Financial management: reducing complexity and risk
The IHP+ Financial Management Technical Working Group met for the first time face-to-face in Geneva on 18th June 2014. IHP+ interviewed Renaud Seligmann from the World Bank and Chair of the working group to find out more.
Q. What did the FM working group discuss at the meeting?
Our working group discussed the problem of financial management arrangements in developing countries. Here, the core issue is that the health sector has many financial players. The government has its own money, then there is money from multi-lateral development banks, most of which are involved in the health sector. On top of that you have a large number of funds and foundations that deal with single diseases, or multiple diseases: the Global Fund, GAVI, PEPFAR, the Bill and Melinda Gates Foundation, etc. Each of these donors individually has fiduciary obligations to their own donors (to take care of the money responsibly). They have to account for the money they have received and how it has been spent.
In order to be able to do that, each of these organizations tends to set up their own financial management arrangements. This means the funds flow to a bank account that they have set up specifically for that purpose, they hire accountants, they set up accounting systems, they require certain rules to be followed, audits to be undertaken, and certain reports to be provided. So the whole cycle of accountability is purposed or custom-built for that particular donor. It makes perfect sense from the perspective of the donor.
The problem is that when you aggregate all of this in a sector like health where there are many players, what you end up with is chaos. There is such a complex array of stove pipes, all of which are going to the same organizations, the same hospitals, the same FBOs and CSOs that are providing primary care and services. If you look at it from the perspective of the recipient countries, it is extremely ineffective.
Q. What are the consequences of this?
There are three sorts of consequences that flow from this situation. Firstly, for governments, there are very high transaction costs associated with doing business with development partners in the health sector. You can see that measured in terms of person hours spent undertaking the financial recording of transactions, and following specific rules for each donor that might be different to other donors’ rules and from the Government’s own set of rules.
The second issue is that it is not effective from a fiduciary perspective. The very fact that there is so much complexity in the financial management system creates risks. It creates opportunities for fraud, for double-dipping (for example, getting the same vehicle paid for by two different organisations, and presenting the invoice twice), duplication (for example, where two items are bought while only one is really required) and misreporting. Because of the complexity of the financial management environment, it is very difficult to identify and mitigate these issues.
While every single organization might think that individually their risks are covered because they have their own system, which gives them comfort, actually in practice they are exposed to a much greater risk. This is because the system as a whole is overly complex.
The third consequence, which in a way is the worst from a developmental perspective, is that this piecemeal approach is a hindrance to strengthening the system as a whole. If donors are only worried about their own pot of money, then how can anyone see if budgeting – funds flow, internal controls, internal audits, external oversight - for the whole of the health sector makes sense? This approach also undermines the development of sustainable staff capacity in financial management. Each development partner is looking to staff their own project implementation units with FM staff, which uses scarce human resources very inefficiently.
If you have poor overall budgeting money does not get to the right places in terms of geography or diseases. There might be too much money in recurring costs like salaries, and not enough for equipment or vice versa. There might not be the correct procurement of vaccines or pharmaceuticals and there can be losses along the logistics supply chain. No one is getting good value for money. It can result for example, in fewer bed nets for families, fewer people being vaccinated, or fewer mothers receiving good antenatal care.
The quality of public FM in the health sector has a critical impact on health and development outcomes. It is very important from a fiduciary perspective to reduce transaction costs, and reduce fiduciary risks inherent with complexity.
Q. What can be done to make the situation better?
We need to ensure that oversight is strengthened through appropriate capacity building, by ensuring that there is a robust FM information system, and the right segregation of duties overall in the system. You cannot do that unless you take a view of the whole system, and unless donors are prepared to provide money, not just for their own pot but for the whole system to improve. A systems approach is necessary.
The piecemeal organization-by-organization approach to FM arrangements in the health sector is a huge obstacle to systems capacity building. By not focusing on this, we are overlooking something that has critical importance to the quality of health service delivery, outputs and outcomes.
The FM working group is going to work on these issues. We are going to raise awareness about the importance of FM from both a fiduciary perspective and developmental perspective to all agencies in the health sector, at HQ and country levels. All agencies need to understand, acknowledge and act on the unintended consequences that are associated with the fragmentation of the FM arrangements.
We are going to assess the costs of this fragmentation in terms of transaction costs, and in terms of money lost that cannot be spent on other things (such as bednets, vaccines, pharmaceuticals or doctors and nurses). For example, if money is being spent on duplicative arrangements, then there could be a more effective and harmonized way of working.
We will highlight these critical links and provide evidence to demonstrate their impact on the quality of public FM systems and on outputs and outcomes in the health sector.
In developing countries, we often find there is a difficult dialogue between the Ministry of Health, the Ministry of Finance and Development Partners, which is not necessarily conducive to focusing appropriately on these issues. We are going to disseminate some tools that already exist about Joint Financial Management Assessments (FMAs - done by IHP+ already) and develop new tools or guidance about good practice as needed. We will also facilitate in-country dialogue between all these stakeholders.
Finally we are going to identify more countries where there is a demand for development partners to work in a more joined-up manner on FM arrangements and look at doing joint FMAs and possibly joint fiduciary arrangements.
The idea is that we will have stronger health systems because there will be stronger FM arrangements. There will be lower transaction costs and lower fiduciary risks. Who will benefit in the end? Patients will get better services and value for money. Donors will have lowered their risks, and their interventions will be more cost effective. Donors will no longer be in the situation where their own requirements are posing an undue burden on the systems of countries they are supposed to be assisting.
It is an ambitious goal, but we are being very pragmatic in how we approach it. We acknowledge that not everything is going to be done in one day, so we will work in parallel on raising awareness, advocacy, increasing demand for harmonization and providing practical steps to make it happen.
Renaud Seligmann is Manager of the West and Central Africa Financial Management Unit at the World Bank. He is Chair of the IHP+ Financial Management Working Group.
Photo: Children lie under a mosquito net. © 2007 Gilbert Awekofua, Courtesy of Photoshare
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