Poverty Reduction Budget Support (PRBS) is a form of aid in which funds to support development programmes are provided directly to a partner government’s exchequer. The Department for International Development (DFID) believes that, where appropriate, it is the best instrument for creating a relationship between donor and partner countries that will build state accountability and capability. This policy paper describes the PRBS process to date and outlines its benefits and risks.
Over the last three financial years, DFID has provided an average of £250 million per year as PRBS (also known as Direct Budget Support) in 20 countries. This is about 15 per cent of total bilateral expenditure. The aim is to help governments implement poverty reduction or similar strategies, accelerating progress towards the Millennium Development Goals. PRBS is only used when the circumstances are right, which requires an assessment of three factors: planned budget priorities in support of poverty reduction; the status of administrative, technical and financial systems; and the costs/benefits of PRBS against other types of aid. For PRBS to be viable, partner governments must have a formal strategic framework for poverty reduction and a track record of policy implementation. If there is a high risk of funds being misused, PRBS is not provided, and in poor policy environments, project support remains preferable.
Evaluations of PRBS to date, mainly in Asia and Africa, have provided useful information on the anticipated benefits and risks of general budget support. Expectations are that:
- In the short-term, PRBS should provide increased ownership of budgets and policy processes, improve policy dialogue and greater harmonisation between donors. Eventually, this should lead to better service delivery.
- In the medium-term, budget support should make aid flows more predictable, lower the transaction costs of aid delivery, and increase the efficiency and pro-poor allocation of public spending.
- In the longer-term, it may also help increase democratic accountability, as greater predictability and transparency in the budget changes expectations, causing different groups to mobilise.
- On the negative side, there is a risk that budget support may actually make aid flows less predictable. As it is easily disbursed, it can also be stopped quickly if donors have concerns, forcing fiscal adjustment.
- There are also risks that funds may be misused or spent on prestige projects, and where a country is making slow progress in improving public finances, PRBS may reinforce the status quo.
The key conclusion is that decisions on the use of PRBS should depend on a careful assessment of country circumstances and DFID’s relationship with the partner country. Other findings are that:
- Some benefits, such as lower transaction costs, are longer term rather than immediate.
- In a few cases, such as Uganda, gains have been made, but not all countries have yet seen benefits. It is still too early to assess the impact on poor people, and more evidence-based analysis is needed.
- Expected benefits are not automatic, and fund transfers must be accompanied by technical assistance and policy dialogue.
- PRBS has proved less predictable than expected, but this could improve with clearer operating rules. Both sides must trust one another and establish mutual obligations.
- The impact of PRBS would likely be increased if donors could establish greater consistency in their objectives and management mechanisms.
