affects the effectiveness of the District Development Facility (DDF), whereas in Tanzania a number of competing reform agendas influence development activities at the local level. Both countries also face major challenges in designing effective capacity-building measures and aligning the RBA programme with these.
2) Effectiveness: In Ghana and Tanzania, the RBA programmes are thoroughly designed towards encouraging increased levels of performance, and both programmes set effective incentives for achieving results. In addition, a number of potential benefits such as improved financial management and greater interaction between local governments and local citizens are observable. The indicators adopted in both countries capture key dimensions of local government performance, but assessment processes are very demanding for partner countries and the donors. Both programmes have set up complicated systems that are often difficult to manage for donors, the partner-country government and local governments. Also, both RBA programmes have mixed records regarding their adherence to principles of aid effectiveness. Although there are signs of greater harmonisation and use of country systems, both programmes also require additional administrative structures that need to be created. Furthermore, both programmes reinforce traditional donor-recipient accountability relationships. Dialogue between donors and partner countries is generally proceeding in an open and constructive manner, yet dialogue on results remains highly political.
3) Efficiency: Both RBA programmes are characterised by the need for elaborate annual assessments of local governments, but the costs for these assessments do not exceed administrative costs of other comparable decentralisation programmes. Overall, both programmes were therefore rated as good value for money. Still, it has to be taken into consideration that both of these programmes are pilots, for which higher costs tend to be tolerated. Also, both programmes are associated with indirect transaction costs that occur due to reporting requirements, for instance, or the piecemeal release of funds. These costs are difficult to quantify but should feature in more detailed assessments.
4) Impact: In Ghana, first observable effects of the DDF indicate positive results in terms of improved financial governance at the local level, greater dialogue between local governments and citizens, and stronger harmonisation among donor countries. For Tanzania it is still too early to draw conclusions on the potential impact of the Urban Local Government Strengthening Program (ULGSP). Regarding equity considerations, it is clear from both cases that the RBA resources are additional funds that supplement the core funding of local governments. Both RBA programmes feature capacity-building support in a narrow sense. Local governments that fail to meet minimum conditions for accessing RBA funds receive capacity-building support to meet programme conditions in the future. However, both programmes face challenges in ensuring effective capacity-development support in a broader sense, where the overall quality of the partner country’s institutions is concerned.
5) Sustainability: The decentralisation reform process in Ghana and Tanzania is characterised by an absence of quick results and requires donors to be patient. One pitfall of RBA in the decentralisation sector is that initial incentives might cease to be effective once the majority of local governments meet the performance criteria. Thus, RBA programmes should set ambitious and realistic results in order for performance incentives to remain relevant. The success of RBA programmes depends on the relevance of incentives for continuous performance improvements. The biggest challenge regarding sustainability, though, will be to establish a results-oriented culture, which was identified as the ultimate goal in Ghana and Tanzania. Yet, progress towards such a strong results-oriented public administration is proceeding only slowly.