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Corruption in Afghanistan: Aid Transparency or Government Financial Management Problem?


July 1, 2010

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.

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Doug Hadden

Doug Hadden

Executive Vice President, Innovation at FreeBalance
Doug is responsible for identifying new global markets, new technologies and trends, and new and enhanced internal processes. Doug leads a cross-functional international team that is responsible for developing product prototypes and innovative go-to-market strategies.

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