The Development Cooperation Report 2015-16 published on Sunday by the Ministry of Finance shows that aid agencies working in Nepal have not stopped scattering financial resources in smaller projects. Such fragmentation of financial assistance reduces aid effectiveness and raises transaction costs of projects.

Aid fragmentation, according to the Organisation for Economic Cooperation and Development, is financial assistance that “comes in too many slices from too many donors, creating high transaction costs and making it difficult for partner countries to effectively manage their development”.

The European Union has recommended a maximum of three sectors for each donor, though it has called for some flexibility at the country level if the sectors are narrow in scope. The Finance Ministry, on the other hand, says engagement of every donor in a maximum of five sectors can be considered satisfactory.

Yet many development partners here are operating far too many projects across a range of sectors. For instance, the United Nations Country Team was found to be implementing 73 projects in partnership with 17 government ministries or agencies in 2015-16, while the Asian Development Bank was overseeing 48 projects of 15 ministries or agencies.

The trend of fragmentation is similar in financial assistance extended by bilateral donors. The United States Agency for International Development, for example, was working with 20 ministries or agencies to implement 41 projects in 2015-16, while the Swiss government was handling 36 projects belonging to 12 ministries or agencies. This was the same with other development partners such as the EU, the World Bank, Japan and the UK.

If resources are scattered in this manner, it will be difficult for the government to monitor implementation of every project. This will raise monitoring costs as teams have to be deployed to examine implementation of projects big and small.

Many donor agencies—particularly bilateral donor agencies—prefer to independently finance small projects as they want to see their country’s tag on such schemes. These donors should not be driven by such desire because small projects do not make much developmental impact. Instead, these donors should pool resources and help fund bigger projects.

The main objectives of development partners operating in Nepal are to end poverty, contribute to socio-economic development by enhancing people’s access to affordable health care and education, and raise their living standards by supporting small businesses and creating job opportunities. These initiatives, donors believe, will help Nepal’s economy to grow in a sustained manner.

They should, therefore, pool resources and fund bigger projects, especially infrastructure projects, to eliminate bottlenecks in the way of sustained economic growth.