Posted by Richard Allen
The World Bank is planning to increase the use of country’s own systems of public financial management for its investment lending operations, rather than its traditional ring-fenced funding arrangements. Several African countries―Benin, Burkina Faso, Ghana, Mali, Mozambique, and Uganda―are already targeted, and others may follow. Sir Humphrey, of “Yes, Minister” fame (http://en.wikipedia.org/wiki/Sir_Humphrey_Appleby), might have described such a policy as “courageous”, thus indicating skepticism about its fundamental soundness. Is such skepticism justified? Does the decision reflect the ascendancy of the Bank’s developmental culture over classic fiduciary concerns?
Certainly, the new policy conforms with prevailing international approaches on the effective use of international aid, as reflected in the Paris Declaration (2005), and the subsequent Accra Agenda for Action (AAA). These agreements are putting pressure on donors to channel their lending through budget support operations, and similarly to use country systems for aid and investment lending operations.
The strongest argument for using country systems is that the large number of ring-fenced arrangements used by the Bank and other donors is complex and inefficient. In principle, streamlining the current arrangements into a single system would lead to efficiencies both for donors and national authorities. However, this assumes that all donors agree to use country systems. Moreover, using country systems does not mean that investment funds will be adequately safeguarded and will not be misappropriated for unintended and sometimes illegal purposes.
The Bank argues that the ring-fenced arrangements used so far to manage its investment projects have themselves suffered from financial mismanagement and corruption, and are not necessarily better in that respect than country systems. Since the ring-fenced arrangements are of the Bank’s own design, and are managed and overseen by its own staff, while the financial management systems of many sub-Saharan African countries are substantially weaker, the logic of the Bank’s argument appears somewhat strained (or else we should worry about the skills and capacity of the Bank’s financial managers).
The Bank’s new approach would make more sense if the upgrading of PFM systems in low-income countries can occur rapidly so that the fiduciary risks of pouring large amounts of public money into country systems at least would be limited in time. However, research suggests that PFM development is a long-term process – we have to think generations, rather than a few short years- and so systems are likely to remain weak for many years before they reach a satisfactory level of performance.
A more cautious step-by-step approach would be preferable. First, agreements between the Bank and national authorities on the use of country systems should be reversible if the governments concerned do not live up to their commitment to use the funds predictably and responsibly. The model used by the European Commission, which requires countries that apply for EU membership to meet defined standards of internal financial control and public procurement in order to be given access to generous pre-accession aid, is interesting in this respect. Aid resources can be clawed back by the EC if countries fail to meet these tests.
Second, a risk-based, asymmetric approach to the use of country systems should be considered. In practice, “country systems” comprise many components, including accounting and cash management, financial reporting, internal and external audit, procurement, and so on. Each of these elements needs to be upgraded in line with the minimal acceptable standards, but the rate of progress is likely to vary widely among the various components. Clear performance standards―perhaps based on the PEFA rating system―which national authorities need to meet before country systems are adopted, should be established in each area. Once performance has reached the prescribed standard, the country system should be used, while ring-fenced arrangements continue to apply in the other areas.
