Trusted Budget Expenditure in Development Finance
An article published by Lamia Boufaied on Feb 7th, 2022.
Need for transparent and secure implementation of public investments in development countries
Lots of questions come into one’s mind when one learns about the huge amounts of funding in development finance, whether one lives in a recipient country or a donor country…
Donor countries are highly interested in tracking their development finance and monitor the use of funds, whereas the recipient countries are more inclined to channel funds through their national accounting systems, which makes it hard to track. Although the Paris Declaration in 2005 clearly stated more the need for more efficient structures, donor financed projects still require complex individual structures of each donor instead of using the national procedures and IT applications (for budget, accounting, tendering etc.) of the partner country.
This leads to a multitude of different procedures and requirements, which often run counter to a nationally coordinated development strategy and further burden the generally weak capacities of the partner countries.
One possible solution
KfW Development Bank supports developing countries and emerging economies, on behalf of the German Ministry for Economic Cooperation and Development (BMZ), by financing programmes aiming at fighting poverty, maintaining peace and protecting both the environment and the climate, like many other donors. KfW has developed a new tool based on blockchain named TruBudget (Trusted Budget Expenditure). The advantage of this technology is that the partners can work together in a trusting and responsible manner. There is no need for costly risk mitigation or control measures. This technology can also improve the sustainability of the use of funds, because donors can process the funds through the systems of the recipients, which was not possible until today due to the existing risks.
With TruBudget, KfW has developed an open source solution that allows transparent and secure control of the use of donor funds, which was previously impossible. Complex parallel structures and processes of donor harmonization with high transaction costs are eliminated. Developing countries are enabled to integrate external project financing into their own budgets and manage it themselves. This improves the impact and sustainability of support.
TruBudget uses blockchain technology to map work processes for a defined group of partner institutions (private blockchain) in a transparent and unfungible manner. Work processes relevant to project implementation include, for example, the allocation of funds, tendering procedures and payment processes, whereby payments continue to be made traditionally via fiat accounts but are logged on the platform. In contrast to cryptocurrencies, “TruBudget” uses a different technical procedure, the so-called consensus mechanism, which is much less resource-intensive than mining. This blockchain technology supports the development cooperation of partner countries and donor organizations by 1) reducing transaction costs; 2) improving transparency and efficiency in project implementation; and 3) strengthening local governance and administrative structures.
TruBudget Pilot in Tunisia
The KfW TruBudget pilot is hosted in different countries like Burkina Fasu, Ethiopia, Georgia and Tunisia. Besides the German cooperation also the French Agence Francaise de Development and the Danish DANIDA support the blockchain approach.
Tunisia: Within the framework of the constitutional reform in 2014 and as a result of the communalization plan in Tunisia, 86 new communes/municipalities were created, and 187 other former communes were extended to cover all the areas previously not covered by communal administration. The new communes/municipalities thus created have urgent investment and support needs related to their new installations (administrative buildings and urban parks, road and lighting infrastructure, engines, equipment and economic projects). The procedures are, due to the multiplicity of stakeholders (municipalities, communes financing institution, donors, ministry etc.) and the multiple authorizations required very heavy to manage.
The TruBudget tool supports these multiple elements (stakeholders and different procedures) on all levels, reducing the workload inherent in project management and speeds up the processing of information, through the automation and traceability of document exchange between the communes financing institution and other stakeholders. With TruBudget, it is possible to cover and monitor all procedures from annual planning to tendering, to project execution and payments.
In the future new municipalities like El Bahra El Kef in Tunisia, which was recently visited by a KfW project supervision mission, can focus on the real needs and implement the so urgently needed infrastructure. The workflow becomes automated and clearer, documents don’t get lost any more, authorizations become traceable and tenders become more transparent. Instead of learning double structures of donors and being constantly slowed down by controls the administration of the partner country (recipient) can focus on development for their citizens and the KfW (donor) benefits from the more efficient implementation of funds — mutual trust is build.
Piet Kleffmann from KfW experienced a multitude of challenges setting up the project in different countries: “The liability of an entry brings up two controversial positions. One part reflects about the question of forgiveness of mistake (Can I make mistakes?). And another part feels more released to be able to make decisions trackable, especially when it comes to tendering processes.” In conclusion TruBudget is a modern governance tool for both sides: donor and partner countries. A successful implementation can open the door for the further use of DLT in Development Finance. “Especially Budget Supports is a potential use field, but also totally new approaches working on the idea of global goods can be supported via blockchain using digital public goods platforms where donors, partner countries, service providers and startups come together to finance and implement projects.”
This solution is a small contribution to ensuring that the funds get to where they belong in a more direct and sustainable way.
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