A yes vote would increase Scotland’s aid budget to £1bn, presenting the new donor with complex spending challenges, writes James Mackie.

James Mackie is senior adviser on EU development policy at the European Centre for Development Policy Management

A yes vote on the Scottish referendum will bring a number of headaches for Scotland’s development minister, Humza Yousaf. The first challenge will be how to spend £1bn in official development assistance – or aid – per year, and the second how to do so effectively?

With just 18 months to prepare for actual independence, Scottish officials would be racing to put together plans for spending the 0.7% of GNI on aid that the White Paper promises Scotland will spend from day one. That is about 100 times Scotland’s current aid spending.

The scale of this budget would put Scotland in a group of middle-level EU donors such as Finland, Ireland or Belgium with a solid administration and many years of experience. For Scotland, starting more or less from scratch, will not be easy; many large aid projects often take one or two years to prepare.

Yousaf’s second challenge poses even more of a conundrum. International best practice in aid effectiveness has defined core principles such as ensuring partner country ownership, donor alignment to partner country priorities, harmonisation between donors and, crucially, reducing the fragmentation of aid.

The very establishment of Scotland as a new donor further breaks up aid since removing £1bn from the UK aid budget and managing it separately inevitably means fragmentation. It will increase transaction costs, particularly for countries receiving aid that have to deal with another donor with its own approaches. As a new donor seeking to work to high professional standards from the start, Scotland will need to manage its aid in a way that does not complicate things for the countries it wishes to support.

It could reduce fragmentation in four ways. First, Scotland could work through other agencies. Second, it could limit the number of countries it works with. Third, it could focus more on larger grants. Finally, it could contribute to global public goods.

Working through other agencies is common. Scotland already channels some funds through NGOs, which could be expanded, although Scottish NGOs would not be able to independently scale up effectively in two years by a factor of 10 how they spend funds from the Scottish executive. As a member of the EU, Scotland would also be expected to contribute to the aid effort managed by the European commission and that might absorb 10-20% of its budget, based on the example of Finland, Ireland or Belgium. This would be a good start. Channelling funds through UN agencies would be another option. Nordic countries are some of the biggest donors to the UN in per capita terms and Scotland could follow their approach.

Keeping the number of partner countries low seems relatively simple, yet there will be pressure on Yousaf to consider working with various countries with which Scotland has ties. A disciplined approach will be essential. One key consideration is how many other donors work with a particular country and whether Scotland can really add value and not just in financial terms.

The third option, particularly if Scotland does want to deliver some aid directly, is to avoid project aid and go for larger programmes or even budget support. Large programmes, for instance to deliver healthcare for a whole district, take considerable time and discussion to design and establish. Often this would be done by working with partner country government ministries and probably a group of donors. Working with other EU donors with similar ideas would be a good option to examine.

Budget support – directly to a country’s treasury in support of the national budget – is a very constructive way of working as it maximises national ownership. To work well, however, it does depend on first developing a good understanding of respective capacities and priorities. It also makes it harder for donor countries to impose conditions on aid (aside for financial management conditions), which requires considerable maturity and trust. Many EU donors are wary of budget support, despite it being used extensively by the European commission and the UK Department for International Development.

Finally, Scotland could consider channelling funds into the creation of global public goods – issues that affect all countries, like climate change – at the international level. Many of the challenges that the international community wants to tackle when the millennium development goals expire next year require focusing on these public goods. Some of them require huge amounts of funding that are best channelled through multilateral funds, such as the Green Climate Fund. Indeed, it seems likely that bilateral aid may well increasingly give way to such funding. By choosing this path, Scotland could even put itself among the avant-garde.