U4 Brief | COVID-19 and corruptionDevelopment cooperation

Covid-19 and donor financing

Minimising corruption risks while ensuring efficiency

By Guillaume Nicaise
U4 Anti-Corruption Resource Centre, Chr. Michelsen Institute (U4 Brief 2020:10)

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With the spread of the Covid-19 pandemic, development aid and donor agencies face new challenges. They have to deliver essential products and financial assistance in a short time frame to help developing states to cope with the current economic, health and societal crisis. This short time frame presents new corruption risks, as partners may rely on funding modalities that differ from their regular financing cycles.

Main points

  • During the pandemic, donors may face a trade-off between delivering aid quickly and efficiently, and minimising the corruption risks.
  • Choosing a financing mechanism to alleviate the effects of the crisis is a delicate process. It should correspond to intervention contexts and objectives but also have the necessary anti-corruption measures in place.
  • Donors should work with agencies and partners for more transparency on financial arrangements and disbursements. Only cooperation and negotiation make effective decisions possible in a multi-organisational context.
  • Previous crises have emphasised the need to coordinate monitoring efforts between private actors, public entities, donors, and civil society. Top-down and bottom-up information sharing is an important aspect in managing corruption and fiduciary risks.

Delivering aid and financial assistance during Covid-19

The need to deliver aid and funding quickly and efficiently during a pandemic is challenging for donor agencies. Such a situation could loosen anti-corruption safeguards, as due diligence, oversight, and accountability mechanisms may not always be prioritised. When donors want to help developing states manage the current crisis, what funding modalities are less prone to corruption?

Donors must consider funding mechanisms that are less prone to corruption and have effective monitoring and accountability measures in place.

While bilateral aid remains significant (with, for example, growing support for cash transfers), donor trackers show that the main financial mechanisms used to alleviate the effects of crises are (by order of importance): multilateral institutions (Bretton Woods Institutions and Asian Development Bank), pooled funding (eg the Global Fund), blended finance and public–private partnerships, and core support to NGOs.

Donor financing related to Covid-19 is highly vulnerable to corruption, which weakens the effectiveness of donors’ interventions. The current crisis has highlighted the following challenges with regard to the risks associated with donors’ responses:

  • Covid-19 aid volumes are substantial and may, sometimes, even exceed national sectorial budgets. This may present a risk if the ‘Do no harm’ principle is not respected.
  • With shorter timelines being seen for the disbursement of funds, the monitoring of those disbursements may not take place, or be insufficient.
  • The economic and health crisis generated by Covid-19 may hamper democratic governance and rule of law, and not only in fragile countries. The situation is likely to increase elite capture and corruption risks for donor‑financing mechanisms depending upon country systems.
  • Social distancing and lockdown have reduced capacities for social accountability, even if new opportunities are emerging. Moreover, in certain countries, the lockdown and evacuation of development agencies’ international staff has increased reliance on remote management.
Donor financing related to Covid-19 is highly vulnerable to corruption, which weakens the effectiveness of donors’ interventions.

Therefore, choosing a financing mechanism that corresponds to intervention contexts and objectives is a delicate process. Among U4 partners, the UK government’s Department for International Development (DFID) decided to vary its aid response, by supporting not only an established NGO network but also Gavi (the Vaccine Alliance), various United Nations agencies, and the International Red Cross and Red Crescent Movement (ICRC). Denmark provided funds mainly to UN agencies, the ICRC Emergency Response Units, the Multi-Partner Trust Fund, and Danish NGOs. Norway currently supports the new UN COVID-19 Response and Recovery Fund. The EU proposes macro-financial assistance to its neighbouring countries, as well as a coordinated multilateral response.

Short timelines for distributing funds during the crisis means that the monitoring of disbursements may not take place, or be insufficient.

Identifying appropriate funding mechanisms: Strengths and weaknesses

Pooled funding

A pooled fund, or multi-partner fund, is used to receive contributions from multiple financial partners and then such resources are allocated to implementing entities to support specific national programmes (such as government-run programmes), or regional and global development priorities. With pooled funding, donors contribute funds to an autonomous account, which is managed jointly by other donors and/or the recipient. Pooled funds offer a flexible mechanism that enables participating organisations to handle implementation according to their own operating procedures for procurement and financial management. The account will have specific purposes, modes of disbursement, and accountability processes. By avoiding any duplication of operating procedures, pass-through mechanisms minimise implementation delays and transaction costs.

A pooled fund typically comprises a fund administrator/technical secretariat, an oversight body, and implementing entities and donors working under common governance arrangements. Implementation methods vary – some funds may disburse the funding themselves, whereas others may rely on private sector, donors, and/or governmental bodies. Some funds (such as Global Partnership for Education) are Financial Intermediary Funds (FIFs) with an independent board that makes policy decisions, and where the roles of trustee, administrator/secretariat, and implementing partners are more clearly defined. While some pooled funds are sector-specific, such as Gavi’s Vaccine Alliance, others are country-specific, such as the Somalia Stability Fund.

Donors are increasingly relying on pooled funding for delivering results on challenging development situations, such as health pandemics. For instance, the Global Fund, the largest multilateral funder of health systems worldwide, is providing immediate funding of up to US$1 billion to help countries fight Covid-19 and prevent fragile health systems from being overwhelmed. Pooled funds offer high standards to prevent corruption risks and to respect donors’ concerns of financial probity, a ‘zero tolerance for corruption,’ and transparency and accountability measures regarding finances and activity results. The attractiveness of multi-partner funds also relies on the risks being shared among the partners, and on their governance structures requiring transparent and accountable pooling of resources to reduce the political, fiduciary, and corruption risks to donors.

Yet, pooled funds also face corruption risks. For instance, in 2010 Sweden temporarily suspended financial support to the Global Fund,in light of ineligible expenditures and non-delivered goods. Indeed, irregularities may start with inflated budget lines. A proper budget analysis takes a considerable amount of time and resources, while budgets are often presented late in the appraisal process. Corruption risks exist mainly along delivery chains, as pooled funds rely on implementation bodies’ own rules and regulations. As those organisations vary, the quality of their regulatory framework and their level of compliance may also differ considerably. Moreover, national politics may influence funds that channel beyond national governments. In the context of hampered democratic governance and elite capture, there is a greater risk that funds may not reach the intended beneficiaries. For instance, the Afghanistan Reconstruction Trust Fund has played an important role in putting aid – with appropriate safeguards – through its government’s systems, while also being challenged by the government’s ineffectiveness in managing funds and combatting corrupt practices (such as fraud, waste, and abuse).

Mitigation measures, such as financial monitoring visits, exist. Regular spot checks may increase the perception of fraud being detected and, therefore, be the strongest deterrent. When pooled funds invest in high-risk sectors, several measures can be considered, such as keeping a simple delivery chain, expanding oversight personnel, and putting more senior staff in charge. Yet, pooled funds’ rules and procedures may not always be the most appropriate mechanism for fast-moving and unpredictable situations. There may be a trade-off between the need for fiduciary solidity versus efficient and effective delivery.

Core support to NGOs

Core support by donors to local, national, and/or international NGOs involves paying funds to them which then contribute to their programmes and activities. NGOs are fully responsible for the administration and use of received funds.

For Covid-19, DFID plans to release the funding through its Rapid Response Facility. This was created in 2012, during Sierra Leone’s cholera outbreak, as a way of quickly channelling funds into disaster zones through a group of preapproved organisations. The facility, which was last used in 2015 after the Nepal earthquake, currently has around 35 members which include a combination of British and European humanitarian NGOs and specialist groups, such as The HALO Trust, BBC Media Action, and Internews Europe.

Independent reviews of DFID’s Rapid Response Facility, such as those following its 2012 intervention in Democratic Republic of Congo or its 2015 operation in the Philippines, praised its efficiency and capacity to deliver value-for-money aid. No corruption cases have been reported. According to ITAD’s review of the operation in the Philippines, ‘DFID partner agencies all had internal systems in place to monitor for corruption and misappropriation of funds which included real-time evaluations and micro-assessments such as spot checks and community monitoring. There was no evidence of petty fraud within DFID’s partner agencies.’ Yet, its philosophy is ‘to focus on delivery, not paperwork,’ thereby increasing the risk for poor tracking on the use (or misuse) of funds. The most emblematic case is the aftermath of the 2010 earthquake in Haiti. The Haitian government faced an aid embargo by the main donor (USA), and only NGOs and private contractors were chosen to provide aid and social services. The result was a clear lack of transparency and accountability on outcomes and fund management.

Another weakness which derives from this funding mechanism is the risk related to additional outsourcing or subcontracting entities, as NGOs may also rely on external partners. With outsourcing, there is a risk that limited due diligence will be undertaken, and there are also few opportunities for monitoring protocol breaches, potential conflicts of interest, or mismanagement. Subcontracting carries a lower risk, yet there is still a risk of payments to local NGOs being duplicated, as they receive funds from several partners. There are no statistics on occurrences of double funding; however, international bodies such as the EU individualise it as a main fraud risk. Double funding risks may be mitigated by sharing information between partners and donors, as well as implementing transparency requirements along delivery chains.

Another important aspect to consider is the ongoing monitoring of operations. In the case of DFID, some NGOs selected for the Rapid Response Facility (Oxfam, Save the Children) are still under investigation by the UK Charity Commission for mismanagement and trying to cover up the 2015 sex scandal. Donors should ensure compliance with their integrity principles by following anti-corruption guidelines. For example, the European Union Food Crisis Rapid Response Facility Trust Fund follows the World Bank Guidelines on Preventing and Combating Fraud and Corruption. DFID’s 2015 guidelines for NGOs mention that ‘all suspicions of fraud or corruption must be reported to DFID.’ Yet, no clear guidelines have been established to prevent the main risks of fraud. Moreover, national NGOs often lack the capacity to create corruption risk management systems, and would therefore benefit from training and support from consortiums. For example, NGOs and the private sector may be asked to report to the International Aid Transparency Initiative (IATI), and IATI compliance could – eventually – become a prerequisite for receiving funds.

The ‘Swedish model’ is another alternative: instalments are paid as long as evaluations within the contribution management process remain positive. Different forms of controls are exercised by managers, controllers, quality assurance system managers, and the project committees. The Swedish International Development Cooperation Agency (Sida) assesses partners’ capacity in resource management, with special emphasis on good governance and anti-corruption measures. A rating system is also in place for monitoring and assessing progress in the implementation process (in particular, benchmarking results with regulations governing resource management). Suspicious cases are handled and managed by Sida’s investigation department. While this mechanism offers flexibility and security in fund management, its sustainability may become a challenge in certain coronavirus crisis contexts, with increasing deficits in democratic governance and rule of law.

Blended finance

Blended finance combines public official development assistance with private finance for shared development goals. Blending differs from traditional forms of development finance in that the projects are at least partially commercial in nature. Private sector entities can be involved: as financiers investing in revenue-generating development projects; by acting as service providers; or by being direct beneficiaries of investments channelled through blended finance initiatives. The main benefit of blended finance is the possibility to mobilise large capital to respond to development issues and economic downturn generated by Covid-19.

Blended finance is already part of the answer to the Covid-19 crisis. The African Development Bank announced the provision of US$10 billion to governments and the private sector. The International Finance Corporation (IFC) announced a US$8 billion plan to sustain private sector companies and livelihoods in developing countries, as well as a collaboration with Proparco, a subsidiary of Agence Française de Développement, devoted to private sector financing. Gavi incentivises private investment in vaccine development, and sells ‘vaccine bonds’ to increase the capital that is immediately available for Gavi projects. Accordingly, private sector actors, public–private partnerships, and foundations are involved in policy setting, fundraising, or implementation to provide short-term responses to Covid-19, but also long-term resiliency investments post-Covid.

To date, little consideration has been given to corruption risks in blended finance mechanisms. Yet, mixing taxpayer resources with commercial finance merits examination of the potential vulnerabilities to corruption, so as to safeguard development funds from misuse. First, the participation of profit-driven actors, such as private foundations, the pharmaceutical industry, commercial banks, and sovereign wealth funds in development work presents integrity risks, such as conflicts of interest or inadequate due diligence procedures. Second, the complex financing arrangements and multi-layered governance structures involved in blended finance projects makes it difficult to manage and monitor transactions and results. Third, collusion and bribery in procurement is a high risk when the recipient government is responsible for the entire process of procuring goods or services, especially in countries with a weak performance in the Country Policy And Institutional Assessment (CPIA). As Covid-19 may impact rule of law and democratic governance negatively, it is likely that the threshold for weak performance will evolve and, therefore, increase overall corruption risks.

Lessons learned from the Ebola crisis emphasise the need to coordinate monitoring efforts between private actors, public entities, donors, and the civil society. In the Democratic Republic of Congo, GIZ has been involved in the monitoring of subsidies provided by Gavi and the Global Fund. This epitomises not only the interest of development agencies for blended finance mechanism but also their concerns. For a successful steering process in a multi-organisational context, only cooperation and negotiation make effective decisions possible. This is especially true when responding to the Covid-19 crisis. Yet, for now, feasibility may be hard to achieve in the short term. The Organisation for Economic Development (OECD) is currently working on principles to guide blended finance and to facilitate its use in the near future.

Contributions to multilateral institutions

When donors provide funds to multilateral institutions, those recipients pool the contributions so that they lose their identity and become an integral part of their financial assets. The major multilateral financial institutions used during Covid-19 are the International Monetary Fund (IMF) and the World Bank. More than 90 countries have already requested emergency funding from the IMF, through the Rapid Credit Facility (RCF) and the Rapid Financing Instrument (RFI), and through debt relief grants financed by the Catastrophe Containment and Relief Trust (CCRT).

The RFI is available to all IMF member countries, and the money should be repaid within 3.25 to 5 years. Conditionalities include the need to make ‘efforts to solve balance of payment difficulties and to describe the general economic policies that it proposes to follow.’ The RCF is very similar, but is targeted more towards low-income countries and does not have ex-post programme-based conditionality or reviews. As most bilateral donors are hesitant to provide general budget support for deteriorating, fragile, and conflict-affected situations, these financial instruments can provide concessional terms and so can initiate the process of stabilisation.

After an internal review of the Fund’s track record on anti-corruption efforts, the IMF Executive Board adopted a new framework for enhanced engagement on governance in April 2018. The framework lays out several critical tools for implementing anti-corruption measures and directs the Fund to systematically address any that may be deficient in its reporting and lending. Yet, there are serious concerns that these new procedures are not being followed during the Covid-19 crisis, as programmes lack even minimal anti-corruption measures. The IMF has recognised the importance of setting this tone from the top, with the Fund’s managing director cautioning national governments to ‘spend what you can but make sure to keep the receipts. We don’t want accountability and transparency to take the back seat.’

Donors should ask the IMF to implement accountability measures, in order to allow civil society to hold governments accountable. Donors should also support civil society organisations, journalists, and anti-corruption commissions to provide a watchdog function on grant disbursement and hold implementation agencies to account. A greater transparency from the IMF on funding decisions would also ease accountability. Moreover, the IMF may provide help to recipients to implement anti-corruption measures (in particular in procurement), which is not currently the case.

The World Bank created a COVID-19 Fast-Track Facility, using ‘projects’ emergency components as well as contingent financing instruments designed for catastrophes, including pandemics.’ It is a project- and sector-specific approach, in direct coordination with national partners. For example, in India the World Bank’s grants will be managed by several national public health institutes under the Ministry of Health and Family Welfare.

According to its Covid-19 response proposal, the World Bank follows its investment project financing directives, in particular its guidance on ‘Procurement in Situations of Urgent Need of Assistance or Capacity Constraints,’ as well as the actions to be taken within the project to mitigate corruption risks, where such mitigation is deemed to be necessary. Yet, those plans are not disclosed and there is no transparency on how the World Bank is going to manage corruption risks. Mitigation actions can be defined in a variety of the project’s instruments, which include publicly available documents and manuals that are not disclosed. This situation leads to a degree of uncertainty concerning what actions are intended to be taken to confront corruption, and reduce the ability for other stakeholders to contribute to and complement those efforts. Donors should work with the World Bank and national partners to get more transparency on financial arrangements and disbursements.

Evaluating the benefits and mitigating the risks

In countries affected by Covid-19 and where democratic governance is worsening, pooled funds offer opportunities to ask for support and to receive aid without relying entirely on country systems. At the same time, they integrate corruption risk management procedures and offer the possibility to localise responses. The trade-off between fiduciary solidity and efficient aid delivery may be overcome by developing a shared understanding of risk appetite between stakeholders: the funding partners, the multi-partner fund’s MPF administrator/trustee, the implementation partners, national authorities, and intended beneficiaries. For example, the Pakistan Humanitarian Pooled Fund links efficiency, accountability, and risk management. Dedicated monitoring staff keep in close contact with implementation partners and beneficiaries, through consultations, hotlines, and complaint mechanisms. Regular project revisions are taking place to adjust programmatic needs based on consultations among beneficiaries, local authorities, and respective cluster coordinators.

Core support to NGOs is also a good option to minimise corruption risks related to country systems, as long as accountability mechanisms and anti-corruption safeguards are put in place to prevent and mitigate corruption risks. If coupled with a coordinated reporting mechanism, such as the International Aid Transparency Initiative or the International Financial Reporting for Non Profit Organisations, it would also help mitigate fiduciary risks.

Blended finance offers long-term opportunities for the post-Covid-19 period, as development aid will need new higher volumes to alleviate poverty and to reach sustainable goals. Yet, in the short term, it is a challenging option for donors to consider, as anti-corruption safeguards are not in place and coordination between public and private entities will be difficult to achieve.

Multilateral institutions’ reliance on country systems make those contributions more prone to corruption in countries where rule of law and democracy are not well respected. Moreover, standards for transparency and accountability are not currently respected by the Bretton Woods institutions. As the World Bank’s activities provide essential support to fulfil its national partners’ needs, the question is how donors can help to oversee country systems and mitigate corruption risks.

Recommendations for donors

  • The ‘Do no harm’ principle should be respected by donors when assessing states’ capacities to absorb aid and seeking coherence and coordination among donors to not overwhelm existing state capacities or put fragile states at risk of corruption.
  • Donors should publish their spending commitments towards different types of aid, in order to facilitate accountability and monitoring coordination.
  • Development agencies should continue to support national oversight agencies, supervisory authorities, and financial intelligence units.
  • By creating additional resources now to prevent corruption, future costly prosecutorial activities could be avoided.
  • Lessons learned from previous remote interventions show that top-down and bottom-up information sharing is a key aspect in managing corruption and fiduciary risks.
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