Cover Feature

Foreign Aid
The Destorted Path

For Nepal, the need for foreign aid is acute. The country is backward in every field. Two out of every five Nepalese live in abject poverty. The per capita income hovers at around US dollars 220, which is one of the lowest in the world. Most of the people in the country earn less than a dollar a day, a criterion designed to determine the degree of absolute poverty.

Development planners are of the opinion that foreign aid should not be heavily depended on as it would hamper the proper utilization of internal resources and give rise to nonchalant attitudes. More dangerously, it would give rise to the dependency syndrome, which is not a healthy signal for any country.

In this backdrop, the question on the appropriateness of foreign aid to the developing countries like Nepal has cropped up. It is true that Nepal is poor in the mobilization of internal resources due to inadequate capital and lack of technical knowhow. But it is obvious that five decades of foreign aid have not brought about any remarkable improvement in the economic scenario of the country. This shows that there must be something amiss in the utilization of aid money.

Donor countries and agencies would certainly take into account their interests in the aid to the developing countries. They would sometimes dictate the course of action for the operation of the projects run through their aid. And the hapless recipients cannot help but accept such diktats for fear of losing the aid. As such, such projects may operate in accordance with the wishes of the donors, something which may even run counter to development models adopted by the recipients.

Moreover, in our context most of the aid money is used to procure costly equipment, vehicles and buildings, and to pay consultancy fees to the technicians/consultants brought along by the donors themselves. And to add the last straw to the scene, corruption is always there, which hampers the proper use of the aid money. As a result, most of the foreign aided projects are in a shamble now.

In recent times, the patterns of foreign aid have also changed, with loans outweighing grants, which implies that a huge chunk of the budget will have to be earmarked for debt servicing.

Foreign aid has not been used in a transparent manner. There lacks a proper accounting system of recording the movement of foreign aid. So the donors countries and agencies have equally shown interest in the proper use of aid money. The World Bank has linked the granting of aid to its proper use and satisfactory progress in socio-economic development.

In this context, it would be prudent for Nepal to determine priority sectors where foreign aid can bring about satisfactory progress. And the ad-hoc selection of projects for self-interest should be abandoned. A scientific accounting and audit system, an effective management information system, a hierarchy specifying rights, duties and responsibilities and the like should be in place. Additionally, a relevant policy should be formulated without any delay so as to streamline foreign aid.

Has the massive inflow of external resources contributed to combating poverty and achieving growth in economy?

If the available evidences are to be believed, the answer is a definite NO. This massive inflow of foreign resources has created minimum impact and economy has more or less remained stagnant. Moreover, there are many who argue that foreign aid inflow in Nepal is very low compared to many other countries.

The only thing external resources have done is to expand dependency culture to the very core of Nepalese lifestyle. The situation has become like that of a drug addict who needs even larger dose of drugs just to sustain life. Persistent poverty in the Nepalese context should be viewed as a reflection of its dependency on foreign resources. The donor initiative and resources have killed the very capacity of Nepalese bureaucratic machinery to initiate and implement development projects and programmes.

It has paralyzed the very core of our administrative machinery and institutionalised corruption in the political and administrative system. If we review our past development efforts we do not find any large scale development programmes and projects that is implemented by Nepalese administrative machinery and internal resources alone. Capacity building, technology transfer through foreign assistance has been a mere rhetoric.

Nepalese elites have become mere intermediaries between the donors and the poor mass on whose name foreign aid flows. The elites which include politicians, bureaucrats, commission agents, consultants, advisors and project managers are only beneficiaries whose lifestyle and living standard resembles that of the people of developed West, while the masses continue to languish on chronic deprivation. Poverty has become the begging bowl of Nepalese elites who thrive on growing foreign aid dependency.

Dependency culture has become so much entrenched on our psyche that we have internalised it in the very core of our development planning through the extension of grant in system to Village Development Council and District Development Councils and Members of Parliament without developing effective mechanism to implement, monitor and evaluate the development programmes. Growing foreign aid dependency has also contributed to retard the economic liberalisation process by creating comfortable balance of payment situation in the country despite the not too encouraging performance of the trade sectors.

Underdevelopment and poverty on the threshold of this new millennium are manifestations of our failure, lack of commitment and sincerity towards our state. The threat of economic, social and political collapse seems very much imminent, as economy has remained more or less stagnant and ineffective to appease the needs of the growing mass. The foreign aid, instead of contributing to the growth of economy, has perpetuated the dependency culture, institutionalised corruption and polarized the people who have access to the resources and those who do not have. It is now time to seriously realise that without mobilising the internal resources, it is impossible to achieve sustained and broad based economic development.

The Corruption Malady

Corruption is the antithesis of accountability and concede the limitations of aid intervention.King Prithvi Narayan Shah the Great had said: "Justice is distorted by bribe-giver and bribe-taker. There is no sin in taking their life, they are great enemies of the king."

The above edict in his Dibya Upadesh (Divine Message) evidences that corruption in Nepal is as old as the country’s foundation. The Nepalese even have a native term, ghiu-khane (butter eating), which can be equated with palm greasing or grease-the-wheel. The quotation has two observations. First, corruption pertains not only to the abuse of power but also the activity of the bribers. Second, corruption can be a threat to the regime.

Corruption has been long been prevalent in Nepalese societies and continues as an issue of public debate. But it remained a taboo theme in development discussion until very recently.

It would be banal to say that corruption has persisted under various forms of regime and successive governments in Nepal. In fact, the culture of corruption has deepened its roots and expanded its tentacles. According to the Auditor-General’s reports, irregular cases of government transactions are multiplying every year. It is estimated that 15 percent of the total government transaction is either unlawful or unauthorised transfer of money, or uncleared advances, or intentional loss to the government.

Despite existence of anti-corruption laws and agencies, corruption is rampant, as the perpetrators remain free from punishment. The same scenario also constitutes the environment in which development aid has to operate.

There is an intrinsic nexus between corruption and aid. The simple truth is that development aid has widened the scope for corruption in Nepal.

The agenda of major donors remains both political (democratisation) and economic (liberalisation). This is evident from their advocacy of good governance that encompasses liberal democracy, privatisation and clean government.

Nepal’s over-dependence is obvious from the fact that donors take initiative in aid coordination including sectoral ones instead of the government that negotiated for them. The problem of aid management in Nepal becomes evident when the host government plays a secondary role.

The second fallout of over-dependence on aid is the increasing clout of donors on aid conditionality. These relate not only to project management but on policy aspects.

Some bilateral donors are more explicit in their governance agenda with incursions in political area such as empowerment and human rights. The irony is that more involvement of donors has not improved the situation either in aid management or in curbing corruption.

Transparency & accountability

How to go about improving transparency and accountability in development aid? Of the litany of problems relating to foreign aid, half are in the nature of ‘beggars cannot choose’. These refer to being donor driven, aid in low priority area, too many projects, conditionalities, and increasing loan burden. In terms of category, four are donor oriented, three due to over-dependence, two of inherent weakness and two, admission of incapacity. The most intriguing of the problems is "the absence of definite policies and guidelines" as if all these years, aid was an ad hoc arena. Given the lack of clarity in problem diagnosis, policy and strategy prescriptions have not much of substance.

Now about initiatives towards transparency and accountability. Corruption through aid has become an established fact. Therefore, donors and international agencies are taking corruption control as one of their key concerns under the rubric of ‘good governance’. Since 1993, Transparency International (TI) has assumed the lead advocacy role to combat corruption. The operational model of TI is coalition building among international agencies, governments, civil society and private sector to combat and control corruption. Of these, the first two with pelf and power have the primary responsibility. Whatever the preventive and curative measures against corruption, it is the government and international agencies that have the authority to pursue and implement. Development aid has also been taken as a ‘partnership’ enterprise. Despite this, the increasing intervention of donors vis-à-vis suppliant recipients, there has been little breakthrough in the campaign for transparency. Yet, much onus lies on the recipient governments. If aid flow to Nepal has multiplied, so has corruption become pervasive and endemic. Aid might have facilitated new technology and avenue to corruption but it is also the domestic environment that sustains the malady.

The notion of ‘donor-driven’ is an expression of dependency syndrome. If Nepal is today enmeshed in aid-induced corruption, the ruling government is also party to it, by doing nothing. Corruption is emerging as a scourge in contemporary Nepal. So is the slow tide of public opinion against it. When things get worse, there are ripples of reaction.

Corruption was a taboo subject, has now become a talk theme, and could be a doable thing. Accountability is said to be an endless prophesy. With concerted effort, transparency in development aid need not be an exercise in futility.

Relationship between donors and Nepal

The present relationship between donors and Nepal is far from ideal. From a quantitative perspective, Nepal is heavily dependent on only donor assistance because of the extent of poverty, few internal resources, huge needs and the low level of national and local revenues. By tending to supplant Nepali efforts with aid money, and by diverting the attention of Nepalis in positions of power towards new aid commitments, donors have inadvertently and indirectly contributed to the failure of the Nepalis to resolve their own problems. There is a general concern among Nepalese experts that donors are too dominant and that the impact of aid programs and overall development efforts are not generating satisfactory and sustainable results on the ground.

For their part, donors have responded to what they have seen as the ineffectiveness and lack of direction and prioritization of HMG by taking more and more responsibility of designing and implementing programs and projects. Some donors have reduced their aid levels and formulated strong conditions in their aid programs; others have reduced their efforts to work through the central government and instead work more directly with local governments, NGOs and communities; or engage their own implementing agencies and consultancy companies. Aid has provided important contributions to the improvement in living standards in isolated valleys and hillsides and has resulted in some significant improvements in program implementation (e.g community forestry, rural development; road construction and maintenance). Nevertheless, without a strong collaboration with national institutions, the sustainability and replicability of many programs remain uncertain. There is a general perception within Nepali civil society that in the past two decades the national institutional capacity for development has eroded due partly to increased donor activism. They consider that in order to reverse this situation, it may be necessary to allow the national actors to make their own mistakes and learn from them.

HMG of Nepal, donors and major Nepalese stakeholders agree on some common elements of the analysis on the main weaknesses in the relations between donors and Nepal but also have some different views and perceptions about their respective roles.

HMG feels it has little choice but to accede to donor pressures on the allocation of resources even if these are not in line with its own priorities. HMG also considers that donor aid is important and has contributed to overall progress. At the same time there is considerable mistrust of the motives of many aid donors. HMG also thinks that donors tend to have their own agendas as well as commercial interests, and do no always accept the government’s own priorities and budget choices. Some of them are "pushy" and tend to set unreasonable and/or inconsistent conditions and timeframes, not fully appreciating Nepalese realities, HMG constraints and the challenge of ensuring the sustainability of their efforts and of their outcomes. In particular, some donors have explicitly made Nepal a target country ( e.g. program country), in some cases through legislative action, and allocated generous annual grant resources and envelopes. Given the prevailing incentive structure in aid management, this creates a pressure to push money out. Moreover, donors are perceived as not being sufficiently transparent, especailly regarding funding of INGOs.

Donors feel that there is a lack of HMG ownership, poor performance and much leakage in the government system. They see a centralized HMG, not strongly interested in development issues and poverty reduction and failing to reflect national development needs and priorities in an inclusive and transparent way. Although the cabinet is very large, the civil service is arguably bottom heavy, with relatively few senior officers who can really do policy-type work. At the same time, they perceive a ‘soft state" that is under multiple pressures, unable to take decisions and stick to clear priorities. Deficiencies in quality control, predictability, transparency, and accountability in key government institutions and politicization and frequent transfers in the bureaucracy, have contributed to inappropriate allocation of budget resources, and ineffective implementation of development programs. In spite of this, many donors believe most of their aid projects are providing support to high priority sectors, and are reasonably successful. The degree of success may vary substantially as many community-based projects, after initial success, do often suffer in their sustainability because they require some support from public institutions.

NGOs, professionals and media are very critical of dysfunctional relationship between HMG and donors, which they see as a significant component of aid ineffectiveness in Nepal. They argue that aid has generally not delivered the benefits that were hoped for. Many believe that donors have contributed to "failed development" in Nepal. They consider that multilateral development banks set ineffective and unrealistic conditions that undermine development and worsen the conditions for the poor. They also see some bilateral donors as pushing their own commercial interests and believe that over-funding of certain (large) projects, without openness and competition, has contributed to corruption. They argue that the donor community is not sufficiently concerned about the specific circumstances and needs of the poor in rural and isolated areas. There is also a strong feeling that donors are not transparent and their reporting and accountability mechanisms are mainly focused on their headquarters’ requirements, rarely on the need to inform and also be accountable to the Nepali public. Nevertheless, it is not always clear whether civil society is ready to be fully transparent in order to enhance its own credibility and effectiveness.

Donor practices

While development is ultimately an HMG responsibility, in Nepal the agenda is still mainly driven by donors.The absence of effective collaboration with central government has led donors to a series of coping strategies for delivering aid in this environment.

* They make extensive use of expensive foreign consultants and engineering companies

* They sometimes initiate and formulate projects and programs, and implement these without much involvement of national institutions.

* In some cases donors direct resources to and through agencies at the local level which are closer to the ultimate beneficiary and subject to the discipline of the local community.

* Even when donors work at the national level they may set up specialized project implementation units outside the framework of national ministries and institutions or support INGOs and local NGOs to manage projects. This enables higher salaries to be paid to motivate the concerned individuals.

* They stimulate a number of reforms and conditions at sectoral and/or national levels that HMG feels it has to accommodate without itself fully "owning" these reforms and conditions.

* They introduce their own concept of development and the latest aid fashion without ensuring that these new ideas are strongly grounded in Nepal realities and institutions.

Despite these strategies and mechanisms, the record of aid implementation remains mixed. It is very difficult to design and implement development programs without effective national involvement. Most programs require some input of counterpart funding – and this has been a serious problem given the low tax collections – as well as a sound and sustainable institutional setting. In addition, there are key policy and legislative changes required to support many programs and delays have seriously hampered project implementation and outcomes. Finally, when public institutions lack effective accountability mechanisms, even "well designed and well implemented" projects cannot escape the concerns of fungibility. Experience worldwide shows that a hard budget constraint, or a fiscal crisis, has often catalyzed severe prioritization in budget and structural reform. In Nepal, generous provision of aid has tended to keep the budget constraint very soft, thereby weakening the much-needed discipline in public expenditure management and delaying some important reforms. Through such aid, donors have arguably helped to entrench the system of public spending in which politically motivated projects and corrupt practices eat away large portions of the public resources.

No long term planning in Nepal: Mutebile
Governor of Central Bank of Uganda

Mr Emmanuel Tumusiime-Mutebile who visited Nepal recently highlighted the political dimension of Nepal’s record in using aid. He noted in particular that the tenure of Nepalese Prime Ministers in recent years was so short that it did not give any Prime Minister or his colleagues the right incentives to focus on the longer term. Related to this there was an emphasis on both the donor and recipient side on levels of commitment of new aid rather than on the quality of programs. Mr Tumusiime-Mutebile felt that donors bore a special responsibility for having offered new assistance regardless of the outcomes of existing programs and that it was difficult from a political perspective for HMG to decline such assistance when offered. He urged HMG to take the difficult course of creating a greater political consensus about major development issues, and sticking with them and donors to link aid more closely to priorities and to development outcomes.

40 pc live in abject poverty in Nepal

Business Age Reporter

Nepal Human Development Report (NHDR) 2001 – Poverty Reduction and Governance, commissioned by the United Nations Development Programme (UNDP) release recently says, "Despite significant nationwide gains in life expectancy, education and per capita income over the last decade, approximately 40 per cent of Nepalis continue to live in abject poverty. "

Because of, the report says, inequity and inequality in the distribution of resources and opportunities, poverty perpetuates. Vast disparities in the ownership of productive assets – both capital and non-capital – correlate closely with a lack of a broad policy "ownership" and the participation of most citizens in allocating public resources. In addition, an absence of transparency and accountability results in misusing and wasting public resources – which diminishes poverty reduction efforts. Non-participation opaque decision-making processes, and sharp shortcomings in accountability add up to weak governance. Good governance is the missing link in poverty reduction strategies.

As the government is in the process of developing the Tenth Plan/Poverty Reduction Strategy Paper (PRSP), the overaching goal of which is poverty reduction, the conclusions and recommendations of this new report are quite opportune. The UN report critically evaluates existing policies and programs for poverty reduction, and applies the concept of a pro-poor growth index for the first time in Nepal. Two observations can be made in this regard, first, economic growth appears to have been moderately pro-poor in recent years, but further efforts must be made to ensure that growth is labour absorbing and accompanied by policies that mitigate inequalities, and facilitate income and employment generation for women and other traditionally excluded groups. Second, data constraints impede the efforts to calculate such indices, as well as to effectively monitor poverty reduction efforts. Data collection, analysis and dissemination must be improved in order to adequately manage, change, adapt and fine-tune economic policies and poverty reduction strategies.

The report reviews the delivery of basic social services, so essential for improving human capabilities. While acknowledging the increased attention and investment in education, and nothing that, with the exception of some isolated cases, virtually all children in Nepal are within 30 minutes of a primary school, the report reminds us that nearly 30 per cent of Nepali children still lack access to basic primary education. Also highlighted is the danger to society of the two-tired system of education that has evolved in the country, with a poor public education system for poor children, and a higher quality private education system for the rich. The report concludes that decentralized governance is essential to improve service delivery, manage public resources, empower local citizens, and increase human development. It is recognized that many steps have been taken in the right direction, such as the promulgation of the Local Self Governance Act. However, implementation has been slow, fiscal decentralization has not followed devolution of authority to local governments, and many conflicting acts and structures hinder efficient local governance.

Even while championing social mobilization, however, the report remains critical. It points out that often, social mobilization efforts do not reach the poorest of the poor. Sometimes the ultra-poor exclude themselves from community organizations: the norms established by the group – such as the rate of savings or meeting times, or even the dominating character of group leaders and elite members – keep them away.

This is the second Nepal Human Development Report that shows that human development has improved between 1996 (reported in the first NHDR) and 2000 in all parts of Nepal, except in the far western mountain region, where it has actually declined.

The HDI measures achievements in basic human capabilities: to lead a long and healthy life, to be knowledgeable and education, and to maintain a decent standard of living.

Nepal in 2000

Human poverty encompasses lack of capabilities, lack of political freedom, inability to participate in decision-making, lack of personal security, and inability to participate in the life of a community. The Human Poverty Index measures the deprivation in these areas by examining five attributes of poverty: illiteracy, malnutrition among children, early death, poor healthcare and poor access to safe water.

10th Plan projection is not achievable

Prof Dr Bishwambher Pyakuryal

BUSINESS AGE: As you know, the country’s economy is deteriorating day by day due to recent internal and external events. In such a difficult period, what measures/strategies the government has to take to bail out itself from such a crisis?

Dr Pyakuryal: We know internal and external events have given difficult challenges to address the "Economics of Emergency" in Nepal. Security requirement has necessitated ordinance to generate additional resources. The government needs to carefully balance between immediate public needs and private consumption and investment. There are some alternatives to take advantage of crisis-induced opportunity by identifying priorities, both military and domestic. Security goals should not be at the cost of long-term objectives. When weakening labor markets marginalizes "non-security" objectives, adequate resources should be made available to vulnerable families as a safety net programs. Government needs to restructure flexible rules to increase consumer and business confidence and expectations. This is of course a difficult job at a time when there is a large temporary decline in consumption and investment expenditures. Sometimes reduced surplus during recession is desirable. Additional expenses further reduce the surplus by creating budget deficit. And these budget changes can support weak economy.

BUSINESS AGE: The Government is holding Nepal development Forum (NDF) is going to meet in Nepal for the first time. A number of papers on wide issues are being produced to show our donors that Nepal is clear in its ‘policy and programmes’ in recent times and follow the same in the days ahead too. Do you think that we are upto the mark what donors had been looking for?

Dr Pyakuryal: Preparations for NDF 2002 are praiseworthy. It is however, not to the mark. Sector-specific presentation is formulated on the basis of Medium Term (three year) Expenditure Program (MTEP) intended to integrate the Tenth Plan and the annual budgets. The alternative measures have not been provided to tight budgetary ceiling by lowering development expenditure by about 20 per cent. The impact of such reductions on long term goal is not explained either. Agriculture, human resource development, physical infrastructure and tourism were identified as Nepal’s major priority areas during NDF 2000. Tourism does not fall under priority in NDF 2002 and no justification is made for its exclusion. Almost 93 reform actions were proposed to be met under eight reform agenda within a given time frame i.e., immediate, short-term, medium-term and long-term during the 2000 meeting. Hardly 50 per cent achievement has been made during last twenty months of time period. No explanation is given for the unaccomplished target. The actual disbursement for the proposed assistance stood as only 32.9 per cent during 1996 NDF meeting. Only USD 1250 million was committed by donor community as against Nepal’s request for USD 2.1 billion during NDF 2000. Neither review of the progress of action program is made nor the reason for the discrepancies between the commitment and disbursement and between the request and commitment is made. So, we still need to go long way to make us more professional.

BUSINESS AGE: Dr. Pyakuryal, you have been involved in various discussions with the government in its policy and programmes and seeking ways for effective implementation. Do you have any examples of effective implementation and works done in a systematic way that have benefited people as a whole ?

Dr Pyakuryal: Government documents prepared for NDF 2002 acknowledges that resources for targeted program is in increasing trend but the impact is minimum. Only smaller portion of funds have reached poorer and disadvantaged groups. How you can say then the programs are effectively implemented? There are emerging trend in Nepal’s poverty scenario. Donors are not found to have earmarked sufficient resources in Nepal’s priority sector i.e., rural infrastructure. The government is totally unaware that not only small farmers but also significant per cent of medium and large land owners in Nepal’s mountains, hills and terai are under poverty line by falsifying the conventional method of attributing land holding as a measure of poverty. If we consider this, we may have to consider new groups of people within the targeted poverty alleviation program.

BUSINESS AGE: The government has come out with the idea of Medium Term Expenditure Programme (MTEP) as per its commitments made during the last meeting of NDF in Paris for a wide ranging economic reform programme. Do you think that it will work at a time when the country’s resources are being drained away for security reasons? Will MTEP be able to integrate the 10th Plan and future budgets under our existing mechanism?

Dr Pyakuryal: I was expecting a separate paper developed on the basis of the "Economics of Emergency" during NDF 2002 deliberation. MTEP is merely an aggregation of MTEP’s of five core line ministries. The programs envisaged in the document are broad and not measurable. There is a well-known management consulting rule, "what gets measured, gets managed". Action program has not addressed principal rules- the right thing must be measured; the thing must be measured right and there must be consequences if it does not get managed. Unfortunately, in Nepal, the least measurable activities are the most important ones. Therefore, I doubt that MTEP will properly integrate 10th Plan by making it amenable to independent scrutiny.

BUSINESS AGE: The present GDP growth stands at 2.5 per cent as stated by the National Planning Commission (NPC). However, NPC has estimated the country’s growth rate at 6.5 per cent in its 10th Plan document. Do you think that we can achieve the said target? If not, what should be our initiatives to hit the target?

Dr Pyakuryal: We have seen how efficient and professional is NPC to make projections during the current Ninth Plan period. Development budget was over-programmed and was over-optimistic. Number of projects raised almost two folds and budget allocation per project had fallen to about half the level in mid-nineties, in real terms. Present situation is most unpredictable and bureaucracy of NPC is unchanged. I do not hope, the projections made in the proposed Tenth plan are achievable. The only alternative at the moment is to reprioritize our priorities by developing intra-party and inter-party consensus and pass them from the parliament as the Act with their explicit implementing rules so that the ruling governments, who so ever may come to the power, may not have to compromise with country’s development goals.

BUSINESS AGE: What will be the possible measures, in your view, to resolve the ‘fiscal crisis’ at the time when the country is spending huge amount of money in internal security?

Dr Pyakuryal: The ultimate aim to rescue the economy from fiscal turmoil is the creation of budget surplus adequate to produce national saving. It is a hard job and distant dream. But what we should equally consider is not only the budget priorities and effectiveness of expenditure programs, but also our revenue policies that affect national saving, investment, and growth. Security and growth with sustainable development depends on policies that support long-term growth. Therefore, although it sounds crazy, the best available economic panacea is the policy flexibility through pro-investment economic policies including tax cuts.

Making Development Partnership in Nepal
A more Bilateral Response

By Ingrid Ofstad, Ambassador of Norway for Nepal

Ambassador of Norway

1. The global Context

There is a growing global concern about the need to improve the impact of development co-operation on poverty reduction. Agreeing on common goals as well as the establishment of lasting and productive partnership are keys to attaining this. The issue can be addressed through:

* Comprehensive national poverty reduction strategies, fully owned by the recipient partner

* improved development partnership, between government, civil society, private sector, academia etc, and

* harmonised donor practices

The Development Committee (DAC) of OECD has produced a checklist for partnership, with i.a. the following recommendations;

"Donors should encourage recipient partners to formulate their own development strategies – setting out local priorities, plans and instruments for implementing such strategies. This process should systematically involve civil society, as well as consultations with external partners. Where such locally-owned strategies are compatible with internationally agreed goals, donors should work to implement their aid programmes in a coordinated manner on the basis of such locally owned strategies and accept their discipline."

Similarly, external partners should agree in principle to adjust more to local procedures, where necessary helping recipient countries bring their procedures and management capacities up to international standards.

Many countries are now developing their own Poverty Reduction Strategy Paper, PRSP. Broad consultations with various stakeholders in the civil society, non-governmental organisations, private sector, political parties and academia, has become a part of the process of developing a national PRSP. Development partners has encouraged this process and contributed with their own views and positions, bearing in mind the respect for national ownership and solutions. In many Least Developed Countries the PRSP is seen by bilateral and multilateral partners as a basis for a common approach and a basis for more flexible support, including financial support through the budget and debt relief.

Bilateral donors have, through DAC, and in co-operation with multilateral development banks and the UN system, recently approved new "Guidelines on Poverty Reduction". These Guidelines emphasise the need to move from agency-driven to country-led activities, create space for partnership and promote integrated programs and sector-wide support. They also call for improved aid co-ordination by working collaboratively, undertaking joint tasks and combining skills and resources and request partners to promote country leadership and provide resources more flexibly.

As regards harmonisation of operating policies and procedures, developing countries and donor nations have increasingly called on developing agencies and development banks to harmonies their multiple and often differing practices, which burden the administrative capacity of developing countries. The DAC have requested the bilateral and multilateral donor partners, together with the World Bank, to develop an overall framework including time-bound action plan to guide and coordinate future work.

As regards harmonisation of operating policies and procedures, developing countries and donor nations have increasingly called on developing agencies and development banks to harmonies their multiple and often differing practices, which burden the administrative capacity of developing countries. The DAC have requested the bilateral and multilateral donor partners, together with the World Bank, to develop an overall framework including time-bound action plan to guide and co-ordinate future work.

The goal of this is to:

- Reduce transaction costs of the development co-operation

- Build recipient capacity

The first stage of this work is now completed. The work groups have carried out stocktaking, compared requirements and identified differences in need of resolution, and donors have begun to collaborate on country diagnostic work. The second ongoing stage implies that the donors are moving to develop common standards or good practice principles at the institutional level. By December 2002 it is expected that significant work on common standards have been developed.

2. Review of development partnerships in Nepal

At the last Nepal Development Forum in April 2000, the Development Partners agreed that they would adopt the following principles in their work:

* collaboration should be a learning process for both the government and their development partners;

* the development partners will steer away from "donor-driven" behaviour and put the government in the "driver’s seat"; and

* the government will be the manager of donor co-ordination.

The work by the Government of Nepal (HMG) to produce a Foreign Aid Policy was warmly welcomed by the development partners.

As HMG has prepared the 10th Five-year Plan draft there is an increasing focus and sense of urgency on improving the effectiveness of its development efforts aimed at reducing poverty and violence. HMG’s declared intention of making the 10th Plan its Poverty Reduction Strategy (PRS) underlines the commitment to reinforcing the poverty focus of the development plan. The rise of a Maoist insurgency over the years may also been seen as a reaction against poverty, unemployment, poor public service and corrupt practices in rural areas. There is a collective view among various stakeholders that there is a need for a renewed and more focussed approach in the development efforts in Nepal, and a more widely owned, inclusive, implementation of national priorities.

HMG is now preparing a poverty reduction strategy, and a medium term expenditure framework to better manger its public expenditure programs. A final draft of the Foreign Aid Policy has also been prepared to redefine the relationship between donors, HMG and other partners is the society. At the upcoming Nepal Development Forum (NDF), HMG plans to make the framework for foreign aid and development partnerships one of the agenda items. Having stressed the need for stronger leadership by HMG and a more satisfactory HMG-donors partnership, donors welcome this evolution. In preparation for this important dialogue, a review of development partnership, as seen by various stakeholder in Nepal, was initiated by the donors.

An Expert Panel, lead by Head of Division, OECD/DAC undertook the review of development partnership from November 18 to December 14, 2001. The main objective of the review and report was to help development partners in Nepal to reflect on their past efforts, particularly the way they worked together, and to make pragmatic suggestions on how to improve the effectiveness of the development assistance. The panel’s members assume the full responsibility for the content of the report, and it does not necessarily reflect the views of the donors.

According to the report NGO-representatives, professionals and media are very critical of the dysfunctional relationship between HMG and donors, which they see as a significant component of aid ineffectiveness in Nepal. They argue that aid has generally not delivered the benefits that were hoped for. Many believe that donors have contributed to "failed development" in Nepal. They consider that multilateral development banks set ineffective and unrealistic conditions that undermine development and worsen the conditions for the poor. They also see some bilateral donors as pushing their own commercial interests and believe that over-funding of certain (large) projects, without openness and competition, has contributed to corruption. They argue that the donor community is not sufficiently concerned about the specific circumstances and needs of the poor in rural and isolated areas. There is a strong feeling that donors are not transparent and their reporting and accountability mechanisms are mainly focused on their headquarters’ requirements, rarely on the need to inform and also be accountable to Nepali public. Nevertheless, it is not always clear whether civil society is ready to be fully transparent in order to enhance its own credibility and effectiveness.

3. Donors response

In the Nepal Development Forum in Nepal in February 2002, and as a response to the Foreign Aid Policy, it is suggested that donors may agree to work jointly to achieve the following overall objective in Nepal.

Aid is made a more effective tool for poverty reduction through improved relations between donors, government and society.

The donors may work together with government and other development partners in Nepal to obtain the following;

Immediate Objective 1: Aid is focussed on priority needs for poverty reduction

Output

* 10th Plan/PRS provides clear and effective strategies for poverty reduction

* MTEF ensures coherence between financial resource and development priorities

* External assistance is aligned with the 10th Plan/PRS/MTEF framework

* A system for review of results and outcome is developed

* Additional and non-governmental resources are encouraged for high priority areas for poverty reduction

Input

Donors may commit themselves to:

* Participate in consultations on the 10th Plan/PRS and MTEF, and contribute views and positions in a transparent manner

* Accept the final 10th Plan and MTEF as the basic framework for support and review their assistance strategies in light of this framework, and in consultation with the government

* Commit predictable funding over medium term, in a transparent manner

* Consider needs for short term support to areas affected by the insurgency

* Be receptive to the views of various stakeholders on development priorities and the need for change in donor priorities and practices

* Contribute to monitoring the outcome and implementation of the 10th Plan/PRS/-MTEF, and the short term interventions

* Contribute to finance the participation of non-governmental organisations, in a transparent manner

Immediate Objective 2: Waste and ineffective implementation of development programmes is reduced

Output

* Public sector management improved

* Corruption and mismanagement reduced

* Nepali human resources utilised to a maximum extent wherever available at competitive price and quality

* Result based monitoring and evaluation of aid effectiveness improved

Input

Donors may commit themselves to:

* Consider additional funding through government if effectiveness of implementations is improved and concrete steps taken to reduce the risk of corruption and mismanagement

* Support the devolution of power, resources and responsibilities to districts and the strengthening of local governance

* Take specific steps to eliminate corruption and misuse of funds in donor-funded projects

* Untie the aid to the greatest extent possible

* Assist government in strengthening the capacity for monitoring and evaluation of development programmes in each line ministry, the Ministry of Finance and independent agencies

Immediate Objective 3: Trust and co-operation between donors, government and society is built

Output

* Basic rules for development partnership agreed between donors and government, on the basis of the Foreign Aid Policy

* Increased transparency of donor commitments and conditionalities

* Co-operation between donors and government improved

* Larger society involved in development and poverty reduction activities

Input

Donors may commit themselves to:

* Participate in the consultations on the Foreign Aid Policy (FAP) and contribute views and position in a transparent manner

* Participate in working out basic rules for development partnership based on the FAP

* Consider harmonising procedures in areas such as planning, financial management/reporting /auditing, progress reporting/monitoring/reviews as well as technical assistance, to lessen burden for the government

* Practice full transparency, including making reports on results, progress, accounts and audits on any donor-supported activity easily available to public, including posting of basic information on a web-site

* Consult widely with relevant stakeholders and acquire substantial information of social, economic and environmental implications before entering into agreement for support

* Greater integration of their development assistance efforts and programme activities

Immediate Objective 4: National ownership of development strategies, priorities and programmes is ensured

Output

* The 10th Plan/PRS and the MTEF is developed after consultations with a wide range of stakeholders Government uses 10th Plan/PRS and MTEF as framework for requesting and approving donor support

* Government invites donors regularly (quarterly) to meetings for a policy dialogue on the progress of implementing the development agenda, results and obstacles

* Line Ministries develop Sector wide strategies to implement 10th Plan/PRS, within the framework of the MTEF

* Line ministries invite relevant donors to discuss sector strategies and policies and the planning and implementation of sector wide activities

Input

Donors may commit themselves to:

* Relate to the government and various stakeholders in an open and transparent manner

* Avoid mixed policy messages which are counterproductive

* Establish functional co-ordination mechanism with relevant line ministries

* Participate in the development of sectoral strategies and sector wide approaches and support their implementation in a co-ordinate manner, making support to decentralisation an early priority

* Give time for the development programmes fully owned by the stakeholders

(This paper was presented at the preparatory meeting of Nepal Development Forum held recently in Kathmandu.)

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