Ministry of Planning & Development Cooperation
International Cooperation Directorate
Challenges and lessons of donors’ aid management process in Iraq
As we are approaching the forth year, since the beginning of the reconstruction program of Iraq, a lot of lessons and experience have been accumulated, that can help us in assessment of the last period and also help us to plan and correct the path forward.
The International community efforts to rebuild Iraq are highly appreciated and should continue specially in raising the capacity of Iraqi institutions and bridging the gab with the outside world and ending the isolation from the international economy.
This paper sheds the light on the current macroeconomic situation, reconstruction and investment, the prevailing institutional problems in Iraq, foreign aid effectiveness, and the way forward to overcome difficulties to pursue the efforts national and international to implement the objectives of the National Development Strategy, and the International Compact with Iraq.
It is widely recognized that Iraq future development requires to increase the economic growth, diversifying the economy, and continue the structural reforms. Growth of Iraqi economy was below expectations during the past period, although the Government has initiated reform program in macroeconomic management and structural reforms. The slow economic growth is attributed to many reasons among which lower than expected oil production, as well as the deterioration security situation and unstable political environment. These factors have also hampered reconstruction process and investment. The shortages in key commodities and basic services resulted in rising inflation rate at 65% in 2006.
It should be mentioned that the decline in oil production and real GDP at 3.7% in 2005 was followed by economic growth by 6.2% due to increase in oil production, but lower than the projected growth rate of 10.4%.
As to the government Investment Program allocations, it is noted that they were increased throughout the years 2004-2007; US$ 3 billion, US$ 4 billion, US$ 8 billion, US$ 10 billion, respectively, but it only constitute 22.2%, 19.4%, 13.0%, 15.8% of GDP respectively for the years 2004-2007.
Off the total investment which amount at US$ 35.4 bil for the period 2004- end August 2007, only 30% was spent by Iraqi implementing agencies. The lowest rate of
implementation was 17% in 2006 but a progress has been made in 2007 to reach 35% as end-August and it is not yet to know how far it will be for this year.
This low implementation rate of the government’s investment program has adversely affected by the prevailing security challenges, political and sectarian conflict, and others. However, the weak absorption capacity of Iraqi implementing agencies is considered to be the most negative factors in this regard. As a result large fiscal surplus has been accumulated. It is reflected in the balance of the Development Fun of Iraq (DFI) standing at about 8.6 billion at end-2006. and the CBI gross international reserves increased to more than 18 billion at end-2006.
Institutional capacity challenges
In addition to increase economic growth and the implementation of structural reforms, the country is facing a major task of reducing inflation and unemployment rates, naturally this task requires among other things speeding of reconstruction and promoting investment. Particularly in the oil sector. Also rebuilding infrastructure and reversing the decline in living conditions will depend on the other hand on other factors in the first place, in the attainment of political consensus and improving security all over the country. These objectives and the facing of challenges demand firm efforts on the part of government to counter insurgency, terrorism, and corruption.
Of special importance other problems need to be dealt with effectively, this includes the existing immature accountability framework, the weakness of anticorruption institutions as well as the inconsistence and unpredictable development assistance. As some of the prevailing negative phenomenon of the current situation, one notes the sever brain drain out of the country and the burning problem of IDPs and refugees flows to the neighboring countries.
According to many respected reports including the UN ones, the situation of human rights has been aggravated, which needs to be addressed by the International Community and friendly countries.
The ethnic and sectarian conflict have damaged a lot of physical infrastructure, hinders the climate of tolerance and constructive human interaction. Also one should stress the fact that the increase of poverty and unemployment have been also considered as causes and consequences of the national conflicts.
Dealing with the problems of post-conflict as well as in-conflict reconstruction requires mainly to address the institutional challenge and has to ensure strong linkages between foreign aid and rebuilding the local institutions, and balancing between immediate reconstruction priorities with long-term institutional development. In addition to the fact that a general prerequisite for post-conflict reconstruction and effective financing, is to establish and maintain public order and security, because the best needs assessment,
reconstruction program, ownership, staffing, financing arrangements, resource availability, policy framework, and implementation capacity can not be attended if economic activities are constrained by lack of physical security.
As it was mentioned earlier, that the weak administrative capacity of Iraqi institutions was among the main reasons of under-spending of national investment budget, and lagging the implementation of donors financed programs. The capacity problem in Iraq is a multi-dimensional one, and will not be quickly overcome. It is partly a result of system-wide problems, reflecting the inefficient bureaucracy which absorb staff time unproductively, no reward system and weak motivation. In addition to prolonged and complicated procurement procedures, financial management, shortages in equipments and machinery, and the availability of fuel, are among the reasons in this regard.
However the conclusion of ICI has represented a package of solutions and commitments that need to be adhered by the Iraqi Government and the donor countries and international organizations. This includes among other things major tasks in areas like security, political stability, and socio-economic matters. Although progress has been achieved on several fronts, but much has to be done on the path forward, and many challenges will face the Iraqi Government to achieve the vision.
As for the International assistance to Iraq, it has developed unstable trends as percentage from GDP, which is 9.1% in 2004, 27.9% in 2005, 12.5% in 2006, and 8.3% in 2007. It has been noted that the off-budget financing of official development assistance is considered to be a negative factor in terms of adopting and following one national consolidated and comprehensive budget. This fact did not provide the possibility to achieve accurate and aligned process of financing which should complement the capital expenditure in a sustainable manner for the reconstruction and development of the country.
It goes without saying that Foreign aid in general, to many recipient countries is expected to play an important role in the transitional period, improving the lives of millions of poor people around the world. In the case of Iraq, violence mounted so extremely since 2003, has badly weakened effectiveness of aid rendered.
One of the major conclusions of the IDA report “Aid architecture: an overview of the
main trends in ODA flow” is that the increased complexity of the global aid architecture, which is represented by huge increase of the number of donors since after the Cold War period (1990s) and respective change of rules regulating their assistance to developing world, has lead to reduction of aid effectiveness, as the transaction costs both for donors and recipients have dramatically grown. This objective reality, aggregated from a large number of quantitative and qualitative data, can be observed in the case of Iraq as well,
though through indirect analysis, as proper monitoring and evaluation of donors’ and GoI performance in executing the aid is constrained by the deteriorating security situation on the ground. More over, the existence both on- and off- the ground in Iraq of a large number of implementing partners, through which donor aid is channeled, represents by itself a multiplicative factor for complexity of aid architecture in general.
How can we make aid more effective, a question that occupied the attention of donors and recipient countries all over the world.
No doubt that the actual situation and specific features of the given country should be taken into consideration while benefiting from solutions of similar problems in other countries. This would help strongly improve the aid effectiveness.
Paris declaration has recommended main principles to be followed to improve aid effectiveness in the long run: national ownership, alignment to national priorities, harmonization across the donors and with national budget, management for results and joint monitoring. These principles though not in a well structured manner have been reflected in major fundamental documents such as NDS (2008-2011) and ICI, defining the priorities, ways and mechanisms for recovery of Iraq’s seriously damaged economy in the widest context. During the past 3 years we have accumulated some experience and lessons learned on aid management issues. We think, that those should be analyzed and used to improve the performance and effectiveness in project implementation as well as of the entire aid in general, as it is anticipated for the implementation of ICI.
Although Iraq is not a signatory to Paris declaration, we think there is no better framework to analyze the aid rendered to Iraq, other than that of defined in Paris declaration. We therefore believe that the support of donor community to continue assisting Iraqi Government in aid management is highly needed. Specifically, as the
quantitative basis for analysis of aid rendered has been created by means of Donor Assistance Database, and respective capacity developed to maintain it with the help of UNDP, EC and Swedish Government, further support is meant to address the issues of increased effectiveness of external assistance by defining and implementing appropriate policies and methods. For this a baseline analysis and assessment of Paris indicators should be carried out, that will allow to measure further progress both at country and donor levels.
At this stage we were able to derive a number of important characteristics of donor assistance so far provided to Iraq from DAD aggregated data analysis. In our opinion the results of this analysis deserve a close attention of donors and the Government as they relate to the issues of effectiveness of donor support.
As an aid recipient country, Iraq is uniquely placed both in terms of volume of aid provided and the specific political and security environment of implementing this aid. As you know, the amount of grant aid provided is well in excess of US$ 23 bln, while the presence of donors and main implementing partners on the ground in Iraq is very limited.
We were able to capture only 70% of the pledged grant assistance and enter respective information into DAD. This reflects that the cooperation among the GoI and donor community needs to be improved and brought to a qualitatively better level. Both the GoI and donors have work to do in this direction, as the commitment to support development efforts of Iraq obviously is out of question.
We have deployed with the support of UNDP MoPDC web portal, use and will continue to use it as a medium of communication with donor community and Government entities, as well as for important publications various aspects of international cooperation and proposed by the GoI regulations in this domain. We kindly encourage you to provide your feedback and concerns on important documents and analytical reports, as they are published. You are also welcome to submit any material that you think might be of a common interest.
However, at the aggregated level, the captured information on aid flows allow to quite accurately understand some important trends of assistance provided until now.
IRFFI, as a mechanism of pooled funding has been established in the form of two Trust funds (UNDG and WB administered) and have provided funding for total of US$ 1.6 bln.
As mater of fact, ISRB is legally considered to deal with and approve all projects seeking funding from IRFFI and other sources, however the assessment of Iraq ownership was wrongly restricted to only 8% of total aid flows coming through IRFFI. This is far below the expectations for the ownership, as a fundamental prerequisite of effective aid defined in Paris declaration.
Most of the donors, providing support through IRFFI, nevertheless continue their assistance program through direct implementation, and some of them either do not report at all, or their reports are not structured in a way that allows integrated and consolidated analysis with the rest of assistance.
Large proportion of earmarked by donors funds in IRFFI predetermines high level of conditionality of external aid. This undermines the very idea of pooled funding, by providing almost no flexibility for the GoI to address in a fast and effective manner emerging priorities. This also predetermines high transaction and overhead costs.
It is noticed that the only modality of aid to Iraq is the project aid: so far we have captured information on more than 17,000 projects implemented with the support of
donors since 2004. Obviously, an extremely well organized capacity and cooperation is required to monitor, verify and accept the delivery of the results of this number of projects. A mutually agreed discipline of reporting is the least we could ask from donors to maintain. We have recently distributed Standard operating procedures on this very matter but did not yet receive any feedback. The necessity of SOP has been stressed many times by other partners, such as EC, WB etc.
We also understand, that other aid modalities, such as program support and direct budget support (preferable) or can be used if Iraq’s public finance and procurement systems are developed and upgraded enough to allow a transparent and accurate accountability, in line with international standards. To this end, these two directions of further donor support seem to be major priorities and are extremely urgent, as the ICI implementation is ongoing.
At this stage, when project type of aid prevails, we should strive at least to make it on-budget, better harmonized and predictable to enable us to respectively plan our budget and monitor its implementation.
In line with aforesaid, project/program implementation, monitoring, and performance evaluation capacity remains of highest priority for Iraqi Government.
As it was mentioned earlier, capacity constraints remain the most important challenge, plus creation of conducive economic environment, that needs support from the International community.
The NDS has identified a huge amount of investments in Iraq until 2010 which exceeds US$ 1 bil. to restore basic services, and to revive vital sectors of the economy. The ICI has developed master plan for reform in security, political, and socio-economic areas. Although Iraq needs huge resources to attain its development goals, but in the short and medium term, there is an urgent need to set up sustainable capacity within ministries to attain these major objectives in an effective manner.
SWAPs and sectoral support
Due to the importance of having well coordinated sector management and policies, it is believed that gradual shift to sector level support or SWAPs is needed, for its success in other countries in setting up a sustainable capacity within the government in planning and implementing the reconstruction agenda, rather than relying on piecemeal approaches that may result in weak national ownership or alignment with national priorities.
The program approach may contribute to enhancing and improving planning and management capacity, by minimizing the difficulties resulted from uncertain donor support using multiple donor projects with different approaches and procedures.
A mutual effort, and coordinated coherent reconstruction effort is needed to overcome the above difficulties.
An assessment of the previous assistance to Iraq is needed in the near future, to be conducted by donors and the Iraqi Government, to be a basis and guidance for future assistance.
In this context, redressing governance gaps constitutes first priority, as well as increasing efficiency of the official institutions and state bureaucracy. Having viable institutions and proper policy environment are prerequisite for revival and economic growth.
Good governance in Iraq will lead to growth, and good economic policies which in its turn will lead to attractive business environment for production and investment.
As to the International aid process, the past experience has shown that more efforts to be made in order to strengthen IRFFI mechanism as well as the bilateral mechanisms, and have them integrated with the ICI mechanism with the aim to strengthen the Iraqi national ownership of the reconstruction process and to ensure better management and coordination among all stakeholders.
1. Fifth Review under the Stand-By Arrangements, IMF Country Report No. 07/ 301,
International Monetary Fund, August 2007
2. Schiavo-Campo, S., Financing and Aid Management Arrangements in Post-
Conflict Situations, CPR Working Paper No. 6, World Bank, June 2003
3. The Status of Sector Wide Approaches, Working Paper No. 142, Centre for Aid
and Public Expenditure, Overseas Development Institute, UK, January 2001
4. Harmonizing Donor, Practices for Effective Aid Delivery, DAC Guidelines and
Reference Series, Good Practice Papers, OECD, 2003
5. Managing Aid: Practices of DAC Member Countries, OECD, 2005
6. Better Governance for Development in the Middle East and North Africa, MENA,
7. Paris Declaration on Aid Effectiveness, High level Forum, Paris, February 2005
8. The International Compact with Iraq, 2007 Mid-year Progress Report, United
Nations, New York, July 2007
9. The International Compact with Iraq, A shared Vision and Mutual Commitment
10. National Development Strategy, 2007-2010, Ministry of Planning & Development
11. Aid Flows and Aid Policies in Iraq, report presented to IRFFI sixth meeting,
International Cooperation Directorate, Ministry of Planning & Development
Cooperation, October, 2007
12. Donors' Contributions to Reconstruction Efforts up to end-June, International
Cooperation directorate, Ministry of Planning & Development Cooperation, August 2007