On-Budget Support

(Host Country Contracting)

What Is Budget Support?

The aid instrument known as On-Budget Support (OBS) is increasingly used by donors, who argue that it gives host governments ownership of the development process by encouraging them to assume a more active role.

We find that when governments and donors work together to identify development priorities, development programs are likely to be more efficiently managed and sustain-able. The policy dialogue encourages harmonization, as donors work in concert to achieve common objectives. However, for OBS to be effective, it is critical that the recipient government is capable of responsibly managing donor funds and effectively implementing development programs within a policy and institutional framework that is conducive to growth.

What Is Budget Support?

OBS is defined as a type of program assistance that develops programs for either food aid or financial aid. Financial program aid is subdivided into budget support (sometimes referred to as direct budget support) and balance of payments support, such as debt relief and import support. Participating donors define budget support as a type of resource transfer in which funds are channeled directly to recipient governments. The recipient uses its own procurement and accounting systems, and the funds are not linked to projects. Budget support entails “a lump sum transfer of foreign exchange,” but there may be differences to the amount of earmarking necessary and on the levels and focuses of the policy dialogue and conditionality.

There are two types of budget support: OBS and Sector Budget Support. OBS contributes to the overall budget of a country; it tends to move away from requiring specific conditions to be met prior to disbursement while moving toward using assessments of performance for a past period to determine future disbursements. Funds are not specifically earmarked. Sector Budget Support is a resource transfer which supports activities in an area with a common theme, such as health or education.

FRESH Global believes on-budget support can improve aid effectiveness and harmonize donor support; however, many countries need to strengthen their management and technical capacity first. Management capacity refers to the ability of the government to plan and administer its own development program as well as to handle funds responsibly. Disparities in capacity may exist between different ministries, within the same ministry, and between central and local levels of government. The need to strengthen management and technical capacity is recognized as an issue in studies conducted in every country. Donors realize that technical assistance must be a component when they provide OBS to countries where there is weak management capacity. A particular concern for donors is the capacity of the host government to transparently manage its finances and track funds. Donors are increasingly understanding of the fact that capacity building can be concurrently carried out as funds are disbursed.

With FRESH Global consultants’ experience and knowledge with on-budget support, we can assist governments with training, mentoring, and systems strengthening.