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Evidence of Afghanistan Progress in Public Financial Management

 

July 21, 2010

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.

 

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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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