Asia Europe Journal

, Volume 6, Issue 1, pp 101–118

Right-financing the future. Lessons for Asian and European peace processes

Authors

    • Middlebrook & Miller, Specialist in International Finance and Economic Development
Original Paper

DOI: 10.1007/s10308-007-0166-7

Cite this article as:
Middlebrook, P.J. AEJ (2008) 6: 101. doi:10.1007/s10308-007-0166-7
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Abstract

This paper outlines measures to strengthen the sustainment of peace processes through the ‘valued’ utilization of external financial assistance, in line with the proposed ‘right-financing’ framework (see Middlebrook, P (2006), http://en.wikipedia.org/wiki/Right-financing). While the right-financing concept has relevance across the entire public and private investment spectrum, its application to the peacekeeping and post conflict reconstruction agenda is equally relevant given concerns regarding rising costs; US$5.03 billion in 2006 alone, and more than US$36 billion since 1948. When additional costs for peace enforcement and post conflict reconstruction exercises are factored in, to be measured in untold billions of US dollars (Middlebrook and Miller, Lessons in post conflict reconstruction from the new Afghanistan compact, 2006), the cost represents an increasingly heavy drain on the tax payers whose demands for increased services at home may 1 day see the ‘end of aid’ as the world currently knows it, unless its effectiveness is substantially increased. In so doing, this paper proposes corrective measures to strengthen financing arrangements to enhance the effectiveness and efficient utilization of scarce international resources.

Introduction

In the hours and days following cessation of conflict political instability, insurgency, increased crime and corruption, low levels of economic growth, hyperinflation, poor revenue mobilization and high levels of unemployment are frequent characteristics of weak and fragile states. Under such conditions the true costs of conflict need to be measured not just in financial terms, but also in terms of loss of political, human, social and environmental capital; not to mention the cost of life itself. In most cases the costs of peacekeeping, peace support and peace enforcement measures, as well as the direct costs of post conflict reconstruction are never measured, for a multitude of reasons including the limitations of consolidated financial reporting. However, cases such as Afghanistan and Kosovo highlight that the costs of securing the peace often run into many billions of dollars. The costs of reconstruction in Afghanistan alone equal an estimated US$27 billion on a commitment basis over the first 7 years, with external military costs (International Security Assistance Force, North Atlantic Treaty Organization (NATO)/Coalition) totaling between US$10 and 12 billion annually. Furthermore, and despite the fact that the total cost of overseas development assistance in 2005 equaled US$105 billion, there is compelling evidence to suggest that it is both financing and the way it is supplied that undermines efficiency directly.

Given the paucity of resources available for such endeavors, it is only logical to seek lessons from practical experience to inform the emergence of viable financing models that deliver effectiveness, efficiently as it were. Indeed, what if the costs of financing peace operations could be dramatically reduced, through the adoption of a simplified approach, with precipitous savings to the international community of say 10–50% delivered through more effectively prioritized, sequenced and developed public spending? What if only a clearly defined number of core state building and peace consolidation measures were financed, following a sufficiently robust needs assessment framework aimed at creating a stable state? What if all external finance could be supplied through interest generating trusts funds so that when the early phases of technical support had been delivered, over the medium to longer term when financing is often most scarce it could then be tapped to enhance the economic growth and employment potential of the post conflict state? What if the core elements of such a ‘right-financing’ approach are already pre-existing, waiting to be organized into a new consolidated framework that would address many of the financing issues that in fact undermine the effectiveness of external assistance in this regard?

Recent experience in Asia and Europe further underlines that core economic aid issues such as ‘utility,’ ‘value,’ ‘effectiveness,’ ‘efficiency,’ ‘fiscal sustainability’ and ‘opportunity cost’ surprisingly do not factor heavily in the decision making process, even though the supply of finance for peacekeeping activities remains heavily constrained. Countries such as Afghanistan and Kosovo are emerging to be fiscally stillborn in spite of the infusion of billions of dollars (hence the delivery of badly-needed public goods/services remains greatly constrained). Set against a financing future where the dominant suppliers of overseas development assistance are likely to face increased pressure to increase domestic social and environmental spending, increase energy and security spending, those who control the public purse, including Ministers of Finance and tax payers are likely to demand greater control over peacekeeping and post conflict spending in future years.

Current financing constraints

The current financing approach for peacekeeping and post conflict reconstruction remains surprisingly poorly conceived and underdeveloped, with short term decisions leading to large public sector liabilities that can further undermine the emergence of peace, stability and economic regeneration over the longer term. By and large, peacekeeping and post conflict reconstruction financing is grant or soft loan based. In the case of grants finance is channeled either as project finance through the United Nations (UN) system, through international and national non-governmental organisations (NGOs), or used to finance direct procurement. In some cases, multi-donor trust funds are established to consolidate external assistance into a single source of finance within which to fund project specific investments. Examples of such funds include the Afghan Reconstruction Trust Fund, the Law and Order Trust Fund, the Counter Narcotics Trust Fund, the Kosovo International Trust Fund and Trust Fund for East Timor. In some cases, governments adopt a position of no-deficit financing to avoid undue indebtedness although as the costs of public services rise, against a background of weak tax administration and revenue mobilization, the temptation to borrow increases.

At the very heart of this challenge, from an economic perspective, government policy must look to foster high levels of growth to drive revenues and service delivery over the medium to longer term while utilizing external assistance to compliment and enhance government’s state building and service delivery agenda. However, far from contributing towards strengthening government, external assistance often undermines the very state (re)building agenda that it is there to support almost from day 1; which is certainly counter to the Paris Declaration Principles on Aid Effectiveness.1 Indeed, many of the ills outlined below are often due to excessive headquarter pressure on donor country offices to maximize disbursement rates, and concern for corruption due to weak public finance management systems and inadequate fiduciary controls. Furthermore, as aid is programmed by donors annually, and because the majority of spending for reconstruction is provided in the immediate aftermath of conflict, in the outer years of the reconstruction effort, external assistance substantially declines often leaving the incumbent government with only sufficient funding to cover the core recurrent costs of state, not the provision of productive infrastructure and basic services such as education and health.
  • Poorly developed post conflict needs assessment (PCNA): Despite efforts to develop a standardized PCNA methodology and a transitional results matrix, particularly by the United Nations Development Group, World Bank and Organisation for Economic Co-operation and Development (OECD) Development Assistance Committee (DAC), the overall framework has yet to be fully endorsed. Moreover, guidance as to how the effectiveness of external financing can be increased, through instruments such as multilateral trust funds where assistance can be sequenced and prioritized have yet to be clearly developed as a core element of most peace and post conflict reconstruction processes.

  • Ill defined fiscal policies combined with weak economic growth strategies: Reforms often inflate the fixed costs of government business raising recurrent costs (wages and non-wage) that undermine progress towards fiscal sustainability. This is particularly a concern where high levels of external funding have been provided to establish an expensive and burgeoning security sector, the costs of which once born by government out complete budgetary resources for education and health service delivery, for example. In all post conflict cases insufficient attention is paid topriming the pumpfor enhanced revenue generation and in establishing a clearly defined fiscal and expenditure framework that supports and does not undermine the emergence of a fully sovereign state;

  • Limited use of donor trust funds and over projectisation of the national budget: Donors look to finance their reconstruction programs through a multitude of budget lines, most of which are not fungible between sectors and sub-sectors, further enhancing the proliferation of poorly prioritized projects. Given the fundamental principles of the Paris Declaration with regard to enhancing aid effectiveness, and in the absence of fiduciary safeguards to direct budget support, the use of trust funds as in Afghanistan are highly recommended. In the absence of clearly established sector-wide approaches, including a consolidated approach to security system reform (SSR),2 the proliferation of thousands of poorly integrated projects undermines the emergence of a cohesive sector-wide whole-of-government national budget;

  • Poor sequencing of external support: In the outer years of reconstruction, when external support is most effective, it is no longer available. The majority of external support is provided by the international community over the first 1–4 years of transition dropping off rapidly thereafter. In the early years however, when the policy and institutional framework is weak, the vast majority of finance is spent on highly unsustainable quick impact projects, many of which do not support the core state building or growth agenda directly. Ideally, external support for reconstruction should be re-sequenced over a longer time path to avoid the risks of return to conflict and to limit the proliferation of poorly designed projects;

  • Ineffective and inefficient use of budgetary resources: Clearly, where fiscal resources are extremely limited there is perhaps a greater need to utilize resources as efficiently and effectively as possible; to maximize the impact of limited public spending on meeting national development objectives. Ideally, the core revenue sectors of health, education, defense and law and order should also look to utilize the same instruments, mechanisms, controls, and monitoring that are used for execution of the rest of the national budget, and for this reason the budget should also be ‘comprehensive.’ Of particular importance in promoting effective and efficient resource utilization are predictability, flexibility, information, transparency, and accountability. In this context monitoring and evaluation, with an effective feedback loop to decision making, will help ensure improving utilization of budgetary resources in the security sector over time. Appropriate financial controls, procurement as well as external scrutiny and audit systems must also be in place, although the lack of comprehensive budgeting undermines substantially the credibility of the budget as the tool of policy—as well as measurement of effectiveness and efficiency;

  • Poor composition and prioritization of spending: Against the principles of the Paris Declaration poor alignment between donor and government priorities remains a continual problem with many urgent ‘core’ state building reforms going unfunded. Examples include limited funding for the reintegration of ex combatants in disarmament, demobilization and reintegration (DDR), the wholesale under-funding of justice reforms,3 lack of funds for strengthening sub-national governance and political and economic linkage with the centre, too much humanitarian assistance that rapidly creates a disincentive effect etc. Furthermore, often the known causes of conflict are poorly addressed, even exacerbated and greater understanding of the political economy of change is therefore essential to overcome the reasons for discontent directly;

  • Creation of unnecessary parallel service delivery mechanisms: In the absence of a national budget and with weak fiduciary controls within the financial management institutions, the majority of reconstruction funds are channeled through the UN system and NGOs creating parallel systems of delivery for basic services that often undermine the public face of government. In the process, valuable human capabilities are recruited from government into the aid-sector, creating a powerful and parallel second civil service;

  • Large off-budget transfers, particularly for the security and law and order systems: The existence of large volumes of off-budget funding only lead to parallel procurement systems and the (often) inefficient use of funds, particularly where high cost foreign labour is used in preference to labour available locally or within the wider region. The control framework, and also the economic accounting categories and reporting processes are important for the effective utilization of budgetary resources—requiring standardization of the public financial management system in all sectors, including the security sector;

  • Poor budget prioritization and formulation: Many core reforms such as the restructuring of public finance management and audit systems, the strengthening of the civil service, macroeconomic and fiscal management, support for sub-national development, growth diagnostic work, support to remove the binding constraints to growth faced by the private sector and urgent reforms to (in)justice systems remain unfunded;

  • Limited support the emerging private sector: In most cases donor procurement arrangements champion the UN, NGOs and international contractors over the national private sector, thereby undermining the potential long term impact on economic growth, both in the construction industry but also in the delivery of basic services; and,

  • Weak monitoring and oversight arrangements: Post conflict monitoring arrangements, as seen in Afghanistan, Aceh, East Timor and the Western Balkans are often very weak, certainly in linking finance directly to state building, stability and poverty outcomes.

Many of the above mentioned constraints can only be overcome through a systematic rethink with regard to the financing of state building, as a means of sustaining the peace. Such an exercise was conducted by the World Bank in Afghanistan, to include a review of the security sector, and many of the findings of this exercise remain wholly relevant to renewing efforts to strengthen the post conflict management agenda.4 Given that the broad objectives of public financial management are to achieve overall fiscal discipline, allocation of resources to priority needs, and efficient and effective allocation of public services, and that the Paris Declaration looks to enhance the effectiveness of external assistance, bring these existing tools together into a ‘right-financing’ approach would provide a coherent road map to government and donors with regard to enhancing the state building and growth agenda.

Peacekeeping and post conflict reconstruction costs

While external financial assistance has undoubtedly undergone substantial transformation over the course of the past three decades with many bilateral and multilateral institutions establishing conflict-professional units5 to develop new tools and financing processes, very few measures of operational effectiveness and efficiency exist for either peacekeeping or reconstruction operations. Furthermore, the sheer range of institutions engaged across the diplomatic–security–humanitarian-development nexus, and their political sensitivity, undermines the calculation of direct costs and ultimate value. Furthermore, the costs of government spending and private sector investment are not easy to capture. In many cases (See Table 1 below) the direct costs of UN peacekeeping are insignificant when compared to the costs of peace support enforcement and post conflict reconstruction operations; once the costs of external military engagement are also included.
Table 1

Examples of Asian and European peacekeeping and post conflict reconstruction costs (US$)

Date of Operation

Name of Operation

Location

Conflict

Costs (US$)

UN peacekeeping

Post conflict reconstruction

Asia

1949

United Nations Military Observer Group in India and Pakistan (UNMOGIP)

India/Pakistan

Indo–Pakistani Wars

15 million/year

1965–1966

United Nations India–Pakistan Observation Mission (UNIPOM)

India/Pakistan

Indo–Pakistani War of 1965

1.7 million

1988–1990

United Nations Good Offices Mission in Afghanistan and Pakistan (UNGOMAP)

Afghanistan; Pakistan

Soviet invasion of Afghanistan

14 milliona

1991–1992

United Nations Advance Mission in Cambodia (UNAMIC)

Cambodia

Vietnamese occupation of Cambodia

Inc. UNTAC

1992–1993

United Nations Transitional Authority in Cambodia (UNTAC)

Cambodia

Vietnamese occupation of Cambodia

1.62 billion

 

1994–2000

United Nations Mission of Observers in Tajikistan (UNMOT)

Tajikistan

Tajikistan Civil War

64 million

 

1999–2002

The United Nations Transitional Administration in East Timor (UNTAET)

East Timor

Indonesian invasion and occupation

 

2001–2007

United Nations Mission to Afghanistan (UNAMA)

Afghanistan

Post September 11 conflict

28 billion

Europe

1964

United Nations Peacekeeping Force in Cyprus (UNFICYP)

Cyprus

Cyprus dispute

2 billionb

 

1993

United Nations Observer Mission in Georgia (UNOMIG)

Georgia

Abkhazian War

 

 

1992–1995

United Nations Protection Force (UNPROFOR)

Former Yugoslavia

Yugoslav wars

4.6 billionc

 

1995–1999

United Nations Preventive Deployment Force (UNPREDEP)

Republic of Macedonia

Yugoslav wars

50 million/yeard

 

1996–1998

United Nations Transitional Authority in Eastern Slavonia, Baranja and Western Sirmium (UNTAES)

Croatia

Croatian War

432 millione

1999

United Nations Interim Administration Mission in Kosovo (UNMIK)

Kosovo

Kosovo War

294 million

2.34 billionf

With the costs of UN peacekeeping6 and peace support operations equaling US$5.03 billion in 2006,7 and with peace enforcement costs (NATO/US Coalition) in Afghanistan alone reaching over US$12–14 billion annually, adopting a sustainable approach, a right-financing approach to peacekeeping has never been more pressing to enhance the full contribution of finance in support of the ‘viable’ and ‘virtuous’ state building agenda.8 The two-gap/financing-gap model is conventionally employed to assess the quantity of aid. In this approach, aid is premised on the determination of an economic growth enhancement based on too many assumptions—including that all external assistance is in fact growth-inducing, which it is not. The aim is to establish a targeted rate of growth and then to use a constant incremental capital-to-output ratio along with measures of private capital and saving.

The problem with conventional approaches to aid effectiveness and efficiency is that all too often newly established institutions of state and the service delivery models that they are primed to serve, many of which are parallel,9 simply can not be sustained once external subventions are eventually withdrawn. This is particularly true for security and law and order systems where high levels of off-budget transfers covering both wage and non-wage recurrent spending create fiscal instability from the outset, rather than promoting greater security. In Kosovo for example, where political deadlock with Serbia still threatens the entire stability of the Western Balkans, the fiscal and economic situation that the future administration will have inherited is insufficient to fund basic services in security, law and order, education and health, perhaps for the coming decade or more. In essence, Kosovo and Afghanistan are ‘fiscally stillborn’ states that will continue to draw upon the purse strings of international tax payers for many years to come. Iraq is not fiscally stillborn, although the failure to bring oil production back to pre-war levels as a vital source of revenue has raised the costs of external aid substantially.

Peace as state building

Before one can determine how much finance is needed to meet certain peace sustainment objectives, it is important to acknowledge that peace simply can not be sustained in the absence of an effective, accountable, secure, transparent and democratically elected state. In essence therefore, peacekeeping is at its very core about state (re)building and all efforts, even prior to a formal peace agreement, must work towards this critical objective. In this regard, whilst much of the finance supplied under the overall banner of poverty reduction simply cannot be effectively used until the institutions of state, the overall policy framework and internal checks and balances etc. have been sufficiently (re)established. Given that the security forces (defence and the police) and education and health services constitute the vast majority of public spending in most countries, special attention needs to be focused here in particular, not least because poor restructuring decisions taken early on can lead very rapidly to the emergence of a fiscally unsustainable state. There are of course also many different financing options that also deserve consideration, including loans, bonds, grants and private equity participation, particularly where public infrastructure is concerned.

There is broad international consensus, at least within the international aid community, that a state modeled broadly on representative or liberal democracy is more effective at sustaining peace and stability alongside greater prosperity, through cost-effective service delivery models, than one premised on less representative structures of governance. Moreover, given that the separation of powers between the executive, legislative and judicial branches of government are a prerequisite to avoid the risks of autocratic rule, the peace and reconstruction processes in Afghanistan, Cambodia and East Timor for example worked hard to guarantee that separation of powers did indeed take place; albeit with differing effects.10

State building is in essence a necessary but insufficient pre-condition for peacekeeping; the process of peacekeeping is also a determinant of success in the state building process. Likewise, developing a secure and stable state is a necessary but insufficient pre-condition for sustaining equitable economic growth. In this regard, the provision of finance and development of financial management systems must look to support an increasingly virtuous cycle. Figure 1 below highlights the inter-relationship between ‘security, law and order and justice’ and development in the light of the overall state building nexus outlined above. Here, weak security and poor governance leads to macroeconomic instability, weak market regulation and the provision of few public services. The prevalence of macroeconomic instability combined with a weak enabling environment actively fosters a large informal and illegal economy and low productivity, which once accompanied by weak revenue mobilization leads to underinvestment in productive infrastructure, public sector salaries and vital services. As a consequence, additional progress to mobilize resources will depend on (1) the security (of state, person and asset) situation and the administrative capacity of the state, and (2) as well as structure of the economy too.
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Fig. 1

The security and development Nexus

In the weak and fragile state context, sustaining investment in an accountable and effective security sector is also vital to creating the minimum enabling environment sufficient to consolidate and enhance economic growth too. In particular, it is where security is absent that its role in development becomes glaringly obvious not least because insecurity, and in particular conflict, carry major costs from an economic and social development perspective (see World Bank, 2003, Chapter 1). These include (1) the cost of resources devoted to conflict and/or combating insecurity; (2) human costs; (3) social costs; (4) loss of physical assets; (5) loss of financial assets; (6) costs to government; and (7) costs to the private sector. Moreover, it is widely acknowledged that crime erodes social and human capital, worsens the business climate and discourages investment; and undermines the state and its ability to promote development. Unfortunately, in Afghanistan, current levels of revenue mobilization do little more than cover the costs of wages and domestic borrowing.

As recognized by theoreticians such as Collier and Hoeffler11 the risks of return to conflict in post conflict states is higher unless the very causes of conflict have been directly and satisfactorily addressed. However, the Collier and Hoeffler model does not directly attribute the role of external (imperial) powers and the waxing and waning of empires in mixing up the internal affairs of buffer states, of which most recent examples in Asia and the Western Balkans well conform. However, we know from recent experience in countries such as Afghanistan and Kosovo that war causes massive economic disruption, the longer the conflict continues, depressing economic growth rates and per capita incomes, disrupting services, diminishing the legal role of the state and thereby strengthening the illegal, illicit and informal economy; all of which are inherently un-taxable. If nothing else, and given the continuation of both exogenous and endogenous grievances related to inter-ethnic disputes and resource monopolization, post conflict public policy must look to address both horizontal and vertical equity issues as well as looking to minimizing the growth of illegal activities and corruption while enhancing economic opportunity through various forms of income diversification.

In most post conflict settings however, following the initial influx of aid which of itself can create inflationary pressures of both public and private wages as well as basic commodities, economic growth rates can be as low as 2% in real terms, which is insufficient to move a country along the path towards greater prosperity and out of poverty. In essence, a strong economic growth policy must be at the very heart of the post conflict state building agenda, as a sine qua non for increased political and economic stability. Yet, in certain post conflict situations the economic growth agenda has not always been the highest priority of external aid as evidenced by the lack of growth diagnostic and value chain work in potential and emerging economic sub-sectors. Box 1 below highlights a number of right-financing priorities that support not undermine state building.
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Adopting a ‘right-financing’ approach to peace building

Right-financing is fundamentally not about money per se; it is about determining policy, governance, oversight, accountability and prioritization mechanisms and processes and the sustainment of increasingly higher quality services (and peace) over time. As weak and fragile states struggle to gain traction towards creating the virtuous cycle outlined in Fig. 1 above, with increased security providing the springboard for economic growth and political stability; issues of scale, prioritization, effectiveness and efficiency become central to sustain enabling services.

While the economics of the public and private sector are differentially motivated, one being not for profit and the other for profit, both spheres of governance are intended to be growth enabling. The role of the public sector is to create and enabling environment, through the successive removal of binding constraints, to release the full potential of the private sector as the engine of growth. To this end, once certain equity measures are established, the aim of government is to successively move to limit the size of the illegal economy, encouraging economic activities that are formal and taxable, the revenues from which flow into basic services. Among other things economics is fundamentally about scarcity, utility, value and of course supply and demand. The ‘right-financing’ approach looks to bring these concepts into play in a practical sense, guiding both public and private sector entities in making more appropriate investment decisions, thereby maximizing the use-value of international finance in meeting given objectives. In this case, the objective of peacekeeping is keeping the peace through state building and legal growth enhancement, and right-financing decisions therefore must be used to support such an end.

In order to move the right-financing agenda forward, first and foremost an enabling environment must be created at the international level that overcomes the first significant hurdle: lack of collaboration between the various peacekeeping, development and security communities around how to support the post conflict state (re)building and economic growth agenda. To overcome the current deficit, the OECD, supported by the UN, World Bank and International Monetary Fund (IMF) should consider the development of a unified ‘Post Conflict Reconstruction Guideline’, to supplement the existing post conflict needs assessment framework, to support government and development actors on the ground in establishing an overall state building and economic development framework that addresses all the known shortfalls of previous post conflict engagements. An outline of such a right-financing guideline is outlined in Box 2 below.
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The overarching framework would span the entire peace building reconstruction process through the phases of (1) stabilization and peace support operations (2) transitional and (3) normalization phases and be premised on the basic principles of the ‘right-financing’ approach, but would be reflective of the specific idiosyncratic needs of a particular context (i.e. culture, religion, gender balance, causes of conflict, fiscal situation, trading position, neighborly and international relations etc.). Moreover, developing a right-financing approach would look to overcome many of the basic problems outlined above, working towards the establishment of sustainable national policies, strategies and institutions to deliver greater service delivery coverage at a higher quality, and in a sustainable way.12
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Stabilization and peace support operations

Adopt a ‘right-financing’ approach to foster not undermine stabilization and peace support operations

Following conflict, the structures of state often undergo transformation following the cessation of hostilities, and while the conclusion of peace agreements and peace accords provide an invaluable road map and benchmarks to support the attainment of stabilization and peace support operations in particular, they also provide opportunities for state financing considerations which are often overlooked. Peace agreements provide a road map for political normalization, for the establishment of a transitional authority, for elections, and for strengthening civil service reforms, human rights and civilian oversight and management mechanisms. Furthermore, agreements often focus heavily on the transformation of security sector institutions in particular, and on DDR, yet with no direct reference to determining right-financing mechanisms for the sector as a whole. Clearly, in the absence of basic criteria to guide discussions, political commitments may be made that are simply unattainable from a resourcing point of view. Adopting a number of basic criteria and forward planning considerations would mitigate the worst risks of ill-informed political decision making during the agreement process. Currently, peace agreements and peace support operations (in varying forms) are often negotiated separately with competing interests and goals between national and international actors and as a result the two processes need to be more closely integrated using government budgets as a primary policy tool. The current process is often expedited, lacks sound operational advice with regard to security sector reform and state building priorities, as well as the monitoring arrangements/benchmarks that link external support to reforms on the ground.

Establish a provisional macro-fiscal framework and establish a central multi-donor trust fund

Lack of information with regard to government revenues (domestic and external) undermine decisions taken by transitional authorities and donors, often leading to expansionary policies. In this regard, International Financial Institutions (IFIs) and bilateral agencies should consider: (1) developing provisional macro-fiscal scenarios and forecasts based on available information or pre-conflict analysis to temper expenditure decisions; (2) identifying the need for trust funds, to consolidate external assistance efforts in the absence of satisfactory fiduciary management capacities of state, to support and not undermine or replace the national budget; and (3) establishing special trust funds to support payment of police or military staff where state revenues remain wholly insufficient, yet building into the arrangement clear ‘exit strategies’ for an orderly transition to a normal budgetary process. Important to fragile states, with limited capacities in revenue mobilization and burgeoning debt payments, is the fast of tracking Highly Indebted Poor Countries (HIPC)13 and Poverty Reduction Growth Facility initiatives, while working towards the write-off of external debt through discussion with the Paris and London clubs as important mitigating measures. As an example, in Sierra Leone, interest payments on debt are over 25% of recurrent budget costs, equaling total recurrent spending on the security forces. The fiscal future of Kosovo will also depend on such measures.
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Determine the shape, size, structure and staffing arrangements for the incumbent administration in support of fiscal sustainability

To establish a path to fiscal sustainability for the administration early on, based on the results of provisional fiscal work and the staffing, pay and grading reviews is vital. All too often staffing size decisions gain political buy-in prior to the establishment of determination of their recurrent or capital cost implications. To avoid the risks of ‘doing harm’, and based initially on a conservative fiscal estimate for the entire sector, consideration could be given to: (1) conducting a pay and grading review across the entire sector to determine market comparative wage scales; (2) right-sizing army, police, justice and penal systems and staffing establishments as one unified process and not four discrete processes; and (3) assessing sector financing considerations in weak and fragile states where external support is required to meet minimum security funding needs until revenue mobilization increases, including the use of trust funds of ear-marked budget support operations.

Conduct a security system reform review to underpin government fiscal policy

Once a transitional authority has been established, a post conflict needs assessment becomes the main tool for assessing the costs and overall focus on reconstruction needs. Such an assessment—as advocated by the new OECD Implementation Framework for SSR—could be led by government, the head of the UN mission, or alternatively NATO depending on the particular context. The review would look to bring government and external actors together to agree on a common set of reform principles and priorities. Ideally, the needs assessment would include an inception phase of dialogue with the whole-of-government14, followed by an SSR assessment. The inception phase would support contextual understanding of key problems and needs, with the SSR assessment looking to identify more strategic interventions, to reform the form, function and financing arrangements across the sector. As many of these issues are extremely political, particularly where a minority political party controls a particular ministry, fostering a supportive political environment is vital to managing the process of change.

Transitional financing

Strengthen the national budget as the primary instrument of public policy

During the normalization phase, and in most cases following the conclusion of successful elections, the annual budget formulation and execution exercise sets policies, sectoral funding levels, allotments, and the prioritization of ongoing activities. Moreover, as there is an increasing tendency for national budgets to be planned over a 3 year planning horizon, policy adjustments for the different sectors (down-sizing, up-sizing, restructuring etc.) can be factored in—based 2 or 3 year adjustments—to move incrementally towards a path of fiscal sustainability, without jeopardizing security in the process.

Establish clearly defined and costed national policy objectives

To create an enabling environment for stability, peace, economic growth and poverty reduction, transitional authorities should establish national strategies, around the government’s Poverty Reduction Strategy Paper and Millennium Development Goals, that place security as the cornerstone of national policy. However, the absence of a coherent national security policy and strategy and lack of support by sub-sector strategies undermines the development a sector-wide whole-of-government approach. This alone undermines budget comprehensiveness, transparency and a unified budget. To strengthen the setting of national policies, based on the results of the needs assessment, consideration should be given to establishing a unified, comprehensive sector-wide policy and strategy that embraces security forces and their civilian staff, justice and penal systems, as well as outlining civilian oversight and management structures. Security policy and strategy would involve a strong civilian element and would focus heavily not just on the quantity of security services, but increasingly on their quality.

Establish, cost and prioritize investment priorities for the army, police, justice and penal institutions

All too often service delivery benchmarks are set for sectors such as transport, but not the security sector. To address this fundamental weakness, and to engender a sustainable approach to the sector, policy innovations would include (1) OECD, UN and IFI collaboration to establish model service delivery benchmarks for defense, police, justice and penal systems that can be used in the SSR review process (2) developing standard unit costs for services delivered in a given context; and (3) integrating these benchmarks into the annual budget formulation exercise, and the medium-term expenditure frameworks. Once service delivery benchmarks have been set for the sector-wide approach, and based on the provisional unit costs external donor support may be required to assist government in costing the SSR program to (4) work towards meeting fundamental public finance management (PFM) principles such as affordability, discipline and predictability; and (5) in better sequencing the transition of services from securing national border integrity towards strengthening law and order and justice services.

Outline public investment implementation and management arrangements

At the core of right-financing stability and peace processes is the need to conduct functional reviews of core ministries to increase the internal effectiveness and efficiency of government executed systems. Frequently, reviews are conducted for security sector agencies last, not first, even though the security sector receives the highest level of financial support in the early post conflict period; the sequencing therefore needs to be reversed. To strengthen program implementation and management arrangements policy makers within the government and the international community should: (1) actively promote the migration of public sector restructuring experts, including those focused on administrative and civil service reform, as well as PFM experts, to build the capabilities of the civilian parts of the ministries of defense, interior and policing entities; (2) conduct an assessment (perhaps a multi-agency assessment led by the UN) of the comparative advantages of different UN, IFI and bilateral agencies to support SSR and coordinate these around either the OECD Implementation Framework for Security Sector Reform or some equivalent framework that brings the security and development communities together; (3) develop support operations to strengthen the role of the ministry of finance (MoF) in budgetary process towards the service sector, including its involvement in national security council and coordination fora; and (4) mainstream procurement arrangements to maximize efficiency, accountability and to minimize corruption.

Establish a practical outcome oriented monitoring framework to track service delivery

Supporting a move towards policy based budgeting requires a focus on strengthening expenditure outcomes and expenditure tracking systems. However, as service delivery benchmarks and performance based monitoring indicators are seldom used in the national budget process, assessing the impact of public spending on security has been almost impossible in weak and fragile states. Moreover, in the absence of performance based indicators that support enhanced equity and quality in service delivery, determining horizontal access issues (i.e. that a particular sector coverage is not biased towards certain interest groups, and that employment opportunities are equitable) has been neglected in almost all cases. In moving towards a service delivery model for various sectors it is proposed that (1) the OECD DAC Conflict, Peace and Development Co-operation, in collaboration with the UN and IFIs, work to establish a standard set of objectively verifiable indicators and means of verification for adaptation by weak state institutions through the national budget process; and (2) support of the implementation of information management systems and public expenditure tracking systems within defense and policing institutions is set as a priority.

Normalization financing

Enhance the execution of core public finance management principles as part of the budget formulation and execution process, making annual adjustments within the overall multi-year framework

With the budget viewed as the central tool of government policy, it is important that expenditure policies are set within the budget framework, to support budgetary aggregates and overall fiscal discipline, the strategic allocation of resources across sectors and programs and the efficient utilization and management of budgetary resources. To this end, the international community should consider: (1) limiting off-budget resource transfers and gifts in kind to the security sector that have not been agreed as part of the annual budget exercise, and expenditure framework process; (2) providing additional support to the ministries of finance to develop national expertise in dealing with financing of security sector policy; (3) strengthening the civilian capabilities of ministries of defense, interior and police services in PFM management in developing an integrated and comprehensive policy based budget; (4) providing support to strengthen the service delivery approach; (5) strengthening sector-wide budget prioritization, including determining sectoral and inter-sectoral trade-offs between the various security functions; and (6) addressing issues of corruption within the sector; and (7) actively supporting the development of civilian oversight and management capacities regard budgetary approval.

Conduct public expenditure reviews of security, law and order and justice institutions to assist government’s analytical capacity in policy making and in setting realistic targets and reform priorities

Given that in weak and fragile states, security spending constitutes the lion share of public spending the failure of IFIs to actively engage the security sector with PFM scrutiny issues negatively impacts the development of the security sector. While the PFM process is not a panacea, it however does provide invaluable analytical advisory support to a sector often starved of such scrutiny. In particular the development of likely fiscal scenarios for the sector has enlightened MoF and security entities to emerging problems. To this end, and given that conducting expenditure reviews of the security sector do not contravene the Articles of Agreement of the World Bank, undertaking security system financial assessments must increasingly become a standard feature of post conflict engagement.

Conclusion

While peace building is an expensive process in too many cases substantial funding is spent on non essential measures that do little to stabilize the state, enhance employment and strengthen the vital role of the private sector. Ultimately, as the cost of global peacekeeping continues to rise, returning to valued investments that are both more effective and efficient will be a critical factor in maintaining strong appetite in peacekeeping support for the future. Within this setting, ‘right-financing’ is a central issue for all policy makers involved in peacekeeping and post conflict reconstruction processes given the primacy of ensuring that states emerging from conflict are provided the foundations on which to build a durable state that can deliver an equally durable peace. Adopting a right-financing framework to decision making is therefore essential in limiting the emergence of fiscally stillborn states such as Kosovo and Afghanistan, the implications of which are a source of instability itself. In this context, financing peace is not just an issue for finance experts it is rather a sine qua non for sustaining the peace and development process over the longer term, at a price affordable to the emergent sovereign state, and therefore an issue for all human resources engaged throughout this process. Peace building is at its core about re-establishing stable, accountable and growth oriented states while employing right-financing policies as a necessary pre-condition for success. As outlines above, success is also therefore about financing effectiveness efficiently.

Footnotes
1

More than a statement of general principles, the Paris Declaration lays down a practical, action-orientated roadmap to improve the quality of aid and its impact on development. The 56 partnership commitments are organized around the five key principles: ownership, alignment, harmonisation, managing for results, and mutual accountability.

 
2

See the DAC Handbook on Security Sector Reform at http://www.oecd.org/dataoecd/21/58/38304398.pdf.

 
3

In both Afghanistan and Sierra Leone less than 3% of total security spending was to support the transformation of justice systems.

 
5

Such as the World Bank Conflict Prevention and Construction Unit, the Low Income Countries Under Stress Initiative, the International Peace Research Institute of Oslo and the Center for the Study of African Economies.

 
6

Peacekeeping often involves, as has been the case in Afghanistan and Kosovo, peace enforcement operational support of NATO.

 
7

UN member states are legally obliged to pay their share of peacekeeping costs under a complex formula that they themselves have established. Despite this legal obligation, member states owed approximately U .37 billion in current and back peacekeeping dues as of June 2004.

 
8

Interestingly, the recent Brahimi report on UN peacekeeping operations failed almost wholesale to address a number of core issues related to fiscal sustainability. Indeed, the words sustainable and fiscal have no single reference in the entire document and peacekeeping operations are still conceived by the UN as an almost distinct and separate process to the entire reconstruction and economic development effort that follows; although they clearly are not.

 
9

In particular the creation of refugee and humanitarian systems, as well as health and education service delivery provided through international and not international non governmental organizations, among other examples.

 
10

Separation of powers a term coined by French political enlightenment thinker Baron de Montesquieu is a model for the governance of democratic states. Under this model the state is divided into branches, and each branch of the state has separate and independent powers and areas of responsibility. The normal division of branches is into the executive, the legislative, and the judicial. Proponents of separation of powers believe that it protects democracy and forestalls tyranny; opponents of separation of powers have pointed out that, regardless of whether it accomplishes this end, it also slows down the process of governing, it can promote executive dictatorship and unaccountability, and it tends to marginalize the legislature. No democratic system exists with an absolute separation of powers or an absolute lack of separation of powers although most systems are clearly founded on the principle of separation of powers, while others are clearly based on a mingling of powers.

 
12

No exact time period can be set in passing along the open conflict, post conflict transitional, and normalisation continuum. However, experience shows that a period of 1–2 years is required following ratification of a peace agreement to create the conditions for a lasting peace, that transitional phases—and the appointed authorities last for between 2 and 5 years, and the normalisation phase has no time limit.

 
13

The HIPC initiative is a comprehensive approach to debt reduction for heavily indebted poor countries pursuing IMF- and World Bank-supported adjustment and reform programs. To date, debt reduction packages have been approved for 29 countries, 25 of them in Africa, providing US$35 billion (net present value terms as of the decision point) in debt-service relief over time. Eleven additional countries are potentially eligible for HIPC initiative assistance and may wish to avail themselves of this debt relief. (See http://www.imf.org/external/np/exr/facts/hipc.htm).

 
14

A number of whole-of-government exercises have been established to enhance the alignment of civilian and military forms to international assistance (UK PCU, US State/CRS, Germany, etc.).

 

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© Springer-Verlag 2007