This Policy Brief outlines an alternative approach to maximising the benefit of donor aid in low income countries. It has policy implications for the allocation of aid by Non-Governmental Organisations (NGOs) and national governments

Arulselvan, Ashwin

Morton, Alec

University of Strathclyde Institutional Repository

Strathprints Institutional RepositoryMorton, Alec and Arulselvan, Ashwin (2015) Maximising the Benefits of Foreign Aid : Leveraging In-Country Financing. [Report] , This version is available at http://strathprints.strath.ac.uk/53553/Strathprints is  designed  to  allow  users  to  access  the  research  output  of  the  University  of Strathclyde. Unless otherwise explicitly stated on the manuscript, Copyright © and Moral Rights for the papers on this site are retained by the individual authors and/or other copyright owners. Please check the manuscript for details of any other licences that may have been applied. You may  not  engage  in  further  distribution  of  the  material  for  any  profitmaking  activities  or  any commercial gain. You may freely distribute both the url (http://strathprints.strath.ac.uk/) and the content of this paper for research or private study, educational, or not-for-profit purposes without prior permission or charge. Any  correspondence  concerning  this  service  should  be  sent  to  Strathprints  administrator: strathprints@strath.ac.uk       Maximising the benefits of Foreign Aid:  leveraging in-country financing      Professor Alec Morton and Dr Ashwin Arulselvan, Department of Management Science University of Strathclyde    Making a difference to policy outcomes locally, nationally and globally     POLICY BRIEF             The views expressed herein are those of the authors and not necessarily those of the International Public Policy Institute (IPPI), University of Strathclyde         University of Strathclyde | International Public Policy Institute                                                                     Policy Brief February 2015                                                                                                                                                                1 Maximising the benefits of Foreign Aid: leveraging in-country financing  Alec Morton, Ashwin Arulselvan   Abstract This Policy Brief outlines an alternative approach to maximising the benefit of donor aid in low income countries.  It has policy implications for the allocation of aid by Non-Governmental Organisations (NGOs) and national governments.    1. Introduction In this Policy Brief we consider the responsibilities of donor agencies (e.g. the Global Fund, the African Development Bank, Oxfam, a rich country Department for International Development) to best disburse development aid.  We take the view that donor agencies have a moral responsibility to ensure that such funds are spent in an efficient way, which improves the lot of the intended beneficiaries to the greatest possible extent.  This is not a controversial view, indeed typically it is the espoused view of donors themselves. In this paper we discuss this issue from the point of view of allocative efficiency rather than technical efficiencyWKDWLVWKHTXHVWLRQRI³GRLQJWKHULJKWWKLQJV´UDWKHUWKDQRI³GRLQJWKLQJVULJKW´Of course we reaffirm that technical efficiency ± delivering programmes in a competent way ± is very important.)  We discuss what allocative efficiency means in the context where one is a donor seeking to finance, for example, health interventions in partnership with a country government which has its own indigenous domestic revenue stream. In particular, we argue that the traditional cost effectiveness principle of ordering based on cost effectiveness and proceeding down the list until the budget is exhausted is inappropriate in this context.  The intuition behind our critique is that by so doing, the donor takes the pressure off the domestic government to contribute its own resources to achieve the intended benefit.  In contrast, we propose two alternative decision rules which target funding at what are to the country government marginal projects, and demonstrate their superiority with respect to a worked example.  In a companion technical paper (in preparation) we present a mathematical analysis of this and related approaches.   University of Strathclyde | International Public Policy Institute                                                                     Policy Brief February 2015                                                                                                                                                                2 2. Preventing HIV Infections ± a worked example We consider the following example.  The government of a low income country C has the opportunity to invest in a variety of HIV prevention activities, as shown in Table 1.  The total cost and number of infections averted from these activities are as shown (the data is roughly based on Hutton et al, 2003).  We can compute the cost of averting an HIV infection (observe that the activities are ordered in order of decreasing cost-effectiveness).  We suppose that country C makes its decisions on a cost effectiveness basis based on the opportunity cost of spending on other sectors.  In particular, country C considers that spending more than $300 of its domestic resources to avert a single HIV infection is not good value for money as it can achieve equivalent or more benefit (from its point of view) by investing $300 in some other sector.  This sector may have nothing to do with health; for example, it may be military spending which country C feels will enable it to seize resources of neighbouring countries. If country C follows standard cost effectiveness advice, it will implement activities 1 and 2 (in italics) on the list in Table 1.  It will spend $89,575 and will prevent 3,068 infections.  Table 1.  Data for HIV prevention activities in country C   Total Cost $    Number of infections averted   Cost per HIV infection prevented (US$, 2002)  1. Peer group education²sex workers 39,575 2473 16 2. Safe blood transfusion 50,000 595 84 3. Peer group education²young people 423,500 799 530 4. Mass media and social marketing of condoms 1,300,000 2434 534 5. Peer group education²high risk men 500,000 862 580 6. Targeted AZT to pregnant women 300,000 319 939 7. Voluntary testing 310,000 261 1190 8. Targeted advice for breast feeding 150,000 62 2424 9. Targeted treatment of STIs 560,000 204 2748    Suppose there is a donor D which can supply $1m to country C to prevent HIV infections; how should it allocate its funding?  One option for D would be proceed down the list of HIV prevention activities and allocate funding to activities in cost effectiveness order until the money is exhausted.  In this case it would implement activities 1²3 completely and 35% of activity 4 before its money runs out.  This means that there are no remaining opportunities which have a cost effectiveness better than £300 per infection averted and country C will spend no money on University of Strathclyde | International Public Policy Institute                                                                     Policy Brief February 2015                                                                                                                                                                3 HIV prevention.  Hence, under this scenario, $1,000,000 will be spent by donor D on HIV prevention and 4,779 infections will be averted.   3. Maximising aid benefit; proposed donor decision rules  Clearly, this £1m is being spent well in the sense that many HIV infections are being averted; but can more be achieved?  We observe that the financing from D is in this example taking the burden off (i.e. substituting for expenditure by) country C, which is now free to spend resources on other, possibly undesirable, activities.  In order to maximise aid donor benefit, we propose two decision rules for donor D.  Our first decision rule is as follows:  Rule 1.  D should fund only interventions which have a cost effectiveness which is worse than $300 per infection averted;  In this case, country C will spend $89,575 (on activities 1 and 2) and will prevent 3,068 infections, freeing up donor D to fund intervention 3 and 44% (rather than 35%) of activity 4, preventing 1,878 infections.  Thus, in total $1,089,575 will be spent by both C and D to prevent 4,946 infections.  Our second decision rule is:  Rule 2.  D should fund only interventions which have a cost effectiveness worse than $300 per infection averted; and should fund such interventions only in part by subsidising them to bring the costs down to $300 per infection averted.  The required subsidies are calculated in Table 2 below.   University of Strathclyde | International Public Policy Institute                                                                     Policy Brief February 2015                                                                                                                                                                4  Table 2: Data for selected HIV prevention activities in country, with donor D subsidies   Original Total Cost $ Number infections averted Donor contribution $ Subsidised cost % of cost met from subsidy  Subsidised cost/ infection averted Donor $/ infection averted  3.Peer group education²young people   423,500  799  183,800  239,700  43%  300  230 4. Mass media and social marketing of condoms  1,300,000   2434   569,800   730,200   44%   300   234   5. Peer group education²high risk men  500,000   862   241,400   258,600   48%   300   280   6. Targeted AZT to pregnant women  300,000   319   204,300   95,700   68%   300   640   7. Voluntary testing  310,000  261  231,700  78,300  75%  300  888  8. Targeted advice for breast feeding  150,000   62   131,400   18,600   88%   300   2119   9. Targeted treatment of STIs  560,000  204  498,800  61,200  89%  300  2445    In this example, once the cost effectiveness of an intervention is improved to the extent that it reaches $300 per infection averted, it now becomes cost effective for country C to invest in the activity.  In this example, D will spend $995,000 (and thus have a small residual fund) to subsidise activities 3, 4 and 5.  Country C will spend £1,228,500 of its own resources on activities 3, 4 and 5 (in italics), plus $89,575 on activities 1 and 2.  The total amount of investment by both D and C is therefore $2,313,075 and the total number of infections averted is 7,163.  The cost effectiveness of the investment for the donor D is shown in the rightmost column of the Table 2. University of Strathclyde | International Public Policy Institute                                                                     Policy Brief February 2015                                                                                                                                                                5 4. Conclusions  It is clear from the above worked examples that (at least in our simple model) allocative rules IRUGRQRU'ZKLFKUHFRJQLVHFRXQWU\&¶VRZQGRPHVWLFSROLF\REMHFWLYHV ± which include the health of its population, but also other objectives which may be less legitimate ± are more HIIHFWLYH LQVHFXULQJFRQWULEXWLRQVIURPFRXQWU\&WRZDUGVGRQRU'¶VDLGREMHFWLYHV )RU WKHdata in this example, these rules lead to a more than doubling of expenditure (from $1,000,000 to $2,313,075) and an almost doubling of benefits (from 4,779 to 7,163 infections averted) against the standard comparator model where the donor applies the standard cost effectiveness decision rule.  This approach raises a number of issues.  First, there are clearly practical questions in the external assessment of the relative cost-effectiveness of policy interventions in country C and it should be recognised that this may depend on the scale of the investment required to meet a policy target in country C.  Second, this approach also raises policy questions for donor D and the extent to which it wishes ± explicitly or implicitly ± to influence the investment made by country C in its own domestic policy priorities ± in the policy field chosen by D, in the this case HIV infection.  These considerations will be dealt with more fully in the accompanying technical paper.                Reference Hutton G, Wyss K, N'Diekhor Y. (2003) Prioritization of prevention activities to combat the spread of HIV/AIDS in resource constrained settings: a cost-effectiveness analysis from Chad, Central Africa. International Journal of Health Planning M; 18; 117-136.      About the authors:  Alec Morton is Professor of Management Science at the University of Strathclyde.  His main interests are in decision analysis and health economics.  Alec Morton is an active member of the Centre for Health Policy, part of the International Public Policy Institute (IPPI), University of Strathclyde.  Ashwin Arulselvan is a lecturer in Management Science at the University of Strathclyde. His research focus is on discrete mathematics and its applications.   Contact details (corresponding author):  Professor Alec Morton School of Management Science Strathclyde Business School University of Strathclyde  t: +44 (0)141 548 3610 e: alec.morton@strath.ac.uk    Dr Ashwin Arulselvan School of Management Science Strathclyde Business School University of Strathclyde  e: ashwin.arulsevan@strath.ac.uk      International Public Policy Institute (IPPI) McCance Building, Room 4.26 University of Strathclyde 16 Richmond Street Glasgow G1 1XQ  t: +44 (0) 141 548 3865 e: ippi-info@strath.ac.uk    The International Public Policy Institute IPPI focuses on global policy challenges in energy, future cities, health, economic development, government and public sector policy, education and social policy.  IPPI draws on expertise from across the Humanities and Social Sciences, Strathclyde Business School, Science and Engineering and takes an inter-disciplinary approach to public policy challenges.         the place of useful learning www.strath.ac.uk/ippi  ippi-info@strath.ac.uk  University of Strathclyde Glasgow G1 1XQ   The University of Strathclyde is a charitable body, registered in Scotland, with registration number SC015263 

Maximising the Benefits of Foreign Aid : Leveraging In-Country Financing

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Maximising the Benefits of Foreign Aid : Leveraging In-Country Financing

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