1.  Budget support has delivered some direct benefits over the 10 years that DFID has provided it, particularly in increasing service delivery, but these benefits have not been quantified. DFID should work with other donors and recipient governments to:

• collect systematic data on the financial inputs to developing country budgets, and make sure that definitions of sectors, regions and activities are applied consistently;
• improve the scope, frequency and reliability of data available on developing government activity, outputs and outcomes; and
• commission evaluations of the impact of budget support on growth and on reducing poverty.

2.  Performance in building the capacity of developing country governments has been mixed. While there is evidence of better policy-making and planning, there is very little evidence of improved performance in key areas such as financial management. DFID should develop more precise measures of capacity to enable it to track progress more reliably, with a greater focus on better management performance, as opposed to new legislation or better central guidance on management practices.

3.  DFID has not established the effectiveness of budget support relative to other types of aid, or been able to conclude whether, as currently implemented, it represents value for money. DFID should test the cost-effectiveness of budget support proposals against credible options. DFID's new Investment Committee should establish the standards of analysis required before programmes can be proposed, and police those standards. DFID should also make sure that programme evaluations address budget support cost-effectiveness.

4.  The decision process governing which countries receive budget support is opaque. DFID have stated principles which must be met before working with government partners, and have developed useful tools to help appraise prospects for budget support and assess risks. Most budget support proposals, however, do not clearly weigh up the risks and benefits. In addition, the pattern of budget support that has arisen appears arbitrary. DFID should state the criteria that should determine a decision (including aspects such as benefits and risks), make sure there are precise assessments recorded against each criterion, and review their portfolio of budget support programmes to make sure there is some consistency of judgement.

5.  DFID's budget support objectives and monitoring have significant weaknesses. DFID follows defined processes to set programme objectives and monitor progress. However, the approval of vague objectives, weaknesses in associated indicator sets and the potential for confusion between a variety of monitoring requirements militate against economic and effective programme management DFID should:

• make sure that the formal objectives for all budget support programmes reflect all the key benefits expected, are precisely stated, and are associated with clear baselines and success measures;
• systematically monitor progress against each of the objectives set out in a budget support programme, as well as progress in mitigating any associated key risks or partnership commitments; and
• streamline the indicators used for such monitoring, to maximise use of agreed, joint monitoring frameworks. Where necessary, DFID should institute arrangements to amend previously approved indicators as better sources emerge.

6.  DFID assesses developing country systems but rarely attempts to quantify the impact of weaknesses in systems for risks to DFID's funds. DFID should use all available sources, including audit reports and other surveys, to estimate the likely impact of risks arising from weak financial systems.

7.  DFID provides budget support expenditure in countries where expenditure and output data are so weak that it cannot monitor progress effectively. DFID provides more assistance than other bilateral donors to improve developing country's national statistics. But it remains DFID's responsibility to ensure that it can obtain sufficient monitoring information to satisfy Parliament that funds have been spent for the purposes authorised, and that such expenditure represents value for money. DFID should make an explicit assessment of the quality of the available monitoring information when proposing or extending a budget support programme, with clear identification of how and when any gaps can be closed.

8.  Domestic institutions in developing countries are often weak and have been underfunded by donors. Collaborating with other donors as appropriate, DFID should ensure that bodies such as Parliaments and audit institutions receive sufficient support to help them in such tasks as mounting an effective challenge to the ruling party and securing accountability for the use of public resources, including in countries such as Nigeria to which DFID plans to extend budget support.

9.  DFID claims that budget support allows it to shape national policy but at other times claims that using leverage rarely works. DFID should assess how effective budget support really is in encouraging developing country governments to prioritise policies aimed at reducing poverty and use such assessments to reach a firm and evidenced position.

10.  The financial risks of putting UK funds through weak national systems are often high. Estimates of leakage and corruption in the use of developing nations' budgets are many times higher than would be acceptable in UK domestic expenditure. Despite this, there is insufficient evidence in the public domain for Parliament to come to an informed view of the balance between risk and reward. Where it assesses financial risks to be high, DFID should disclose the scale and nature of these risks, and offer its best estimate of the levels of corruption, waste and inefficiency that may result. It should also set out its risk management plans. Such information should be available when requesting funds from the UK Parliament and when accounting for their use.