September 3, 2009Doug Hadden
Richard Allen provided interesting insight into whether development partners should use country financial management systems on the IMF PFM blog. Mr. Allen describes the risk associated with doing so and provides a prescription of how country systems can be used. The main focus of the article was on Sub-Saharan Africa. I provided some comments on the IMF PFM blog that I expand below. FreeBalance is one of the major providers of government Integrated Financial Management Information Systems in emerging nations.
The implicit governance equation used when considering using country financial management systems can be troubling. Donors rightly identify the risks of using these systems: corruption, inefficiency, errors and so on. One can often focus on the risk of change without considering the benefits. Governments in Sub-Saharan Africa can question whether the minimum target for PFM quality is set too high. The equation often does not consider the inefficiencies of the current aid regime. There seems to be an “all-or-nothing” view for using country systems within the aid effectiveness community. Practical solutions for phasing in the use of country systems are available. Mr. Allen advanced the discussion in pragmatic terms.
What should the target be for PFM quality and effectiveness?
Governments around the world are reforming PFM processes. Many G7 countries have not achieved unqualified audits in the past decade. The Government of the United States does not account for trillions of dollars of long-term liabilities. Aid partner financial systems have also been shown to be flawed. Governments in Sub-Saharan Africa should not be expected to have better systems than the G7 or donors.
A practical minimum target should be set. This means “clear performance targets” as indicated by Mr. Allen. PEFA may be ideal. But, there is some concern about the application of PEFA. Many emerging nation governments see the value of PEFA for internal assessments but not necessarily for external assessments. Millennium Challenge Corporation indicators come from multiple sources but these may be too high level to be prescriptive.
Why should alternatives be costed?
Country PFM systems can be inefficient and prone to corruption. Some estimates show that inefficiency costs governments up to 20% in government procurement. Estimates suggest that corruptions costs up to an additional 20%. Yet, aid transaction costs could be even higher. (The material about aid transaction costs is mostly anecdotal.)
Aid executed by third parties in countries can be particularly inefficient through high sub-contracting, foreign personnel and reporting costs. Aid distributed to government agencies suffers from the same inefficiencies as country systems with the added problem of reporting costs. Poor outcomes result because of the lack of donor and government coordination. The question of whether to use country systems should focus on the notion of cost per unit of outcome. This can be unrealistic in most countries, so the cost per unit of output should be used temporarily.
Why phase in country systems?
Sequencing PFM reform is considered a best practice by the vast majority of experts in the fields. The aid effectiveness community is pushing for aid harmonization and the use of country systems, as indicated in the article. The Accra Agenda for Action (AAA) and Paris Declaration represent core beliefs for aid effectiveness. The aid community wants, as Mr. Allen points out, “donors to channel their lending through budget support operations, and similarly to use country systems for aid and investment lending operations.”
Some donors should try to use country systems to encourage governance. The European Community methodology where “aid resources can be clawed back by the EC if countries fail to meet” criteria can be used to ensure compliance. This provides practical experience for governments. Donors can mentor governments.
What about commitments and disbursements?
Effective outcomes are compromised when donors do not disburse promised aid. Sometimes this aid is not provided to governments because conditions were not met. Donors need to help governments to account for these liabilities within financial systems.
Government systems often appear to be black boxes to development partners. There is a focus on actual expenditures rather than the commitment cycle. Aid is often delayed because of inefficiencies or through disciplined fiscal procedures. Donors and governments need to know the commitment progress: purchase requisitions, civil service recruitment procedures, purchase orders and goods/services received for aid projects. This can be accomplished through country financial systems at low transaction costs relative to current methods.
What about COTS software?
The leading vendors of Commercial-Off-the-Shelf government financial management software provide comprehensive audit trails. Reports can be created from these systems in an encrypted manner, resilient to tampering and made available to donors. Among others, Ghana, Malawi, Sierra Leone, Tanzania, Uganda and Zambia use COTS software. COTS software does not eliminate inefficiencies or corruption. It does reduce errors, improve efficiency, and provide audit trails to uncover potential corruption.
The advantages of using country systems to manage aid disbursements exceed disadvantages in most cases. And, participating in the country systems enables development partners to assist governments to improve governance.