U4 Theme:
Corruption in Public Financial Management and Procurement
Public financial management (PFM) and procurement are key areas for the functioning of a state. Every public entity needs financial means in order to provide its services and to ensuring performance according to its role and mandate in the institutional landscape of a state – ideally for the good of the people. In this regard, PFM encompasses
- collection of revenues,
- allocation of funds through the budgetary process, and
- utilisation of public revenues, for instance through procurement of goods and services, but also
- internal and external auditing of public spending and performance of state institutions.
Corruption can occur within all these processes with devastating consequences for service provision economic growth.
However, corruption is not only a problem isolated to the PFM system itself. As the recent World Bank report The Many Faces of Corruption underlines, the “nature and quality of a country’s PFM system to a large extent determine the ease with which public corruption can occur” in other sectors as well. Unclear or weak regulation and lack of scrutiny allow corruption to flourish wherever public spending is involved. This is why sound PFM institutions and procedures and a functioning system of checks and balances are essential in order to reduce corruption and enhance integrity and accountability in any given state.
Related pages:
Public Expenditure Tracking Surveys
- PETS have emerged as a popular tool for identification of problems with the flow of resources between different levels of public administration and frontline service providers (read more).
Procurement
- How does corruption affect public contracting and what can be done about it? A general overview of the problem, exploring the examples of two sectors - health and education (read more).
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The gaps between approved budgets and the realisation of policy and development goals stand among key governance challenges in many developing countries. Supreme Audit Institutions (SAIs) play an important role in holding governments to account. However, many SAIs face serious challenges when trying to evaluate the expenditures and performance of government agencies. This U4 Issue Paper explores those challenges in detail and suggests how SAIs can overcome some of them by forming and strengthening alliances with parliaments and civil society. It proposes that in circumstances where the legislature is weak, the SAI may need to stretch the letter of their mandate for the benefit of more effective application of public resources to development challenges. Given their central role in funding governance reform, donors have a potentially key role to play in supporting SAIs. Existing support could be made more efficient if related interventions were better coordinated and if underlying political dimensions were taken into account. Donors could also play an important role in financing innovative partnerships between SAIs, legislatures, and civil society.
Tax and customs authorities are frequently among the most corrupt institutions in many countries For staff, opportunities for corruption and temptation to engage in it are numerous, including speeding up services, undervaluing cargo and helping with tax evasion. Based on experiences from a wide range of countries, this U4 Brief gives some examples of corrupt activities and outlines practical steps to minimise the problem through appropriate staff management, training, operational procedures, and internal investigations.
A recent and relatively successful anti-corruption strategy on value added tax refunds conducted in Bolivia, applied a process flow approach that appears to be powerful in preventing corruption in tax administration. This approach identifies corruption vulnerabilities, generates measurable indicators and helps design remedial efforts, and it may well be replicated elsewhere. This U4 Brief summarizes the experiences from Bolivia, highlighting how improved inspection control contributed to reducing corruption in the National Tax Service and stemmed the loss of public funds.
The introduction of ‘new' aid modalities - and in particular general budget support - has increased the interest in the relationship between corruption and aid modalities. This U4 Issue reviews the information that theory and empirical studies provide on the prevalence of corruption in relation to various aid modalities, the degrees to which corruption distorts the developmental impact of different aid modalities, and whether aid modalities affect the governance environment and corruption in a country differently. It concludes that the choice of aid modality will not affect aid allocation nor accountability in countries with relatively low levels of aid, regardless of the level of corruption. With high aid dependency, however, donors have some more control over aid allocation with project than with budget support. Where this is the case, and corruption is high, there are strong reasons for not choosing budget support as an aid modality.
Public Expenditure Tracking Surveys, or PETS, are recognised as an effective tool to improve accountability in public finance and service delivery. A Ugandan success with PETS is one of the most cited anti‑corruption success stories. Expenditure tracking has also become a popular activity among civil society organisations engaged in accountability issues at the local level. This U4 Issue Paper takes a closer look at the experience of expenditure tracking and argues that its successes may have been overstated. It suggests that an uncritical acceptance of the effectiveness of expenditure tracking has hindered the development of a more nuanced approach that is better suited to the particular circumstances of each case. The paper proposes some principles of engagement on how to track expenditures more effectively.
Whereas the successful application of PETS in Uganda has received and continues to receive a lot of attention, less has been written about the experiences of PETS elsewhere. The Tanzanian experience clearly shows that PETS is not a silver bullet as vested interests can easily derail the process.
A frequently used argument for fiscal decentralisation is that it increases accountability in the spending and raising of public funds, by moving government closer to the people. At the same time, there are concerns that fiscal decentralisation in practice may lead to a decentralisation of corruption. This issue paper summarises available evidence on fiscal decentralisation and corruption. It starts off with a discussion of issues and proceeds to look at policy implications.
How does corruption affect the appropriateness and design of budget support? The aim of this issue paper is to compare the effectiveness of budget support versus that of other aid modalities - in particular project support - in partner countries characterized by corruption. It discusses how corruption affects or mediates the impact of budget support on developmental outcomes such as growth and poverty, but also the impact of budget support on institutional reform.
In the interest of making aid effective, donors are increasingly stressing the importance of a good public financial management (PFM) system in partner countries. The budget process is a part of the PFM system which is both very crucial to good development outcomes, and a process vulnerable to corruption. These issue pages collect evidence and knowledge in the area of corruption in the budget process which is operationally relevant for staff in international development agencies. What is budgetary corruption, how may it be detected and what should the policy responses be?
The aim of this U4 Issue paper is to identify and discuss major challenges, appropriate responses, and relevant tools for addressing corruption in revenue administrations. This text is part of the output from the U4 Focus Area on Public Financial Management and Corruption. How does corruption affect revenue collection, and what are the consequences for development indicators such as growth and poverty? This paper explores the driving forces behind fiscal corruption in order to facilitate a thorough understanding of the problem - a prerequisite for anyone who wants to succeed in designing appropriate measures to improve the situation. |
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Public Financial
Management and Procurement |
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Budget process |
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Revenue administration |
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Fiscal decentralisation |
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Direct budget support |
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Public Expenditure Tracking |
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Procurement |
Query the U4 helpdesk about PFM |
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U4 welcomes any | CONTACT |
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Hannes Hechler
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| RECOMMENDED READING |
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“It is our money. Where is it gone?” is a short documentary, released by the International Budget Partnership, on an initiative, in Mombasa (Kenya) to involve communities directly in monitoring the Constituency Development Fund, a fund managed by Kenyan parliamentarians. Through social audits, communities monitored budgets and held their government accountable for managing the public’s money and meeting the needs of the poor.
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| RELATED U4 PUBLICATIONS |
This U4 Brief assesses how banks facilitate illicit capital flows from developing countries. The shortcomings of the existing regulatory frameworks are discussed, and recommendations are made for donor governments on what can be done to curb the flow of corrupt money out of the developing world. |
