Sustainable Public Financial Management

Doug Hadden, VP Products

Reuters reported yesterday about an IMF report that found corruption and mismanagement at Kabulbank. There were some interesting points made in the report:

Donors contribute about 70 percent of the Afghan state operating budget, itself dwarfed by billions more in direct aid.

and

One of the next cards to fall would be the Afghan Reconstruction Trust Fund (ARTF), the biggest vehicle for donor funding. Between 2002 and April 2009, 30 donors contributed more than $3 billion to the World Bank-administered ARTF, according to the fund’s website (www.worldbank.org).

As the provider of the Afghanistan Financial Management Information System (AFMIS), we have been somewhat vocal on the subject of corruption and the superficial reporting on corruption. For one thing, this report doesn’t make the necessary connection that the use of ARTF and budget support through AFMIS is a strong tool to reduce corruption.

Fighting Corruption with Software and Process

This simplified diagram demonstrates the strong anti-corruption tools available to international donors:

• Visibility throughout the budget cycle where every step can be audited increases the chances of discovering corrupt practices
• Segregation of duties to prevent someone from approving purchase orders, indicating that goods were received and approving payment
• Use of budget and approval controls reduces the opportunity for corrupt practices
• Avoiding cash as much as possible reduces corruption
• Standard reports and automated processes improves efficiency

I’m not going to tell you that the FreeBalance Accountability Suite eliminates corruption. It’s a tool for good governance. And, transparency. The vast majority of government corruption in Afghanistan is perpetrated outside of the financial system.

The ARTF provides transparency with monthly financial reports and the Government of Afghanistan budget statements. As the ARTF points out, on-budget funding reduces corruption:

Corruption remains a major concern for the people of Afghanistan and for international donors. Indeed, the World Bank’s own diagnostics recognize that graft and bribery are widespread, even pervasive, in Afghanistan. Yet despite the growing threat of corruption, the Afghan government has improved its accountability measures for public finances, and the essentials of a public financial management system are now in place. In fact, Afghanistan’s Public Financial Management (PFM) per formance compares favorably with other post-conflict countries. An assessment by the World Bank and DFID in June 2008 (the Public Expenditure and Financial Accountability (PEFA) assessment) rated Afghanistan better than the average of a sample of other low-income countries. Interestingly, on some criteria, Afghanistan’s ratings were even better than the average of a sample of middle-income countries.

Practices that Enable Corruption

You’ve read the stories like billions of dollars flying out of Afghanistan. How is this enabled? Ironically, many donors enable corruption by trying to avoid it. This concern that government systems are rife with corruption creates an environment that is impossible to audit.

How?

1. Donor aid is provided in multiple projects
2. Projects are executed by private sector companies and NGOs
3. Some of the money is provided to government entities but is off the books – “off-budget”
4. There can be significant amounts of sub-contracting
5. Every player in the aid life-cycle has different levels of controls
6. Cash is widely used
7. Every project requires reports but these reports do not necessarily come from a robust financial application – some could be fiction
8. Of course, multiple projects with donors and sub-contracting creates inefficiency and makes it difficult to coordinate

So What?

It doesn’t make sense that donors will scrap ARTF because of corruption. There could be other factors at play, but the notion that the ARTF will be the “next card to fall” because of corruption at Kabulbank is something that makes no objective sense.

James Elrick
PR Specialist

There’s an article written by Nicolas Kristof, a columnist from the New York Times, that illustrates how sustainability, increasing internal capacity, and self-sufficiency applies to donated bicycles in Africa.

The title of the article is “A Boy and a Bicycle(s)”. It describes how World Bicycle Relief has donated bikes to school children in Zimbabwe. This program is known as The Bicycles for Educational Empowerment Program, and has made a positive difference for these school children as riding bicycles reduces commute times. This gives the children more time to study. An important goal for any country.

Where sustainability enters the article is that World Bicycle Relief realized it couldn’t just donate any bikes, new or used, to these children. It had to donate bikes meeting the needs of children. It had to listen to the customers. And World Bicycle Relief had to design bikes that were easy to repair. You don’t want to donate a bike that gets thrown out as soon as it breaks down. And you don’t want the bikes to require expensive bike repair experts or consultants.

When World Bicycle Relief donates bikes they train people in the community to repair the bikes. They have a ratio of 1 repair person to 50 bikes distributed. Training local people how to repair bikes increases local capacity. Local people learn valuable skills and a trade. This means an out-of-country repair person is only needed at the beginning for training. It also means the solution, bicycles, are sustainable as the community can continue to repair the bicycles. Repaired bicycles stay on the road longer. This is self-sufficiency in action.

FreeBalance believes its PFM software solutions for governments should be sustainable, leverage and increase local capacity, and be self-sufficient. Just like The Bicycles for Educational Empowerment Program.

The FreeBalance PFM solution, the FreeBalance Accountability Suite, is a commercial off-the-shelf (COTS) solution that doesn’t require extensive and expensive software changes to get started. FreeBalance is designed and structured for government rather than modified to fit government. FreeBalance solutions have a proven history of being implemented within a couple of months. A fast implementation is a requirement for post-conflict countries as the need for a stable, PFM system is mandatory by aid agencies and donors for building and reconstruction.

FreeBalance provides train-the-trainer sessions. Just like the local bicycle repair person, the in-country trainer continues to train government employees. This increases local capacity as people from that country learn the FreeBalance Accountability Suite. The FreeBalance Accountability Suite is also easy to use, another key to increasing local capacity. For example, the government of Afghanistan trained 262 government employees in 2009 to use the Afghanistan Financial Management Information System (AFMIS). Increasing local capacity increases self-sufficiency. FreeBalance believes governments should be able to operate its PFM system without constantly calling the vendor or having the vendor operate the government’s PFM system.

A recent survey of FreeBalance customers describes what FreeBalance is doing to find new ways to improve sustainability for its customers.

Sustainability and increasing local capacity are the keys for any long-term solution, whether it’s bicycles or a PFM software solution. And it doesn’t matter if the country is an emerging economy or belongs to the G20: sustainability, nurturing local capacity, and self-sufficiency should always be the goal.