Friday, October 30, 2015

Managing Risks to Development – Donors agencies and anti-corruption, by Alan Whaites

Donor agencies actively manage numerous risks to programmes (security, political etc), including the mitigation of corruption and fiduciary risks.  The drive towards improvement in managing risks is unsurprising, given very real fears of reputational damage. The desire to be as effective as possible has led to work to identify common learning, potentially leading to new ‘integrity guidelines.’ But the complexity of the problems is often under-appreciated – for donors it is not simply stopping corrupt politicians from pocketing aid funds.  The risks are diverse and the potential for `gaming’ is high.  Addressing corruption is not dissimilar to fighting computer viruses – a cat and mouse game between those evolving mechanisms for fraud, and those working to stop them. 

The important story is of course that well designed aid can make a difference, a point argued by, among others, Charles Kenny in his book ‘Getting Better.’     Progress in achieving human development targets (health, education, water etc) is an indication that the work to maintain integrity is worthwhile. But the risks are unlikely to disappear, and they occur regardless of the nature of the instrument; NGOs and contractors can be just as vulnerable to misuse of funds as Government. In its simplest form donors are managing at least four different categories of risk, each of which is complex in its own right:  
a)  Direct misappropriation of funds - either for personal gain or to support an unapproved form of expenditure (the former could be ghost staffing, the latter the purchase of vehicles for the health dept that are then actually used by the police/army).  
b) Substitution effects – in which aid funds are spent as intended, but simply displace other approved/allocated sources of funding for development leading to no net gain in expenditure.  
c) Indirect misuse of funds – involving some form of corrupt incentives or rent-seeking that is associated with aid/programmes. This can include funds being used to purchase inferior equipment due to a bribe. Another example might be the exclusion of intended beneficiaries from an aid funded service (e.g. where staff at a health clinic demands unofficial payments from clients).   
d) Political/patronage risks – where funds are used for apparently legitimate purposes, but with low value for money due to political interference. For example a school may be built, staffed and operated without direct or indirect misappropriation of funds, but may be located somewhere that can not be justified programmatically due to political pressure. 
So what can donors do?  Recent work commissioned by the OECD points to progress in building strong internal systems to prevent, identify and report fraud. The focus of these systems is often on the first of the risks outlined above – those linked directly to the donors own funds. But donor work on broader corruption issues often also provides important insights into the second, third and fourth areas.  Much of the lesson learning that takes place is captured by U4 centre established by a group of donors. The approaches used often involve combinations of the following four activities:  
a) Analysis and due diligence – numerous analytical tools, including PEFA assessments, Vulnerability to Corruption Assessments and Public Expenditure Tracking Surveys all offer good insights on the way that systems do or don't work, but none offer a comprehensive picture.   
b) Audit – An important safeguard, but audits don't usually involve checking everything. They will generally be designed to do enough checking to establish that there are no material errors or misstatements in the financial reports (including misstatements due to corruption). 
c) Public Financial Management reform - offers a broader approach in relation to partner systems; trying to ensure that money is appropriately directed (spent on the right things), properly passed through the system to the point of expenditure, and then accounted for and scrutinised. It reduces opportunity/potential for misuse of funds while also increasing the chance that problems will be caught and addressed.  
d) Anti-corruption projects – Funding anti-corruption groups and activities can particularly help to address indirect misuse of funds - those occasions when incentives are used to influence the nature of expenditure in ways that could impact on value for money. 
The range of activities is indicative of the fact that no one set of modalities are likely to mitigate all the risks present, each instead offers progress on one or more of the angles involved. For example in education moving to an electronic payroll is often seen as important; it provides a more accurate list of who is supposed to be receiving payments and can make it harder for staff to be pressured to hand over a slice of salary to somebody more senior. It does not, however, fully solve the problem of ghost teachers unless a thorough verification of actual people in posts is undertaken. It is therefore one step and as such is only likely to help resolve part of the problem.   
It is generally best to relate the level of checking and control to the level of risk, focusing most attention on the higher risk areas, or where risks are greatest. A mix of short and long-term measures are therefore normally the approaches taken, but the multiple nature of risks facing development programmes means that multiple approaches are also needed to ensure effective mitigation. 

The views expressed in this blog are those of the author alone and should not be reported as representing the official views of the OECD or of its member countries.