Consequences and tracking of corruption
in development aid
Could you provide me with 1) an overview of issues on how
development aid projects (including budget support) become
undermined by corruption and 2) an overview on tracking corruption?
Content
Part I describes how development aid
is undermined by corruption.
Part II presents tools for tracking corruption
in development aid.
Part III lists further readings that
might be of interest.
The query is answered in several sections. Section 1 looks
at how development aid (allocated as projects or direct budget support)
becomes undermined by corrupt practices. Section 2 highlights
some of the key issues on tracking corruption in aid and then moves
to expand on one of the elements of development aid management that
can be relevant to tracking corruption in aid - that is financial
accountability and expenditure tracking tools. References to useful
papers and resources are made throughout the answer. Some additional
readings are listed at the end of the document.
Part I: How is development aid undermined by corruption?
Corruption in development aid generally diverts resources to purposes
other than that for which it was granted, thus seriously affecting
the efficiency and effectiveness of aid. Corruption can occur at
any stage of aid delivery and can involve a variety of actors
including public officials and private sector representatives in the
recipient country as well as aid agency staff themselves. These actors
sometimes work in collusion with each other to divert aid resources.
The following are key areas where corruption in development aid projects
can occur:
Project selection: Corruption can negatively affect the
selection of development projects. According to the Asian Development
Bank, corruption can divert resources away from social sectors and
toward defense and major infrastructure projects. It may also encourage
the selection of uneconomical projects because of opportunities
for financial kickbacks and political patronage. For more information
see: The
Corner House, Underwriting Corruption: Britain's Role in
Promoting Corruption, Cronyism and Graft.
Project design: The distorting effects of corruption on
projects can take effect early in the project design phase. Project
requirements may be overstated or tailored to fit one specific bidder.
More generally, a corrupt system deflates the value of work performed
in project planning because subsequent planning decisions do not
depend on a careful assessment of needs and goals, but rather on
the need to maintain cash flow from the diversion of development
aid. For more information see: Dudley, The
Rotten Mango: The Effect of Corruption on International Development
Projects.
Procurement: The risk of corruption in the procurement
of good and services needed for the implementation of development
projects is particularly high. This can involve attempts by aid
borrowers to limit competition (via insufficient advertising, short
bidding times etc) or corrupt practice on the part of bidders (e.g.
unjustified complaints, misleading bids etc). Collusion among firms
or between public officials and bidders can also render competition
ineffective, leading to contracts to underperforming firms at inflated
prices. For more information see: Aguilar et al, Preventing
Fraud and Corruption in World Bank Projects.
Implementation: Corrupt practice at the implementation
stage of development projects can be very costly and may be the
main cause of cost overruns. Corruption at this stage can involve
a variety of different practices including corrupt contract amendments,
overbilling and/or underpayment, the provision of equipment or goods
of lower then specified quality, as well as outright theft of materials,
equipment or services. Expenditure leakage refers to the corrupt
diversion of allocated project funding. This often involves various
actors in the funding distribution chain and can lead to significant
reductions in aid levels received by end-users. In extreme cases,
aid may only reach those willing and able to pay to receive it.
Financial management: Corruption in the financial management
of development projects can include a wide range of practices including:
duplication of payments, alteration of invoices, lack of supporting
records, ineligible payments, misuse of funds (i.e. for purposes
other than those aligned to project needs), unauthorised payments
etc. For more information see: Aguilar et al, Preventing
Fraud and Corruption in World Bank Projects.
Project evaluation: Corruption can be used as a means to
distort the evaluation of development projects, thus ensuring the
continued flow of development resources for potential diversion.
Kick-backs can be given to persuade recipient government officials
and/or aid agency staff to turn a blind eye to sluggishly implemented
projects, unfulfilled contract requirements, undelivered aid and
other instances of malpractice.
The following are key issues in relation to corruption and direct
budget support:
Direct Budget Support (DBS) funds are provided in support of a
government programme usually focused on growth and poverty reduction,
and on transforming institutions. The focus is on the partner government
spending funds using its own financial management and accountability
systems.
As such, when DBS is granted to a recipient government the donor
is not directly responsible for the use of those funds. Rather,
the donor is responsible for making an ex-ante assessment of the
effectiveness of the recipient government's systems and practices,
deciding whether the level of risk of misuse of the funds is acceptable,
and taking appropriate steps to mitigate and monitor these risks.
DfID's Internal Audit Department has identified three main types
of risk in relation to DBS:
Directional or policy risks: a high level risk that the
intervention is directed at unacceptable sectors in unacceptable
ways e.g. where donors have different policies on what constitutes
bribery.
Developmental risks: risk that the outcomes of the intervention
are unsatisfactory (this does not necesarily relate to corrupt practice).
Fiduciary/accounting risks: risk that funds may not be
used for intended purposes. These risks arise through the lack of
visibility of funds once they are in the recipient government's
system.
Because it is directly injected into a recipient government's financial
management system, DBS is also vulnerable to the same forms of corruption
that threaten the proper management of national budgets.
Examples of opportunities for corruption in the budgetary cycle
are:
Budget formulation: Policy objectives are often not reflected
in budget formulation because of the distorting effects of corruption.
Sectors like defence and large infrastructure projects often receive
a disproportionate share of the budget because they provide more opportunity
for kickbacks and pay-offs for politicians.
Budget execution: In many countries budget management systems
are so poor that it is difficult for the executive to monitor how
resources are spent. This opens the door for funding levels in the
budget to be ignored and authorised funds not to be spent for their
intended purposes. In such circumstances, the corrupt diversion of
funds can occur unchecked.
Budget evaluation: Once the fiscal year is over, the public
and legislature should be able to measure whether public resources
have been spent effectively. This is often hampered by delays in providing
information and a lack of access. Impediments to effective evaluation
may be directly promoted by those wishing to conceal corrupt practices
e.g. through bribing of audit officials.
After looking at how corruption occurs and undermines development
aid (a topic that has been relatively well addressed in the anti-corruption
realm), an inevitable question follows as to how can we better track
aid that is being misused and misallocated, which can in turn have
both preventive as well as punitive effects.
Brian Cooksey, who has written rather extensively on the topic, suggests
that increased access to information and disclosure are the general
basis for tracking corruption in aid. They also raise public awareness
and influence policies that affect the use and misuse of aid receipts.
Tracking can effectively be attempted through a combination of elements
including:
Research (ongoing research and analysis, development and
use of measurement tools, including new tools and indices that would
focus on measuring corruption in aid)
Monitoring and Evaluation (in-depth evaluations and case
studies of aid effectiveness and the aid relationship, including
the donor-side of the equation)
Expenditure Tracking (Public Expenditure Reviews (PER)
should include greater disclosure of aid inputs and the rationale
for public investment choices)
Auditing (unannounced value for money audits and expenditure
tracking of loan-funded projects)
Impact Assessment (such as all debt-creating, loan-funded
projects above a certain threshold value to be reviewed by parliament,
civil society and the public regarding their likely social and economic
impact; and obligatory independent Poverty and Social Impact Assessments
(PSIA) of all loan-funded projects)
For these methods to yield sustained results, political will and
leadership to address corruption in aid should be present on both
the donor's and the recipient's side.
For details see: Brian Cooksey, Tracking Corruption in Aid: Opportunities
and Constraints, Tanzania Development Research Group, November
2000.
II.1. Tracking through financial accountability
tools
"Donor aid can only be secured when there is sound management
of all the resources available, whether or not they come from the
donor community", Bernard Petit, EC
As summarised above, a variety of methods can be deployed to assist
in tracking corruption and misused development funds. In this section,
by way of an example, we would like to expand on one of the possible
means for taking practical steps towards tracking - through public
financial accountability and expenditure tracking tools already in
use in international development processes. The tools contain their
share of strengths and weaknesses.
Specialised Audits
The European Commission has faced serious difficulties in several
countries where it has provided budgetary assistance in support of
macroeconomic reforms. In those countries, the EU executive has conducted
audits of the use of the resources received and more precisely of
the sectors which were supposed to have benefited. These audits have
revealed a number of irregularities, systemic and institutional weaknesses
and serious cases of corruption. A series of measures have been taken
as a result, like the suspension of budgetary support, the request
for reimbursement of misused funds, the implementation by the authorities
of administrative and judiciary actions, and others.
Fiduciary Risk Assessments
This is a tool used by DFID in conjunction with some of its aid funds,
such as poverty reduction budget support. A mandatory section on fiduciary
risk assessment, including an evaluation of the risk of corruption,
should be included in all PRBS submissions. Questions to consider
include technical expenditure tracking elements, assessments of transparency
and oversight mechanisms in place, evaluation of corruption prevention
and elimination provisions and many others.
For details, please see the DfID
note on fiduciary risk assessments.
Country Financial Accountability Assessments
As a diagnostic tool, the CFAAs support World Bank's fiduciary responsibilities
by identifying strengths and weaknesses of PFM so that potential risks
to Bank funds can be managed. It also supports the Bank's development
objectives by facilitating common understanding with the borrower
and other development partners to assist in the design of PFM capacity
building programs. Some of the reports contain, amongst other things,
examination of mechanisms ensuring transparency, oversight and scrutiny
of public funds.
To access CFAA methodology and specific country CFAAs, please refer
to the explanatory
webpage.
Public Expenditure Reviews Public
Expenditure Reviews (PERs) have traditionally been the most common
analytic instrument for analytic and advisory work in the area of
public sector reform. PERs vary significantly from country to country,
but in general their focus has been primarily on budget structure
and composition, with some attention paid to more general public sector
issues. They may be only one component of the public expenditure program
through which WB engages with clients, being complemented by other
forms of technical assistance, training, and analysis.
Public Expenditure Tracking Surveys (PETS)
PETS, first pioneered in Uganda and later implemented in numerous
countries (including in Tanzania for tracking of pro-poor expenditures
in priority sectors at all levels), compare budgetary allocations
to actual spending. This involves 'following the money' to
where it is spent, comparing budgetary allocations with records of
transfers and receipts at each level of government. The data compiled
by a well conducted PETS will show how much of the funds reach the
intended beneficiaries. It will also indicate at what level any leakage
or diversion takes place.
The impact of PETS has not been assessed. A
DFID brief states that following a tracking survey in Tanzania,
the Treasury has begun to disseminate itemised local budgets to Members
of Parliament. Budgets for pro-poor programmes have also been published
in Swahili and English language newspapers, showing the allocations
for ministries, regions and local authorities. The impact of these
measures on transparency and resource use is not yet known.
