Misused Public Funds

Misused Public Funds Fuel Government Mistrust

Numerous multilateral organisations, including the World Bank and African Development Bank, note that corruption is a severe hindrance to a country’s development goals. Despite this reality, corrupt practices manifest themselves in a number of ways in Ethiopia – perhaps most notably in the misuse of public funds used for mega construction projects. In some cases, monies that were given to these projects go missing, unaccounted for, or are misallocated, resulting in delays or overspending. These phenomena are especially problematic, as publicly funded projects are meant to benefit the general population and are usually beholden to strict deadlines and budgetary constraints. In fact, according to the Auditor General’s Report, the Ministry of Education and a number of public universities have mismanaged around ETB2.08 billion in the 2014/15 fiscal year. EBR’s Ashenafi Endale consulted stakeholders and research to gain more insight into the potential mishandling of public funds and offers this report.

Due to the developmental state ideology the Ethiopian government follows, which emphasises state-led macroeconomic planning and execution as well as strict control over the economy, the fate of public resources is left in the hands of public institutions.
These institutions, however, are sometimes prone to corruption, which is defined as the use of public office, funds or power for private gain. Given the realities of the developmental state model, corrupt practices may occur but go unnoticed because the entities responsible for identifying illicit acts are often government offices, which potentially compromises impartiality.
Identifying and thwarting problematic activities is particularly important with regard to public funds, as these monies are intended to help build infrastructure to benefit the general populace and are often collected in the form of taxes. As the country pursues its goal of attaining lower middle-income status by 2025 through public mega projects, the need to establish effective and efficient public money management is a particularly important task. Due to the failure to finalise projects on time after utilising large sums of public funds, public money management poses a particular concern in Ethiopia.
Multilateral organisations have even suggested key sectors are prone to corrupt practices with public funds. In its report entitled ‘Diagnosing Corruption in Ethiopia’, the World Bank says the construction sector, which is responsible for the large-scale infrastructure projects that have contributed to the country’s rapid economic growth, “exhibits classic warning signs of corruption risk.” According to the study, these include “instances of poor-quality construction, inflated costs, and delays in implementation. In some cases, these instances may have resulted from corruption driven by unequal contractual relationships, wide-ranging discretionary powers exercised by government, a lack of transparency, and a widespread perception of hidden barriers to market entry.”
These challenges are exemplified in a number of high-profile construction delays. For instance, a few months ago officials of the Ethiopian Sugar Corporation reported to the Parliament that the construction of 10 sugar factories awarded to the state-owned Metal and Engineering Corporation (METEC) could not materialise even after the Corporation paid up to 97Pct of the total cost for some of the projects. The total cost of the projects was estimated at ETB77 billion.
As a result, the country has continued importing sugar for consumption and the import-export imbalance of the country has become uncontrollable – reaching -20Pct in 2014, one of the worst in Africa, according to the International Monetary Fund’s (IMF) 2015 Regional Economic Outlook – despite the project’s aim to export sugar and substitute imports. The projects, some of which have yet to begin construction while others are progressing sluggishly, were expected to produce 4.9 million tonnes of sugar and 446 million litres of ethanol annually.
Again, in May 2016, dissatisfying news about poor public money management surfaced in Ethiopia when the Auditor General’s 2014/15 Report presented to Parliament revealed the Ministry of Education (MoE) and 17 universities mismanaged ETB2.08 billion.
The MoE, which itself mismanaged ETB342.3 million according to the Report, is also undertaking the construction of 11 new universities, in addition to its responsibility of regulating the education sector. The Public Procurement and Property Administration Agency also topped the list in the Report, mismanaging ETB342.2 million.
Charges of mismanaged funds are not new in Ethiopia. In an exclusive profile featured in EBR’s July 2015 edition, Auditor General Gemechu Dubiso said problems relating to corruption are entrenched in government offices: “Ever since I took this job, the findings of the auditing reports mainly indicate three setbacks: the failure of providing proper documentation for procurements, expenditures that have not been properly accounted for and lack of clarity in finance administration.”
Still, Gemechu says that the perpetrators of corrupt practices often go unpunished: “I have never come across any official who has been discharged from his position or sent to court for wrongdoing,” he told EBR.
The other area in which large sums of public money have been mishandled is the Integrated Housing Development Programme. Since the introduction of the Programme in 2004, the government was able to deliver only 205,482 housing units, of which 142,028 are in Addis Ababa. The construction of 171,492 houses is still on-going under the 20/80, 10/90 and 40/60 schemes. The target set to build 400,000 houses before last fiscal year did not materialise due to continuous setbacks in the projects.
However, the government still plans to build 2.4 million houses in the next five years of the second phase of the Growth and Transformation Plan (GTP) period, of which 750,000 houses are planned for Addis Ababa, where there is a severe shortage of housing.
Shemeles Eshetu, Planning, Implementation and Follow-Up Officer at the Ministry of Urban Development and Housing (MoUDH), says that although the aim of the housing programme is to deliver timely, cost-effective houses, the delays have resulted in price escalations, including the recent price revision in the 40/60 housing schemes, which was close to double the former prices.
“The main reason for the delays is the lack of infrastructure at the project sites,” he says.
Despite the delays and the poor quality of the constructed units, the state-owned Commercial Bank of Ethiopia (CBE) has disbursed over ETB32 billion in loans for the projects so far. Of the total, ETB15 billion was disbursed in the 2015/16 fiscal year, although the government institutions assigned to administer the Programme requested a total of ETB29 billion for the year, according to data from the MoUDH.
However, another high-ranking official at the Ministry, who spoke to EBR on the condition of anonymity, says that the main challenge in the housing programme is corruption and rent-seeking behaviour, which he says is ubiquitous – from the top officials down to the contractors.
“The number of houses built and their quality never matches the amount of money the CBE disburses,” he says. “Nobody knows the exact amount of money spent on a condominium house, except through the loan document from the CBE. There is a big challenge in lack of capacity and human resource that’s deterring the Ministry from tracing the effectiveness of the public money down to the buildings on the ground.”
What’s more, during the recounting of condominiums, 18 blocks were missing from projects, though the money to build them was already spent. As a result, the CBE informed the MoUDH that beginning in the 2016/17 fiscal year, the Bank will only release money after evaluating the exact amount it disburses and what is done with it, according to the official.
Another state-owned entity that has garnered a reputation for failing to deliver infrastructure projects and wasting resources is the Ethiopian Water Works Construction Enterprise. One of its time-consuming projects is the construction of Rib Dam, which began in 2008 with ETB1.2 billion, but is still under construction in spite of its deadline, which passed four years ago.
The project was supposed to be developed on 20,000 hectares of land in the south Gondar zone, in State of Amhara, for irrigation purposes. As a result of the delay, the cost of the dam has reached over ETB4.1 billion, according to Tinfu Muche, who works in the Communication Affairs Department at the Ethiopian Construction Works Corporation (ECWC), which was established with ETB20.3 billion authorised capital last year. The new Corporation was established by merging the former Ethiopian Water Works Construction Enterprise and the Ethiopian Road Construction Corporation.
It has also inherited ETB1.9 billion in unpaid loans from the Enterprise, in addition to the delayed projects. A total of 20 projects, 10 from the Enterprise and 10 from the former Ethiopian Road Construction Corporation are currently under construction by the ECWC, most of which were already delayed before it took over, according to Tinfu.
Hailemeskel Tefera, the former State Minister of the then Ministry of Urban Development, Housing and Construction, leads the ECWC. The Corporation was established to implement and oversee various areas of construction, upgrading, maintenance and the administration of infrastructure across all sectors; the assembling of construction equipment and machinery; manufacturing spare parts; and maintenance services for construction equipment and machineries, among other things.
Experts also argue that in addition to wasted or missing funds, the mismanagement of investments leads the economy into debt stock, which they say will ultimately burden taxpayers.
“Delays in any project have an impact on the total economy,” says Yoseph Biru (PhD), Director General of the Ethiopian Construction Project Management Institute. “If the capacity matched the demand for construction, we could have saved huge resources.”
The Institute is responsible for initiating policies and action plans to develop a competitive construction project management sector, identify gaps within project management, and facilitate the certification of construction management professionals.
Globally, the issue of public financial management – which includes budgeting, spending, and managing public monies – is gaining momentum and many governments have established legal frameworks to promote fiscal responsibility by passing laws intended to improve discipline, transparency, and accountability. As a result, innovations in accounting and reporting are increasingly being developed and adopted by a growing number of governments because without good information governments can’t make educated decisions about public finances.
According to the IMF, public financial management is concerned with how governments manage the budget in its established phases: formulation, approval and execution. It deals with the set of processes and procedures that govern all aspects of expenditure management in government. It is also interdisciplinary, drawing from economics, political science, and public administration, as well as accounting and auditing.
However, according to many literatures written on the subject, its relevance in fiscal policy-making has evolved over time, so has its definition. According to a study entitled ‘Public Financial Management and Its Emerging Architecture’ published by the IMF, public financial management is now seen as an “umbrella” definition, covering a set of systems aimed at producing information, processes, and rules that can help support fiscal policy-making as well as provide instruments for its implementation.
Experts have established the key objectives of public financial management, which include maintaining a sustainable fiscal position, the effective allocation of resources and the efficient delivery of public goods and services. With overall economic uncertainty likely to continue into the foreseeable future, the management of fiscal risk is expected to continue gaining prominence, especially in developing countries that are trying to maintain robust economic growth.
Scholars urge that public resources should be applied in a manner that benefits the general populace. Therefore, government institutions should be guided by certain principles when they manage these resources. These principles, in turn, will inform the development of the public entity’s rules, policies and procedures.
Alexandre Afonso, an Assistant Professor of Public Policy at Leiden University in the Netherlands, argues that sound public finance management is a key factor of fiscal policies that are conducive to economic growth. Therefore, he says that the relationship between economic and social development, proper public investment and sound money management are crucial.
Yoseph agrees with this analysis: “Development cannot be realised without carrying out huge public infrastructural projects. But there is a huge demand for the development of infrastructural projects, which is putting pressure on the government.”
As a result of such pressure, however, he says no regulatory agency gets enough time to conduct detailed studies before starting a project. “The sugar projects are a good example of this,” he argues. “Every project has a reason and, at the end of the day, that project must be finalised on time, with the expected specifications that fulfil its aims, which needs an efficient contractor. However, most of the projects in Ethiopia start without feasibility studies.”
Despite the existence of legal frameworks and guidelines, critics have been offering a range of explanations for the on-going failures in Ethiopia, from institutional incompetence to high staff turnover, which has meant the individuals responsible for making decisions are rarely around to face flak when the project misses deadlines and financial targets. This is exacerbated by the fact that in Ethiopia it is often difficult to identify who has the prime responsibility for a particular project.
This is why stakeholders stress that everything that may deter the implementation of the project must be studied first. However, there are misconceptions and most projects in Ethiopia, especially the large ones the government develops, as they don’t always undergo detailed studies. The south Omo sugar project, which suffered a landslide after construction started, is one example according to stakeholders.
Yoseph argues there are exceptional projects, like cave excavation, where contractors can start excavating and work on the design side by side. “However, starting projects above the ground without detailed studies always has negative results,” he says. “Such effects may be losing invaluable economic opportunities, wasting [meagre] resources and putting pressure on the economy.”
Experts stress that any delay in any project has an impact on the economy. Among the others, citizens keep paying salaries for public employees, funding machinery rentals and many other costs, while the projects are delayed, engendering or exacerbating mistrust in government. “There are foreign contractors who purposefully delay projects, find reasons like rain, and claim compensation that costs Ethiopia a lot of money,” argues Yoseph. “The Modjo-Hawasa road project is one example in this regard. In order to address this reforms [is important] in public entities. Otherwise it will open room for corruption.”
This is why corruption is widely seen as one of the biggest impediments to economic growth, investment and poverty reduction in developing countries, where public money management is often weak or inefficient. In fact, there are several sectors in Ethiopia that are particularly vulnerable to corruption, especially those that are overwhelmed by huge public projects such as road, railway, electricity and water, among others.
For instance, last year the Federal Ethics and Anti-Corruption Commission revealed a study that demonstrated that the contracting practices of the Ethiopian Roads Authority were vulnerable to corruption. They disclosed that the Authority is also prone to cost and time overruns.
The Commission found gaps in 20 projects it assessed, all of which were run by the Authority. Tendering procedures, especially in the form of awarding projects without considering the track record of companies, has resulted in time and cost overruns, compromising the quality of the Authority’s work, according to the study. These overruns, in turn, lead to hundreds of millions of birr in additional costs on some contracts.
In addition to the money the country looses in the form of corruption, the mismanagement of enormous government projects has cost taxpayers billions of birr in the past few years, as civil servants failed to meet their responsibility to deliver programmes in a timely and fiscally efficient manner.
Experts argue that public management reform did not develop in a vacuum globally. The drive for public management reform was a response to the increasing dissatisfaction with governments of developing countries like Ethiopia that register poor performance in maintaining economic and social development. This is despite the fact that public institutions should be accountable for their performance and provide full and accurate accounts of their activities.
There are developing countries that are currently reforming their public service sectors because of concerns about economic performance, the changing needs or demands of citizens and institutions, and a decline in the trustworthiness of their respective governments. Many agree that Ethiopia should take lesson from these countries to improve long-term growth perspectives and take equity considerations into account. EBR

4th Year • September 16 2016 – October 15 2016 • No. 43

Ashenafi Endale

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