Domestic Resource Mobilization: The Role of Donors
September 2, 2016
This is the second in a series of four policy memos that explore various facets of domestic resource mobilization (DRM) and will specifically examine the role that donors play in supporting DRM. DRM is commonly defined as the mix of financial resources available to a government to fund its operations, including direct and indirect taxes, other revenue, and borrowing from local capital markets. This series of policy memos is primarily concerned with the tax or domestic revenue side of DRM. The two subsequent memos will explore other topics related to DRM: how good public financial management impacts DRM and the political side of DRM. The first policy memo examined tax system reform. Donors have long provided support for tax reform, but since the adoption of the Millennium Development Goals in 2000s, donor and recipient governments have increasingly placed local resources at the center of efforts to tackling development challenges. This conversation has gained importance in the last five years as the international development community adopted the more ambitious Sustainable Development Goals (SDGs) in 2015, which aim to end extreme poverty by 2030.
DRM is not a new focus for donors; indeed, bilateral and multilateral donors have long seen a strong government revenue system as being critical to the creation of a functioning state. In recent years, however, donors have begun to enthusiastically focus on DRM as an important component of development finance. Why? First, the sheer size of domestic resources has grown tremendously over the past 10 to 15 years. Domestic resources in developing countries total just under $6 trillion per year; compared to just under $2 trillion of international resources. Second, there has been a broader move toward improved aid and development effectiveness with “country ownership” or better alignment of donor funding with a country’s national development plan as an important component of achieving it. Third, this has become increasingly a demand side conversation as developing country voices have led the call for greater donor attention paid to DRM. Developing countries have huge unmet needs (particularly in water, healthcare, education, and infrastructure) and face significant financing gaps; official development assistance (ODA) cannot meet all of these needs. Private investment will not necessarily provide financing for projects in social sectors, such as healthcare or education, where the return on investment is uncertain. A country’s own resources will fill these gaps. Improving DRM holds the possibility that, under the right conditions, high returns on small investments (“turn millions into billions”) can be generated and sustained for years.
Given this, DRM was front and center at the 2015 Financing for Development (FFD) Conference and raised the profile of DRM significantly. To be sure, DRM was a focus at earlier FFD conferences in 2002 and 2008, but Addis generated concrete proposals with commitments by donors and developing countries to increase their focus. Close to 30 donor and partner countries and a number of international organizations jointly launched the Addis Tax Initiative (ATI) as one of the main deliverables. ATI was not just a pledged commitment by donors, but rather a partnership between developing countries and their international community partners to find local, workable solutions to fixing revenue challenges. The goals of the ATI include increasing technical cooperation programs, ensuring policy coherence, and creating partnerships. ATI will contribute toward achieving more effective, efficient and fair tax systems, reducing distortions from historical international tax arrangements, and paying for the Sustainable Development goals (SDGs), water, sanitation, healthcare, and other goods and services that traditional aid alone cannot cover. In addition, donors pledged to double the total amount of ODA directed toward DRM in order to make good on these pledges.
This memo will provide an overview of how bilateral and multilateral donors are approaching DRM through a series of existing and new initiatives meant to take advantage of the enthusiasm from Addis. It will also consider some of the challenges that donors face from a monitoring, evaluation, and diagnostic perspective in placing a greater emphasis on DRM.
Donor Approaches to DRM
The international donor response to DRM reform has been enthusiastic, giving rise to various new tools, organizations, and initiatives. This includes both bilateral donor programs and a series of new multilateral initiatives launched by the International Monetary Fund (IMF), the OECD, and UN Development Program (UNDP). ATI offers an opportunity to draw together the collective experience of a number of leading donors who have long worked on DRM. Different donors also use different approaches to DRM projects. For example, USAID primarily focuses its efforts on bilateral, multi-year technical assistance and capacity building projects, while the IMF operates primarily through peripatetic technical assistance missions either by staff from its Fiscal Affairs Department or its regional technical assistance centers (RTACs) around the world. The differences among developing countries require a country-led approach to DRM that suits their individual needs and priorities, which requires time and careful consideration. Additionally, uncoordinated donor efforts and weak local institutions could postpone implementation of tax reforms, which may diminish the sense of urgency and excitement around DRM after the Addis conference.
The U.S. government is a long-standing donor to DRM efforts; according to a review of donor efforts around DRM, the United States is the world’s seventh largest donor to DRM. The U.S. Agency for International Development (USAID) has undertaken successful DRM reform projects in a number of countries, including El Salvador, Georgia, Jamaica, Ghana, the Philippines, and Bosnia. Many of these have been long-term, on-going commitments by USAID. Currently, USAID spends approximately $20 million per year in 11 countries on DRM reform projects, with total U.S. spending at around $35 million. USAID provides a wide range of tax policy analysis support, including running diagnostics and assessments. It also conducts tax administration projects such as building a tax registry and redesigning business processes to increase ease of paying taxes. USAID is committed to continuing investment in DRM, to scaling up assistance in certain places, and to figuring out how to partner with organizations focusing on sectoral issues to achieve the SDGs.
One innovative U.S. approach to DRM is a pilot launched in September 2014 that relies upon money from PEPFAR to implement reforms aimed at mobilizing additional local government revenue to help support health budgets. Announced by Secretary of State John Kerry at the Frontiers in Development conference, PEPFAR will commit $63.5 million over three years in seven target countries: Tanzania, Kenya, Zambia, Nigeria, Mozambique, Uganda, and Vietnam. Under the Sustainable Financing Initiative, USAID aims to help these countries mobilize their own resources ($1 billion in additional government revenue) to create sustainable sources of financing for health budgets. This effort aligns well with PEPFAR’s third stage activities, which envisions greater local capacity building in order to begin to turn over responsibility for HIV/AIDS prevention programs to local governments.
In addition to USAID’s work on DRM, a number of other U.S. government agencies provide support to tax system reform, including the U.S. Treasury Department and the Millennium Challenge Corporation (MCC). The Treasury Department’s Office of Technical Assistance (OTA) regularly undertakes technical assistance missions at the formal request of developing country governments. These missions provide assistance with improving audit practices, risk management, anti-corruption, and the functioning of large tax payer units; OTA does not advise of tax policy reform. In 2015, OTA had tax reform missions in 14 countries (Burma, Cambodia, Georgia, Guatemala, Haiti, Liberia, Malawi, Mongolia, Niger, Paraguay, Rwanda, Tanzania, Ukraine, and Zambia). OTA is limited by the amount of money available per mission (typically $550,000), but is an important instrument for U.S. government support for DRM. MCC, through both its compact and threshold program, has also supported tax reform work (and public financial management) especially in the Philippines and Honduras.
Beyond the work of bilateral donors such as the United States, a number of multilateral actors have either scaled up their work or launched new initiatives aimed at capitalizing on the enthusiasm coming out of the Addis FFD conference. This includes the OECD, IMF, World Bank, regional development banks, and UNDP. The IMF, for example, is a long-standing supporter of tax reform work in developing countries through technical assistance missions that are funded out of a multi-donor trust fund that was established in 2011. The original topical trust fund—the Tax Policy Administration trust fund—was originally meant to run for five years at a cost of $30 million. When this trust fund expired, the IMF launched a new one called the “Revenue Mobilization Trust Fund” that is scheduled to run for another six years at a cost of $60 million. Historically, the IMF has achieved some success through their technical assistance; for example, a review of IMF technical assistance missions to 19 Francophone African countries found that all but three of these countries saw double-digit increases in tax revenue as a proportion of GDP between 1995 and 2012. The IMF has also launched a new diagnostic—the Tax Administration Diagnostic Assessment Tool (TADAT)—that is designed to help donors and recipient countries understand where deficiencies exist.
In order to improve and modernize a country’s tax system, diagnostics are the first step to assess the current state of the system. Regardless of which organization or company is performing the diagnostic, it is important to include participation of knowledgeable local experts, as they will likely be more familiar with the system than will the foreign or international agencies supporting them. The integrity of the taxpayer database is the first step in such a diagnostic, as an information-rich, accurate, and up-to-date registry must be a top priority. Determining which diagnostic tool(s) best addresses the current tax situation is important, and a variety of diagnostics may need to be completed in order to provide a firm foundation for effective tax reform.
In addition to the work of the IMF, the OECD has also emerged as a leading multilateral force behind tax reform work in developing countries. The OECD launched its Task Force on Tax and Development in 2010 that brings together a number of stakeholders including OECD members, developing and emerging market countries, civil society and business, and multilateral organizations. Under the Task Force, OECD has concentrated on a number of focus areas with an emphasis on policy development, but has expanded its work. Most tangibly this has resulted in a new program jointly run with UNDP called “Tax Inspectors Without Borders (TIWB).” TIWB was originally proposed by OECD in July 2012 and seeks to deploy experienced tax inspectors to developing countries on a demand-driven basis to share expertise and experience. After a period of review, the program was officially launched by OECD and UNDP at the Addis FFD conference in July 2015; currently there are pilot programs underway including in Albania, Senegal, and Ghana.
Donor Coordination, Monitoring, and Evaluation
Beyond programming there are two issues worth considering as donors create new DRM projects or increase existing support: coordination and monitoring and evaluation. Coordination, in particular, is important to consider given the increased focus on DRM coming out of the Addis FFD conference. Coordination has been an important component of the broader aid/development effectiveness conversation, which has sought to better manage the growing number of donors and projects. This is particularly true at the country level, where many developing countries struggle to manage competing donors and competing projects.
The ATI, in particular, can serve as a coordinating mechanism going forward, at least at the strategic level. The IMF has welcomed the ATI, but needs to focus on increasing coordination with the donor communities to develop a common ground on reform and revenue spending and to ensure that the IMF’s and their donors’ efforts are devoted to collaboration with local communities. For example, the IMF has implemented the Revenue Administration Fiscal Information Tool (RA-FIT), which supports donors as they set educated priorities, created joint programs with the World Bank, began technical collaboration with the U.S. Treasury technical assistance programs, and other steps to ensure interoperability and cooperation between implementers, donors, and local communities.
It is also important to evaluate the quality and effectiveness of DRM reform programs. It is easy to evaluate technical assistance through a results-based approach. Ultimately, donors are trying to prevent inefficiency in their technical assistance, and collaboration with other agencies and groups provides an immediate, informal peer review in the field. Knowledge-sharing efforts such as USAID’s Learning Lab create cooperative platforms to discuss progress and share tools for improving future development projects. This peer review and collaboration is valuable, but does not replace rigorous monitoring and evaluation systems for DRM programs. This is necessary to ensure that donors understand the results that DRM programs are generating in order to help justify continued investment in them.
Donors have enthusiastically embraced the promise that DRM holds for meeting the development finance needs of the new SDGs. Since the Addis FFD conference, new initiatives and commitments have been launched in fulfillment of pledges made under the ATI. Though this enthusiasm is admirable, donors would be well advised to temper it somewhat. As discussed in the first policy memo in this series, the challenges to increasing DRM through improvements to tax systems in developing countries are immense. In particular, effective tax reform will require a politically willing partner to undertake challenging reforms to many of the underlying political and economic power structures that exist in developing countries. This coupled with corruption presents a difficult situation that will require more than technical reform efforts aimed at tax systems. It will require that some donors—particularly on the multilateral side—become more comfortable with working in a “political” environment. Without serious political will, true reform will be impossible to achieve.
Beyond the politics (covered more in-depth in DRM policy memo #4), donors must also focus on coordinating their efforts and how to monitor and evaluate results. On the coordination side, this is essential as donors move to meet the new commitments made at Addis through the ATI. Ensuring that coordination is robust, especially at the country level, will reduce the possibility of overlap and help to better align DRM programs with country development plans. Monitoring and evaluation is also important in order to demonstrate results. For better or for worst, there has been an increase in attention paid to monitoring and evaluation (M&E) in the broader development policy community—demonstrating clear results will help ensure the sustainability of DRM reform.
 USAID Presentation, CSIS Working Group, November 13, 2015.
 Tim Strawson and Guto Ifan, “Aid for Domestic Resource Mobilization: How Much is There?,” Development Initiatives, February 2014, http://devinit.org/#!/post/aid-domestic-resource-mobilisation-much .
 USAID, “Domestic Resource Mobilization,” https://www.usaid.gov/what-we-do/economic-growth-and-trade/domestic-resource-mobilization .
 USAID, “Sustainable Financing Initiative: Delivering an AIDS-Free Generation Through Shared Responsibility,” July 6, 2016, https://www.usaid.gov/what-we-do/global-health/hiv-and-aids/technical-areas/sustainable-financing-initiative .
 Steven Damiano, “Domestic Resource Mobilization for Development: Ideas for U.S. Policy,” Bread for the World Institute, Briefing Paper No. 29, October 2015, http://www.bread.org/library/domestic-resource-mobilization-development .
 IMF, “Revenue Mobilization Trust Fund: Securing Revenue for Development,” http://www.imf.org/external/np/ins/english/rmtf.htm.
 Patrick Fossat and Michel Bua, “Tax Administration Reform in the Francophone Countries of Sub-Saharan Africa,” International Monetary Fund, July 2013, 10, https://www.imf.org/external/pubs/ft/wp/2013/wp13173.pdf.
 IMF Fiscal Affairs Department, “Revenue Administration’s Fiscal Information Tool,” 2012, http://pitaa.pftac.org/filemanager/files/2012Papers/7_FIT.pdf.
 IMF, “World Bank and the IMF Launch Joint Initiative to Support Developing Countries in Strengthening Tax Systems,” 2015, https://www.imf.org/external/np/sec/pr/2015/pr15330.htm.