Evaluating the Transaction Costs of Implementing the Paris Declaration

Transcription

1 Fiscus Public Finance Cnsultants, Ltd. 2, Hllway Rad, Wheatley, Oxfrd, OX33 1NH. United Kingdm T: M: fiscus@fiscus.rg.uk Evaluating the Transactin Csts f Implementing the Paris Declaratin CONCEPT PAPER Andrew Lawsn Paper Submitted by Fiscus Public Finance Cnsultants t the Secretariat fr the Evaluatin f the Paris Declaratin Nvember

2 Evaluating the Transactin Csts f Implementing the Paris Declaratin: Draft Cncept Paper Overview and Acknwledgements This paper has been cmmissined by the Secretariat fr the Evaluatin f the Paris Declaratin and written by Andrew Lawsn f Fiscus Limited, UK. It prvides a definitin f the cncept f transactin csts and an illustratin f hw the cncept may be applied firstly t aid peratins as a whle and secndly t the analysis f the csts f implementing the Paris Declaratin. It cnsiders whether it wuld be pssible and useful t measure the transactin csts f aid and/ r the transactin csts f implementing the Paris Declaratin. It emphasises that the ntin f transactin csts is best cnsidered as a metaphr, rather than as a precise measureable cncept. Althugh transactin csts represent a real cncept f demnstrable imprtance t the structuring f markets and rganisatins and t the efficiency f aid peratins, this is nt a cncept which lends itself t easy measurement. This is in large part because investments in transactin activities may generate benefits as well as csts. In principle, ne may identify an inflectin pint in the transactin cst curve where investments begin t generate nly net csts but identifying this pint wuld in practice be virtually impssible. Fr this and ther practical reasns, any serius attempt t measure the transactin csts f aid r the transactin csts f the Paris Declaratin is likely t be expensive but ultimately futile, and is nt recmmended. Hwever, infrmed resurce persns d have clearly held perceptins abut trends in transactin csts, abut their incidence (between dnrs and partner gvernments), abut the main surces f transactin csts and abut the effects t date f the Paris Declaratin. Such perceptins are wrth dcumenting, triangulating and analysing. In additin, it seems likely that there are examples frm particular cuntries f specific gd practises which have served t reduce transactin csts and t facilitate implementatin f the Paris Declaratin. There wuld be real merit in dcumenting these examples and examining hw they might be reprduced n a wider scale. The paper therefre cncludes with a set f structured questins n transactin csts which it is prpsed shuld be intrduced int the Cuntry and Agency studies, which will be cnducted as part f the secnd phase f the evaluatin f the Paris Declaratin. An initial utline f the key arguments in this paper was presented t the Evaluatin Management Grup at a meeting in Lndn in September,. I am very grateful fr the helpful cmments received there many f which have been incrprated int the current text. A secnd rund f cmments n the first draft f this cncept nte was als received frm the Evaluatin Management Grup and frm ther stakehlders and their incrpratin in this versin has helped t add clarity and cnsistency t the text. Nevertheless, any respnsibility fr the arguments r prpsals here presented lie with the authr alne. F i s c u s L i m i t e d f r t h e S e c r e t a r i a t f r t h e E v a l u a t i n f t h e P a r i s D e c l a r a t i n ; N v e m b e r P a g e 2

3 Evaluating the Transactin Csts f Implementing the Paris Declaratin: Draft Cncept Paper Table f Cntents Overview and Acknwledgements... 2 Table f Cntents... 3 Figures and Tables Intrductin Defining and Measuring Aid Transactin Csts Identifying the Relevant Evaluatin Questins Recmmendatins n the Way Frward...21 Bibligraphy...26 Figures and Tables Figure 1: Overview f the Results f the 2008 Mnitring Survey n the Implementatin f the Paris Declaratin... 5 Figure 2: The Transactin Csts Curve...11 Table 1: The Principal categries f Transactin Csts as defined in Transactin Cst Ecnmics... 8 Table 2: Principal categries f Transactin Csts as applied t Aid prcesses...10 Table 3: The nature f Transactin Csts generated by the Paris Declaratin...15 Table 4: Prpsed Questins fr Inclusin in Cuntry & Agency Studies...22 F i s c u s L i m i t e d f r t h e S e c r e t a r i a t f r t h e E v a l u a t i n f t h e P a r i s D e c l a r a t i n ; N v e m b e r P a g e 3

4 Evaluating the Transactin Csts f Implementing the Paris Declaratin: Draft Cncept Paper 1. Intrductin 1. The secnd phase f the evaluatin f the Paris Declaratin n Aid Effectiveness f March 2005 is currently under design. The first phase was cnducted with the purpse f strengthening aid effectiveness by assessing changes in behaviur and identifying better practices fr partners and dnrs in implementing the Paris Declaratin. It was cncluded in July and fed int the discussins at the third High level Frum n Aid Effectiveness and int the subsequent Accra Agenda fr Actin (AAA). The secnd phase will be cnducted ver and 2010 s as t be cncluded in time fr the furth High level Frum n Aid Effectiveness t be held in It will fcus n assessing the develpment results achieved frm increased aid effectiveness, cnsidering bth the intended and unintended develpment utcmes that can be attributed t the aid effectiveness agenda f the Paris Declaratin. The questin f the transactin csts f aid is directly pertinent t this secnd phase. This Cncept Paper has been cmmissined by the Secretariat fr the Evaluatin f the Paris Declaratin in rder t define an apprpriate apprach fr incrprating cncerns abut aid transactin csts. 2. Whilst the fundamental bjective f the Paris Declaratin and the subsequent Accra Agenda fr Actin f September 2008 is t increase the effectiveness f aid by enhancing the develpment utcmes which it can generate, bth dcuments recgnise that a first step in this directin wuld be t increase the efficiency f aid, by reducing the relative csts f aid utputs. A key prblem identified at the time f the Paris Declaratin, and reiterated in Accra, was that aid was seen t have high transactin csts, many f which were perceived as being avidable r at least reducible. 3. The 2008 mnitring survey n the implementatin f the Paris Declaratin did nt explicitly address the questin f transactin csts but it did nte: Reducing the transactin csts f prviding aid t partner cuntries is ne f the fundamental bjectives f the Paris Declaratin. The 2008 Survey prvides clear evidence that the cst f managing aid cntinues t be high fr partner cuntries and dnrs. Furthermre, n a business as usual basis, these csts can be expected t increase significantly in the near future as the vlume f aid is scaled up and new develpment actrs enter the field. OECD-DAC (2008a), p The 2008 mnitring survey als pinted t the mdest level f prgress achieved in implementing thse aspects f the Paris Declaratin mst likely t impact psitively n aid transactin csts. In particular, it nted that in 2007 nly 47 % f aid flws were managed thrugh crdinated mechanisms fr aid delivery (such as Prgramme Based Appraches) against a target f 66 % fr 2010 (Indicatr 9). Similarly, it nted that mre than 14,000 dnr missins 1 Wd B., Kabell D., Sagasti F. & Muwanga N, (July 2008), Synthesis Reprt n the First Phase f the Evaluatin f the Implementatin f the Paris Declaratin, Cpenhagen. F i s c u s L i m i t e d f r t h e S e c r e t a r i a t f r t h e E v a l u a t i n f t h e P a r i s D e c l a r a t i n ; N v e m b e r P a g e 4

5 Evaluating the Transactin Csts f Implementing the Paris Declaratin: Draft Cncept Paper were fielded t the 55 cuntries which tk part in the 2008 survey and, f these missins less than ne in five was crdinated with anther dnr (Indicatr 10a). 5. In all, f the 7 indicatrs mst likely t be crrelated with psitive impacts n aid transactin csts (Indicatrs 4, 5a, 5b, 6, 9, 10a and 10b), nly the alignment and crdinatin f technical assistance (Indicatr 4) shwed clear prgress. (See Figure 1 belw.) While the survey did recgnise that decisins t adjust the structure f aid were likely t have lagged effects (as ld prgrammes were clsed and new, mre harmnised and aligned prgrammes were initiated), it nevertheless emphasised that change wuld have t be cnsiderably accelerated in rder t achieve the targets set fr Figure 1: Overview f the Results f the 2008 Mnitring Survey n the Implementatin f the Paris Declaratin Perfrmance in 2007 against 14 Key Paris Declaratin Targets a 5b Operatinal Develpment Strategies Reliable Public Financial Management Systems Aid flws are recrded in cuntries' budgets Technical assistance is aligned & crdinated Dnrs use cuntry PFM Systems Dnrs use cuntry prcurement systems Targets 17% 22% 75% 36% 50% 42% 49% 85% 48% 50% 59% 40% 43% [80%] 39% 42% [80%] 6 Dnrs avid parallel PIUs Aid is mre predictable 41% 45% 71% 8 Aid is untied 75% 88% [100%] 9 10a 10b Dnrs use crdinated mechanisms fr aid delivery Dnrs crdinate their missins Dnrs crdinate their cuntry studies Sund framewrks t mnitr results Mechanisms fr mutal accuntability 43% 42% (slippage) 66% 18% 20% 40% 42% 44% 66% 7% 9% 38% 22% 22% (N prgress) 100% 6. Thus, the 2008 survey strngly supprts the view that the aggregate transactin csts f aid are nt falling and that, with the scaling up f aid and the entry f new develpment partners, they are likely t increase 2. A secndary message, mre implicit in the dcumentatin f the 2008 Mnitring Survey, was that the implementatin f the Paris Declaratin was itself generating 2 As we nte abve, the 2008 Survey did nt explicitly assess transactin csts and made n cmment, fr example, n the trend mvement in average transactin csts per dllar f aid. F i s c u s L i m i t e d f r t h e S e c r e t a r i a t f r t h e E v a l u a t i n f t h e P a r i s D e c l a r a t i n ; N v e m b e r P a g e 5

6 Evaluating the Transactin Csts f Implementing the Paris Declaratin: Draft Cncept Paper significant new transactin csts: many new framewrks, mechanisms and crdinating structures fr mving frward with the Paris Declaratin had been created which were demanding f administrative and managerial resurces, but had nt yet generated benefits. 7. The first phase f the evaluatin f the implementatin f the Paris Declaratin highlighted these same cncerns. Fr example, the synthesis reprt states: All f the dnr evaluatins recrd that the measures called fr in the Paris Declaratin are leading t difficult transitinal adjustments and increased transactin csts in managing their aid prgrammes. Partner cuntry evaluatins are nt yet clear abut the new demands being placed n them r abut the ld nes perhaps being alleviated....overall, the evaluatins d nt yet yield a clear view n whether the net transactin csts f aid will ultimately be reduced as expected frm the pre-2005 situatin. Wd, B et al (July, 2008), p In designing the secnd phase f the evaluatin f the Paris Declaratin, the issue f aid transactin csts thus remains very much alive. At a bare minimum, it seems imprtant t knw: Whether the implementatin f the Paris Declaratin shws credible signs f generating a reductin in the average transactin csts per dllar f aid? Whether the Paris Declaratin is itself cntinuing t generate high transactin csts f its wn and whether these shw any signs f diminishing? Wh bears the majr burden f these different transactin csts? Is it mainly partner gvernments r mainly dnrs? At what level are such csts brne amngst managerial and senir technical cadres r amng administrative cadres? Finally, what prspects are there f future reductins in transactin csts? In the wrds f the 2008 Survey, is it a questin f mre pressure n the gas pedal r des it require a shifting f gears? Are there any examples f such shifting f gears having taken place t date and culd such examples be replicated? 9. This Cncept Paper presents an apprach fr addressing these fur cre questins. In rder t elabrate this apprach, it is necessary first t define aid transactin csts and t cnsider hw they might be measured. We then cnsider mre carefully what exactly is the nature f the transactin csts prblem befre then presenting prpsals. The remainder f this Cncept Paper is thus laid ut in three chapters as fllws: Defining & Measuring Aid Transactin Csts Identifying the Pertinent Evaluatin Questins Recmmendatins n the Way Frward. F i s c u s L i m i t e d f r t h e S e c r e t a r i a t f r t h e E v a l u a t i n f t h e P a r i s D e c l a r a t i n ; N v e m b e r P a g e 6

7 Evaluating the Transactin Csts f Implementing the Paris Declaratin: Draft Cncept Paper 2. Defining and Measuring Aid Transactin Csts 10. The ntin f transactin csts is taken frm the field f transactin cst ecnmics, a theretical develpment first pineered by Rnald Case in 1937 in the The Nature f the Firm and subsequently develped by Oliver Williamsn, and by thers wrking within the new institutinal ecnmics traditin, such as David Teece. A shrt bibligraphy f the main literature in this traditin is presented in annex. The definitins and explanatins presented belw are drawn frm this literature but deliberately simplified t capture their essence. Fr a deeper understanding, readers are invited t cnsult the surce literature, mst especially Case (1937), Williamsn & Masten (1995) and Teece and Carrll (1998). The theretical rigins f Transactin Cst Ecnmics 11. Rnald Case develped the ntin f transactin csts as a way f explaining the emergence f the firm within an exchange ecnmy and als as a way f understanding the particular structure and gvernance framewrk f firms in different sectrs and under different circumstances. He asked: why des a firm emerge at all within an exchange ecnmy, where the different factrs f prductin (land, labur and capital) necessary t make gds r prvide services can be freely exchanged? If the answer is t d with the nature f entrepreneurialism (specifically the ability f entrepreneurs t bring tgether factrs f prductin which wuld nt easily cme tgether thrugh the market mechanism alne), then why is this type f crdinatin achieved in sme cases thrugh entrepreneurialism and in ther cases thrugh the price mechanism? Why was it that, in sme agricultural systems, bread wuld be made as a result f a series f exchanges between wheat farmers, millers and bakers, whereas, in ther systems, all these functins wuld be vertically integrated within a single firm? 12. The answer he came t was that in a real ecnmy (rather than the imaginary perfect market f Len Walras 3 ), each exchange r transactin between farmer and miller r between miller and baker carried a cst which was additinal t the actual prductin cst f the gds r services being exchanged. If these csts remained lw, it was cst-efficient t rely n the market mechanism fr crdinatin f transactins but, as these csts rse, integrated supply and emplyment cntracts started t becme mre efficient. It was these transactin csts which explained the spectrum f rganisatinal structures present in mdern ecnmies between fully independent agents farmers, millers bakers (and als day laburers, hirers f plughs/ dnkeys / tractrs, etc) perating purely thrugh market exchange at ne end f the scale t large 3 In fairness t Walras, he als recgnised that sme mechanism by which prices might be shared between prspective buyers and sellers wuld be required in rder t mve t equilibrium. He described this prcess as tâtnnement r grping twards the equilibrium price. Althugh his descriptin f the prcess was rudimentary, it is clear that he realised at least implicitly that it wuld invlve csts. See Walras/ Jaffe (1954), als Blaug (1986). F i s c u s L i m i t e d f r t h e S e c r e t a r i a t f r t h e E v a l u a t i n f t h e P a r i s D e c l a r a t i n ; N v e m b e r P a g e 7

8 Evaluating the Transactin Csts f Implementing the Paris Declaratin: Draft Cncept Paper vertically integrated firms at the ther, with a variety f hybrid arrangements in between. The ratinale fr all these different institutinal and gvernance arrangements derived frm the desire t ecnmise n transactin csts. 13. Within this cnceptin, transactin csts are defined as the csts which allw an ecnmic transactin t take place but which add nthing t the value f the transactin. They are distinguished frm the prductin csts which are essential fr the creatin f a prduct r the prvisin f a service. They may be brken dwn int search csts, bargaining and decisin csts and plicing and enfrcement csts. Table 1, belw, shws hw these cncepts may be applied in the cntext f the general ecnmy. Table 1: The Principal categries f Transactin Csts as defined in Transactin Cst Ecnmics Search Csts Bargaining & Decisin Csts Plicing & Enfrcement Csts The csts necessary fr ptential buyers and sellers t identify the pssibility f a mutually beneficial cntract being established essentially the csts f market research. The csts which need t be incurred in rder t define a cntract: specifically the cst f negtiating mutually satisfactry terms and cnditins. The csts which must be incurred in rder fr a cntract t be enfrced: the cst f supervising the fulfilment f a cntract and f seeking legal redress in the case f nnfulfilment. 14. Befre cnsidering the applicatin f the cncept f transactin csts t the delivery f aid and t the implementatin f the Paris Declaratin, it is wrth reflecting n sme f the key insights emerging frm transactin cst ecnmics because many f these apply als t the transactin csts f aid. Althugh the literature f transactin cst ecnmics is vast, there are three brad insights which are wrth keeping in mind: a) Firstly, it shuld be remembered that transactin csts are a metaphr 4, an abstract cncept certainly real and very imprtant in guiding hw exchange takes place in different cntexts but nt amenable t precise definitin and measurement. This metaphr is designed t help appreciate the difference between an idealised perfect market situatin and the reality f hw the prductin and exchange f gds and services takes place in the real wrld. In a perfect market, there is perfect infrmatin and hence n csts need t be incurred in rder fr cmpatible buyers and sellers t 4 I am indebted t Francisc Sagasti, a member f the Cre Team fr the evaluatin f the Paris Declaratin, fr the ntin f transactin csts as a metaphr. F i s c u s L i m i t e d f r t h e S e c r e t a r i a t f r t h e E v a l u a t i n f t h e P a r i s D e c l a r a t i n ; N v e m b e r P a g e 8

9 Evaluating the Transactin Csts f Implementing the Paris Declaratin: Draft Cncept Paper meet. In the real wrld, withut sme transactin csts being incurred, n market exchange wuld take place: it is the il withut which the wheels f the market d nt turn. But is als mre than just a necessary evil: sme transactin csts help t imprve the quality f prducts fr example by generating the infrmatin n cnsumer tastes which is necessary fr the supply f prducts t be fully adapted t their demand. Nevertheless, it is clear that where search, bargaining and enfrcement csts are lw (r, t express this differently, where investments in search, bargaining and enfrcement are nt necessary), it is easier fr transactins t ccur and therefre fr market needs t be satisfied. Thus, the required level f up-frnt investment in transactinal activities is a majr determinant f the vlume f exchange which can take place and market agents will naturally search fr ways t reduce this requirement. b) The market mechanism can itself generate new prducts r services targeted at reducing transactin csts. Market Research services are the mst bvius example, in which infrmatin n the qualities and prices f different gds is cmpiled by an agent wh is seen t be bjective and then sld as a prduct in itself in rder t reduce search csts. The rle f middlemen r brkers f different kinds is als created by the recgnitin f the value f having specialised knwledge bth f the prspective buyers and the prspective sellers f specific gds r services. Such services shuld serve t reduce bth search csts and bargaining csts. Similarly, new types f services may cme nt the market-place t reduce the csts f cntract enfrcement, such as debt cllectin services and specific types f insurance. c) The institutins and rules which gvern hw markets wrk (the rules f the game, in the terminlgy f Duglass Nrth) may als be adapted and refined s as t reduce transactin csts. The mst bvius example f this is the intrductin f standard weights and measures and quality standards which make it easier fr prducts t be directly cmpared. The creatin f market-places in which buyers and sellers f specific prducts assemble at knwn times and places is anther bvius institutinal mechanism fr reducing search csts. There are als mre cmplex infrmal rules and cdes f cnduct which gvern hw negtiatins may be clsed and cntracts enfrced within particular types f markets r amngst specific scieties r grups f peple. Specifically, where established cdes f cnduct serve t create increased trust, transactin csts are seen t fall cnsiderably and this may be a key explanatry factr fr why markets grw faster within certain scieties and lcatins 5. 5 Fr example, this may be seen t explain why the Jesuits were able t trade s actively with Japan in the eighteenth and nineteenth centuries where ther trading grups failed. The levels f mutual supprt and trust between members f the Lebanese cmmunity in West Africa and the Asian cmmunity in East Africa might als explain why their transactin csts f ding business appear lwer than thse f ther trading cmmunities. F i s c u s L i m i t e d f r t h e S e c r e t a r i a t f r t h e E v a l u a t i n f t h e P a r i s D e c l a r a t i n ; N v e m b e r P a g e 9

10 Evaluating the Transactin Csts f Implementing the Paris Declaratin: Draft Cncept Paper Applying the transactin cst cncept t Aid peratins 15. Transactin cst cncepts can be applied fairly readily t the area f aid transactins as can be seen frm the Table belw. Overall, aid transactin csts might be defined as the csts necessary fr an aid transactin t take place but which add nthing t the actual value f that transactin. Table 2: Principal categries f Transactin Csts as applied t Aid prcesses Search Csts Bargaining & Decisin Csts Plicing & Enfrcement Csts The csts necessary fr recipient gvernments/ ptential dnrs t identify apprpriate develpment partners. The csts (fr dnrs) f identifying apprpriate prjects r prgrammes t fund and (fr gvernments) f selling prject cncepts t apprpriate funders. The csts f negtiating and agreeing financing agreements fr prjects and ther peratins. The csts f defining and agreeing plicy r utcme cnditins fr Develpment Plicy Lending r Budget Supprt. The csts t recipient gvernments f fulfilling requirements fr prject executin and mnitring using systems ther than cuntry systems. The csts t recipient gvernments f mnitring dnr cmmitments t predictable disbursements and ther aspects f mutual accuntability. The csts t dnr agencies f supervising adherence t prject and prgramme cnditins and f undertaking crrective actins where necessary. 16. As with the applicatin f the transactin csts cncept t the exchange f gds and services in the ecnmy, aid transactin csts are als best cnsidered a metaphr. Ideally, ne wuld wish aid transactins t take place withut the need t incur search csts r subsequent csts fr bargaining r cntract enfrcement and yet, in the real wrld, it is clear that, withut these, aid transactins wuld nt take place at all. These are nt csts which can be indiscriminately cut because this wuld jepardise the cmpletin f aid transactins. Transactin csts are an integral part f the design and implementatin prcess fr aid prgrammes and investments in these transactinal activities will up t a certain pint bring tangible benefits in terms f imprved prject selectin and design (resulting frm search csts ) r mre efficient prject executin (frm the supervisin cmpnent f enfrcement csts ). The supervisin f cnditins fr Develpment Plicy Lans/ Budget Supprt may als assist in refining plicy design and/ r in strengthening natinal capacities fr plicy dialgue, mnitring and executin. 17. Thus, transactin csts are necessary fr aid interventins t ccur and, up t a certain pint, investments in transactinal activities may raise the net benefits f aid peratins. Yet, in many F i s c u s L i m i t e d f r t h e S e c r e t a r i a t f r t h e E v a l u a t i n f t h e P a r i s D e c l a r a t i n ; N v e m b e r P a g e 10

11 Evaluating the Transactin Csts f Implementing the Paris Declaratin: Draft Cncept Paper aid recipient cuntries the level f transactin csts being incurred is perceived t be substantially higher than necessary and n lnger a surce f net benefits. Hw may we explain this? And hw can this widely held perceptin be cnsistent with the bservatin that investments in transactinal activities als bring benefits? Figure 2: The Transactin Csts Curve Inflectin Pint Benefits f Transactinal Activities Inflectin Pint Minimum Initial Investment Transactinal Activities with Net Benefits Transactinal Activities with Net Csts Csts f Transactinal Activities (Search csts, Bargaining/negtiatin, Cntract enfrcement) 18. Cnceptually, we may cnsider that all investments in transactinal activities will carry csts but nly sme f these will carry benefits. In Figure 2 abve we present a graphical illustratin f the Transactin Csts Curve, shwing the relatinship between csts (n the x axis) and benefits (n the y axis), as higher levels f investment in transactinal activities are undertaken. We hypthesise that: a) fr any aid peratin t be undertaken, a minimum level f investment in transactinal activities is needed which carries csts but des nt itself enhance the net benefits f that peratin. Fr example, a minimum level f search csts must be incurred simply fr dnrs and partner cuntries t agree t wrk tgether diplmatic ties must be established and letters f agreement signed fr example. Similarly, in relatin t supervisin csts, a basic framewrk f reprting and mnitring must be established simply t ensure that infrmatin is available. b) As investments in these transactinal activities increase, benefits start t be created and a first inflectin pint is reached where the gradient f the cst curve is greater F i s c u s L i m i t e d f r t h e S e c r e t a r i a t f r t h e E v a l u a t i n f t h e P a r i s D e c l a r a t i n ; N v e m b e r P a g e 11

12 Evaluating the Transactin Csts f Implementing the Paris Declaratin: Draft Cncept Paper than 45 degrees, meaning that benefits are nw greater than csts. Here, investments in search csts are starting t make a real difference t the quality f the design f the aid peratin, and investments in supervisin csts are generating feedback n mnitring reprts which serves t crrect prblems and imprve executin. c) As investments cntinue t increase the marginal benefits start t fall until a secnd inflectin pint is reached where the gradient f the curve is again belw 45 degrees s that there are again net csts. Here we might cnsider that investments in search csts are invlving such a wide set f stakehlders and such a cmplex range f feasibility studies that the csts are nw exceeding the benefits. Similarly, supervisin missins are nw s frequent and s expensive that csts start t exceed the benefits. 19. Aid transactin csts are defined abve is as the csts necessary fr an aid transactin t take place but which add nthing t the actual value f that transactin. In keeping with this definitin, nly thse csts incurred t the left f the first inflectin pint in the graph and t the right f the secnd ne may prperly be defined as transactin csts. 20. The Paris Declaratin and its related initiatives aim t eliminate all transactinal activities taking place after the secnd inflectin pint, whilst nt jepardising the beneficial transactinal activities which take place prir t this pint. In additin, they aim t mve the whle curve leftwards s as t reduce the verall level f investment in transactinal activities which is necessary fr aid transactins t ccur. 21. Any measurement f transactin csts wuld need t assess the aggregate cst f investment in transactinal activities during a given time perid but wuld als need t distinguish between csts attributable t the minimum initial investment (bringing n benefits in aid quality but necessary nnetheless), csts f transactinal activities bringing net benefits (investments in between the tw inflectin pints) and csts f transactinal activities with net csts (investments t the right f the secnd inflectin pint). In practise it wuld be extremely cmplicated t measure precisely the respective values f transactinal activities in each f these categries. 22. There are at least fur reasns why measurement wuld be cmplicated: a) In the first place, the cst f transactinal activities is measured predminantly in time use time spent in the activities f searching, bargaining and cntract enfrcement and, in particular in time used by gvernment and aid bureaucracies wh d nt generally measure time use in a detailed manner. F i s c u s L i m i t e d f r t h e S e c r e t a r i a t f r t h e E v a l u a t i n f t h e P a r i s D e c l a r a t i n ; N v e m b e r P a g e 12

13 Evaluating the Transactin Csts f Implementing the Paris Declaratin: Draft Cncept Paper b) Secndly, the transactinal activities crrespnding t the minimum initial investment, thse taking place befre the secnd inflectin pint (bringing benefits in aid quality) and thse taking place after it (and therefre bringing net csts) wuld nt be easily distinguishable. Indeed they wuld prbably be the same types f activities, undertaken at different scales f cmplexity and cmprehensiveness. c) Thirdly, adding the transactin cst curves f different agencies and interpreting them crrectly wuld be cmplicated because investments in transactinal activities wuld almst certainly be characterised by ecnmies f scale. Thus search activities (prgramming and design wrk) r supervisin activities culd in principle be undertaken by ne agency n behalf f several thers which is exactly why the Paris Declaratin prmtes jint analytical wrk and jint missins as well as divisins f labur and silent partnerships. Where pprtunities fr jint wrking are missed, this shuld be recrded as a transactinal activity with a net cst but frm the perspective f the individual agencies it might lk like an investment with net benefits. d) Finally, the psitin f the curve as a whle and f its inflectin pints wuld nt be static and wuld nt be the same between cuntries. Just as in the general market, new prducts and services wuld arise t reduce the level f investment in transactinal activities necessary fr a successful aid peratin. Fr example, the Cmmitment t Develpment Index, which is cnstructed annually by the Center fr Glbal Develpment in Washingtn D.C., prvides an independent ranking f the quality f the develpment prgrammes f different natins 6. Increased use f this index shuld serve t reduce the search csts fr recipient gvernments lking fr apprpriate develpment partners. Increased use f this index shuld therefre shift the Transactin Cst Curve leftwards. Similarly, the Paris Declaratin is effectively an institutinal innvatin which has changed the rules f the aid game, changing the verall psitin f the transactin csts curve and f its inflectin pints. Whether it has succeeded in shifting the curve leftwards as intended (i.e. reducing the level f investment necessary in transactinal activities) r has generated a temprary shift t the right as frequently alleged is the key issue at questin in this paper. But few wuld dubt that it has generated changes and that these changes have yet t wrk their way fully thrugh the aid system. Thus, in sme cuntries it may have succeeded in shifting the transactin cst curve leftwards, while in thers at an earlier stage f transitin, a rightward shift may have ccurred. T measure this mving target at a snapsht in time may prve t be very misleading, particularly if it was nt pssible t discern the verall trend. 6 See F i s c u s L i m i t e d f r t h e S e c r e t a r i a t f r t h e E v a l u a t i n f t h e P a r i s D e c l a r a t i n ; N v e m b e r P a g e 13

14 Evaluating the Transactin Csts f Implementing the Paris Declaratin: Draft Cncept Paper 23. Nt surprisingly, the nly tw studies which have made serius attempts t actually measure aid transactin csts essentially failed t achieve this bjective. These are the UNDP study f aid transactin csts in the Zambia and Senegal educatin SWAps led by Patrick Watt (2005) 7 and the ODI study f aid transactin csts in Vietnam undertaken fr UNDP and UK DFID (Fzzard, A. et al. 2000) 8. Each f these studies prvides interesting reflectins n aid transactin csts but neither is able t generate a system f measurement and valuatin which might permit cmparisn acrss sectrs, cuntries r time perids f average transactin csts per US $ dllar f aid. Frm ur mre detailed analysis f the underlying thery, we can see clearly why this shuld be s. Transactin csts and the Paris Declaratin 24. As we have nted abve, the Paris Declaratin can be described as an institutinal innvatin which seeks t change the rules f the aid game. One f its specific bjectives is t reduce the level f investment in transactinal activities which is necessary fr aid peratins t ccur. It seeks t d this thrugh three related types f activities 9 : Aid alignment and enhancement f Cuntry Ownership thrugh which the quality f natinal develpment strategies and systems is enhanced and aid delivery mechanisms are re-riented twards investments in natinally specified plicy pririties and twards the use f cuntry systems. Aid harmnisatin thrugh which aid agencies cllabrate t make increasing use f cmmn systems, by undertaking jint missins and jint analytical activities and using cmmn funding and management arrangements. Develpment f framewrks t measure results and prmte mutual accuntability: the creatin f framewrks by which develpment results might be specified and measured and the respect f mutual cmmitments by dnr agencies and partner gvernments might be mnitred Watt, P. (2005), Transactin Csts in Aid: Case Studies f Sectr Wide Appraches in Zambia and Senegal,, UNDP Human Develpment Reprt Office Occasinal Paper, New Yrk. Fzzard, A., Brwn, A., Naschld, F., Cnway, T., Bui Quang Huy and Dung Quc Thang (2000), Aid Transactin Csts in Vietnam, UNDP and UK Department fr Internatinal Develpment, Hani. The Paris Declaratin actually presents these as five initiatives fcused respectively n Ownership, Alignment, Harmnisatin, Managing fr Results and Mutual Accuntability. Hwever, actins t prmte Ownership are virtually indistinguishable frm actins t prmte alignment and actins t measure results are a necessary precursr t ensuring mutual accuntability. Thus, as a practical framewrk fr defining the transactin csts f different types f activities, we believe it makes sense t cnsider wnership and alignment tgether and results and mutual accuntability tgether. F i s c u s L i m i t e d f r t h e S e c r e t a r i a t f r t h e E v a l u a t i n f t h e P a r i s D e c l a r a t i n ; N v e m b e r P a g e 14

15 Evaluating the Transactin Csts f Implementing the Paris Declaratin: Draft Cncept Paper 25. Whether the Paris Declaratin has actually succeeded in reducing average transactin csts per dllar f aid is the first fundamental questin. We nted abve that this wuld be exceedingly difficult t measure. The 2008 survey n the implementatin f the Paris Declaratin did nt explicitly assess transactin csts but it did reprt n the perceptins f dnr agencies and partner gvernments in this regard. Its findings strngly supprted the view that, in 2008 at least, the average transactin csts f aid were nt falling. 26. A further and related questin is whether the Paris Declaratin is itself generating transactin csts? The Table belw shws hw the Paris Declaratin might be expected t generate csts fr search activities, bargaining and negtiatin and cntract enfrcement. Fr practical purpses, it grups tgether actins t prmte wnership and aid alignment as well as actins t prmte management fr results and mutual accuntability. (See Ftnte 9.) Table 3: The nature f Transactin Csts generated by the Paris Declaratin Ownership & Aid Alignment Search Csts Fr Gvernments: finding Dnrs willing t use cuntry systems and respect wnership Fr Dnrs: assessing Cuntry systems which might cnfrm t adequate fiduciary standards Bargaining & Decisin Csts Plicing & Enfrcement Csts Definining, negtiating and agreeing mutually satisfactry cnditins fr the use f Cuntry systems Fulfillment by all parties f agreed reprting requirements. Mnitring f fulfillment by ther parties Reacting t censure parties nt fulfilling cmmitments Aid Harmnisatin Fr Gvernments: finding ways f encuraging r cmpelling aid harmnisatin Fr Dnrs: identifying likeminded dnrs and apprpriate pprtunities fr undertaking jint activities Defining, negtiating and agreeing mutually satisfactry cnditins fr harmnisatin Fulfillment by all dnrs f agreed reprting requirements. Mnitring f fulfillment by ther parties Reacting t censure parties nt fulfilling cmmitments. Framewrks fr Results & Mutual Accuntability Identifying partners willing and able t engage in the develpment and establishment f framewrks fr results and mutual accuntability Defining, negtiating and agreeing apprpriate indicatrs f perfrmance and methds f measurement Fulfillment by all parties f agreed reprting requirements. Mnitring f fulfillment by ther parties Reacting t censure partiess nt fulfilling cmmitments. F i s c u s L i m i t e d f r t h e S e c r e t a r i a t f r t h e E v a l u a t i n f t h e P a r i s D e c l a r a t i n ; N v e m b e r P a g e 15

16 Evaluating the Transactin Csts f Implementing the Paris Declaratin: Draft Cncept Paper 27. We may see frm the table abve that the implementatin f the Paris Declaratin will require a variety f investments in transactinal activities which will be necessary in rder t make prgress n wnership/ alignment, harmnisatin and the creatin f framewrks fr results and mutual accuntability. Casual bservatin f the many mnitring framewrks, cnventins, cmmittees and task frces which have been created suggests that investments in transactinal activities have already been very high. There is nthing t suggest, hwever, that measuring the value f thse investments, distinguishing between thse generating net benefits and thse generating net csts (i.e. identifying the inflectin pints ) and reaching quantifiable cnclusins n the transactin csts f the Paris Declaratin will be any easier than it wuld be fr aid transactin csts as a whle. Summing Up 28. What cnclusins can we draw frm this brief review f the theries f transactin cst ecnmics and their applicatin t aid and the Paris Declaratin? Firstly, the cncepts f transactin csts deriving frm the Transactin Csts Ecnmics literature can be seen t be directly applicable t the delivery f aid as a whle and t the implementatin f the Paris Declaratin. In each f these areas, we may identify transactin csts related t search, bargaining/ negtiatin, and cntract enfrcement. Due t the fact that infrmatin flws are nt perfect, a minimum investment in transactinal activities is necessary in all markets simply fr transactins t ccur. The same is true fr aid and the Paris Declaratin: withut investing in transactinal activities, aid wuld nt be effectively disbursed and the Paris Declaratin wuld nt be implemented. A minimum initial investment in transactinal activities seems t be necessary simply fr transactins t take place. Thereafter, investments in transactinal activities prbably bring net benefits but after a secnd inflectin pint is reached n the transactin cst curve, further investments bring nly net csts. Bth in the aid wrld and in the wrld f nrmal ecnmic exchange, agents seek bth t eliminate the transactinal activities which bring nly net csts (the activities t the right f the secnd inflectin pint) and t find ways f mving the transactin csts curve t the left s as t reduce the minimum required level f investment in transactinal activities (t the left f the first inflectin pint). F i s c u s L i m i t e d f r t h e S e c r e t a r i a t f r t h e E v a l u a t i n f t h e P a r i s D e c l a r a t i n ; N v e m b e r P a g e 16

17 Evaluating the Transactin Csts f Implementing the Paris Declaratin: Draft Cncept Paper Bth cmmercial market innvatins and institutinal innvatins are cntinuusly intrduced in pursuit f these bjectives. The Paris Declaratin may be characterised as an institutinal innvatin aiming t achieve these very same bjectives in relatin t aid transactin csts. Hwever, the Paris Declaratin has itself generated new transactin csts by intrducing new types f search, negtiatin and cntract enfrcement csts. Ideally, ne wuld want t track the net transactin csts per dllar f aid disbursed and t be able t distinguish which f thse transactin csts derive directly frm the Paris Declaratin. In practise, cnceptual and practical difficulties make net transactin csts per dllar f aid virtually impssible t measure. Yet the Paris Declaratin signatries perceive that transactin csts per dllar f aid are inherently t high and that additinal transactin csts have been added by the implementatin f the Paris Declaratin. Assessing the validity f this perceptin and gauging the underlying trends in aid transactin csts thus remain crucially imprtant challenges, despite the evident measurement prblems. 29. Hw then shuld ne prceed? Clearly, it is futile t attempt any detailed measurement f net transactin csts per dllar f aid. Nevertheless, there is prbably sme value in assessing the perceptins f transactin csts acrss different resurce persns and triangulating these bservatins in rder t get a sense f verall trends. But which perceptins are mst imprtant? And whse perceptins are mst imprtant? We need first t define the transactin cst prblem mre clearly befre we can answer this questin and we d this in the fllwing chapter. We then prpse a way frward in ur cncluding chapter. F i s c u s L i m i t e d f r t h e S e c r e t a r i a t f r t h e E v a l u a t i n f t h e P a r i s D e c l a r a t i n ; N v e m b e r P a g e 17

18 Evaluating the Transactin Csts f Implementing the Paris Declaratin: Draft Cncept Paper 3. Identifying the Relevant Evaluatin Questins 30. In this sectin we cnsider mre carefully the nature f the transactins csts prblem in rder t define mre precisely why it wuld be useful t evaluate aid transactin csts. This then leads t the identificatin f a set f pertinent evaluatin questins. In the final chapter, we will cnsider whether these can be evaluated and if s, hw. The magnitude f aid transactin csts, their trends and incidence 31. The ntin that aid transactin csts are excessively high has nw becme cnventinal wisdm. It lies at the heart f the Paris Declaratin and drives much f cntemprary plicy twards develpment cperatin. Sme have argued that it wuld be useful t actually prve this prpsitin. We wuld disagree: this prpsitin is already adequately prven by the wealth f infrmatin n prxy indicatrs f transactin csts numbers f visiting missins per year, numbers f prject reprts per year and cncrete data n design and supervisin budgets fr specific develpment agencies and by the strngly shared perceptins f different types f stakehlders in the field. Especially in the light f the cnceptual difficulties we have identified abve, it wuld seem futile t attempt t measure cmprehensively the average level f transactin csts per dllar f aid. 32. Hwever, it des seem mre imprtant t have a sense f the directin f change. Is the average level f transactin csts rising r falling r remaining stable? Given the extensive investments already made in the implementatin f the Paris Declaratin and the demand fr still higher levels f investment underlying the Accra Agenda fr Actin, it wuld be very useful t have sme sense f whether thse investments are having an impact. Answering this questin requires first an assessment f the trend mvement f transactin csts and then sme investigatin f causality. Is it the implementatin f the Paris Declaratin which is causing change (where it is happening)? Or is this driven by parallel measures taken independently by different gvernments r by unrelated develpments in the wider ecnmic r plitical envirnment? This secnd questin may be difficult t answer cnclusively but having sme cnfidence ver the recent trends wuld be a first step. 33. The secnd general set f questins wrth addressing relates t the incidence f aid transactin csts. Sme agencies and sme staff within particular agencies are better placed t absrb additinal transactin csts than thers. Specifically, it seems a reasnable general assumptin that Develping Cuntry gvernments, wh already meet significant capacity cnstraints in the nrmal business f gvernment, shuld carry less f the burden f aid transactin csts than the Develpment Agencies, whse budgets can mre easily be expanded t carry these csts. Hwever, within bth Gvernments and Develpment Agencies, high level managerial and F i s c u s L i m i t e d f r t h e S e c r e t a r i a t f r t h e E v a l u a t i n f t h e P a r i s D e c l a r a t i n ; N v e m b e r P a g e 18

19 Evaluating the Transactin Csts f Implementing the Paris Declaratin: Draft Cncept Paper technical staff are scarce and aid transactin csts brne by such peple wuld have a higher pprtunity cst than thse which can be brne by lwer level administrative staff. 34. Thus, it is als imprtant t knw, r at least t be able t estimate, hw aid transactin csts are divided between Develping Cuntry Gvernments and Dnrs n the ne hand and between managerial/ technical staff r administrative staff n the ther. The relative influence f the Paris Declaratin 35. Althugh causality is always difficult t prve cnclusively, btaining sme sense f the relative influence f the Paris Declaratin is bviusly imprtant. D the infrmed cmmentatrs wh actually manage aid peratins n a day t day basis believe that the Paris Declaratin is having a psitive r negative influence n aid transactin csts? 36. Because the implementatin f the Paris Declaratin can be brken dwn relatively easily between measures t prmte wnership/ aid alignment, aid harmnisatin and framewrks fr results/ mutual accuntability 10, it is als pssible t ask which aspect f the Paris Declaratin is driving change and in which directin. This culd give a clear sense f where further investment f effrts is likely t bring psitive results and where sme restructuring and adaptatin f appraches might be needed. Future trends and ptential fr change 37. The directin f change can be assessed bth frm perceptins f past changes and frm expectatins f future changes. The latter is bviusly mre cnjectural but nevertheless likely t be f sme value in the case f infrmed cmmentatrs wh have direct persnal experience f the implementatin f the Paris Declaratin. What perhaps wuld be f mre value wuld be t ask these same infrmed cmmentatrs t identify what srts f changes in the implementatin f the Paris Declaratin might generate mre favurable impacts n aid transactin csts. In the wrds f the reprt f the 2008 Mnitring Survey is mre pressure n the gas pedal all that wuld be required r wuld a change f gears be needed? And if a change f gears, what precisely might that mean? 38. In terms f finding ideas fr psitive changes in the mde f implementatin f the Paris Declaratin, it wuld als be useful t draw frm the diversity f experiences acrss cuntries t find if there are nt already certain examples f gd practise which might be replicated. One f the great disadvantages f the aid wrld is that it is a highly imperfect market. In a cmmercial 10 We nte in Ftnte 9 abve that categrising measures accrding t the five axes f the Paris Declaratin is mre difficult because measures t prmte wnership will simultaneusly prmte alignment (and vice-versa) and measures t imprve management by results wuld als help t prmte mutual accuntability. We therefre favur a clustering int three grups f measures as presented here and in the questinnaire in Chapter 4. F i s c u s L i m i t e d f r t h e S e c r e t a r i a t f r t h e E v a l u a t i n f t h e P a r i s D e c l a r a t i n ; N v e m b e r P a g e 19

20 Evaluating the Transactin Csts f Implementing the Paris Declaratin: Draft Cncept Paper market, ideas fr reducing transactin csts quickly becme packaged up as new services, sld and replicated. In the aid wrld, aid transactins are nt in general managed thrugh market exchange but thrugh bureaucratic hierarchies. These are essentially civil service hierarchies, pursuing a range f smetimes cmpeting bjectives, where the internal incentives driving the behaviur f individual staff members may nt always be cnsistent with the stated crprate bjectives, ntably in relatin t the implementatin f the Paris Declaratin 11. In s far as the assessment f aid transactin csts might help t speed the disseminatin f innvative practices, which wuld nt s easily be prmted by existing incentive structures and mechanisms f cllabratin, then this wuld clearly be advantageus. 11 Fr this reasn, there has been a variety f studies examining the cnsistency f internal incentives within aid agencies with the bjectives f the Paris Declaratin. The OECD DAC Jint Venture n Managing fr Develpment Results cmmissined a self-assessment tl t assess the cnsistency f these internal incentives and help t prmte imprved practise. See ODI (2006) and PriceWaterhuseCpers [2008 a) and b).] F i s c u s L i m i t e d f r t h e S e c r e t a r i a t f r t h e E v a l u a t i n f t h e P a r i s D e c l a r a t i n ; N v e m b e r P a g e 20

21 Evaluating the Transactin Csts f Implementing the Paris Declaratin: Draft Cncept Paper 4. Recmmendatins n the Way Frward 39. The evaluatin f the implementatin f the Paris Declaratin will be undertaken thrugh a cmbinatin f fur types f instruments: Cuntry-level studies, in which cmmentatrs frm Gvernment, Develpment Partners and civil sciety wuld be asked t assess prgress with the implementatin f the Paris Declaratin in specific cuntries. Agency-level studies, in which cmmentatrs frm within specific Develpment Agencies wuld be asked t assess verall prgress within their agencies at an internatinal level. Thematic studies, in which specific sub-issues f the Paris Declaratin (such as aid transactin csts) might be addressed thrugh dedicated evaluatin wrk, additinal t the cuntry and agency studies. Synthesis Reprts, in which the results f the cuntry, agency and thematic studies wuld be brught tgether, drawing cmparisns where necessary with ther infrmatin surces and ther literature. 40. The cnsideratins we have utlined in chapter 3 lead naturally t a set f questins n aid transactin csts which culd be addressed bth within the cuntry studies and the agency studies. These are presented in the table verleaf. 41. Cnsideratin has als been given t the pssibility f an additinal thematic study dedicated t the issue f aid transactin csts. If it was intended t undertake sme srt f mre detailed measurement f aid transactin csts within a particular sectr r cuntry, then such a study wuld be necessary. Yet, as we have pinted ut repeatedly, any attempt at direct measurement f aid transactin csts wuld be fraught with cnceptual difficulties. The mst that might be hped fr wuld be t undertake tw parallel studies, estimating transactin csts in ne specific sectr within tw different cuntries. Then, the questin wuld immediately arise ver the representativeness f the chsen sectr and chsen cuntries: effectively there wuld be n sund statistical r research basis fr extraplating results in rder t reach cnclusins valid at the internatinal level. In this cntext, it seems far better t make use f the sampling prcess which will underlie the selectin f cuntry studies and agency studies and rely n questins abut perceptins addressed t a wider sample f infrmed cmmentatrs. F i s c u s L i m i t e d f r t h e S e c r e t a r i a t f r t h e E v a l u a t i n f t h e P a r i s D e c l a r a t i n ; N v e m b e r P a g e 21