Credit: P4H.world

Extra-Budgetary Funds for COVID-19: Evidence from Two Years of Implementation

Justine Hsu, Helene Barroy, Richard Allen, Fazeer Sheik Rahim, Tsolmon Tsilaajav

November 9, 2022

This article has been reposted from the Social Health Protection Network: Extra-Budgetary Funds for COVID-19: Evidence from two years of implementation | P4H Network

Funding the response to the COVID-19 pandemic has posed a considerable challenge to public financial management (PFM) systems, many of which were already constrained and suffering from rigid budget structures, cumbersome approval procedures delaying the release of funds, and poor budget execution. In the wake of COVID-19 being declared a pandemic, many countries created extra-budgetary funds (EBFs) to respond to the virus more effectively.

Historically, EBFs have often been established in times of crisis to respond to emergencies. EBFs are accounts created for general government transactions for a specific dedicated purpose; typically they are not included in the annual budget, and operate through separate banking and institutional arrangements. Governments opt for these accounts to help streamline funding, allowing for more rapid and flexible transactions. However, because EBFs bypass government’s regular control functions, these accounts carry financial management and accountability risks.

In 2020, during the initial stages of the pandemic, the World Health Organization (WHO) and International Monetary Fund (IMF) carried out a review of more than 40 EBFs that had been created by governments to respond to COVID-19. The team compiled information on the purpose of these funds, their general characteristics, and their legal mandates. The review, published in August 2020 as a Note for the IMF’s Special Series on COVID-19, found that the main aims in establishing these EBFs were (i) to simplify procedures and accelerate spending, (ii) to pool public and private resources, and (iii) to incentivize coordination of interventions across different sectors and levels of government.

Two years on, in 2021-22, a review of the same 40-plus EBFs was conducted to assess the extent to which the funds met their objectives and how they were operationalized. The review included an in-depth analysis of a subset of these EBFs, representing diverse institutional setups and operating modalities. Stakeholders were interviewed in Bhutan, Côte d’Ivoire, Kenya, and South Africa to better understand how the funds have been implemented at each step in the PFM chain, covering topics such as funding arrangements, spending modalities, and reporting and tracking mechanisms. In addition, publicly available auditor reports and related documentation were also reviewed to further understand any issues in the efficiency and/or effectiveness of funds in Bhutan, Cameroon, Côte d’Ivoire, Kenya, Mauritius, Sierra Leone, and South Africa1.

Overall, this follow-up analysis revealed that operationalizing such funds was not as easy or as quick as initially thought and thus served as a ‘reality check’. Our analysis found that EBFs not only varied in their implementation across country contexts studied but have also generally not worked as well with some funds later reintegrated into regular budgetary processes in order to reinvigorate oversight and accountability. The review identified a set of eight key lessons on good practices and on risks posed by EBFs, to help guide countries in their response to future health emergencies.

 

1. COVID-19 EBFs varied widely in their structure and operating modalities, in spite of a shared objective to make funding more streamlined, timely, and flexible.

A first type of arrangement was in keeping with ‘traditional’ EBFs, where a state-owned enterprise or other public entity manages resources using banking arrangements and financial procedures that are outside the regular budgeting process and PFM rules2. In Sierra Leone, for example, an EBF was established under the President’s National Coronavirus Emergency Response Centre, but exempted from the country’s PFM Act of 2016 and Public Procurement Act of 2016, such that accounts were opened in commercial banks and transactions were managed outside of the regular procedures.

In a second type of arrangement, governments created a separate fund to finance its COVID-19 response but expenditure followed regular PFM procedures. In Côte d’Ivoire, this involved some adaptations to facilitate a more flexible and timely release of spending where emergency procedures, for example for spending authorizations, were called upon.

A third type of arrangement is the privately managed fund, for example in Kenya and South Africa where a private entity mobilized and managed resources outside regular budgetary and PFM rules. In Kenya, the private fund is managed by a board consisting of leaders from private banks and companies from other sectors. The South African fund is managed by an independent board of 12 directors with experience in private-sector banking and investment. This fund also established specific committees for fundraising, disbursements, audit, and risk management.

 

2. Certain countries modified their EBF’s design or organization over the course of implementation, generally to address unclear arrangements that had proved to be problematic. Côte d’Ivoire’s government initially proposed its EBF as a separate pooled fund to streamline the flow of resources through a single account; to improve transparency and accountability, it later integrated this fund into the regular budget process. A common reason for making changes was that the legal framework was loosely defined3 and lacked specific provisions on the EBFs’ exact mandate and organizational arrangements. In Sierra Leone, for example, the authorities inherited a fund that had been set up to fight Ebola and was not legally codified to address COVID-19. The government subsequently clarified the EBF’s scope, institutional set-up, and operating procedures and rules, making adjustments such as hiring a private accounting firm to undertake fiduciary management and setting up district-level entities to fast-track the response.

 

3.  Most COVID-19 EBFs complemented regular PFM processes; only a minority of funds substituted for those processes. In South Africa, for example, the Solidarity Fund complemented regular flows of budgetary resources by supporting “high impact procurement” in situations where the government was “not able to act with sufficient agility” – for example, the rapid expansion of contact tracing and the acceleration of COVID-19 testing. The fund also provided resources for R&D and other “catalytic interventions” that supported the country’s innovation and industrial capabilities, such as the local manufacture of ventilators. By contrast, Mauritius’s COVID-19 Solidarity Fund and Sierra Leone’s National Coronavirus Emergency Response Centre were the sole COVID-19 funding response mechanisms in each country. In contexts where an EBF’s mandate was less well-defined, overlaps were reported between operations financed by the funds and by regular budgets allocations (e.g., in Kenya).

 

4.  Particularly in countries that adopted a COVID-19 national response plan, EBFs helped to foster coordination and ensure alignment of domestic and external funding and public and private sources. For example, Côte d’Ivoire developed a strategic COVID-19 health response plan with cost projections for a wide range of COVID-19-related needs; the government used these estimates to request financing and to negotiate with development partners on budget lines within the EBFs that were over or under-funded. Bhutan’s EBF helped to coordinate public and private contributions in support of the National Preparedness and Response Plan for COVID-19. The funds in Kenya and South Africa were particularly successful in mobilizing and bringing together resources from private companies and private individuals to serve the response’s objectives. As of September 2020, government financing of South Africa’s Solidarity Fund represented less than 4% of the total ZAR 3.1 billion received (~USD 181 million), with ZAR 2.9 billion coming from corporations and foundations and ZAR 83 million from individual donations.

 

5. Most EBFs facilitated the flexible reallocation of resources across national budgets to respond to COVID-19-related needs, but often the releases of domestic funding were delayed or did not materialize. Bhutan’s government deferred all new construction, and reallocated funds from the construction sector to health in order to help ensure budget for responding to COVID-19. However, in several countries, funds were not released as planned due to insufficient revenue, or weaknesses in expenditure procedures. In Cameroon, there were reported shortfalls in budget disbursements to the EBF, adversely impacting the fund’s operations. In Mauritius, the Ministry of Health disbursed only around a third of the MUR 1.7 billion (~USD 36 million) that had been budgeted for medical products. Such delays and revenue shortfalls not only hinder service delivery but also raise questions about transparency and accountability. Several countries noted issues with disbursements to the government’s subnational levels. Sierra Leone, for example, grappled with challenges in decentralizing its COVID-19 response. While the government appointed response centers and district coordinators in all of the country’s 16 districts to coordinate local planning and oversee implementation of response operations, insufficient funds were made available through the EBF, and there were substantial delays before a uniform financial management system and standard operating procedures were put in place.

 

6. Although some EBFs facilitated a more streamlined and timely approval process for spending, the use of emergency funds was also associated with inefficiencies and misuse. This was especially the case in countries that lack robust financial management capabilities, and clear and effective standard operating procedures for managing and accounting for the funds. For example, in the early phase of the pandemic in Sierra Leone, there were many reports of unauthorized payments and misuse of funds to purchase items not related to the COVID-19 response. In Mauritius, auditors noted the inadequacy of documentation at the different stages of the spending process; some ministries did not keep a record of key decisions, such as justifications for selection of suppliers, consideration of risks, and/or procedures for managing potential conflicts of interest. More favorably, Bhutan adopted Simplified Procurement Rules and Regulations for goods, works, and services related to the COVID-19 response, and adoption of this regulation mitigated inefficiencies and the misuse of funds.

 

7.  While oversight of EBFs was challenging in all study contexts, their implementation prompted the development of ‘real-time auditing’ in the face of accountability concerns. Real-time audits can provide useful evidence of irregular spending, fraud/corruption, and the misuse of funds, thus demonstrating a commitment to transparency. Mauritius, Sierra Leone, and South Africa published timely audit reports for their COVID-19 funds before the end of 2020. To better track data and support fiscal transparency, some EBFs created reporting platforms with financial data (as in Côte d’Ivoire), reported on performance (as in South Africa), and contracted private firms to conduct audits (as in Kenya, Sierra Leone, and South Africa). Accountability concerns were less of an issue for privately managed COVID-19 funds, which typically have established processes to ensure checks and balances. The Solidarity Fund in South Africa, for example, has a strong reporting framework and contracted an independent audit by PWC which reviewed not only financial data but also the Fund’s impact on the health sector.

 

8. Legislation did not systematically specify arrangements for the closure of EBFs once the COVID-19 crisis ends, leaving some uncertainty about future operations and retrocession of funds. As of July 2022, only Mauritius and South Africa among the seven countries surveyed had specified end-dates for their COVID-19 funds. Mauritius’ EBF was reintegrated into regular budgetary processes in 2021. South Africa’s Solidarity Fund announced its ‘sunset’ for September 2022 with remaining funds to be transferred to various regular budgetary programmes. Bhutan’s government indicated that its COVID-19 fund will ‘sunset’ when the situation ‘rebounds,’ but without details on the fund’s retrocession.

 

In conclusion, this review provided a deeper understanding of how EBFs in specific country contexts have performed in terms of meeting their objectives, specific processes and operations adopted for budgeting and spending, and regulations to ensure accountability.The experience of the past two years demonstrates that while EBFs could facilitate the response to help emergency situations, they are not a ‘magic bullet.’A key lesson from EBF implementation is the need to ensure a balance between potential benefits (gains in flexibility) and risks (weak oversight, misuse of funds, potential for corruption). Governments and development partners should be cautious about the use of EBFs as a tool for crisis response, unless they are able to manage the funds robustly within a sound legal framework, with appropriate checks and balances to mitigate financial management and accountability risks. There is still much to learn about how EBFs – with their wide variation in design and standard operating procedures (or lack thereof) – compare with regular budget allocations, both in terms of the speed and volume of budget execution and of accountability measures. More broadly, the focus should be on strengthening the regular PFM system – at all stages of the cycle from budget formulation to the auditing of expenditures – to improve the government’s capability to respond flexibly and in a timely manner to national health emergencies.

  The authors wish to acknowledge the invaluable insights provided by COVID-19 fund representatives from Bhutan, Côte d’Ivoire, Kenya, and South Africa. Without their willingness to share information, this review would not have been possible.

 

1. Bhutan: cabinet.gov.bt/press-release-3/2/bhtf.bt/resources/3; Cameroon: minfi.gov.cm/en/audits-report-on-the-use-of-covid-19-fund/; Côte d’Ivoire: finances.gouv.ci/actualites/65-contenu-dynamique/actualite/724-covid-19-fonds-de-soutien-du-gouvernement-les-premiers-cheques-remis-aux-beneficiaires; Kenya: oagkenya.go.ke/special-audit-report/; Mauritius: nao.govmu.org/Pages/ValueForMoney_n.aspx; Sierra Leone: auditservice.gov.sl/other-reports/; South Africa: solidarityfund.co.za/reports/,  agsa.co.za/Reporting/SpecialAuditReports.aspx

2.  These private funds should not be strictly identified as EBFs because they operate largely or completely outside the control of the government.

3.  For example, in Bhutan the legislation refers to “the response and containment of COVID-19”; in Côte d’Ivoire to “support the human emergency response”; and in Mauritius to “strengthening the preparedness and response to face COVID-19”.

 

 

 

 

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