GIZ support for budget implementation in Malawi

Evaluating politically sensitive good financial governance interventions

GIZ PFEM Malawi & Overseas Development Institute

October 2016

Outline

1. Context

2. Design of study

3. What are findings to date?

4. Lessons for other studies

2

Context

• World Bank SAPs included budget preparation already in mid-1980s

• Large WB PFM support project since 2003 (FIMTAP, 2003-2009)

• GIZ steadily increasing support since 2004 (goal: implementation of national dev. strategy)

– support to macroeconomic planning and coordination (2004-2006)

– added focus on improvements in budget planning and public finances (2006-2014), alongside budget support via KfW since 2007

– PFM strengthening in complement to budget support planned for 2014-2016

• US$120 million of support provided to PFM (IMF, 2016)

4

Malawi has had long standing support for improving PFM

Malawi seen to be making progress on PFM

5

Source: Folscher (2012)

2013 ‘Cashgate’ Scandal’

• Became apparent that payments were being made to suppliers and then transactions deleted from IFMIS

• Initial forensic audit estimated $32 million had been defrauded in six months

• Preliminary audit by NAO estimated that $207 million had been defrauded in 2009-2012

6

‘Opened eyes’ regarding functionality of PFM system

• Structural benchmarks 2012

– Configure IFMIS to support commitment controls

– Extend processes to capture donor-funded transactions in IFMIS

– Provide Ministries with quarterly spending ceilings consistent with quarterly fiscal targets

7

• Structural benchmarks 2016

– Reconcile all government bank accounts

– Produce monthly bank account control reports

– Review all bank accounts and close redundant and dormant accounts and

Cashgate has become synonymous with

misuse of public money

8

GIZ support

• Against this backdrop, Germany withdrew budget support and increased technical assistance for PFM improvements

• A €15.5m comprehensive project with the following objective:

– PFEM institutions are more accountable, effective and transparent

9

GIZ Programme “Strengthening Public Financial

and Economic Management (PFEM) in Malawi”

10

A

Improved IFMIS System and Cash

Management

Improved capacity of NAO according

to AFROSAI-E methodology

3

A1: IFMIS coverage,

stability, degree of usage improved

E2: Implementation of main recommendations

from tax incentivesstudy

A2: Improved Cash

Management through effective

steering by Cash

Management Committee

FinancialManagement is

improved

B1: Legal base in accordance

with international accountability standards is

drafted

B2: Five Pilot audits applying

international standards are

conducted

Follow-up of audit recommendations improved

C1: Regularity Audits of the NAO in selected areas (Income, Parastal

companies, etc) are done according to

INTOSAI Standards)

Accountability of use of public resources increased

C2: Follow up mechanism for

follow up of audit recommendations

D1: First EITI report published

Contribution to the common budgetary support for an efficient and transparent implementation of the national growth and devel opment strategy

(MGDS II)

PFEM institutions are more accountable, effective, and transparent

Increased acceptance of

the tax and budget system

by the Malawian

population

Sphere of responsibility of PFEM

New implementation phase (2014-2017)

1

2

4

Overarching goal

Development-oriented

and poverty-reducing

use of public funds

Improved life

situation of the

population

Improved legitimacy

of state action

C: ...

Legend:

Change expressedby an indicator of

the offer document

Result (Outcome,Output)

3

Activities,Instruments

A: Budget ImplementationThe Ministry of Finance is technically and structurally

enabled to implement a sound management of public finances

B: Internal AuditOrganisational and HR

capacities for an effective internal audit are established C: External Audit

NAO enabled to increasingly perform audits of public

finances in accordance with international standards

D: Demand for AccountabilityGovernment officials, media and citizens

have a better understanding of their rights and duties regarding public revenue and

its use

1

Budget Planning and Execution improved

Lamin Sanyang, Alfred

Nyasulu, Vitima Mkandawire

Marie Chantal Ingabire

Marie Chantal Ingabire Annika Wolframm/ Rachel Etter / Karen del Biondo

Increasedtotal revenue

D2: Action plan for

improvement of local budget implementation

discussed

E: DRMDecision makers are enabled tobase strategic decision-making,

planning and monitoring onreliable and transparent data

D3: 3 public diallogue fora

about topics of Good Financial

Governance conducted

E1: Implementation

of TADAT POA by MRA

Trust of citizens in MRA enhanced

George Margesson

Domestic resource mobilisation strengthened

E3: Revenue forecasting model available

A3: Long-term commitments from contracts integrated into

IFMIS

Design of study

A contribution analysis

• Step 1: Set out the cause-effect issue to be addressed (November 2015)

• Step 2: Develop the theory of change (January 2016)

• Step 3: Gather the existing evidence on the theory of change (Jan-Mar 2016)

• Step 4: Assess the contribution story and challenges to it (ongoing)

• Step 5: Seek out additional empirical evidence (ongoing)

• Step 6: Revise and strengthen the contribution story (ongoing)

12

Step 1 – Cause-effect issues to be addressed

– Whether GIZ interventions to strengthen the financial management system are

contributing to change? (e.g. are GIZ inputs contributing to expected outputs and outcomes

or not?)

– How are GIZ interventions contributing to change? (e.g. what kinds of inputs work well, how

are different inputs used by government etc.)

– Under what conditions can GIZ interventions contribute to change? (e.g. role of government

ownership, coordination between ministries, coordination between DPs etc.)

13

A

Improved IFMIS System and Cash

Management

Improved capacity of NAO according

to AFROSAI-E methodology

3

A1: IFMIS coverage,

stability, degree of usage improved

E2: Implementation of main recommendations

from tax incentivesstudy

A2: Improved Cash

Management through effective

steering by Cash

Management Committee

FinancialManagement is

improved

B1: Legal base in accordance

with international accountability standards is

drafted

B2: Five Pilot audits applying

international standards are

conducted

Follow-up of audit recommendations improved

C1: Regularity Audits of the NAO in selected areas (Income, Parastal

companies, etc) are done according to

INTOSAI Standards)

Accountability of use of public resources increased

C2: Follow up mechanism for

follow up of audit recommendations

D1: First EITI report published

Contribution to the common budgetary support for an efficient and transparent implementation of the national growth and devel opment strategy

(MGDS II)

PFEM institutions are more accountable, effective, and transparent

Increased acceptance of

the tax and budget system

by the Malawian

population

Sphere of responsibility of PFEM

New implementation phase (2014-2017)

1

2

4

Overarching goal

Development-oriented

and poverty-reducing

use of public funds

Improved life

situation of the

population

Improved legitimacy

of state action

C: ...

Legend:

Change expressedby an indicator of

the offer document

Result (Outcome,Output)

3

Activities,Instruments

A: Budget ImplementationThe Ministry of Finance is technically and structurally

enabled to implement a sound management of public finances

B: Internal AuditOrganisational and HR

capacities for an effective internal audit are established C: External Audit

NAO enabled to increasingly perform audits of public

finances in accordance with international standards

D: Demand for AccountabilityGovernment officials, media and citizens

have a better understanding of their rights and duties regarding public revenue and

its use

1

Budget Planning and Execution improved

Lamin Sanyang, Alfred

Nyasulu, Vitima Mkandawire

Marie Chantal Ingabire

Marie Chantal Ingabire Annika Wolframm/ Rachel Etter / Karen del Biondo

Increasedtotal revenue

D2: Action plan for

improvement of local budget implementation

discussed

E: DRMDecision makers are enabled tobase strategic decision-making,

planning and monitoring onreliable and transparent data

D3: 3 public diallogue fora

about topics of Good Financial

Governance conducted

E1: Implementation

of TADAT POA by MRA

Trust of citizens in MRA enhanced

George Margesson

Domestic resource mobilisation strengthened

E3: Revenue forecasting model available

A3: Long-term commitments from contracts integrated into

IFMIS

Step 2 – Theory of Change (GIZ results model)

14

Focus of our study

Step 2 – Theory of Change

15

IFMIS coverage, stability, degree of usage improved

Improved Cash Management through effective steering by Cash Management

Committee

Improved IFMIS and Cash Management

Long-term advisers, short term consultancies, training,

equipment

The Ministry of Finance is technically and structurally enabled to implement a

sound management of public finances

PFEM institutions are more effective, transparent and accountable

Step 2 – theory of change

16

Inputs

Outputs Intermediate Outcomes

Final Outcomes

Impacts

GIZ inputs

Other relevant donor inputs

Relevant government inputs

Changes to formal (de jure) laws, rules, procedures

Changes to system functionality

Changes to technological platform

Changes in people and skills

Changes to organisational leadership and incentives

Greater expenditure control

More efficient processing of transactions

Improved reports for decision making

Improved aggregate fiscal discipline

Improved allocative efficiency

Improved value for money from public spending

Improved financial accountability and transparency

Increased donor willingness to channel aid through government systems

Higher rates of economic growth

Reductions in poverty

Improved basic service delivery

Improved legitimacy of state action

Contextual factors Economic and financial constraints, political, institutional constraints

Examples of measures used

17

Inputs

Outputs Intermediate Outcomes Final Outcomes

Impacts

Description of different input types (e.g. TA, training, equipment etc.)

Largely measures of ‘form’:

• Changes to rules

• Changes in IFMIS modules

• Changes in organisational structures

Functional measures:

• % coverage of expenditures

recorded in IFMIS

• System processing times

• Use of information from IFMIS

for management reports

Fiscal outcomes

Fiscal indicators (e.g. deficit as % of GDP)

Measures of budget credibility

Not considered

Contextual factors Economic and financial constraints, political and policy constraints

Step 3 – first round of gathering evidence

• Initial round of data collection predominantly focused on assessing what change has happened between January 2015 and March 2016

– A series of formal and informal semi-structured interviews,

– Documentation provided by GIZ

– Reports in the media and online

– Publically available financial information

18

Findings to date

Change is the exception, not the rule

• Cronyism – people put in senior positions without public service commitment

• Traditional Social Pressure – Wamkulu salakwa/An elderly person is never wrong, i.e. your boss cannot be questioned – Kupeza zifukwa/A fault finder – Wankhanza/someone who is cruel, i.e. negative feedback is not socially acceptable

• “Acceptance” social pressure

– “It’s his turn to eat”, i.e. people appointed as leaders have the right to take financial advantage of their position

– “That’s normal” (e.g. receiving gifts from suppliers to accelerate their payments) • Pressure from informal rules to breach formal rules – Boss: “Do you want to be promoted? If so, do this.”

• Divisive donor projects/ activities – Allowances, top-ups, etc.

• Losing personal commitment – Others are benefiting more; who can you trust?;

• Need to survive, i.e. to get sufficient income and to keep one’s job;

20

Source: Government officials in DFID-funded workshop on Resource Accountability Improvement in Health Sector

Despite this, some evidence of change in the period

21

Outputs Intermediate Outcomes Final Outcomes

GIZ contribution

• Processes set up for reconciliation of government bank accounts

• IFMIS database rebuilt

• New IFMIS modules introduced (Forex, e-receipting)

• Increased ministerial compliance with

requirements to submit reports (0% to

80%) and number of unreconciled

transactions fallen

• Processing speeds improved

• Coverage of transactions recorded in

system increased,

Narrowly missed domestic borrowing targets

Contextual factors enabling change

– Economic context

• Macroeconomic weaknesses mean Malawi is keen to mobilise external financial support.

• Severe fiscal constraints are also creating pressure to improve controls

– Political pressures

• Daily media reports on ‘cashgate’ incidents

– Pressure on finance ministry to do ‘whatever it takes’

• Some clear ‘leadership’ of reform shown in wake of suspension of IMF programme

22

How GIZ have contributed to change?

– GIZ work has progressed furthest when consistent with IMF structural benchmarks

– Value of informal, well-informed, technical advice

• Informal, just-in-time, hands on assistance has been more effective than seeing GIZ-

supported strategic documents through to action (e.g. medium-term reform plan)

• ‘Resident advisor is ‘a technician’ – he does not just come with theories, but helps us with

finding solutions’

– Doing the job of others or ‘demonstration effects’?

• GIZ have mobilised contractors to assist in strategic activities – ‘they need to see that it can

be done’. Has not always been sustained after initial push, but may take time to become

‘institutionalised’

23

Why change hasn’t happened?

Gulf between donor and government responses

24

They lack capacity

They are not committed – we are

fed up of hearing ‘the dog ate our homework’

We have done a lot – the donors keep

moving the goalposts

The government

isn’t interested

We ask if they want our help, but

they then use money for things

that aren’t a priority

The Reserve Bank won’t help us

The training room is being used for another activity

This is no longer a problem – statistical

discrepancies are now always zero

Barriers to change

25

Proposed change Current status Barriers to change

Setting up cash management unit

Cash rationing undertaken from month to month

• Political economy issues - Finance ministry does not have authority to limit spending through the budget process

Processing of foreign currency transactions in real time

New module introduced, but implementation delays

• Weaknesses in collaborative problem solving - disagreements between Accountant General and RBM over how XR volatility should be managed

Address backlog of bank reconciliations

Salaries account yet to be fully reconciled

• Complex ICT systems issues making it difficult to reconcile transactions

Implications for programming

26

Barriers to change Implications for programming

• Political economy issues • Reframe ambition – ‘how can cash rationing be done better?’

• Weaknesses in collaborative problem solving • Role for external actors as ‘brokers’

• Complex ICT systems issues making it difficult to reconcile transactions

• Scope for sound, well-informed technical advice

Lessons for future studies and programming

Building strong evidence can be extremely difficult

• Challenges of establishing ‘truth’

– ‘we are making very good progress’

• 5 different people give 5 different answers to the same question

• Limited government enthusiasm for another evaluation on IFMIS

– ‘we are evaluated by DPs on a fortnightly basis’

• Issues of data access

– No management reporting

– Reluctance to share figures (whose reliability might be questionable)

Possible lessons for future studies

• Building evidence base – Informal interviews, can be significantly more revealing than formal interviews – Can draw insights from actors who get more access to info through the ‘front

door’ (e.g. IMF, WB) – GIZ advisers and well-connected national consultants valuable source of

information both for design of study and gathering evidence

• Benefit in clarifying ambition of studies – To assess how and why change happens? – To assess links between PFM and impacts?

• Comparison of interventions holding ‘country context’ constant could offer useful insights

Some possible lessons for GIZ programming in

Malawi (and elsewhere?)

• Role of using basic political analysis – What does history tell us about prospects for change? – Where is change likely to be possible and where is it unlikely?

• Financing

– A large budget cannot necessarily fix a large problem– issues of absorptive capacity, incentives etc.

• Still demand for people can provide solutions – A ‘technician’ whose technical experience fills a key gap (e.g. detailed knowledge of the ‘Epicor system’

used by government’)

• Role of contextual factors calls for flexibility in programming – Success dependent on courageous people willing to work against the grain in the ministry. – Backing people may get better returns than backing a ‘logical’ sequence of reforms

• Using advisers to provide feedback on progress

– Difficult to come up with formal ‘functional’ PFM measures – Advisers are much better placed than external actors to monitor ongoing functional performance

• Understand comparative advantage of GIZ relative to other actors:

– Helping shape strategies or providing nimble support to IMF benchmarks?