New poverty reduction strategy: The most remarkable policy innovation since 1998 in German development co-operation was the Cabinet approval in April 2001 of the Programme of Action 2015 for Poverty Reduction. This establishes global poverty reduction as an overarching task in development co-operation and an important element in all national policies. In this broad context, the Programme also sets out the vision for German development co-operation, which should call for a need to re-align policies, resources, operations and organisation to be consistent with this vision. A detailed strategy for operation of the Programme, including priorities, is expected in early 2002.
Global structural policy: The Programme states that poverty reduction in developing countries must be pursued in the interest of global sustainable development, recognising the ongoing globalisation process and the interdependence of nations. The Programme calls for better synergies and coherence at an international, multilateral, and partner country levels. In particular, Germany will promote better coherence of European Union (EU) policies with global poverty reduction. The Programme provides a better scope for the Ministry of Economic Co-operation (BMZ) in screening draft legislations for policy coherence, and in its participation in inter-ministerial committees on export guarantees and arms exports. The BMZ frequently needs to argue its case with other influential ministries within the government and has yet to sufficiently develop the analytical capacity necessary to carry out its substantive mandate. The implementation of effective policy coherence will also require a sustained political commitment.
A constrained resource base: Germany is now the third largest donor among member countries of the Development Assistance Committee, after Japan and the United States. In 2000, Germany's ODA was USD 5.0 billion and its ratio of ODA to gross national income (GNI) increased to 0.27%. The implementation of the German government's political commitment to uphold an ODA level consistent with the United Nation's 0.7 % target ratio remains constrained by the government's overall national objective of balancing the federal budget by 2006. Germany's current ratio is above the DAC (weighted) average of 0.22%, but below the DAC average country effort (unweighted) of 0.39%. Germany does not currently have a mechanism to establish an overall system for ODA allocations nor target effectively any ODA/GNI ratio.
Recent changes in bilateral aid: BMZ is improving the efficiency and effectiveness of its bilateral aid programme. BMZ has decided to focus on 37 "priority" and 33 "partner" countries, and a reduced number of sectors in each country. Several more years may be required to fully implement the new policy and make the related shifts in disbursements. Two challenges remain to be addressed, first, the top five recipients of German aid (30% of bilateral ODA) have been more or less the same for a decade and will continue to be priority countries, and 83% of bilateral ODA is already disbursed to the priority/partner countries. Second, these BMZ priorities will not apply to the activities of the Länder (states). The implementation plan for the Programme of Action 2015 needs to address how the new vision would re-align resources.
Increasing importance of multilateral aid: The Programme of Action 2015 states that Germany will pursue more coherence between its bilateral and multilateral aid in international forums. The fact that development assistance must be seen against the background of a globalising world has led to its emphasis on co-operation with multilateral institutions, particularly the European Commission (EC) - which accounted for 59% of German multilateral ODA in 1999. Germany also favours the EC channel to fund Central and Eastern European Countries and the Newly Independent States. Within the framework of a global structural policy, Germany has a commitment to the UN as an important forum for international co-operation, and has increased its contributions in recent years. The BMZ also intends to forge alliances within the international financial institutions, such as in advocating the adaptation of PRSP process to the reality and capacities of developing countries.
Challenges: The Programme of Action 2015 focuses on Germany's contribution to halving extreme poverty worldwide by 2015. This will be very challenging in the poorest countries. DAC data shows that, in 1999, 22% and 33% of ODA went to the least developed and other low-income countries (including India, China and Indonesia), and 37% went to lower middle-income, 7% to upper middle-income, and 1% high-income, countries, respectively. Regarding sectoral priorities, the indirect approach to poverty reduction (including large infrastructure projects, support for macro policies, institutional capacity building, and private sector development) took a relatively larger share of ODA than the direct targeted approach. DAC estimates that 11% of total German ODA was allocated towards basic social services (BSS) in 1997/98. Recognising the importance of poverty reduction, Germany will need to emphasise its concern with BSS in its negotiations with relevant partner countries to attain the objectives of the Copenhagen 20/20 Initiative. Furthermore, since the Programme of Action 2015 aims at halving poverty and the Millennium Development Goals (MDGs) target universal primary school enrolment by 2015, it may seem incongruous that 10% of bilateral ODA (8% of total ODA) is devoted to tertiary education. This arises because the Länder automatically report the imputed costs as ODA support for any developing country student studying at German universities. Regarding Germany's funding to the UN systems its voluntary contributions are based on political and budgetary considerations more than an assessment of performance.
Current financial instruments: The share of non-grant bilateral aid -- mainly ODA loans provided through KfW -- in bilateral ODA was 24%, which made Germany's share of loans the third highest among DAC Members in 1999. However, the proportion as well as the absolute volume has been decreasing from 1995. The remaining 76% of Germany's bilateral ODA was in the form of grants. Project and programme aid amounted to 20% of grants in 1999. Germany has been cautious about financing recipient country budgets and donor pool-funding arrangements, whether at the macro or the sector level. This is mainly due to scepticism, shared with some other donors, over the financial and auditing capacities of the recipient countries and the risks of mismanagement in such operations.
Technical co-operation: Within grants, technical co-operation accounts for almost 60%, the largest proportion, with the Agency for Technical Co-operation (GTZ) carrying out most of the tasks. Germany should look at its technical co-operation policies, including the potential for new modalities of technical assistance such as by sharing and exchanging technical co-operation resources with other donors and the increased use of local staff, taking account of the need to strengthen the local government capacity. Germany might also consider collaborating with other donors in sharing arrangements of local and regional expertise.
Possible new modalities: German policy statements aim to facilitate partner country ownership of the development process, so Germany has begun engaging in new modalities, most notable being the new sector approaches and the Poverty Reduction Strategy Papers (PRSP) process. These new modalities pose several challenges for Germany, especially the extent to which Germany can reduce the administrative burden on the recipient. However, the practice of keeping German control of important areas, such as financial management, is sometimes perceived as running counter to local ownership. As with other donors, Germany's willingness to participate in these new modalities depends on suitable macro-economic conditions, including capacity for financial management, and the continued donor commitment to share the risks.
Need for organisational adjustments: There have been some changes since 1998: internal reorganisation of BMZ, reshaping GTZ and streamlining Bank for Reconstruction (KfW); a major decentralisation process in GTZ, and downsizing; the operational integration of KfW with German Investment & Development Corporation (DEG) and of some German training institutions, and encouragement of GTZ and KfW joint action on the ground. The measures are also part of a government-wide programme of administrative streamlining called "Renewing Germany". The process was supported by a series of recent evaluation studies. These highlighted the importance of improving the way information is handled and shared in a multi-faceted system of development co-operation. Germany is commended for this creative use of its evaluation systems and is encouraged to continue this practice in the future.
Need for even further flexibility: The system of German aid proved capable of delivering technically good quality development projects, but now requires re-engineering for a different context in which the distinction between policy and operations is more blurred. The new modalities of PRSP and sector approaches are encouraging greater decision-making and co-ordination in the field, though there is concern, shared by some donors, about the amount of transaction costs involved. Nevertheless to engage effectively in ongoing policy dialogue, local decision-making, and donor co-ordination, Germany needs a stronger professional field presence. Therefore, there are implications for staffing and organisation at the country level, but it is an open question when and to what extent Germany will be able to make the adjustments necessary. Conceptual distinctions, quite common for many donors' development co-operation practice, have become the basis, in Germany, for formal institutional arrangements, some underpinned by a legal basis. For instance, the distinction between policy and implementation has led to the separation between the BMZ in Bonn providing the policy mandate and the implementing agencies delivering German aid in the field, which now requires some revision for the different field reality. Similarly, there is a need for greater integration between technical co-operation (especially GTZ) and financial co-operation (especially KfW). This Peer Review encourages the BMZ to pursue its current, constructive re-examination of its aid systems, and to build from the strengths of the implementing agencies, like KFW and GTZ.
At the level of headquarters-field relationships: Despite the changes already made, Germany's development co-operation still appears both centralised and hierarchical at headquarters' level, although fragmented among the different institutional actors, particularly at the field level. While the diversity of institutional actors is an asset of Germany's aid processes, the use of a multi-institutional system creates challenges for co-ordination efforts. The small number of qualified staff to deal with development in the Embassies is now a constraint to Germany's effective participation in these local policy discussions and operational co-ordination mechanisms. Special attention is required to improve communications between headquarters and the field, and to develop more decentralised models of decision-making.
At the level of staff: The BMZ has some 600 staff, mostly located in the Bonn headquarters. Extensive use is made of the implementing agencies for more operational backstopping, so that, while not formally part of the BMZ personnel system, they frequently act as logical extensions of it. The expected government-wide 1.5% annual reduction of overall staff levels in place ever since 1993 will further reduce the ability of the BMZ to undertake its existing tasks. In addition the BMZ has been assigned new, more complex, and higher priority tasks that are frequently more politically challenging (e.g. poverty leadership, and screening of new laws for coherence). To renew the leadership of the ministry in view of the retirement of many German officials will require substantial advance thinking and preparation to ensure the right personnel mix.
At the level of feedback and learning: It is important for Germany to take account of field realities by establishing effective learning systems. The reform of the monitoring and evaluation (M&E) process aims at facilitating "learning" in the system, and this will increasingly become a central element of the overall reform process. The government is now making a conscious attempt to improve the efficiency and effectiveness of its aid by creating an overall learning system. In the BMZ, evaluation, management control and audit are now in a "Quality Enhancement and Improvement" cluster. In the implementing agencies, the evaluation units were too dependent on the implementation side of their organisations to permit independent and therefore, credible, evaluations. Both GTZ and KfW have addressed this weakness by empowering their evaluation units with independent authority. The facilitation of horizontal learning among the different actors poses a structural challenge because of the vertically organised nature of the German system.
Based on the above findings, the DAC recognises that the Programme of Action 2015 sets out an ambitious agenda for development co-operation centred on poverty reduction in a global perspective, and that it will take time to align all policies, resource allocation, operations and organisational arrangements with this vision. The DAC also appreciates that Germany has already made some significant changes and encourages Germany to continue to:
Use forcefully all opportunities for public advocacy of its development cause, particularly through the Federal Ministry for Economic Co-operation and Development, the BMZ.
Focus on an overall goal of poverty reduction in the implementation plan for the Programme of Action 2015.
Develop effective ways and instruments of promoting greater policy coherence
Identify options for improved feedback of results and learning of lessons, including for the international donor community.
Collaborate with other donors in building local capacities, for example, in financial management and auditing, as a contribution to local ownership and the PRSP process, upon the request of the partner country.
In addition, in order to strengthen the implementation of the Programme of Action 2015, the DAC encourages Germany to:
While welcoming the reversal in declining ODA, sustain efforts to increase the size of its ODA.
Produce an annual report on the utilisation and results of ODA, disseminate this report widely in major languages, and consider developing a mechanism for projecting overall use of ODA.
Set out priorities, including for the realignment of policies, financial flows, organisational structures and operational aspects, taking account of the coherence of multilateral and bilateral channels for aid, and the important contributions of the different actors in Germany's pluralist system.
Further increase budget allocations to the low-income countries, particularly with large numbers of poor people, to be consistent with both the Programme of Action 2015 and Germany's emphasis on the achievement of the MDGs.
Examine in the context of Germany's experiment with budget support the changes needed in budget regulations and institutional arrangements (e.g. greater decentralisation to the field) to engage effectively in the new aid modalities, such as the sector programmes or the PRSP.
Make more use of different policy options for human resources and technical co-operation, both to enhance German capacity to engage in policy dialogue, local decision-making, and co-ordination in the field, and also to promote local capacity and ownership.
Assess Germany's capacity to take up a leadership role within the donor community in those sectors and activities where Germany has a comparative advantage.
Review, in contact with Secretariat experts, the reporting of indirect ("imputed") costs of tuition in donor countries eligible for inclusion in ODA in line with DAC directives.
This review is available in the DAC Journal, Volume 2, No. 4.