Sustainable Public Financial Management

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FreeBalance was recently featured in the Ottawa Business Journal (original article), published on July 26, 2010. Here’s an excerpt:

FreeBalance tracks cash in Afghan government
by Elizabeth Howell

Wondering where the money goes is a common problem in Ottawa. That issue is compounded in Afghanistan, which does not yet have all the financial controls that Canada does.

Ottawa tech firm FreeBalance has been in the war-torn country since the interim government took over from the Taliban in 2001, implementing its financial tracking system province-by-province to help chart the flow of aid money through government spheres.

Just this spring, the last Afghan province – Nuristan – signed on to FreeBalance’s system, which is a small yet crucial part of a government-wide software solution designed to allow people away from central government to decide where to spend money next, said Doug Hadden, FreeBalance’s vice-president of products.

Read the FreeBalance article on the Ottawa Business Journal website >>

Doug Hadden, VP Products

There really seems to be no hope for Afghanistan. Select “Afghanistan corruption” in Google News and you’ll find thousands of press articles. Gives the impression that there is little progress in anti-corruption. As Newsweek  reports, the Government of Afghanistan “vows to fight the Taliban harder, spend international aid money more wisely, end corruption, and promote good governance in order to win the embattled population over to his side.” AFP, like other reports, indicated that donors committed to “putting more aid money through government coffers, and applying international standards of accountability should reduce levels of corruption and embezzlement.” Integrity Watch Afghanistan has published a study showing that “Corruption is rampant and has become more entrenched in all areas of life in Afghanistan, and the Afghan government is under increased pressure to address the issue.” It doesn’t help to have bundles of money being flown out of the country even though the BBC and other press outlets reported that the Afghan Minister of Finance Omar Zakhilwal “said foreign contractors were to blame for taking the bulk of $4bn (£2.6bn) that has reportedly left the country in recent years. He said his government had little control over foreign aid money.”

If Only Corruption was Simple

Corruption is a multi-faceted and complex problem to overcome. A 2008 Study by Altai Consulting on Aid Effectiveness recognized the complexity of this “cross-cutting” issue. Some of the factors include:

• Cultural practices that go back hundreds of years
• Public sectorwages that are too low requiring supplemental sources of income
• Systemic ethnic and political stresses that requires building power bases
• Foreign aid money flowing into the country with limited oversight
• State capturewhere politicians reward businesses who supported them

The mechanisms for anti-corruption are also complex to coordinate:

• Public sector reform to create a professional public service
• Legal reform to provide recourse when corruption is identified
• Capacity building to reduce corruption and increase oversight
• Political will to support anti-corruption measures
• Information systems that can reduce the opportunity of corruption and identify suspected corruption
• Good anti-corruption lawsand enforcement in donor countries
• Banking systems with electronic funds reducing the movement of illegal cash
• Fiscal decentralization to reduce the ability to hide funds

Why using the Afghanistan Government Resource Planning (GRP), AFMIS Assists Anti-Corruption

It is no surprise that the recent  “conference ended with the approval of a 10-page communique that restated strong support for channeling at least 50 percent of development aid through the Afghan government within two years while the government reforms, reduces corruption and strengthens its public financial management systems”, acording to the AP. Why? The use of country financial systems reduces transation and administrative costs, enables more effective budget planning by having full visibility over funding, and encourages the building of capacity. The study by Altai Consulting on Aid Effectiveness indicated that “the reasons cited for not using public financial management systems include lack of confidence by donors in system and associated corruption.” Perhaps the bundles of money leaving Afghanistan by not using the country system is a bit of wake up call.

We reported the good news about the roll-out of AFMIS to all mustafiats yesterday. We were aware of the progress made by the Government of Afghanistan in implementing financial management across the country, and the successful completion some months ago. That’s because AFMIS is the FreeBalance Accountability Suite. The remarkable achievement is that this was implemented without our assistance in the face of military conflict. This is the definition of a sustainable implementation – can be installed and managed by public servants. Sure, it is less revenue for us, but it is critical to improving governance – and that’s what we are all about.

AFMIS is a tool that improves efficiency and effectiveness in public finances. It also provides anti-corruption tools including:

• Tracking of all financial transactions with audit trail to enable identifying potential corruption
• Strong budget controls and segregation of duties to reduce the opportunity for corruption
• Support of banking integration to reduce cash and bank accounts making it more difficult to appropriate money and hide money
• Fiscal decentralization within the software
• Reporting to enable improving anti-corruption processes and supporting additional PFM reform 

The Ministry of Finance has a strong reform agenda that helps reduce corruption and increase accountability and capacity:

• Improving payment and accounting services based on best international practices in the Treasury offices in the center and in provinces,
•  Ensuring timely payment of salaries to verified government employees in full amount and according to the approved budget and establishment
• Restructuring government financial management arrangements to ensure efficient implementation of government policies and reducing unnecessary administrative burden, while processing financial transactions
• Improving the relevance, reliability, timeliness, and comprehensiveness of the financial reporting based on international standards
• Ensuring adequate financial accountability of the managers of government units
• Improving the accountability for the government assets
• Developing and implementing policy in government banking arrangements based on the Treasury Single Account system
• Providing clear guidance to the financial managers of the government law, regulations, and procedures in accounting and financial management
• Ensuring improved financial management capacity of government units in the center and provinces
• Building strong and capable civil service based staff of the Treasury in the center and provinces.
• Promoting the development of the government accounting profession

And, the Ministry of Finance is leading in transparency with the publication of an accounting manual and regular monthly budget reports.

Success in PFM to Date

It is somewhat difficult to find current information about the state of public financial management in Afghanistan. The most recent Public Expenditure and Financial Accountability (PEFA) assessment was completed in December 2007 and published in 2008. This occured during the first stages of decentralization, yet showed improvements in indicators since 2005: “Out of total 28 PFM performance indicators, 18 indicators improved and two indicators deteriorated, while eight indicators remained unchanged.” (See chart in top left). The conclusions, 18 months ago, were promising:

Comparison with other countries shows that PFM performance in Afghanistan as of December 2007 is better than that of many other comparable countries in most categories. Indicators on budget cycle (C-(i)-(iv)) outperform even average the average for those middle income countries for which PEFA assessments are available, which suggests that there have been major improvements in this area. However, the credibility of budget (A) is lower than the average for other low income countries for which PEFA assessments have been conducted, while comprehensiveness and transparency (B) is equivalent to the average of these low income countries.

Corruption is measured in numerous ways, but mainly through perception. The World Bank governance indicators show an improvement in indicators since 1998. The corruption indicator for 2008 is down from 2003, but the standard error has been reduced. And, more sources have been used in the indicator. A 2009 study for USAID provided 6 recommendations to reduce corruption in Afghanistan. We hope that AFMIS represents a foundation element to improve the anti-corruption regime in Afghanistan – especially building on success. After all, the Ministry of Finance is rarely mentioned as a source of corruption. It is also critical that  measures designed with Afghanistan in mind – “the country context”, be used to help reduce corruption.

How can GRP Help for continuing Anti-Corruption?

GRP systems are typically phased in. Additional modules in GRP suites are added in sequence with the government reform agenda. Additional GRP modules can assist in anti-corruption:

• Procurement systems can ensure process compliance with financial policies and identify potential areas of corruption. E-procurement portals enables civil society to assist in identifying suspect companies and transactions.
• Civil service management systems can eliminate ghost employees and the illegal redistribution of cash through electronic funds transfer. Standard salary scales, talent management, training and other human resource functions can aid in civil service reform – identifying underpaid positions and promoting based on talent.
• Budget preparation systems that provide transparent  publication of budget intentions and reducing the opportunity for “state capture” or influence of politicians.
• Asset management systems that reduce misappropriation of government assets for private gain.
• Audit systemsthat can analyze audit trails of these systems to improve processes.

Of course, GRP is a tool – a critical part of the anti-corruption solution.

Good News about Good Governance in Afghanistan

Doug Hadden, VP Product

I took exception to the sensational reporting on government corruption in Afghanistan last week.  The  Wall Street Journal broke a story about the sacks of money leaving Afghanistan in aircraft.  Predictable moral indignation and blaming the Government of Afghanistan ensued. Yet, none of these funds seemed come on-budget through the government financial system. (That’s the kind of subtle fact that interfers with the media narrative). Just yesterday, the IMF PFM blog  posted a report about the success of the government financial mangaement system! I wonder whether this will be analyzed on cable news channels.

The article describes the successful sequencing of the Afghanistan Financial Management Information System (AFMIS) by the Government.  The system was recently completed the roll-out to all provinces or mustafiats. All national line ministries are also integrated. This means that 100% of all on-budget funds will operate through AFMIS. And, this was accomplished by the Government under difficult circumstances. The IMF article provides good insight into lessons learned, especially in sequencing PFM reform.

Of course, one factor for the success of AFMIS is that it is the FreeBalance Accountability Suite. Government Resource Planning (GRP) systems enable PFM reform. But, reform is the responsibility of the government. There are some factors of why the FreeBalance Accountability Suite enabled reform in Afghanistan – rather than inhibiting reform – one of the problems in the public sector worldwide:

• Support of simple configurations that can be progressively activated over time to support reform and increased capacity
• Vendor commitment to add features and use SWAT teams when problems occur – which happened
• No customization by the client necessary to make systems easier to manage and sustain
• Experience in similar circumstances built into the software

It is now time to stop blaming the victim for off-budget corruption. It’s also time to recognize the Government of Afghanistan for successes.

Doug Hadden, VP Products

Corruption in Afghanistan has become big news since the Wall Street Journal broke the story:  Billions of Dollars of cash flying out of the country. This has lead to outrage. The Washington Post reports that its “readers have filed a long string of comments that overwhelmingly question why the United States continues to commit troops and dollars to this country.”

This makes for exciting political theatre – but does it help us learn anything? There seems to be an undercurrent of blaming the victim – the people and culture of Afghanistan.

Make Corruption Difficult (on-budget) or Easy (off-budget)?

Some media stories mention a different underlying problem: off budget funds. The BBC pointed out that “Kabul has meanwhile said that international partners should shoulder some of the  blame for failing to provide oversight for contracts.” That sounds a bit like the government making excuses. The original WSJ article is more detailed:

Officials believe some of the cash, if not most, is siphoned from Western aid projects and U.S., European and NATO contracts to provide security, supplies and reconstruction work for coalition forces in Afghanistan.

Foreign aid includes on-budget and off-budget funds. On-budget funds are executed by the government through the public financial management system. Off-budget funds are executed by 3rd parties, such as NGOs and contractors, or government ministries who do not use the public financial management system.

Why does the government suspect that the majority of this money comes from off-budget aid? On-budget aid is more difficult to siphon off because of strong automated “budget execution and fiduciary controls…with the implementation of the centralized and computerized Afghanistan Financial Management Information Systems (AFMIS)” according to a 2008 report about financial management in Afghanistan. A story in June of 2010 from Outlook Afghanistan pointed out the following:

officials in the MoF believe that projects like AFMIS and VPP are very helpful in fighting  corruption in Afghanistan. The beneficiaries of manual financial system in Afghanistan were the corrupt officials. But that system is no more in use and as result there is no chance of corruption in government financial transactions. Efficient financial system and proper accountability can not only improve the trust of Afghans but also increase the confidence of the donors on the government of Afghanistan.

It is clear that automated financial management systems with built-in controls make it difficult to siphon funds for personal gain. Not impossible – but difficult. And, the audit trail enables governments to identify corruption after the fact. And, improve processes to make corruption even more difficult in the future. Great – except it’s not going to help prevent corruption in off-budget funds.

A Wake-Up Call: Use Country Systems

The Accra Agenda for Action (AAA) states clearly that “donors agree to use country systems as the first option for aid programmes in support of activities managed by the public sector.” There is reluctance to do so because these systems – laws, processes, capacity and technology are not as robust as those in developed countries. Richard Allen has pointed out that donors have to be courageous to use these systems. But, the potential corruption in using these systems seems to cost less than transaction costs. Transaction costs are the administrative costs of managing many off-budget funds and parties – and the cost of reporting back. For example, a paper entitled Show me the money: IATI and aid traceability gives an Afghanistan example where $150M went up in smoke because of transaction costs.

The evidence in Afghanistan suggests that off-budget corruption is far higher and more dangerous that on-budget corruption. And, the media seems to be completely uninterested in the good news of how the Afghanistan Ministry of Finance is modernizing public financial management to reduce corruption.  The AFMIS system “has been implemented in all central ministries located Kabul…deployed to all provinces, with the exception of Nuristan“. The Ministry of Finance continues to make progress. This is an amazing story of capacity building and resolve in unfavourable circumstances, as described in the IMF Blog. Perhaps this slow and steady progress is not exciting in our 24/7 cable news world.

What is important is the need to use country systems. Much of the technology that drives country systems has been proven in highly developed countries around the world. This is a base to improve procurement, audit and civil service processes. Donors can turn their attention from managing and auditing scores of projects executed by hundreds of third parties to helping the government improve public financial management.

Wake-up Call: Aid Transparency

The Government of Afghanistan is a convenient media target. Are donors providing the funds they commit to? Do donors use proper controls? Do third parties use off-budget funds effectively? How is corruption controlled throughout the aid lifecycle: from the point when foreign aid projects are considered by the donor until it is delivered to the recipient?

We can’t answer most of these questions because aid in not transparent.  This is the aim of the International Aid Transparency Initiative (IATI).  It’s ubiquitous transparency. To help reduce corruption, increase cooperation and improve aid effectiveness.

In this case, the lack of transparency means that no body knows exactly where the money came from. In addition to using country systems, donors and recipient governments need to harmonize aid and report it. This is the goal of the NGO, Publish What You Fund, one of the most active participants in IATI.

There is an excellent post on the IMF PFM Blog about capacity building and sustainability in Afghanistan.  The post contrasts the approaches within the Ministry of Finance used by the Budget and Treasury groups. It concludes that the approach taken in Treasury of focusing on capacity building has proven  successful.

One might think from the press that there are no successes by the Government of Afghanistan. This is a clear success.  In 2008, Afghanistan Treasury was able to roll-out the AFMIS software to 14 line ministries and 12 provincial Mutofiats. With limited foreign assistance. Treasury expects to roll-out to all remaining line ministries and provinces this year. They now produce timely financial statements. 85% of all budget execution was accomplished in real-time, as of February this year. Afghanistan Treasury has created trust with donors.

Afghanistan Treasury utilizes FreeBalance software. The Budget Office does not. We  make the argument that our software is designed to enable capacity building.  But the success for capacity building is solely an Afghanistan Treasury success.

Afghanistan Treasury recognized the capacity problem. They have configured the FreeBalance software to meet capacity. As capacity has improved, more advanced functionality has been progressively activated.  They expect to improve controls and budget management as capacity improves.