Chapter 3. Aid Relationships after 1986

Overview

3.1 During the Museveni era, Uganda became a favoured aid recipient, and a pioneer of many innovations in aid management. An initial impetus for donors was the desire to assist with reconstruction and rehabilitation of the country’s infrastructure and institutions. In the early 1990s, Uganda achieved fiscal discipline and macroeconomic stability, which has since been maintained under a strong Ministry of Finance, Planning and Economic Development (MFPED). This enabled the dialogue between government and its aid partners to move on from structural adjustment concerns to more detailed consideration of development strategy and public expenditures. Bilateral donors assumed greater relative importance in the relationship.

Aid Donors and Aid Coordination

3.2 Initially, aid was dominated by multilateral agencies, but as aid flows grew, so did the relative importance of bilateral donors (see Figure 3.1). In the earlier years the government was heavily reliant on the Bretton Woods Institutions (BWI = World Bank and IMF), who provided structural adjustment funding to support the Economic Recovery Programme. The relationship between the BWI and a number of bilateral donors was often strained, as they did not necessarily agree about the macroeconomic policy prescriptions for structural adjustment and its implications for poverty and debt. Even when bilaterals co-funded Structural Adjustment Programmes (SAPs), they often felt excluded from the policy dialogue.

Figure 3.1: Major Donors to Uganda in 1985, 1994 and 2004 (% of total ODA)

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Source: OECD DAC data.

3.3 During the 1980s, aid coordination by the government was rather weak. A turning point was in 1992 when the Ministries of Planning and Finance were merged and the President gave MFPED more authority to run a disciplined macroeconomic and fiscal policy. Thereafter MFPED began to take a more pro-active role in aid management, backed by considerable openness in engaging the donors in the discussion of public expenditure priorities. Spending departments were disciplined by cash budgets, and a Medium Term Expenditure Framework (MTEF) was developed to guide expenditure priorities in a less hand-to-mouth way. When, reflecting the government’s own political interests, a poverty strategy (the Poverty Eradication Action Plan – Box 3.2) was developed, it was possible to link this both to the expenditure planning framework provided by the MTEF and to the development of sector-wide approaches (SWAps) in a number of key sectors.

Box 3.2: Poverty Eradication Action Plan (PEAP) Pillars PEAP1 (1997) and PEAP2 (2000/01) Framework for Economic Growth and Structural Transformation. Ensuring Good Governance and Security. Directly Increasing the Ability of the Poor to Raise their Incomes. Directly Improving the Quality of Life of the Poor. PEAP3 (2003/04) Economic Management. Production, Competitiveness and Incomes. Security, Conflict Resolution and Disasters. Good Governance. Human Development.

3.4 Against the background of general discontent with the effectiveness of aid, Uganda became a laboratory for new approaches. It was a pioneer in MTEFs and SWAps, and its PEAP was the forerunner of the Poverty Reduction Strategy Papers. The second iteration of the PEAP was accompanied by a set of “Partnership Principles” (Box 3.3) which codi-fied reciprocal aid management undertakings by the government and donors.

3.5 Debt relief under the HIPC initiative was linked to the establishment of an innovative Poverty Action Fund (PAF) which encouraged donors to channel funds through the budget to pro-poor expenditure priorities. Under the PAF there was a surge in funding of basic public services delivered through the new local government structures.¹⁰

3.6 There were corresponding changes in the way aid was delivered. Balance of payments support for structural adjustment was succeeded by debt relief and, after HIPC, by increasing use of general and sector budget support (Figure 3.2 – see Lister et al, 2006 for details). At the same time, fragmented project approaches gave way to more coordinated, government-led sector approaches, facilitating greater donor harmonisation and alignment. The impact of new aid modalities varied significantly from sector to sector, reflect-ing both sector characteristics and the preferences of different donors (see Figure 3.3).

Figure 3.2: Trends in Aid Modalities in Uganda

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Source: Lister et al, 2006.

Box 3.3: Summary of Partnership Principles (PEAP2, 2001)11 Government will continue to increase its focus on poverty eradication continue with increased tax effort assume full leadership in donor coordination decline any offers of stand alone donor projects strengthen monitoring and accountability continue to improve transparency and combat corruption continue to strengthen district capacity develop comprehensive, costed and prioritised sector wide programmes, eventually covering the whole budget further develop participation and coordination of all stakeholders (incl. parliamentarians) strengthen capacity to coordinate across government Donors will jointly undertake all analytical work, appraisals, reviews jointly set output/outcome indicators develop uniform disbursement rules develop uniform and stronger accountability rules ensure all support is fully integrated into sector wide programmes and is fully consistent with each sector programme’s priorities continue to increase the level of untied sector budget support increase the level of delegation to country offices abolish topping up of individual project staff salaries end individual, parallel country programmes and stand alone projects progressively reduce tying of procurement Source: PEAP Volume 3, Annex 1 (2001).

Figure 3.3: Balance between GOU Budget and Projects by Sector

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Source: MTEF from Lister et al, 2006. “GOU Budget” is inclusive of aid received as budget support.

3.7 For much of the period under review there was a strong coincidence of interests between the presidency, MFPED and donors, which fostered a high level of trust and collaboration. Towards the end of the period, this relationship had deteriorated somewhat, reflecting donor concerns about a number of governance issues, including corruption and democratic transition. Nevertheless there was still continuing impetus towards delivering aid more effectively, in keeping with the emerging ideas of good practice most recently expressed in the Paris Declaration. During 2004–2005 a group of bilateral and multilateral agencies prepared and adopted a Uganda Joint Assistance Strategy (UJAS), which was expected to attract more adherents over time.

10) See Chapter 5 below, Figure 5.2.

11) The Partnership Principles were revised in 2003, and appear in full in PEAP3. (The full version is annexed to Background Paper 3 in Volume 3 of this report.)