Posted by Fazeer Rahim, Richard Allen, Hélène Barroy, Laura Gores and Joseph Kutzin[1]
In response to the COVID-19 pandemic, many countries have created dedicated extrabudgetary funds[2] (EBFs) to mobilize resources and streamline emergency spending measures. A recently published IMF Note discusses the role these funds can play in the current crisis.
The note examines the motivation for setting up EBFs and describes a database of more than 40 funds worldwide compiled by the World Health Organization (WHO). It documents the diverse nature of these funds, discusses the risks that poorly designed funds can pose for public financial management (PFM) and provides guidance on how to design funds to make them efficient, transparent and accountable.
Reasons and Risks
There are several motivations behind creating EBFs in the current crisis. A central one has been to simplify procedures and accelerate spending. Other reasons include the need for a high-level control of measures, to pool public and private resources, coordinate interventions across different sectors and levels of government, or ring-fence COVID-19 spending.
Yet, for good reasons, EBFs are often regarded as suboptimal. In the absence of strong safeguards, funds with independent spending authority, bypassing normal budgetary and expenditure controls, can dilute accountability and weaken fiscal control, creating significant fiscal risks and corruption vulnerabilities.
The COVID-19 crisis heightens many of these risks. The rush to set up funds has led in some cases to a legal vacuum, in which their purpose, management and oversight are insufficiently defined. The pressure on governments to respond swiftly to the emergency has often led to the relaxation of ex-ante financial controls and procurement processes, and the weakening of oversight mechanisms.
The WHO Survey of COVID-19 Funds
Whilst the WHO survey reveals a wide diversity of approaches, some common features and patterns have emerged.
Legal backing, institutional design and governance: COVID-19 funds have generally been authorized at the highest political levels. Legal provisions are often vague on important governance arrangements, including the fund’s objectives and scope, procedures for spending decisions, or the interplay with government bodies and the budget system. The role of the ministry of finance varies widely, ranging from no role (example: Mauritania), to general oversight (Mauritius) to direct fund administration (Kenya, Mexico).
Revenue sources and pooling: While some funds draw on state budgets, in most cases, they pool private donations, public resources and external sources of finance to maximize the resources available for emergency responses.
PFM systems and spending modalities: Most funds operate through separate banking, financial management and reporting arrangements, outside regular PFM channels. Nevertheless, some countries use elements of their regular PFM processes (Ghana). Reporting modalities often bypass the government’s financial management information system. A few countries publish information on their fiscal transparency portals (Honduras, Togo).
Oversight: Some countries have put in place specific oversight mechanisms or commissioned independent audits to compensate for relaxed ex ante controls. Some countries’ Supreme Audit Institution (SAI) use innovative controls, such as interim audits (Sierra Leone) or concurrent controls (Honduras).
Sunset clauses: Only a few countries have indicated how to terminate funds post-crisis or what to do with unspent resources. In Kenya, for example, the regulations stipulate when to terminate the fund, but not how to use any remaining balances. Mauritius has no sunset clause but has defined how to use remaining sums.
Getting it Right
Countries wishing to establish new COVID-19 funds (or modify existing funds) should consider the following key points:
- Legal mandate. It is essential to clarify the purpose of the fund and its sources of finance, its management and oversight structure, including operational, reporting and accounting standards. The law should include a sunset clause.
- Purpose of the fund and revenue sources. The operations of the fund and its revenue sources should be defined in consultation with the government, development partners and NGOs.
- Management. A sound management structure could comprise an independent management committee for strategic decisions, an administrator managing the fund’s day-to-day activities, and technical teams for operations and financial management.
- Spending procedures. Standards of operational practice (SOPs) should cover the submission and approval of the fund’s operations, rules for payments, procurement and financial reporting. The relations with existing PFM systems should be specified.
- To the extent possible, COVID-19 funds should conduct transactions (and procurement) electronically, to lend speed and accuracy to transfers, maintain records and reduce operating costs.
- Transparency. Authorities should report on crisis-related spending, and disclose procurement contracts and the beneficial ownership of firms awarded contracts. Fiscal transparency also requires tracking the spending, through dedicated accounts or the FMIS.
- SAIs should have a clear mandate for auditing funds and publish reports in a timely manner. Ex post controls are particularly important when ex ante controls are streamlined for rapid response.
A French translation of the article is available on the following link.
This article is part of a series related to the Coronavirus Crisis. All of our articles covering the topic can be found on our PFM Blog Coronavirus Articles page.
[1] Fazeer Sheik Rahim, Richard Allen and Laura Gores are with the IMF’s Fiscal Affairs Department. Hélène Barroy and Joseph Kutzin are with the World Health Organization, Health Systems Governance and Financing.
[2] An EBF can be defined as a set of accounts or a government entity engaged in general government transactions, often with separate banking and institutional arrangements, that are not included in the annual state budget law.
Note: The posts on the IMF PFM Blog should not be reported as representing the views of the IMF. The views expressed are those of the authors and do not necessarily represent those of the IMF or IMF policy.
