2023年12月20日发(作者：宝马740l价格表)
JEL code: F35
COST-EFFECTIVENESS OF FOREIGN AID PROGRAMS IN THE BALTICS
M. Peter van der Hoek and Yen Yee Chong*
*M. Peter van der Hoek is an Associate Professor of Economics at the Erasmus Public Law and
Economics Center (EPLEC) of Erasmus University in Rotterdam. Yen Yee Chong was visiting
Assistant Professor in Economics at Tallinn and Tartu Universities, Estonia, under the
Soros-funded Civic Education Project. He now works for DSL Consultants, London,
specializing in Emerging Markets and Information Systems. The authors gratefully
acknowledge useful data/suggestions they received with regard to this paper through
communications with:
Geoffrey Adams, (Agricultural consultant-PHARE), England.
Peter Ausden, Department of Trade and Industry, World Aid Section, Britain.
Charles Garrett, Know-How Fund, FCO, London, Britain.
Jackie Gent, Project Evaluations, Overseas Development Agency, Britain.
Tomas Gils?, journalist, Karlstadt, Sweden.
Gudrun Knutsson, NUTEK, Stockholm, Sweden.
Ene Kolbre, Dean of Economics, Tallinn Technical University, Estonia.
Lars Kristofferson, Stockholm Environmental Institute, Stockholm.
Ragnar L?fstedt, University of Surrey, Britain.
Ulo Mander, Department of Geography, Tartu University, Estonia.
Bob Maushammer, USAID, Estonia.
Frank Ryan, European Bank of Reconstruction and Development, London.
Charles Scott, Loyola College, MD, USA.
Basil Zavoico, IMF representative, Estonia.
In particular, Charles Scott provided us with much support throughout, while Ragnar L?fstedt
helped us a lot with initial Swedish contacts. Some of the data in countries of Estonia, Latvia,
Lithuania come from private interviews for which we are requested not to divulge personal
details. Other data in the fields of environmental science has been gathered by meetings and
discussions with economics staff in: the universities of Aarhus, Roskilde, Copenhagen,
Denmark; Royal Academy of Sciences, Sweden; Finnish Environmental Ministry, Helsinki.
We would like to thank the staff who are numerous and not explicitly mentioned who have
helped us with information. Among them are participants of the 42nd International Atlantic
Economic Conference held in Washington, D.C., October 10-13, 1996, where an earlier
version of this paper was presented. The sole responsibility for the paper, however, lies with
the authors.
Correspondence address:
M. Peter van der Hoek
P.O. Box 137
NL-3350 AC Papendrecht
Netherlands
Phone: 31-10-4081622
Fax: 31-10-4532912
E-mail: vanderHoek@
Abstract
After the upheavals in Central and Eastern Europe in the late 1980s and early 1990s, the Western
world has given considerable aid to the fledgling democracies. In this paper we draw a summary
from Baltic experience in the fields of educational programs, scientific and environmental
programs, and commercial projects in banking, taxation and energy. We analyze the motivation
and identify different possible effects of foreign aid. We signal possible inefficiencies arising from
the lack of coordination of foreign aid, deal with possible waste as being a form of loss in
cost-effectiveness, and address the policies followed by aid providing agencies. Finally, we suggest
ways that can help to achieve cost-effectiveness by assisting the donor and recipient in maximizing
benefits gained and possibly reducing costs. (JEL F35)
1. Introduction
After the upheavals in Central and Eastern Europe in the late 1980s and early 1990s, the Western
world has given considerable aid to the fledgling democracies. The Organisation for Economic
Co-operation and Development [OECD, 1996] survey of aid flows to Central and Eastern
European countries 1990-1994 showed total net official and private flows from bilateral sources
amounting to $81 billion and from multilateral institutions $26 billion. On an annual basis, total
receipts rose rapidly from $10 billion in 1990 to $31 billion in 1992, but declined over the
following two years to $18 billion in 1994.
For an eastern European country, the aid may even overshadow its own GDP. In the former East
Germany following reunification the aid from the western part exceeded the regional GDP of East
Germany.i The amount of foreign aid is smaller in the Baltic states of Estonia, Latvia and
Lithuania, but still represents a significant part of economic activity. For example, 1995 foreign
aid was $82 million in Estoniaii although it has only 1.5 million people.
In this paper we do not aim at carrying out a comprehensive empirical evaluation of all programs.
We have to point out the large amount of resources required to mount a comprehensive survey of
cost-effectiveness across all types of foreign-aid programs. We draw a summary from Baltic
experience in the fields of educational programs, scientific and environmental programs, and
commercial projects in banking, taxation and energy. We analyze the motivation and evaluate the
aid flows, a field in which relatively little work has been done so far.
Our goal is to present a framework for future evaluation studies. First, we identify motives that
underlie the aid to the Central and Eastern European countries. Second, we address the effects of
the aid flows. As in environmental aid \"there has been almost no evaluation of Western
bilateral-aid projects in Eastern Europe, e.g. their cost-effectiveness for a specific objective. This is
related to the fact that many countries, such as Sweden and Denmark, do not have clear
environmental strategies for their East European environmental aid programs, which leads to
inefficient use of aid funds\" [L?fstedt and Sj?stedt, 1995, p. 368]. In the Netherlands, the AR or
General Accounting Officeiii asked ministries to list policy evaluation studies carried out during
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1987-1989. The AR considered only half of the studies listed by the ministries to be policy
evaluation studies. In addition, less than a quarter of the reports analyzed by the AR appeared to
study policy effects, and thereby, present any measure of cost-effectiveness [Algemene
Rekenkamer, 1991, p. 71].
The OECD defines an evaluation as \"an assessment, as systematic and objective as possible, of an
on-going or completed project, program or policy, its design, implementation and results\" [OECD,
1992, p. 132]. Insofar as empirical evaluations have been carried out, these were usually done for
internal use. Other evaluations have been more project-specific as at such lower levels of detail, we
come up with good concrete data on the actual cost-effectiveness of projects in terms of cash
investments and pay-back periods on investments. One such area that evaluates effectiveness is in
the use of Swedish funds and manpower in the Baltic Environmentally Adapted Energy Systems
(EAES) program of the Swedish agency NUTEK (National Board for Industrial and Technical
Development). EAES project-effectiveness evaluation examples are Martinot (1995) and Blumberga
(1995).
Though there are difficulties and inadequacies of assessing operational cost-effectiveness
objectively, we analyzed our own directly-collected data [Chong, 1995], plus a sample of Baltic
cases in various sectors [Secretariat for Analysis of Swedish Development Assistance, 1994;
National Board for Industrial and Technical Development, 1995; European Bank for
Reconstruction and Development (EBRD), 1994]. We then drew our conclusions from these cases
which we believe to be representative for the Baltics in their fields.
In order to assess the cost-effectiveness of programs, we need criteria for measuring costs and
benefits. We have come across very subjective and sometimes controversial measurements of costs
and benefits. Although we were not always able to exercise the American-style Freedom of
Information Act data access, we did manage to meet official bodies and individual contacts from
living and working in the Baltics during 1990-1996. This meant that we received direct data and
statistics, and we concentrated in areas where costs and benefits were either known (according to
pre-defined criteria) or concrete (observed and even measurable). Apart from financial costs we can
examine other costs. One view of costs [Martinot, 1995, pp. 2-3] included factors of direct
investment, intermediation, risk, avoided costs, financial repayment, and other costs (e.g.,
externalities or third party harm/injury, such as pollution). We can assume that there are benefits
that motivate donors to provide the relatively large sums of funds and resources available.
The remainder of the paper is organized as follows. Section 2 addresses the motives underlying
foreign aid, both on the side of the donor and on the recipient\'s side. Section 3 identifies different
possible effects of foreign aid. In section 4 we signal possible inefficiencies arising from the lack of
coordination of foreign aid, while section 5 deals with the possibly resulting waste. Section 6
addresses the policies followed by aid providing agencies. Section 7 deals with procedures and
presents some recommendations to help achieve cost-effectiveness. Finally, in section 8 we present
some concluding remarks.
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2. Foreign Aid Motives
As a major Baltic \"player\", the EBRD sets overall goals: \"It is important to note that the
performance classifications of the evaluated operations are based on four strategic criteria: The
EBRD\'s additionality (other financing for the operation is not available on favourable terms); the
operation\'s transition impact, including environmental considerations; the company/project
performance; and the Bank\'s investment performance\" [EBRD, 1996a, p. 34]. As a nation, Sweden
in 1993 trebled its aid to SEK 1.12 billion ($170 million) to the Baltic countries, Poland and the
Russian oblasts of burg and Kaliningrad. But Estonia, Latvia and Lithuania got most of
the aid - even though their populations total about 8 million - making Sweden the largest Western
aid-donor in the region [Schori and Karlsson, 1993, p. A4].
There are many reasons for a foreign power to donate aid to the Baltic countries. Reasons cited,
for example, \"Sweden\'s aid policy towards the Baltic region is a mix of philanthropy and realism
and includes aid for economic, strategic and environmental purposes\" [L?fstedt, 1995a, p. 255].
Such assistance has been said to be motivated by the \"neighborhood interest\" of looking after one\'s
own backyard. This has included Baltic military border security equipment of patrol boats, radar,
all-terrain vehicles and technical help for improving the safety of Lithuania\'s Ignalina nuclear
reactor, which is a Chernobyl-type reactor. There are ECU 33 million ($42 million) available for
increased safety measures at Ignalina, which was strongly motivated by the fear of a nuclear
disaster coupled with the proximity of the European Union countries to the reactor site [EBRD,
1996a, pp. 39-40].
On the donor\'s side there are also different actors, including politicians, civil servants, private
consultants, and pressure or special interest groups. Basically, they may be moved significantly by
the same motives as actors on the recipient\'s side. This has manifested itself in the large amounts
of foreign aid donated by Sweden and Finland to Estonia, even though Estonia only has 1.5 million
inhabitants. Historically, these Western benefactors are concerned with the fate of the recipient
country. Sweden possessed Estonia and northern Latvia as colonies during the 16th and 17th
centuries. Finland is Estonia\'s strongest ally and relation in the Finno-Ugric linguistic family.
The self-interest of those donors involved does play a large role. For example, the old Swedish aid
agency BITS (being the National Committee for International Technical and Economic
Collaboration) was required by law to fund only Swedish firms and consultants (BITS became
subsumed into the larger aid agency, SIDA, in 1995). Local Western companies can therefore
derive profit from deliveries to the Baltic aid-providing agency. The high costs of employing
Western staff and using Western equipment drive up the total project costs; thus, it is not possible
to instigate low-cost Baltic programs (e.g., see Chong, 1993). On the other hand, it would not be
politically easy to win approval for a project that employs mainly lower-cost eastern European
labor and equipment. Thus, much of the foreign-aid budget is already \"ear-marked\" or \"tied\" for
Western firms and staff, with cost-effectiveness and helping the Eastern country bearing secondary
importance [L?fstedt, 1995b, p. 43].
Politicians may gain political support, for instance among émigrés from the recipient country.
Estonia has a large émigré population living in Sweden and Finland. Civil servants may also
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improve their position by administering an aid project. An \"institutional\" self-interest to reinforce
the position or power of the donor country in international politics may be an underlying motive
for the aid provided. Thus, Denmark provided up to DKK 160 million ($28 million) in
environmental aid to Eastern Europe, primarily Poland. This is because Poland is its largest
Eastern European neighbor, and most of the pollution in that Danish part of the Baltic sea
originates from the river Vistula, Poland. Once again, the aid is administered by the Danish
Environmental ministry with representations from the trade, labor and engineering associations.
Most aid investment goes to Danish manufacturing companies and consultants, with a third of the
total budget going to direct environmental investment and equipment in the targeted Baltic
countries [L?fstedt and Sj?stedt, 1995, p. 367].
Many actors play an important role on the aid recipient\'s side, including politicians, civil servants,
and private consultants. Each actor or group of actors may be ruled by different motives. First,
they may be stirred by the benevolent motive of serving the interest of the recipient country. It is
postulated that they want the best results for their country in terms of concrete benefits. Such
benefits are, for example, the improvement in water quality and a better sewage system instead of
Western analyses. This manifested itself in the complaint of the Latvian ex-Environmental
vice-minister that he preferred more Western aid as pipes for the Riga sewage system instead of
another pre-feasibility study [Bjerstr?m, 1992].
Second, the financial or career self-interests of the individual involved play a major role, be it of a
politician, a civil servant, or a private consultant. A politician may expect to gain political or
popular support by acquiring some aid, while he also may expect to gain benefits for his ministry
or for himself. A civil servant may improve his position by serving as the donor country\'s
counterpart and being responsible for the absorption of the aid. A private consultant has an interest
because the aid program opens up new opportunities for assignments and revenue.
An example of political and business self-interests is in the race to win the contract for the
rebuilding of the electricity generators in Narva, Estonia. The capital contract amounts to some
$100 million and carries a large element of prestige for all those who will work on it [Chong,
1995, p. 8]. But there is little expenditure for pollution-control and energy conservation projects
which are less politically-beneficial. These energy-conservation measures are more financially
cost-effective. The Ministry of Economy\'s Energy Conservation Center had an annual budget of
$10,000 (i.e., 0.01% of the new generators\' cost) but this agency was threatened with axing
[Chong, 1995, p. 8]. Estonian power demands fell 6% in 1992 after the fall of the USSR, giving a
reduction in SO2 pollution of 6% at zero additional cost [L?fstedt and Sj?stedt, 1995, p. 369]. But
we have to add that this comparison somewhat unfairly juxtaposes a once-off drop in demand with
a concomitant fall in energy output/pollution and is not an active pollution-reduction measure.
Since 1994, the Estonian economy has grown [The Economist Intelligence Unit, 1996, p. 4] and
the increased economic activity necessitates additional costs as pollution-reducing investments. To
illustrate the cost-effectiveness of such investments - as opposed to once-off reductions of pollution
and production resulting from a fall in economic activity - we refer to the FIM 24 million ($5
million) costs - paid 3/4 by Finland and 1/4 by Estonia - to install the latest scrubber technology at
one of these power plants. This resulted in a 0.5% fall in national SO2 pollution, i.e. $10 million
per percentage-point SO2 pollution decrease.
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Air quality is definitely poor in the Narva region of Estonia. \"Air pollution, particularly from SO2
and fly ash [comes] from thermal power plants and other industrial activities in North-East Estonia
as a result of the burning of oil-shale (with 1.6-2.4% sulphur), and also with NOx from traffic (the
majority of vehicles use leaded fuel and do not have catalytic converters)\" [Mander, 1996, p. 1].
There are limited signs of immediate improvement; certainly, enforced fitting of catalytic
converters and reduction in electricity usage would be more cost-effective for pollution reduction,
but these measures are unlikely to be politically acceptable. \"An enormous decrease in the
population\'s interest in environmental problems has occurred since the re-establishment of
independence\" [Mander, 1996, p. 1]. Thus, these particular cases suggest that the political and
business self-interests may be plausible explanations for driving large Western projects, as they
cannot be justified in terms of cost-effectiveness alone.
3. Effects
Effects of aid programs can be direct effects as concrete and immediate results of the program, for
instance, Riga city\'s much-needed overhaul of its sewage system. Latvia\'s welfare is improved by
a gain in technical skills and material assistance. The EBRD and the Latvian government agreed to
spend SEK 800 million ($121 million) to clean the sewage outlet from Riga to the river Daugava, a
waterway to the Baltic sea. The EBRD put up a loan of SEK 150 million ($23 million) and the
European Investment Bank (EIB) lent SEK 124 million ($19 million). Finland, Switzerland and
Sweden guaranteed loans on a total of SEK 77 million ($12 million). A third of Riga\'s sewage has
up to now gone totally untreated into the Daugava river and caused very serious long-term
environmental damage in the surrounding area. The sewage cleaning project will greatly decrease
the amount of pollution in the Daugava, Riga Bay and Baltic Sea [Tidningarnas Telegrambyra,
1996]. Another example is that the European Union\'s PHARE-program is notable in leaving
behind all the hardware that was purchased for the project. Thus, after the consultants have left,
cars, computers, etc. will stay in the recipient country. Larger hardware gains often come in the
form of loans instead of grants or donations, such as in large capital projects.
Indirect effects may occur in the medium/long-run as a by-product of the aid, for example, the
improved public transport or sewage may result in an increased productivity of the city\'s industries
and an increased attractiveness to investors. In addition, local people increase their knowledge and
experience partly from contact with the aid project. The British Know-How Fund (KHF) does not
give direct effects of capital accumulation in any hardware or equipment purchase but solely
provides technical assistance in terms of expert skills transfer. It has been involved in banking
skills training in Lithuania, which were demonstrably much needed in the wake of Lithuania\'s 1995
banking crisis. The sums invested in Britain\'s KHF Lithuanian banking program are small in
relation to other larger programs, i.e $150,000. The small size and the large element of local labor,
plus lack of any capital equipment injection, meant that this budget tended to be easier to monitor
and control. Essentially, this type of project ensured that the stock of human capital in the host
country increases as a result of the aid project.
The indirect effects of aid programs are difficult to measure and to identify. The causal relationship
between the indirect effect(s) and the original aid program may be vague or questionable.
Evaluations of aid programs are rare and they have been carried out with the (implicit) intention to
justify the policy pursued rather than obtain an objective assessment of the results. The US Agency
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for International Development (USAID), for example, issued a press release on July 6, 1996 of
USAID\'s Estonian success stories. This presentation may be consistent with the finding of the AR,
that in the Netherlands ministries use evaluations partly or solely to support their main policies
[Algemene Rekenkamer, 1991, p. 63]. However, USAID has compiled a comprehensive
assessment of its more than 60 activities in Estonia over the last five years. Since the full USAID
report was not yet available at the time of writing, we cannot judge to what extent it conducts an
accounting cost-benefit analysis or otherwise objectively looks at program results rather than
supports main US policies.
Riding on the back of its press presentation is the latent need to preserve good public relations,
both in the host country and at home. Nevertheless, it may be such that the self-interest motive is
perceived by tax-payers/voters to be too uncontrolled, or foreign-aid becomes too cost-ineffective,
that remedial action must be taken. An example is the creation of the Secretariat for Analysis of
Swedish Development Assistance (SASDA): \"The Swedish Government has appointed a committee
with the task of analyzing the results and effectiveness of Swedish development aid. SASDA\'s
point of departure is the aim of a better understanding of the mechanisms of development in order
to enhance the results and increase the effectiveness of aid in achieving the five goals set by the
Swedish parliament: increased resources, economic and social equality, economic and political
independence, the democratic development of society, and the long-term management of natural
resources and care of the environment\" [SASDA, 1994, front cover page].
4. Lack of Coordination
International aid is uncoordinated to a large extent and is offered by individual countries, groups of
countries or supranational bodies (such as the European Union), multilateral institutions (including
United Nations agencies, The World Bank, the International Monetary Fund (IMF),iv the
International Labour Office, etc. In addition, a large contribution comes from both national and
international charities. Several surveys of international aid flows are available, such as the OECD
survey covering aid to Central and Eastern Europe [OECD, 1996]. However, the surveys available
are not complete, do not cover total real spending, and do not contain evaluations of the effects.
In addition, there is no single institution that serves as coordinator of international aid programs.
The United Nations (UN) under an ideal environment seems the most obvious institution for such a
coordinating role, since by definition the UN cannot seek national or regional interests in providing
aid. Although to some extent it attempts to do so, and the UN Development Program (UNDP) does
play a key role, it does not have an official coordinating task as to international aid programs. Its
authority does not give it access to or control of the programs of other donor agencies, nor would
such control be appreciated by many agencies.
The lack of coordination of international aid gives rise to situations that leave room for
inefficiencies. Since there are many aid providers, it is possible that two different providers offer
the same aid without knowing each other\'s proposals.v This is a case of an imperfect market where
agencies \"compete\" against each other as part of the bid tender process. Competition between
agencies and their different proposals is good for the recipient, but this must be contrasted against
possible duplication of donors\' effort and waste. Competition is in the interests of the recipient
7
nation as it may lower the project It can select the best tender at the best available terms
offered as Western countries offer different offset deals and \"sweeteners\", together with soft bank
loans or grants in order to clinch the contract in the Baltics. We have seen this particularly in large
capital projects such as the bids for the overhaul of the electricity power generators in the Narva
region, Estonia [Chong, 1995, p. 5].
Generally, aid-receiving countries may seem rather passive as to from whom they receive aid.
There have been cases where agencies took aid from those that made it available rather than from
those who were recognized experts in their field. For example, a former Soviet republic, planned
to introduce Value-Added Tax (VAT) and sought advice on how to implement it. An aid program
was requested from a country that has no experience with VAT. Indeed, in this particular case the
aid providing agency did not honor the recipient country\'s request precisely on the ground that
experts from countries applying a VAT seem more obvious
This phenomenon is even more likely when there are different groups in the same recipient aid
agency who have large amounts of local autonomy and are in contact with different donor groups
or consultants. Instead of working together on the same project, they come up with different and
competing solutions, e.g., how to generate electrical energy. The donors would consider this
inefficient, if they consider the duplicated effort in feasibility studies and contract tenders.
However, the recipient country may consider it efficient in that it can choose the advice that fits its
specifications best and provides the best terms for the mix of skills, equipment and loan/grant
offered [Chong, 1995, p. 6]. The recipient may also be said to receive the added prestige of twice
the amount of attention paid it by two (or more) agencies to fix one problem.
5. Foreign Aid Waste
We can look at waste as being a form of loss in cost-effectiveness. Measuring the extent of
inefficiency and waste is not easy per se as this can be largely influenced by our choice of
bench-marks. Thus, a project with lax or generous budgets and limits would tend to have met their
limits with ease. Those projects that run over-budget could have had their limits set unrealistically.
Therefore, we choose to point out differences across projects from recommended guidelines which
can indicate inefficiency and a breakdown in accountability, for example, because staff were not
able to exercise enough control over the project to avoid cost and time over-runs. Earlier problems
with administering aid to the Baltics and Eastern Europe led Sweden to come up with guidelines
for aid programs. This outlines the drive towards reducing wasted spending in Swedish-funded
pollution-control projects abroad. \"Joint implementation is a mechanism aimed at achieving
increased cost-efficiency. This means that for each Swedish crown the greatest possible
reduction-increasing or emission-reducing effect should be obtained\" [Swedish State Studies, 1994,
p. 3].
One source of waste comes from the use of bilateral aid using tied donor country products and
services, against multi-lateral aid where purchase of required goods and services is more open to
international Finland, one of the largest regional aid donors in environmental work, has a
large involvement in the Baltic area. The Polish Environment Ministry has suggested that Finnish
bilateral aid that stipulates purchase of goods from Finland results in more expensive goods, even
8
with a 30% government subsidy, than would be in an international tender [Zylicz, 1993].
For other evidence of waste, we have come across faculties in the Baltic state universities where
large amounts of money were spent in short trips by Western lecturers to deliver isolated single
lectures with little follow-up or impact on the final university education service. Other assistance
has included books, computers and telecommunications equipment sent to the people who were not
qualified to use them or unable to provide much-needed training to students. We recommend a
longer-term strategic partnership for universities whereby key staff can be transferred between
West and East for terms of about six months to transfer knowledge and skills [Van der Hoek and
Chong, 1995, p. 13]. These are cost-effective means of building teaching and research skills on
both sides, East and West.
We have pointed out several concrete examples of where waste or lack of cost-effectiveness can be
said to exist in programs. These are just a cross-section, but we need to go deeper with specific
cases of uses of program aid across all industrial sectors in the Baltics. It does emphasize that
foreign aid needs to be planned for the medium to long-term and coordinated with the recipients
and other donor agencies. Others have already proposed that there should be assessments to cut
down waste or sub-optimum performance in the programs, e.g., NUTEK, Sweden conducts
evaluation exercises for all its projects in the Baltics as routine procedure [Vares, 1995;
Blumberga, 1995; Pedisius, 1995]. Furthermore, these evaluations must be followed up \"[F]or
evaluations to be useful, they must be applied. Feedback to both policy-makers and operational
staff is essential\" [OECD, 1992, p. 132]. As obvious as this may seem, the AR found for Dutch
ministries that over half of the evaluation reports analyzed had not been demonstrably used
[Algemene Rekenkamer, 1991, p. 65]. The principles for evaluation of Development Assistance as
set out by the OECD [1992, pp. 131-138] have mainly been drafted for use by aid agencies for
evaluating their own activities. These guidelines are useful only as far as involved parties follow
this advice at all.
6. Donor Agency Policies
Foreign aid policies differ between donor countries and aid agencies. USAID has a much larger
budget with a large number of projects and operates a different policy from, say, the British
Know-How Fund (KHF) active in the Baltic states as part of operations handled by the Foreign and
Commonwealth Office (FCO). KHF also stipulates rules for projects such as the submission of the
project plan by the host countries\' ministries, not Western consultancies. Higher-cost projects need
to be submitted to a competitive tender process, with a contribution from the host country and the
contractor (\"matched funding\") required. This is a directive that Britain is unwilling to pay for a
project until it sees a commitment from interested parties [Overseas Development Agency, 1996, p.
28]. These pre-requisites may be waived for smaller projects or exceptional circumstances.
British overseas project proposals are evaluated by a central body, the Overseas Development
Agency (ODA) which compares projects submitted in order to select those that meet its criteria for
project desirability. These criteria depend upon the FCO view of regional political relations and the
needs of the foreign country, plus whether Britain wants to raise or lower its political and trade
status in the particular target country. This may seem an unwarranted intrusion by the FCO, but it
9
helps Britain to maintain a smaller and more cost-effective aid operation that suits Britain\'s needs
in maintaining foreign relations with developing Eastern countries. It is a case of foreign aid
meeting the foreign relations strategy controlled by a centralized body.
This is contrasted against the former Swedish example which was to have projects evaluated by
economists and officials in an agency such as BITS. Such staff did not have specific required skills
as in engineering, project-cost management accounting, environmental science etc., and therefore
BITS had to employ consultants from outside firms. This had the effect of driving up project costs,
or more accurately, the operational costs of BITS and the emphasis of spending a greater
proportion of the budget on pre-feasibility studies. Another unwanted result was that a
technically-skilled pool of in-house staff was not built up at BITS. This created poor results, among
other sectors, in the environmental engineering field. \"From a Western point of view, being
involved in Eastern European aid, especially bilateral, can be very lucrative. As there are not many
consultant firms working in Eastern Europe, there is a high chance that a given firm will have its
proposals funded (no international tenders), and there is a large amount of money in circulation.
Reports indicate that many consultants do not speak the language where they are working, they are
insensitive to the country\'s customs, spend too little time on site, lack environmental expertise, and
sometimes conduct studies that have already been carried out\" [L?fstedt and Sj?stedt, 1995, p.
368]. For these high-profile shortcomings BITS became taken over by the other Swedish aid
agency SIDA in 1995.
We can contrast this modus operandi of high-state expenditure and short-term approach of BITS
against the more private-enterprise funded approach of the British KHF and The World Bank. The
World Bank has promoted the Lithuanian bank-twinning project. This involved a project cost of
approximately $1 million over 18 months and linked the Lithuanian Ukio Bank in Kaunas with the
Dutch ING Bank and the Danish Unibank and the Lithuanian Vilnius Bank with the Dutch
ABN-AMRO Bank. No hardware is provided and project costs are shared by funds from The
World Bank, the Netherlands and Denmark. Skills transfer is concentrated in management and
control systems strategy, marketing, budget and accounting, treasury/securities. The
cost-effectiveness of this project is predicated upon a long-term commitment to business relations:
\"In a twinning project the partners work very closely together, and we learn a lot about each other.
That means we will also have less difficulties in doing business together in the future\" [The Baltic
Independent, 1996].
Similarly, the EBRD has invested ECU 2.3 million ($2.9 million) in the Estonian Savings bank
and ECU 2.5 million ($3.2 million) for Lithuanian Hermis Bank on an equity basis [EBRD, 1996a,
pp. 78-79]. The EBRD would only have done so when it is satisfied that the proposed projects are
suitable for their financial viability and regional economic goals after they have been evaluated
through the EBRD Bank Procedures [EBRD, 1996b, pp. 10-12]. The relatively high-profile input
enables the EBRD to exert a large element of influence on the Board of Directors and to implement
constant monitoring for a more appropriate business strategy. Furthermore, this equity move is
explicitly taken as a clear business-minded decision: \"When the EBRD takes an equity stake it
expects an appropriate return on its investment. It will have a clear exit strategy and will only take
a minority position\" [EBRD, 1996b, p. 4]. Estonian Union and Savings Bank, Latvian LZB,
Unibanka and D-L Banks, Lithuanian Hermis and Vilnius Banks have received ECU 63 million
($80 million) as credit lines to finance SME (small and medium sized enterprises) as part of the
EBRD strategy of regional economic development [EBRD, 1996a, pp. 76-82]. This move clearly
10
aims to stimulate economic growth and employment through generating several locally-inspired
small projects instead of a few large capital projects. For its smaller sponsored projects when
contract values are relatively low or local resource prices are lower than on the international
market, the EBRD favors Local Competitive Tendering, whereas for larger projects the EBRD
stipulates Open Tendering: \"It provides the greatest opportunity for competition and satisfies the
needs for economy and efficiency\" [EBRD, 1996c, pp. 6-7].
7. Procedures
The cases mentioned in section 6 are almost classic cases of the \"trade not aid\" dictum, and would
seem a more suitable platform for Baltic enterprises to build on, especially when they come to
compete effectively against Western enterprises. One financial institution that operates on this basis
is the EIB which lends up to ECU 3 billion ($3.8 billion) in 1994-1996 to Central and Eastern
Europe including the Baltic states. Its foreign aid is built on the provision of loans, not grants,
which meet its criteria. \"All projects must be economically justified, technically viable and
environmentally sound; in addition, productive sector investment must offer an adequate financial
return\" [EIB, 1996, p. 7].
We have examined some of the motives and effects of operating foreign-aid programs in the Baltic
region. There is a need to strike the \"right\" balance to satisfy interests of those involved. \"It may
be argued that donor interests should predominate because tax-payers in the donor country have the
right to a fair return on their tax money. Furthermore, the donor often has more advanced
knowledge about [environmental] problems and technologies and therefore `knows best\'. On the
other hand, it may be argued that the recipient has the right to the last word with regard to
domestic problems and policy choices. Familiarity with local conditions may give recipient
authorities privileged knowledge; they may also `know best\'\" [L?fstedt and Sj?stedt, 1995, p.
370].
We can suggest a common project set of procedures that assist the donor and recipient in
maximizing benefits gained and possibly reducing costs. These would raise the cost-effectiveness,
and thereby, the quality of the project. It is important to pre-screen or evaluate all projects before
starting so as to assess likely viability or performance. \"The quality of the operations at entry was
identified as one of the important ingredients for a project\'s success. Once disbursements are under
way on a fatally flawed operation little can be done to improve the success prospects\" [EBRD,
1996a, p. 34].
Foreign aid projects can be supported and coordinated under independent administrators to avoid
unnecessary duplication of effort and waste of resources between projects. This paper demonstrates
the need for foreign aid programs to be evaluated in tandem by both foreign aid donors and their
host country recipients; that evaluations are done to reduce potential waste and that we learn from
this process. Thus, we endorse the EBRD\'s statement about its project evaluations: \"There are two
basic objectives in project evaluation: to ascertain the results of the EBRD\'s portfolio of projects
and programmes, both intended and otherwise; and to determine whether there are significant
lessons to be learned from experience in order to ensure more successful operations\" [EBRD,
1996a, p.34].
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Ways that can help to achieve cost-effectiveness are:
for competing proposals or tenders.
e independent external skilled judges with technical understanding of the project for a more
balanced assessment of the \"best\" and most suitable solution.
trate that standard recommended operational guidelines have been followed, i.e.,
feasibility, tender bids competition, operational monitoring and milestones, post-project
evaluation. Example procedural steps are: Project proposal, Collateral submission, Project
appraisal, Financing, Tendering, Project monitoring, Project evaluation [EIB, 1996, pp. 7-9].
8. Concluding remarks
It is necessary to point out the difficulty of gaining data in a dynamic environment, where some of
the data could have politically-damaging results. We came across many cases where projects did
operate on a cost-effective basis, and where programs incorporated effectiveness evaluation
procedures. Nevertheless, there is proof of some inefficiency from our evidence of sample projects
in the Baltics. Standard operational procedures and audits serve to provide a structure for
promoting efficiency and monitoring of foreign-aid programs to gain cost-effectiveness.
We recommend the implementation of standard Project Operational Guidelines to reduce room for
such waste and inefficiency. We stress that both prospective donors and recipients should obtain a
better view of what is available in terms of solutions on the \"market\" by a tender process where
possible. We do recognize the need for political realism, and that it would be prudent for a
recipient country to accept an offer of international aid with strings attached (ear-marked aid),
where donor country staff and products are used as a return for tax payers\' money, rather than to
receive no assistance at all. However, a more business-minded approach should be adopted with
involvement of local enterprises in order to lower total budget costs and to know more about the
local requirements and conditions. We stress that both aid donor and recipient countries are likely
to gain from such procedures.
12
public expenditure as percentage of GNP of the area involved:
Former Western Germany
Former Eastern Germany
1991
48
123
1992
49
124
1993
48
113
Notes
Source: Central Planning Bureau, 1992, p. 43. (The original sources are: Deutsches Institut für Wirtschaftsforschung, Wochenbericht 26-27/92and HWWA, Konjunktur von Morgen 867).
we have ample experience in Estonia, we gathered some data pertaining to this country (with a population of 1.5 million). In 1995,Estonia received a total of at least EEK 1 billion ($83 million) grant aid from individual countries (Canada, Denmark, Finland, France,
Germany, Netherlands, Norway, Sweden, Switzerland, United Kingdom, and USA), the European Union, the Council of Europe, and theUN Development Program (source: Estonian Ministry of Finance). Obviously, even in the case of small countries like Estonia the aid is
scattered over a number of individual donor countries, international bodies, and international institutions.
avoid confusion with the American General Accounting Office (GAO) we refer to the Dutch General Accounting Office by using the
Dutch acronym: AR (Algemene Rekenkamer).
take the view that the IMF is not an aid provider. Rather, it maintains close relations with all of its members. Nonetheless, technical
assistance and certain loans provided by the IMF may be considered aid.
gained data in the financial consultancy services sector of foreign aid projects that we are not at liberty to divulge. These are from
individuals or agencies who gave information on the proviso that we did not make their data public. We respect their wishes. Frompersonal experience in Estonia we know, indeed, that foreign consultants from different donor countries have been working on similar
problems without knowing of each others activities or certainly, not cooperating with each other [Van der Hoek and Chong, 1995, p. 13;Chong, 1995, p. 5].
sly, this depends on the kind of aid. For example, nobody would rehabilitate the same power plant twice, but technical assistance is,
at times, accepted from two sources for the same need.
on information kindly provided by Robert J. Maushammer, USAID, Estonia.
term bilateral aid should be interpreted broadly, since it may not only pertain to aid provided by a single nation, but also by
supranational body such as the European Union, which allows only European sourcing.
13
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