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Red tape costs lives in Africa.
Why the fear of fraud shackles foreign aid and what we can do about it.


Roger Bate, Benjamin Schwab
March 24, 2005

With the ever expanding AIDS pandemic, many have called on developed nations to substantially increase their aid budgets. At the same time, many also want increased accountability from agencies and governments receiving the windfall to protect against fraud and abuse. This has the makings of a perfect storm, where increases in AIDS funding are siphoned away to honest underperformers in a fruitless attempt to bring about “zero tolerance” for fraud. Preventing fraud is good; but saving lives and promoting effective local AIDS programs is better.

The dilemma in AIDS funding, as in many other types of foreign aid, is ensuring sufficient oversight to maximally restrict fraud, while refraining from overloading recipients with mounds of paperwork that sap productivity.

Previous HIV aid efforts have focused mainly on getting as much funding as possible to those most likely to be able to make a difference, with little regard for accountability. The inevitable consequence has been poor oversight and small-scale fraud.

Limiting serious fraud is vitally important, especially now that the United States is embarking on a $15 billion worldwide AIDS program, the UK Government is increasing its health aid commitments and agreeing to write off all of its previous loans to African countries, and the Global Fund to Fight AIDS, Malaria and Tuberculosis also is increasing its efforts. In the next year, AIDS funding is expected to increase from $1 billion to $8 billion.

Fatima Hassan, an attorney with the Johannesburg-based AIDS Law Project who filed requests with the South African Attorney-General requesting investigations into AIDS finances, notes that "there are groups meeting their objectives and those that are not, but no one is holding them accountable." According to Hassan, the South African Government simply does not have the appropriate systems in place to prevent fraud.

In dealing with fraud, donors must strike a difficult balance between ensuring accountability and allowing grant recipients the freedom to be effective. Ignoring effectiveness, major Western government donors often err on the side of Kafkan anti-fraud practices. That’s unfortunate, because handicapping the effectiveness of aid money out of fear of a few instances of abuse is often far more wasteful than the fraud itself.

A prime example of this tendency is the U.S. Agency for International Development. USAID is so worried about bad publicity from small scale fraud that they employ huge Washington DC-based ‘beltway’ contractors to do much of their "giving", instead of taking a chance on organizations based in countries where the epidemic is raging.

Beltway contractors mainly provide what is known in aid lingo as ‘technical assistance’ (TA). In most cases, that assistance consists of hiring US-based organizations to consult with recipient governments on matters of policy. Occasionally, these groups will provide personnel training, though the human resource development goal is often subverted as the best local staff are hired away by other USAID-funded non-governmental organizations.

It is difficult to ascertain exactly how much USAID spends on administration for each project, since it is obsessively secretive with releasing any details relating to contract proposals, terms or budgets. It took a Congressional inquiry to convince the Agency to account for its malaria spending, and the subsequently released numbers were startling: 95 percent of its money allocated to contractors for TA-type activities and only 5 percent for buying life-saving commodities like medicine.

This means that the vast majority of U.S. (taxpayer) funding for malaria never leaves the United States and that only a few cents of every aid dollar ends up in the hands of the countries and people that need aid the most.

Bottom line: paper work doesn’t save lives.

It is a perverse betrayal of HIV victims and generous U.S. taxpayers to spend most of the USAID budget on big advice-giving contractors primarily because these groups are easier to monitor and have sophisticated accounting techniques - not to mention entrenched Washington lobbyists. USAID’s own refusal to account for its activities to its donors - US taxpayers - makes its obsession with accounting for every dollar even more hypocritical.

Worse still, the overzealous search for even minor abuses does little to encourage accountability in those local organizations that are actually effective in fighting the AIDS pandemic. For instance, the Treatment Action Campaign in South Africa, which tries to increase generic drug distribution to those with HIV, rarely discusses funding abuses in order "to avoid creating confusion or further disunity among people with HIV/AIDS and the organizations that represent them."

In other words, paranoia over fraud ignites a vicious circle of hiding the truth about fraud to prevent loss of funding, a secretive pattern set in motion by western aid agencies wrapping their recipients - effective or not - in swaths of red tape. Instead of reaching out for management help from Western agencies, grantees pretend that fraud doesn’t exist. When the truth comes out, public cynicism only increases.

True, it is difficult to balance the costs of credible accounting controls with the real dangers of fraud. Both expenses mean less money available for helping AIDS patients.

However, innovative local initiatives are finding ways to encourage integrity without sapping flexibility.

The South African Sibambisene AIDS Network, funded by the drug company Bristol Myers Squibb (BMS) and the Nelson Mandela Children's Fund, helps distribute money to 30 or so small organizations addressing the AIDS pandemic in South Africa, and each organization operates on only a few thousand dollars a year. Sibambisene helps small organizations account for money responsibly and provides basic training in banking and accounting. By relying on the excellent BMS ‘NGO Financial Management Pocket Guide’ it helps small groups achieve good financial practices.

Instead of demanding more paperwork and providing annual grants as a western agency would, Sibambisene audits major expenditures closely and regularly and never provides more funds at any one time than will sustain an operation for a month. Thereby, any fraud is by definition going to be minimal, and it can afford to tacitly accept that a small amount of abuse, such as its staff using work cell phones for personal calls, may occur. It doesn’t approve of small abuses but correctly recognises that major abuses are what people really care about preventing.

Recently, three of Sibambisene’s groups couldn't account for how they had spent most of their monthly funds. However, Sibambisene’s monitoring approach kept the embezzlement by staff members of the three groups to less than a thousand dollars. Furthermore, the guilty are now repaying the missing funds, and the local organization responsible does not receive monthly distributions any more. At the same time, there has been no knee jerk reaction to penalize other contractors with more regulations, and even the guilty groups can apply for funds on an ad hoc basis since many of their staff still do good work.

Teaching better program management, accepting some minor irregularities, and regular auditing of programs on a case by case basis makes far more financial sense than USAID’s approach of using US firms to try and manage African programs. As one Beltway consultant said (who declined to be named because of the risk of future contracts being withdrawn), "Paying USAID funded consultants more per week than was stolen in an entire year by the private Sibambisene groups is a poor allocation of resources."

Fraud will happen. Efforts need to be made to limit it. But striving for zero fraud inevitably wastes scarce resources, shackles local innovation, and cost more lives than it saves.

At the end of the day, AIDS donors should be more worried about getting value for their dollars than cataloguing how every dollar is spent.


Dr. Roger Bate is a fellow and Benjamin Schwab a researcher at the American Enterprise Institute in Washington DC.

 
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