FreeBalance has developed a framework to show how Government Resource Planning (GRP) software can help improve governance outcomes for governments in developing countries. This Governance Framework includes an overview of the governance question and a description of the methodology.
Impact: Total global annual government procurement is estimated to be $9.5 Trillion .
Problem: Corruption is estimated to cost developing country governments 20% to 25% of procurement costs.
Other factors: Procurement efficiency, effectiveness and competitiveness are other important governance factors
Scenario: Lifecycle for an important multiple year public investment program such as the building of a new hospital.
Government Resource Planning
The technical GRP lifecycle can be described as follows:
- Enterprise-grade ICT Platform as foundation including a secure infrastructure
- User group controls have been defined in the ICT Platform
- The hospital public investment program is defined during budget preparation, part of Government Performance Management functionality, and the budget has been approved by the legislature
- Core Public Financials includes commitment accounting functionality used to ensures that the government does not overspend the budget (integrates with the budget passed by the legislature) and tracks all accounting transactions related to the hospital program
- Public Expenditure Management integrates with commitment accounting through a procurement cycle begins with the approval of a commitment from a purchase requisition that generates a Request for Proposal (RFP) to qualified bidders as part of the tendering process that results, in this case, a winning “turnkey” contract based on evaluation criteria to a winning bidder or consortium
- Proposal opportunities were presented via the web through e-procurement and the winner of the proposal and contract size is posted
- Payment is provided to the winning bidder through payment management based on the contract provisions typically based on the government acceptance that building milestones have been reached
- And the entire cycle is stored in an audit trail to improve Government Performance
Governance Toolset
The hospital acquisition scenario described provides multiple corruption opportunities:
- Vendor collusion to provide only a single winning bid
- Bribes by vendors to manipulate the process such as changing the evaluation criteria unfairly
- Approval of a bid by family members
- Payment for goods and services not received
GRP systems contain three classes of toolsets that can be used to overcome corruption opportunities:
- Controls that prevent civil service users from manipulating the process
- Transparency that expose inner government workings to provide oversight
- Decision-making to enable tracking compliance and performance
Some governance tools from the FreeBalance Governance Framework can be leveraged in this scenario.
There are universal governance tools operating at every stage in the procurement lifecycle including:
Controls
- Chart of Accounts that aligns all government financial activity to budgets, users, purpose, organizational structure and accounting types to reduce accounting manipulation
- Segregation of Duties to ensure that multiple individuals are involved in the procurement cycle making manipulation more difficult
- Integration to ensure that the commitment rules in use in the commitment accounting system are respected in the procurement system
- Procedure Workflow that articulates the proper processes and prevents system user from changing rules such as the length of time that vendors have to respond to the RFP
Decision-making
- Alerts from the workflow that notifies interested parties such as internal audit or the Minister of Finance about milestones in the tendering process providing more oversight
- Dashboards that provides exception reporting to managers about the process
Some governance tools augment specific parts of procurement lifecycle:
- Secure infrastructure is augmented by control tools such as data integrity that prevents manipulation in underlying databases, encryption that prevents people from accessing certain types of data, and general IT security such as virtual private networks to reduce ICT manipulation
- User group controls is augmented by user management such as password controls
- Budget preparation is enabled through structured multiple year planning decision-making such as MTEF that leverages historical data to ensure that the planned hospital budget is realistic
- Commitment accounting is enabled through budget and commitment controls that ensures that obligations do not exceed commitments and that items not part of the hospital procurement are acquired
- Procurement is enhanced through e-procurement transparency that enables comparing contracts over time to expose potential manipulation
- Payment management is enhanced through secure payment controls such as Electronic Funds Transfer (EFT) that reduces the opportunity for the fungibility of cash and ensures traceability
- Auditing is enhanced through decision-making tools that trace every function, transaction and approval in the system from payments back to the original plan through the audit trail
Governance Enablers
Institutions and institutional characteristics such as capacity and political will are necessary to effectively leverage the governance capabilities of GRP. However, there is evidence that GRP systems, by themselves, reduce corruption:
- Controls prevent many corruption opportunity points
- Transparency through front-office systems changes behaviour because of the embarrassment factor
- Knowledge that all transactions are tracked changes behaviour because of the threat of being caught
Institutional governance enablers that are critical across the procurement lifecycle include:
- Capacity of stakeholders including businesses, civil society, legislature, anti-corruption organizations and the civil service for management and oversight
- Political Will by stakeholders such as the executive to support anti-corruption activities
- Standards used in public financials that provides better information to stakeholders
- Compliance processes and norms within the government
There are other institutional characteristics that are important during the lifecycle include:
- Accounting procedures used by the government that provides appropriate fiscal discipline using good practices and integrated with controls
- Access to transparency technology and maturity of civil society institutions during and after public investment procurement which can extend back to budget preparation to hold the government to account
- The independence and enforcement options for internal and external audit institutions to trap corrupt practices
It can be argued that appropriate institutional arrangements for anti-corruption will have limited impact without an effective underlying technology system:
- Auditors will be forced to track spending and compliance violations through paper files or across incompatible information systems
- Transparency mechanisms could result in publishing only the information that procurement officers wish to be published
- Manipulation of procurement processes will be difficult to uncover without an audit trail “smoking gun”
- Disconnection with the original budget process could result in the purchase of goods and services that have little to do with the intention to build a hospital
- Cash payment will reduce the ability for auditors to “follow the money”
Governance Signs
There are numerous signs that are used to measure the governance effectiveness of PFM in this scenario:
- Public Expenditure and Financial Accountability (PEFA) assessments are widely accepted as showing the PFM state-of-the-art in any country. PEFA provides detailed analysis of the comprehensiveness, efficiency and quality of PFM processes
- Transparency International Corruption Perception Index that uses surveys to determine the perception of corruption in a country
- Actual incidents of procurement corruption and prosecuted procurement corruption that becomes well-known in the country
Governance Linkages
In this anti-corruption scenario:
- GRP systems support automated transparency in the form of an e-procurement portals
- Governance tools within the GRP help to control corruption
- Transparency through the e-procurement portal changes stakeholder behaviour reducing corruption
- Procurement transparency improves the perception of corruption such as the Transparency International Corruption Perception Index
- Improved corruption perception and corruption processes will result in improved rating in the meta World Governance Indicator, Control of Corruption
(Take a look at FreeBalance customers’ success at addressing corruption here)
PEFA Impact
Although PEFA assessments lack some detail on procurement processes, a GRP with tools and enablers will help to improve ratings for:
PEFA B Comprehensiveness and Transparency
- PI-5 budget classification could be improved to show objectives and sector programs within the government books
- PI-6 increase in the comprehensiveness in budget documents thanks to improved planning and accessibility of procurement details
- PI-10 increase in the availability of financial information to the public via the e-procurement portal and through improved reporting
PEFA C(ii) Predictability and Control in Budget Execution
- PI-19 improved value for money through increased competition and improved commitment and procurement controls
- PI-20 effectiveness of controls for non-salary expenditures through budget, commitment and process controls integrated across accounting and procurement systems
- PI-21 effectiveness of internal audit through improved capacity, independence and access to audit trails
PEFA C(iii) Accounting, Recording, Reporting
- PI-22 improved timeliness of accounts reconciliation via integration and automation including bank reconciliation from payments made to the vendor providing the hospital
- PI-24 improved quality and timeliness of in-year reports through integration, automation and the use of international standards and good practices in accounting procedures that shows potential gaps between the proposed budget and actuals
- PI-25 improved quality and timeliness of in-year reports through integration, automation and the use of international standards that shows the impact of public investment projects like the hospital to the government books
PEFA C(iv) External Audit and Scrutiny
- PI-26 improved scope of external audit through independence, capacity and access to the procurement audit trail
Governance Indicators and Outcomes
The improvement of meta governance indicators like the Control of Corruption improves trust and investment in countries. These indicators are used by credit agencies. Foreign Direct Investment (FDI) can increase. “Doing Business” ratings can improve based on the transparency of government procurement that represents significant portions of business opportunities within developing countries.
The procurement “output” – the acquisition of a hospital through a process that reduces corruption can enable a small developing country to improve health outcomes. Some health outcomes are used by donors such as the Millennium Challenge Corporation (MCC) when evaluating funding decisions. Other health outcomes are tracked as part of the Millennium Development Goals (MDGs).
These health outcomes are not trivial. MDGs are highly politicized and play a significant role in donor and government priorities.
It is true that exogenous factors can prevent the smooth transition from GRP solutions to improved health outcomes. Yet, it is clear that a lack of corruption controls in the hospital procurement will negatively impact any governance outcomes.
Conclusions
Public investment programs are critical in developing countries. Infrastructure is needed to improve the transportation of goods to market. Hospitals and schools are needed to improve health and education.
Public investment programs are also fraught with corrupt practices even in developed countries. GRP systems are leveraged to reduce procurement corruption and to trap incidences of procurement corruption through:
- ICT security techniques to reduce manipulation
- User management integrated with GRP controls
- Audit trails and alerts to track manipulation of GRP systems
- Integration among systems to prevent corruption at interface points
- Transparency through e-procurement to enable civil society and competitors to monitor procurement
- Workflow that ensures that government procedures are used
These tools and techniques are best leveraged by governments with anti-corruption political will, good civil service and civil society capacity and audit organizations with sufficient capacity, independence and enforcement.
For more information on how the FreeBalance Accountability Suite™ can help address corruption, please get in touch.