Rethinking aid model to have sustainable impact

The current aid model largely characterised by grants and hand-outs has not addressed long-term development challenges of most developing countries in a sustainable manner. The aid has largely been directed at responding to crises such as famine, conflict and disease. This model is devoid of the fundamental element of empowerment that is essential in enabling developing countries to tackle development challenges sustainably. Empowerment is envisaged to result in gradual decrease in aid dependence and eventual self-sustainability to drive further development.

Through capacity building and eliminating bottlenecks, to responsible investment and industrialisation, developing countries should be enabled to unlock mechanisms to equitably exploit and share natural resources amongst the people for inclusive growth. This model of supporting development is however yet to be embraced by most Development Partners. Developing countries have as a result tended to be locked in cycles of aid dependency. This is especially the case in situations where aid, over and above being applied to respond to crises, is seen as a long term strategy to achieving development. The dependency syndrome inhibits innovation and reform at the country level as well as amongst the citizenry. Steady aid inflows tend to propel a laidback mentality impacting the capacity to generate innovative solutions to tackle development challenges.

In situations where attempts have been made to exploit natural resources in developing countries, the lack of capacity in most governments, skills in the private sector, and financing to translate the resources into bankable projects, result in these resources not equitably benefiting the citizenry. Foreign Direct Investments (FDIs) are poorly structured, with investment terms largely in favour of investors leaving the governments to settle for meagre payments from the natural resources. Low levels of industrialisation continue to limit value addition to natural resources or agricultural produce, resulting in less share of the cake. In addition, poorly packaged and unmonitored subsidies and incentives to attract investments further result in governments not realising much from taxes.

Due to inefficiencies with the current aid model, there is need for a paradigm shift in the way aid is provided to countries to tackle development challenges differently. By leveraging aid as an enabler to address capacity constraints in governments and the private sector, as well as the bottlenecks to investment and equitable resource exploitation, it is possible to scale and sustain impact. Capable governments with requisite skill sets have an upper hand in directing how aid is utilised to catalyse development.

The grants, if properly directed into investment projects such as manufacturing and agro-processing will have a multiplier effect on employment and productivity. This will come along with value addition to enable import substitution and also boost export potential to improve balance of payments for developing countries.

The grants from Development Partners to supplement the ailing social services if directed at strengthening capacity of government agencies to undertake more effective fiscal management, and leverage natural resources to identify and develop bankable projects would result in better packaging of investment deals.

Development Partners could directly fund project preparation activities including exploration and feasibility studies that developing countries largely remain unable to and slow at funding on their own.

When bankable investment projects are developed, decision making by potential investors is fast-tracked due to availability of information. Development Partners could further support uptake of bankable projects through setting up guarantee funding programmes to cushion the private sector investors (including FDIs) against events like emergency of unfavourable government policies to boost investor confidence. Aid could also be directed at addressing investment and trade bottlenecks to increase flow of FDIs and Public Private Partnerships (PPPs).

On a positive note, some of the major Development Partners are already embracing initiatives in the paradigm shift. Blended aid packages with investment catalysts and technical assistance rolled out as part of one programme have lately started to constitute part of the aid mix.

The push for results and sustainability (manifesting in program for results projects) is also evident with public and private investors, including foundations and philanthropists, strongly advocating for impact investment.

The UK Department for International Development (DFID) aims at unlocking potential of a number of African countries through the Invest Africa programme whose aim is to increase inflow of manufacturing FDIs to trigger economic growth and ultimately address the recurrent problems of unemployment and lack of sufficient funding for education, health and infrastructure.

The recently launched European Union External Investment Plan seeks to directly speak to the challenges of limited investment, capacity gaps and unfavourable investment climate in Africa and the EU Neighbourhood region.

The United States Agency for International Development (USAID) Trade and Investment Hubs programme that works towards reducing the cost of doing business in Africa and promoting two-way trade with the US is another indicator of evolution in aid delivery models.

Moses Busingye, Senior Manager, International Development Advisory Services at KPMG East Africa, [email protected]