[ Defence budgets in Public Expenditure Reviews ]

A challenge for the World Bank

The efficient use of state funds is a precondition of successful development policy. Development cooperation can contribute by helping partner countries define their priorities and check whether public funds are being used accordingly. For instance, international donors support measures to improve budget management in partner countries within the framework of Poverty Reduction Strategies (PRS). However, defence budgets have so far mainly been ignored. That is problematical, because in many countries the military is known for its opaqueness while at the same time it has preferential access to government resources. This furthers inefficiency and corruption. In addition, defence spending is so high worldwide that considerable room for savings can be assumed. According to the Bonn International Conversion Centre (BICC), US$ 850 billion was spent on armaments worldwide in 2002, US$ 225 billion of it in developing countries. Moreover, armed forces, which are not financially accountable, often also evade political accountability.

The World Bank has a leading position in the search for reliable methodical approaches to the analysis of defence budgets in developing countries, and in dealing with the question of how the donors can react to such analyses. The bank has taken on a pioneer role in developing instruments for the analysis and management of public spending in general and now has great expertise in this sector. In the international debate, it is proposed time and again that these instruments should also be applied to developing countries’ defence budgets.

On the one hand, this proposal is obvious, but on the other it is fraught with a number of problems. Instruments such as Public Expenditure Reviews (PER) and Medium-Term Expenditure Frameworks (MTEF) are much more than tools for external and technically designed budget audits. Usually, they are part of comprehensive sectoral strategies and thus of a rather political character. Security and defence, however, are among the policy sectors in which governments are extremely unwilling to show their cards, and in which the World Bank only has a limited mandate to intervene.


The defence budget is often difficult to fathom

Reliable information on defence budgets in developing countries often is kept secret. It may also be unavailable or only incompletely available for other reasons. In many cases, not even Parliament or the responsible ministries have access to them. Frequently, the military is privileged in the allocation of funds and can simply exceed its allotted budget limits. At the same time the efficiency of the use of funds in the defence sector is often checked only insufficiently. For instance, the Public Expenditure Review in Cambodia found that the Finance Ministry had no influence whatsoever on the defence budget, and that the Defence Ministry was in general exempt from scrutiny by the National Audit Office (World Bank, 1999).

Where budgets are accessible, military expenditure is often disguised as civil spending (so-called off-budget spending), or the military finances itself by income that is not covered by public supervision – such as the Ugandan army’s illegal explotation of raw materials in Congo. On the other hand, one cannot conclude solely from the absolute level of defence spending how much might be saved. Much spending in the military sector is not on armaments, but serves other purposes which certainly are to be welcomed and some of which have long been part of development cooperation. They include:

– the disarming, demobilisation and reintegration of ex-combatants;
– the implementation of security sector reforms;
– adjusting the budget by to reassigning previously disguised spending to military items which in consequence will increase in the short-term;
– spending in connection with peacekeeping missions;
– mine-clearing and other services to protect and support the civilian population in the aftermath of conflicts or in the case of natural disasters.

The inclusion of military budgets in Public Expenditure Management (PEM) must aim at making the defence budget transparent and, if it is too high, reducing it to an appropriate level. Spending should be based on a plausible assessment of defence needs and available funds in order for the money to be used more efficiently. The focus is on the difficult question of a country’s legitimate defence expenditure. There can be no general benchmark to answer this question. At times, and for good reasons, the public good of security is given the highest priority in poverty reduction strategy papers (PRSPs) of post-conflict countries such as Sierra Leone (Republic of Sierra Leone, 2001).


Instruments for managing public budgets

Nevertheless, the World Bank has instruments which in principle can also be used to examine the defence sector and determine whether the funds are appropriate and being used efficiently. Thus, Public Expenditure Management is oriented much more on results than is conventional budgeting. The spending of public funds must be oriented not only on a need which is formulated ex ante, but also be measured in terms of its outputs. PEM provides for management at three levels:

– Fiscal discipline: total spending is laid down on the basis of expected revenue (“Don’t spend more than you earn”).
– Allocation efficiency: spending should match plausible political priorities. If this is not the case, funds must be reshuffled within the overall budget in favour of tasks with higher priority.
– Operational efficiency: money must be used as efficiently and effectively as possible in order to achieve the desired results at lowest possible cost.

In short, a government’s spending should (1) be able to be financed in the medium term, (2) be oriented on political priorities, and (3) achieve the desired results at the lowest cost.

In practice, however, it is difficult to exert influence without having first analysed and assessed a country’s security situation. If at all, that is most feasible in the case of assessing fiscal discipline and operational efficiency. If a country spends more than it earns and at the same time its defence spending is disproportionately high it would appear that first cuts should be made here (fiscal discipline). Security policy issues are also of secondary importance for the assessment of operational efficiency. Critical quantities at this level are procurement costs and overheads. For instance, in the military sector money is often wasted by not tendering procurement contracts. Ex post checks of overheads are carried out by Expenditure Tracking Surveys, which, for instance, help identify non-planned costs, as well as irregularities or cases of mismanagement. Irregularities include the payment of staff that exist only on the payroll (ghost employees) and spending on fuel that is disproportionate to the size of the army motor transport pool.


Budget must be based on strategy

By contrast, the World Bank’s scope for scrutinizing and assessing allocation efficiency in the defence sector is much more limited. To do that the bank must first form a judgment on a country’s security and defence policy priorities, for which the bank has neither expertise nor mandate. Like other public spending, defence budgets should be drawn up on the basis of a sectoral strategy. Key elements for this include an analysis of the defence policy environment and strategic planning aligned on it. Frequently, excessively large armies or armed forces units that are not suited for specific tasks are kept in place to retain internal power or for prestige reasons. Such phenomena clearly indicate a lack of a plausible needs assessment.

In the final analysis, a country’s defence strategy is based on threat scenarios, an assessment of internal security and assumptions on the stability and behaviour of neighbouring countries. In dealing with these questions, the World Bank is confronted with the principle of non-intervention. According to its Articles of Agreement, the bank is not permitted to interfere in the politics of the recipient countries, nor may it base decisions on the political character of a member government. The bank’s elbowroom in the defence spending sector is largely regulated by a memorandum of 1991 titled ‘Note on Military Expenditure’. It says the bank may address the subject and point out to member countries (“address at a senior level”) that in its view defence spending deprives other development-relevant tasks of funds. The bank can also carry out an analysis of the issue and initiate a political dialogue with the member countries. However, it has no mandate to make decisions which depend directly upon the volume of a member country’s military spending (conditionality).


The World Bank depends on partners

The World Bank has so far engaged in the defence and security sector mainly in the context of conflict and post-conflict situations. Controlling defence budgets, for example, plays a role in some PRSPs, Transitional Support Strategies and Country Assistance Strategies. In recent cases countries like Ethiopia, Cambodia and Croatia expressly asked the bank to include their defence budgets in Public Expenditure Reviews. That makes clear both the demand for support in this sector as well as the need for the bank to focus more intensively on the issue. Because of the World Bank’s restrictions due to its mandate and lack of expertise, it depends on partners that can advise the recipient countries on military questions. These include the development of a security doctrine, analyses of military needs or a government white paper on defence policy. Think-tanks, political foundations, regional organisations and the United Nations are possible actors. It would be desirable for the local civil society as well to be enabled to participate in such a process as it is the case in the PRS process. However, it will be possible only in exceptional cases to include civil society organisations in drawing up security policy concepts.
The bilateral donors should consider to what extent they can support the World Bank in these sensitive sectors. In Germany, for instance, the political foundations, academic political consultancy institutes, and actors involved in military cooperation would be suitable partners for such a division of labour. However, such an engagement raises a number of fundamental questions for the bilateral donors as well. International development cooperation would have to open itself more to security issues and cooperate with actors in this sector.

Successful advice aimed at achieving appropriate defence spending is hardly conceivable without falling back on the knowledge of military experts. However, such an opening, like the use of development cooperation funds for security policy tasks, is contentious. In addition, the question arises to what extent the money used this way can still be counted as official development assistance (ODA).

Nevertheless, the bilateral donors should support the World Bank in its efforts. On the one hand, this would promote the interlocking of bilateral and multilateral development cooperation. On the other hand, it would contribute to mobilising more money for poverty reduction and at the same time to making the defence sector in partner countries more efficient and transparent.

World Bank: Cambodia Public Expenditure Review:
Enhancing the Effectiveness of Public Expenditures, January 1999
Republic of Sierra Leone: Interim Poverty Reduction Strategy Paper, June 2001