Public finance and development: top things to read in December

Loans and repayment schedules, Mumbai, India. Simone D. McCourtie/World Bank CC BY-NC-ND 2.0

The American novelist F. Scott Fitzgerald is supposed to have once said to his fellow writer Ernest Hemingway, ‘You know, the rich are different from you and me.’ Hemingway replied, ‘Yes, they have more money.’

We write our last round-up of 2020 as an incumbent President in the United states has refused to concede to the victorious opposition candidate and has pressured ruling party operatives to invalidate votes in opposition party strongholds. Here in the UK, a Covid-19 procurement scandal is gathering pace. Author Oliver Bullough commented: “I'm accustomed to seeing [corruption] in developing countries, and essentially the mechanisms here are the same: cutting corners, doing favours, making money.”

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In looking across country income levels, we should have as much sympathy with Hemingway’s viewpoint as with Fitzgerald’s. While there are many differences, often the underlying challenges in improving public financial management, and the performance of the public sector more broadly, are the same. We’ll cover corruption in the emergency response to Covid-19, Zambia’s recent debt default and what it says about the international system for dealing with sovereign debt more generally, and the latest work on tax in Africa.

Risks in emergency procurement

The UK’s National Audit Office has examined procurement that took place in the first six months of the Covid-19 crisis. It notes that while emergency procurement methods may have been necessary, the risks increase was not adequately mitigated. Potential conflicts of interest were not dealt with, errors may have occurred and there was a lack of transparency with contracts not published in a timely manner. As a result, the standards needed to maintain public trust were not always reached.

As the chair of the Public Accounts Committee said, “even in an emergency, public procurements need to get the basics right. Clearly, too many didn’t.” The existence of a “high priority” channel to which politicians or officials could refer firms to has raised particular concerns about the risk of cronyism. The warning lights are flashing red.

Unfortunately, the UK’s experience may be the rule, rather than the exception. The Open Contracting Partnership’s synthesis of research on emergency procurement in twelve countries found extensive use of ‘multipurpose firms’ with no specialisation or prior experience of selling the purchased items. It also found evidence of direct contract awards to firms that were only one or two months old. Lastly, the research revealed serious problems with quality, timeliness and completeness of data.

In Lithuania, for example, access to information requests revealed that 73 contracts worth 5.5 million euros were not proactively disclosed. In Kenya, only 125 out of 40,000 procuring entities published any information on the national procurement portal during the crisis, and only a single non-competitive contract was published, despite rules requiring disclosure.

Transparency and accountability in procurement

Many of these failures could be addressed by taking into account these ten recommendations (PDF) for policy-makers on ensuring transparency in emergency procurement from the University of Sussex’s Centre for the Study of Corruption. The World Bank, the Organisation for Economic Co-operation and Development (OECD) and the United Nations Office on Drugs and Crime (UNODC) have also developed a Good Practices Guide on preventing and managing conflicts of interest in the public sector.

How should procurement arrangements differ according to the quality of government? There is often a trade-off between flexibility or discretion and tighter regulation. The former can allow officials to pursue better social or economic outcomes but might also lead to greater corruption. Tighter regulation on the other hand may limit flexibility, but it could also limit opportunities for corruption. In line with this, a new paper using 2019 survey data on public procurement law and practices from 187 countries argues that regulation is helpful when government capacity is low, and harmful when it is high.

The World Health Organization, the Global Fund, United Nations Development Programme and the World Bank are working together under a new alliance for Anti-Corruption, Transparency and Accountability (ACTA) in Health. It aims to work with governments and communities to institutionalise appropriate anti-corruption mechanisms in the Covid-19 health response, and advocates that these mechanisms need to be built on the principles of transparency, accountability, and openness. Potential actions countries could take include:

  • a risk-based prioritisation framework to focus corruption prevention efforts in the areas where it could cause greatest harm to health outcomes
  • the establishment of a multi-stakeholder, multi-sectoral oversight body to promote dialogue and cooperation to mitigate corruption risks
  • greater reliance on bottom-up social accountability.

If you are interested in the issue of corruption in the health sector, then the work of the Anti-Corruption Evidence research consortium at SOAS, University of London is well worth a look.

Zambia’s default highlights weaknesses in the sovereign debt architecture

In last month’s round-up, we highlighted the urgency of improving the international architecture for sovereign debt restructuring. Two recent developments this month have laid bare the deficiencies of the existing system.

1. Zambia’s debt default

On 13 November, Zambia officially defaulted after talks with its bondholders to secure a six-month standstill on debt payments hit an impasse. At the heart of Zambia’s current predicament is the challenge of treating creditors in a comparable manner. Days after the default, Finance Minister Bwalya Ng’andu explained that despite the damaging effects of missing a bond payment, he could not pay bondholders without paying other creditors. Both bondholders and Chinese creditors have expressed fears that any relief granted will be used to pay the other.

Nonetheless, a few days after the default, Zambia’s finance ministry announced that it had reached an agreement with China's Exim Bank to suspend debt service payments worth $110 million. It remains unclear whether other Chinese creditors are participating in this suspension. Full transparency of debt restructuring terms is important, as shown by a recent study by the Center for Global Development which found that the Republic of the Congo was actually worse off after rescheduling its debts with China. This was due to the revised terms which involved extended maturities but higher interest rates.

2. The G20 common framework

On the same day as Zambia’s debt default, G20 finance ministers also announced the first details of the common framework (PDF). China’s participation in coordinating the bilateral creditors is an important step forward, as it is not part of the Paris Club group of major creditor countries. But aside from this, the framework is disappointing in several respects.

Civil society groups have criticised the initiative on three points:

  • It excludes vulnerable middle-income countries.
  • The initiative does not propose a mechanism to ensure private creditor involvement, despite insisting that debtor countries seek comparable treatment from all their creditors.
  • It shies away from debt cancellations which will only be done “where necessary”.

A more ambitious proposal calls on the G20 to move beyond the common framework. It calls on the leaders to require public and private creditors to provide a substantial debt cut to a broad set of low- and middle-income countries, in exchange for a commitment to a green and inclusive recovery.

Zambia’s default, coupled with limitations of the G20 common framework, casts a long shadow over the international system at a time when many countries are experiencing heightened debt vulnerabilities or actual debt distress. Finding ways to maximise incentives for creditor-debtor engagement in pre-default restructurings is of utmost importance to avoid the mistakes of past restructurings where debt relief given was too little and too late.

Tax in Africa

It has been a busy month for analysis of taxation in Africa. The African Union (AU), African Tax Administration Forum (ATAF) and the OECD jointly released an analysis of revenue statistics for 30 African countries between 1990-2018. This highlights that tax revenues across these countries have been flat for five years at 17% of GDP and are being substantially reduced by the Covid-19 crisis.

As well as the usual run-down of trends in tax and non-tax revenues, it has a chapter on the impact of the African Continental Free Trade Area on revenue, and the tax response to Covid-19. Interestingly, it found that out of the 23 ATAF members analysed, Lesotho, Rwanda and Uganda undertook the largest number of measures.

There is no shortage of material to help make sense of these trends. The University of Manchester’s Effective States and Inclusive Development Research Centre has released a series of case studies on the politics of revenue administration in Kenya, Rwanda and Zambia, helping to understand the patterns of performance in these countries.

Over at the International Centre for Tax and Development (ICTD), Mick Moore sets out a more general explanation for the under-performance of African revenue administrations, the “registration obsession.” He argues that African revenue administrations are too focused on registering taxpayers from the “informal sector” to ensure that this sector pays taxes. But this is a diversion, as these small-scale businesses will only ever have small tax liabilities. The major sources of uncollected revenues are the undeclared incomes and assets of the wealthy and tax exemptions given to firms.

Lastly, on property tax, the World Bank has a new property tax diagnostic manual that provides guidance on diagnosing the strengths and weaknesses of these systems, and how to develop a reform plan to improve them. And in Kananga, capital of Kasaï-Central Province in the Democratic Republic of Congo, a property tax campaign did not just improve tax compliance, but also increased citizen participation and demands for accountable governance.

Existentialism and programme budgeting

To end the year, some philosophical reflections on performance budgeting (yes, you did read that right). To anyone whose efforts to implement this reform has led them to ponder the meaning of life, you have my sympathies.

Authors

Research Fellow
Tom Hart specialises in budget reforms, fiscal decentralisation and fragile states [...].
Shakira Mustapha
Research Fellow
Shakira specialises on public administration and development finance. Previously she worked with [...]