Integration of iDSI’s Reference Case principles for economic evaluation and DFID’s approach to value for money analysis
This project investigated Value for Money (VfM) analysis methodologies and considered whether analyses conducted by donors to explore their programme expenditure would be more useful if lessons were learnt from the International Decision Support Initiative (iDSI) Reference Case (RC) for economic evaluation.
How do donors in international development make sure they are not wasting money? This is harder than it may initially seem. Money is spent thousands of miles away from headquarter offices, in settings where information is poor, politics complex and staff turnover rapid.
When mistakes are made, poor uses of public funds are exploited by the international media, putting pressure on governments to cut their aid budgets. Moreover, and more importantly, the missed opportunities to spend aid well represent huge losses in potential improvements to people’s lives.
But what does good spending look like? It’s not always obvious.
Any donor expenditure involves a trade-off. The finite money and resources available mean decisions have to be made over which areas to invest in, and which not to. When donors spend money in Sierra Leone, for example, they have less money to spend in Ethiopia. When donors spend money on health, they have less money to spend on education.
These are the opportunity costs of donor spending – the forgone benefits of not choosing alternative courses of action. If money is spent well, those benefits are smaller than the benefits actually achieved. If money is wasted, however, the reverse becomes true. In the international development sphere, the picture is complicated further by two significant conceptual challenges that donors face:
1. There is no established social welfare function that captures benefits across numerous sectors – and donors generally work in numerous sectors. What metric should be used to compare the benefits of a programme to develop private sector competition in Malawi to the benefits of a programme to improve maternal health in Sierra Leone?
2. In order to understand opportunity costs, donors need to examine the counterfactual – what would have happened instead? In contexts with abundant data this is a practice of statistical trickery and technique. In low and middle income countries, this can be mere speculation.
We compared the UK Department for International Development's (DFID's) Value for Money methodology to the iDSI RC principles. For each principle we asked whether it is relevant to DFID, already incorporated into DFID’s VfM analysis and, if not, could it feasibly be incorporated.
This study has provided valuable insights that will hopefully encourage donors to more critically assess the methods they use for measuring value for money. Better methods produce more useful information, and more useful information leads to better decisions - ultimately improving lives.