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Open Quality Standards Initiative's project due diligence design procedures - are they practical?
Part 1


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The Development Intelligence Organization's annual "Leading Issues" workshop took place in Alexandria, Virginia, 9-11 August, 2019. The Keynote address by Hector McNeill of the George Boole Foundation (GBF) was extensively discussed. This outlined a set of new evaluation criteria for projects, programmes and policies, in the context of Agenda 2030 Sustainable Development Goals. In particular, these have been designed to accommodate and adjust project design and implementation management to support Reduced Inequality (SDG10), Responsible Consumption and Production (SDG12) and Climate Action (SDG13). Hector McNeill, the Director of GBF, is a leading development economist who has worked in this field now for over 50 years. He is the world's leading developer of the Real Incomes Approach to economic development having initiated this work in 1975. This specific topic was covered in a separate interview that took place in 2015.

This interview, is divided into three parts. The first part deals with the problems the OQSI work has been designed to solve. These relate to gaps in current practice that exacerbate the state of affairs of SDGs 10, 12 and 13 as well as many others. Once this background is clarified it is fairly easy to understand the purpose and likely impact of the OQSI's new project due diligence design procedures (3DP). Below is the content of Part 1 covering the reasoning behind this new set of criteria. Part 2 covers some of the shortcomings in common administrative arrangements and procedures currntly applied to project cycle management and Part 3 will cover the OQSI proposed solutions where I assess their practicality.

Nevit Turk
Economics Correspondent
Agence Presse Européenne, Centre Montparnasse
Paris
email: nevit.turk@apeurope.org
January, 2020    


Nevit Turk: I listened to your paper this morning and as I understand it the OQSI has developed a new set of evaluation criteria in an attempt to avoid what you referred to as "slippage" in the progress in meeting Agenda 2030 targets. I would like to cover in this interview what you consider to be the causes of the disappointing performance in reducing inequality, securing sustainable production and consumption and addressing climate action.


Hector McNeill
I would like to follow this up with how you feel the new OQSI criteria can contribute to supporting a better performance.


Hector McNeill: In early 2019, Sci Dev published an article by Ben Deighton, with the headline, "Most SDGs going into reverse"; an alarm bell that climate change goals are not being met. This article reported on some early conclusions expressed by Dr. Jean-Paul Moatti, the director-general of the French National Research Institute for Development (IRD). He is also a member of the expert group charged by the UN with evaluating progress of Agenda 2030 and SDGs so far. Dr. Moatti stated that there is a need to decorrelate economic growth from its negative social and environmental impacts. He explained that as soon as economic growth goes back on track, the SDGs start to go backwards. Dr. Moatti identified the three SDGs requiring more effort. These are reduction of inequalities (SDG10), the limitation and adaptation to climate change (SDG13) and the reduction of the environmental and ecological footprint of our modes of production and consumption (SDG12).

Given that the whole economy consisis of production and consumption and, for some time macroeconomic policies have been exacerbating inequalities it is evident that the adaptation to climate change is battling against the operational practices in whole national economies.


Nevit Turk: What are the reasons macroeconomic policies are raising inequalities?

Hector McNeill: In very broad terms, during the period 1945 through to 1970 most economic growth occurred as the result of investment based on the circulation of savings through fractional reserve banking and businesses seeking out appropriate technologies and driving innovation and change forwards. This was a supply side driven growth. In the UK, for example, over that period there was very little government debt based spending to generate "demand". As from the 1970s with the USA coming off the Gold Standard there was an impulse given to fiat currency-based financialization or mechanisms to generate money from largely financial manipulation. This,at first, was not fully appreciated by the general public or most operating in the production and non-financial service sectors.

However a fundamental change occurred with the three major international petroleum price hikes in mid 1970 and the early 1980s. The result was slumpflation, the combination of high inflation and unemployment. This created a major international financial crisis because the normal demand management policy instruments were useless. This was a supply side cost-push problem. The solutions imposed of high interest rates and reductions in high income taxes, were not in fact solutions because during the first 3 years conditions got worse especially in the area of employment. Trickle-down economics of the Reagan era, for example, did not result in much trickling down.

Financial lobbies secured a removal of the legal separation of commercial, or investment banking from retail banking and the trading in derivatives, on the unofficial grey market, began to increase. Increasing enphasis on financial performance led to shareholder value concepts and the transfer of funds which might have gone into wages or investment in productivity-enhancing technologies, were being used to buy back shares to increased their value only to be selectively sold to generate bonuses for executives. The result of this combination of factors was that between 1985 to 2008 there was a 23 year period when profits and shareholder returns increased as a percentage of GDPs while wages, investment and productivity declined. This set in motion a trend of increasing income disparity. With the financial crisis of 2008 the solution was to bail out the banks who caused the crisis. The new policy was quantitative easing or very low interest rates combined with a large increase in money based on private bank loans. With the interest rate being so low, banks essentially continued what they had been doing leading up to the crisis. They invested the "cheap" money in low risk assets such as land and real estate to hold as assets and financing the buy backs of stocks to transfer massive sums into executive bonuses and shareholder dividends. Therefore we see the answer to your question as to why rising inequalities or income and wealth disparity has become a common feature of economies. This trend has been running now for over 34 years.


Nevit Turk: Concerning Agenda 2030 what is the impact of these economic policies?

Economic rates of return (ERR) and rate of return to the environment (RRE)
Medium to long term comparisons of intensive and climate positive economic production


Key:

Current practice: Blue line conventional production with acceptable ERR; Red line associated with blue line with negative RRE i.e. declining carrying capacity and imposing limit on future economic growth;

Required practice: Light green line with lower but positive ERR over longer term than blue line; Dark green line with neutral or positive RRE leading to stable or growing carrying capacity and longer term sustainability.

Modified version of: McNeill, H. W., Slide 7, "Comparison of medium to long term prospects of production systems", Seminar: "Population & Food Supplies", Electrical Engineering School, Stanford University, 1968. (Modification made: substitution of ENVIRONMENT POSITIVE by CLIMATE POSITIVE)
Hector McNeill:
I think we have covered that. SDG 10, concerning inequalities, and SDG 12, concerning supply chains that operate under an economic framework that generates inequalities. The lack of investment and low productivity means the rate of transition to sustainable methods is too slow. Therefore, any economic growth under such as system, continues to impact the climate negatively.

Nevit Turk: But this problem needs to be solved. We are facing an existential issues here, so what is the way out?

Hector McNeill: I would like to refer back to some preparatory work. In 1966-67 the School of Agriculture at the University of Cambridge ran a seminar entitled, "Population and food supplies" and in 1968-69, the Electrical Engineering School at Stanford University also ran a seminar under the same title coordinated by Professor Buce Lusignan. A lot of the analyses people are dealing with now were clearly set out at that time. Governments need to complete decision analysis exercises to compare medium to long term economic benefits of intensive production compared with climate positive production. Intensive projects are not sustainable in the medium to long term because carrying capacity declines resulting in falling production options and economic growth going into reverse because of the progressively falling carrying capacity. Climate positive production has a lower economic growth rate but maintains or increases carrying capacity so economic growth can continue far further into the future (see diagram on the left).

The paradox here is that with positive rates of return to the environment, economic growth can continue over a far longer period whereas we already know that the form of economic growth now practiced causes negative rates of return to the environment and medium to long term declines in feasible economic growth.




I am not sure why, but the Cambridge and Stanford initiatives were not covered to any great extent by the media. However, a more extensive repeat exericse by MIT was published by the Club of Rome in their report, "The limits of growth". I refer to these studies because the overall analysis of our predicament has not changed but today we have more data. We also have passed through the slumpflation of 1907s-1980s, the Dot Com crisis (2000) and the 2008 financial crisis where we have learned even more as to why the aggregate demand policies are not conducive to resolving this crisis as confirmed by the state of SDGs 10, 12 and 13. I should add that our work on the Real Incomes Approach had identified these issues by 1976.

In our own work we have concluded that there is a need for more practical project design procedures to lower the risk of creating over-ambitious or under-ambitious projects but to create feasible and sustainable projects that balance economic and financial returns with sustainability. There is a significant mismatch between the information requirements to calculate these issues and the ability of available human resources to carry out such analyses. This is why we established the Open Quality Standards Initiative (OQSI) in 2010. This has the sole task of developing practical recommendations for project design and implementation procedures based on a global review of the effectiveness of existing guidlines on project cycle management. An analysis of the resulting quality of designs and management of implementations provides a basis for identifying where more effort is required. The OQSI has built on our work on real incomes initiated in 1975 and project results to identify economic policies as the driving force leading to the excerbation of the climate crisis. More significantly, they have also estimated, based on detailed evidence (World Bank and field surveys), that something like 35% of the annual $215 billion assigned to economic development projects (OECD data), result in project failures, as a result of poor design and/or poor subsequent implementation management. Poor design often results in over-ambitious and under-ambitious projects that are therefore destined to fail or to have a lower than feasible development impact. This represents a waste of around $75 billion each year. This is more than the World Bank lends out each year for economic development projects. This $75 billion is not only wasted, the majority of effort associated with the projects concerned would not have been sustainable.

If a system can be implanted to substitute gradually this $75 billion hole with feasible and sustainable projects there would be a net economic gain - positive ERR (Economic Rates of Return) - even with lower economic productivity, where at the moment there is an absolute economic loss. At the same time there could be a positive climatic impact - through positive RRE (Rate of Return to Environment). This logic has contributed to some of the key aspects of the OQSI due diligence design procedures (3DP) and evaluation criteria recommendations.

The 2015 Paris Climate Conference (COP21) was heralded by some as an historic agreement. But of the $100 billion pledged to assist low income countries in 2009, perhaps $20 billion have been forthcoming. GEF, a major contributor is in fact quite tiny. So making a more effective use of existing resources by reducing waste estimated to be around $75 billion each year could help begin to turn the tide, if this does not happen, then the required resources will rise, as a result of population pressure alone, impacting carrying capacity negatively.

With the advent of Agenda 2030 in 2015 we noticed that many project design teams faced difficulty in being able to relate the national level indicators for Sustainable Development Goals in a transparent fashion to identify project level actions. This was also made more difficult because the nature of the SDGs often involves a need to identify and manage several coordinated actions covering different determinants of a desired result.

Increasing complexity of projects (SCI) and declines in percentage of funded projects subject to economic assessments ERR (1960-2020)


Source: OQSI, "The impact of trends in the international development environment on project performance", DIO-GBF, 2020. (2020 is an estimate)
The Agenda 2030 target is sustainable development with neutral or positive impacts on carrying capacity and climate. Therefore, the economic and financial macroeconomic framework needs to change to help microeconomic decision-making move in this direction on an economic and financial and climatic neutral or enhancing basis. At the moment this is not the case. SDG 8 is to promote sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all. Indicator 8.4 for SDG 8, is to improve progressively, through 2030, global resource efficiency in consumption and production and endeavour to decouple economic growth from environmental degradation, in accordance with the 10-Year Framework of Programmes on Sustainable Consumption and Production, with developed countries taking the lead. So far, this has not been achieved. This process requires more effort both in terms of redesign of projects, multi-project programmes and policies. There are several details that need to be sorted out.

In terms of the general trend since 1960 an increasing number of projects are funded without having undergone adequate economic rate of return analyses (ERR) (see table on right). This trend has continued downwards in spite of the complexity of projects increasing (SCI).

In terms of many projects and where financial feasibility criteria are applied, they are often applied without sufficient attention being paid to the purchasing power of those identified as beneficiaries of projects. A common outcome is that, because of changing conditions, the cash flow projections often relate to projected national income and population growth rates. Invariably final costs, especially in the initial phases, are higher than projected and real income growth rates are considerably lower than the nominal income projections. As a result many so-called beneficiaries cannot afford to purchase the output. It is notable that quite often monitoring and evaluation assignments do not identify these occurrences, so this lesson is seldom learned.

Nevit Turk: But what happens to the beneficiaries?

Hector McNeill: The proportion of production not sold, for lack of purchasing power, finds its way to higher income consumers or is even exported. Here we can see that the investment financial criteria are often governed more by the interest rates which are often high, than by inflation, which can be low. Therefore in attempting to establsh a realistic loan repayment schedule, project proposals tend to be somewhat ambitious in the attempt to obtain a loan. If cash flow was set to accommodate lower unit prices that would enable more people to be able to afford output, the ability to repay loans can be undermined. I should add that quite often by following sustainable production procedures, productivity can be lower but also costs are often lower. If we project the economic growth arising from climate neutral or positive impact projects, the growth rates will be lower than input-intensive systems. However, as already mentioned, if an increasing proportion of the wasted $75 billions is substituted by such projects, the overall picture could improve. Once farmers are accustomed to the modified production systems, and this can take time, then efforts to improve the efficiency of their activities can advance from a firm foundation. So the initial, possibly disappointing growth, in economic terms will pick up speed and transition into higher growth rates linked to higher productivity.

Nevit Turk: Are any other points you consider worth raising concerning the background giving rise to the new OQSI project design procedures?

Hector McNeill: There is quite often a mismatch between stated national objectives and the contribution of different projects to those objectives. National objectives are defined by the macroenconomic policy frameworks, sector policies drawn up by governments by various means. Large development organizations develop country assistance strategies, economic sector reviews and project support documents for their own actions. Many donors and non government organizations run parallel initiatives quite often to support stated national policies or aspects of those policies. Therefore projects are justified in terms of the contribution to such policies. However, in many cases there is insufficient coherence between what the policy details are, when they exist, and what individual projects, nominally supporting the stated policies, are in fact doing. There can be mismatches between policy target communities at the national level and the effective cover provided by different projects, again this is a question of lack of coherence.

There are many reasons institutions, agencies, companies and NGOs are involved in economic development where there exist project cycle management guidelines. There has been a tendency for the project cycle guidelines and procedures that exist becoming regarded as necessary steps or hurdles to be undertaken in order to secure funding contracts. Proposals often consist of an execution plan contained in a Log Frame and Gantt Chart that makes reference to its contribution to a national policy. There can be insufficient detail on why the proposed set of activities was selected. Information on the range of solution options analysed used as a basis for selecting the one set out in the proposal can be missing. The assessment and evidence base for sustainability across social, technical, economic, financial, environmental and ecosystems is often weak. Resilience assessment, in terms of dependencies and sensitivities of projects to possible or likely events is also not well prepared. A common gap in terms of sustainability is post-funding or post-implementation sustainability. There is sometimes an implicit assumption that because a project is connected to a government provision or ministry that this will guarantee survival when, quite often this is not the case as a result of no self-generation of income and lack of government budgets.


Nevit Turk: Is this a transparency issue? Is this related to corruption at all?

Hector McNeill: Unless procedures are of a high standard and need to be applied following due diligence requirements, transparency does not contribute much. Corruption exists, but the same condition applies, if development agencies offload multi-million dollar tranches into the coffers of governments and institutions that do not have the absorptive capacity and there are inadequate procedural standards and operational due diligence requirements linked to enforcements that can legally take funds back where they are diverted towards ends not in contract agreements, corruption is almost a natural consequence. But in both cases, improvements in the quality of project design due diligence procedures and a similar processes applied to implementation management can go a long way towards reducing waste and corruption as well as to achieving positive climate impacts while achieving positive growth in real incomes.

Posted: 20200409
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  Author:   Nevit Turk:     nevit.turk@apeurope.org         Source:   Hector McNeill:     hector.mcneill@boolean.org.uk


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