Major recipients of aid often have weak institutions and systems to deliver aid, leading to "considerable" risks of fraud, a report by the National Audit Office says
LONDON (AlertNet) - Britain must step up efforts to minimise the risks of corruption in its foreign aid programmes as it boosts spending in the world's poorest and most unstable states, the National Audit Office (NAO) said on Wednesday.
In a review of financial management at the Department for International Development (DfID), the independent spending watchdog said the level of reported fraud is low but likely to be under-reported.
For the 2009-10 financial year, DfID uncovered losses due to fraud of £459,000 ($750,000) - around 0.01 percent of overall spending - of which £199,000 has been recovered so far. It received 96 cases to investigate, up nine percent from the previous year.
The report says investigation of fraud is reactive, and DfID makes no attempt to quantify its estimated likely fraud losses.
Sound financial management will be essential as foreign aid spending increases by a third over the next four years, the NAO says. The annual budget for programmes is set to grow by around £3.3 billion from 2010-11 to 2014-15, to reach nearly £11.4 billion that year. At the same time, DfID's administration budget is due to reduce by a third.
"The Department knows its increase in funding, and new approach to aiding developing countries, brings challenges," NAO head Amyas Morse said in a statement.
"This report shows considerable progress is being made, but a better information environment is needed to deal with the heightened levels of assurance required in targeting future aid at higher risk locations."
The report says countries that are major recipients of aid often have weak institutions and systems to deliver aid, leading to "considerable" risks of fraud and corruption. Graft in aid reduces the amount of money going to those who need it, as well its efficiency.
DfID plans to channel more of its aid budget to "fragile states" - developing countries that are affected by conflict, politically unstable, or unwilling to tackle poverty. These conditions usually translate into weak governance.
The NAO review shows that all nine of the countries where Britain plans to boost its spending by more than 50 percent over the next four years - including Somalia, Myanmar, Democratic Republic of Congo, Pakistan and Yemen - are perceived to have relatively high levels of corruption in an annual index issued by graft watchdog Transparency International.
"Whilst the Department's actual risk exposure depends on how it spends and the controls it puts in place, operating in high-risk environments necessarily means the potential for increased risk of leakage through fraud and corruption," the report says.
VALUE FOR MONEY
DfID has improved its core financial management and has launched a programme to strengthen its focus on value for money, the review says, but its financial management is not yet "mature".
Nor can it assess key aspects of the value generated by the aid it delivers - as it is required to do by the Conservative-Liberal Democrat coalition government which came to power in May 2010.
"This report makes some good points. That is why, from day one of the coalition government, we set about making fundamental changes to British development policy - for example, setting up an independent aid watchdog and pioneering results-based aid," said Andrew Mitchell, Britain's international development minister.
A DFID spokesperson added that the department has an anti-corruption unit tasked with identifying and preventing funds being misused, and publishes details of all its spending online.
The rise in aid funding comes at a time when other British government departments are having their budgets cut in an effort to reduce the public deficit. As a result, DfID will come under "intense scrutiny" from parliament as well as the new Independent Commission for Aid Impact, the report says.
But Sarah Bailey, a humanitarian policy researcher with the London-based Overseas Development Institute, warned against focusing too heavily on trying to eliminate corruption - which she said is "close to impossible" in fragile states.
"You need to take risks to generate results (from aid), and everyone needs to be OK with it," she said.
To control fraud, donors should not rely only on putting the right financial management systems in place. They must also employ competent staff who understand the context they work in, and encourage open discussion of corruption risks, she added.
Our Standards: The Thomson Reuters Trust Principles.
