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Agency for International Development

Recommendations and Actions

AID05: Establish an AID Innovation Capital Fund

Background

The Agency for International Development (AID) must significantly improve its information management capability to adjust to reduced funding levels and a field presence restructured in response to the end of the Cold War. Reductions in the level of operating expense funds between fiscal years 1993 and 1994 make it difficult, however, for AID to reengineer its processes. Without capital funding for information systems development, AID will be hindered in meeting its reporting requirements and empowering managers with useful project information. AID must invest in order to build its capacity to accomplish its mission.

Information Management Deficiencies. AID has been widely criticized for deficiencies in its information management. The agency's systems are considered antiquated and unintegrated and consequently do not support management decision making. The accounting system cannot comply with some federal accounting standards. Layers of redundancy exist in the current system structures. Management improvements proposed by various studies conducted over the last several years regularly involve the application of new information technology as integral parts of the corrective actions.

Deficiencies in both financial accounting and program information processing have combined to exacerbate AID's resource management problems. Financial management systems and operations in the agency have been reported by AID as high-risk material weaknesses under the Federal Managers' Financial Integrity Act since 1988.(1) The General Accounting Office (GAO) has criticized AID for its lack of effective funds control. GAO noted the proliferation of unintegrated systems, identifying more than 100. One core criticism has been that the financial accounting and control system and the mission accounting and control systems are not in conformance with government-wide accounting standards.(2) GAO recommended that AID develop a comprehensive business plan, centralize information resources management (IRM) leadership, incorporate IRM planning into agency strategic planning and resource allocation processes, develop system standards, educate agency decision makers on information initiatives, and complete initiatives to identify information management requirements.(3)

Unintegrated Reporting. The Joint OMB-AID SWAT Team, which comprised analysts from both agencies, reported that:

AID cannot assemble an "official" portrait of AID's large, diverse field activity portfolio because the agency's information systems lack essential data, are not coordinated, and do not collect information in a consistent manner.

The report continued:

AID uses many automated and manual systems to monitor field activity. AID's systems are not integrated, operate on older proprietary computer technologies, and are often duplicate and overlapping. This leads to inconsistent, inaccurate and incomplete reporting that managers frequently do not trust.(4)

During the National Performance Review (NPR) interview process, criticism was frequently expressed regarding the decentralized management structure that had developed at AID and an apparent failure by senior management to exert centralized policy control over automation initiatives. Recent responses to a worldwide AID request for comments indicated a strong field concern about the number and obvious duplication of headquarters reporting requirements.(5)

Consolidating Data. Corporate data sharing (centralized data shared by the entire agency) would serve to consolidate reporting and make higher quality and more comprehensive information available faster to both headquarters and field staff. Until AID has the telecommunications capability to provide connectivity with all of the field missions, the agency automation systems will be operating in a mixed mode, with some information coming in electronically and some by incompatible diskette requiring re-entry in Washington--a process that substantially increases the likelihood for data error.(6)

AID Information Systems Plan. AID has begun to respond to the criticisms. The agency has completed a comprehensive information systems plan (ISP) geared toward integrating the basic financial, procurement, personnel, and program management functions of the agency by sharing data electronically across office boundaries throughout the agency. A comprehensive business process reengineering initiative is under way as part of the ISP process. This ISP has been favorably reviewed by General Services Administration (GSA). The GSA team briefed AID officials, OMB financial and technical analysts, and NPR staff in June 1993 regarding the outcome of its review. The ISP was seen as technically sound but ambitious, given the lack of resources available to carry it out.

AID has actively pursued implementation of the Army Corps of Engineers Financial Management System (CEFMS) to replace AID's current accounting system. CEFMS was selected by AID over off-the- shelf software because AID personnel believed it was: (1) from an agency with project management requirements similar to AID, and hence about 70 percent compatible without modification; and (2) available without licensing fees. AID will have to modify either type of software to suit its specialized requirements. AID contends that commercial software will require much higher levels of costly modification for full implementation. The system is currently undergoing extensive testing at AID. The new system is based on establishing centralized corporate data sharing and relating resources to program measures. AID has provided briefings on its findings to the departments of State, Agriculture, and Commerce, and the United States Information Agency.

Financial Constraints. Upgrading information management (along with other capital-intensive innovations) at AID has been seriously impeded by rapid expansion of the agency into the countries of the former Soviet Union without program reductions elsewhere. It has also been affected by constraints on the operational expenses account. These two situations have strained AID's ability to put its automation infrastructure in place. AID has requested funding for automation initiatives every year for three years and has received only partial funding. AID has limited authority, with OMB approval, to reprogram some project money into the operational expenses account. Such a transfer has been authorized by OMB and could be expanded with cost analysis by AID.

Funding Structures. Increasingly common in state and local governments, innovation funds allow organizations to invest in capital intensive information management hardware, training, or other infrastructure required to fundamentally reengineer work processes. As in the private sector, reengineering business processes depends on both the application of the right amount of capital investment at the right time and a measurable return on investment. A good example for AID would be development of a paperless travel management system, which would cost money to implement but would yield substantial savings in reduced staff-time requirements. Opportunities like this exist throughout the agency. One or more of the following approaches could provide a source of innovation funds for AID, if legislative and funding issues can be resolved:

--- Cost savings could be retained in an innovation fund account and allocated by the agency for individual projects.(7) This has the advantage of creating an incentive for managers to save resources for innovation purchases. It has the disadvantages of legal restrictions (e.g., the ability to carry savings across fiscal years) and the long wait for enough cash to accumulate so that the innovation would have a substantial impact. AID will have difficulty meeting fiscal year 1994 needs given the operating expenses reduction from fiscal year 1993 that the agency will be absorbing. The likelihood of operating expense funds becoming available is slim.

--- An innovation fund could be established within normal budget authority by making across-the-board cuts and replenishing depleted funds with savings realized by the new IRM efficiencies.(8) This model has the advantages of speed and simplicity, plus the incentive of reinvesting savings. In AID's case, this approach may be difficult, however, because across-the-board cuts have already been made, and the scale of funding needed to accomplish reengineering would require more capital than might be available.

--- Funds could be borrowed from program account(s) and paid back with interest. This approach has the advantage of simplicity and provides an incentive to create savings. It also offers the additional benefit of reversing the normal flow of funds from the program accounts into the administrative accounts. This action, however, would require a presidential determination and congressional consultations. Absent legislation, such funds would remain available only for a single year. AID has limited authority to shift program funds to cover operating expenses.

--- Funds could be requested in a separate appropriation or an emergency supplemental to provide seed money for a capital fund. The appropriation should preferably be for more than one year. This type of fund would be replenished with interest through payments from the end users of the innovation. If funded from the foreign operations account, the Budget Act would require off-setting reductions in other AID accounts. This suggests the need for a governmentwide innovation account that is not credited only against the foreign operations account.

Repayment to the Fund. Money advanced to pay for an innovation should be considered as a capital investment loan that must be repaid. A request should be accompanied by a comprehensive rate of return analysis that demonstrates whether investment in capital information technology will reduce future operating costs and yield a positive return.

The lenders, in this case Congress and OMB, need to have assurance that the resources will not simply fall into the general operating account and dissipate. Funds made available for capital projects must not be diluted. Objectives must be clear and progress measurable. A clear repayment structure must be agreed upon at the beginning, reflecting the useful life of the innovation, and any policy-related conditions must be laid out unambiguously. Ideally, the repayment should originate with the end users themselves based on actual use of the innovation.

Actions

1. AID should work with OMB and Congress to establish a revolving capital investment fund.

In AID's case, given the current financial constraints under which the agency is operating, a separate appropriation or an emergency supplemental seems best. The specifics of any funding arrangement must be agreed upon by the parties, but several general principles apply. To begin realizing savings, sufficient funding authority must be established to substantially implement the innovation or capital project. The investment capital fund should be established in a separate appropriation, which would be offset against some portion of AID's current information management funding levels and would be accounted for over several fiscal years. AID should request authority from OMB and Congress to replenish the fund from savings in operating expenses and program accounts achieved by eliminating obsolete systems and other management improvements. Payments against the innovation loan should be subtracted directly from AID's appropriation. Savings realized by the innovation should be available for reprogramming by the AID administrator.

2. AID should target sound projects from the Information Systems Plan for funding.

The agency's focus should be on: (1) agencywide data sharing through improved connectivity, (2) the financial management system, and (3) the automated program management system. These are the areas that have either been subjected to the majority of the criticisms or have the greatest likelihood of success. This would demonstrate the utility of the new technology, build faith in outside observers regarding the agency's ability to correct internal problems, and improve the management of the agency.

3. AID should conduct a thorough cost-benefit analysis of any proposed capital expenditure.

Congress and OMB must be satisfied that a proposed capital expenditure will produce a positive benefit justifying its cost. Accomplishing a fundamental change in the way that an agency does business, using unproven technology with borrowed funds, is a proposition that requires a high level of confidence from the participants.

4. AID should obtain customer input during business process reengineering.

AID has a good but tenuous start on analyzing its business processes. Key to the success of this endeavor is the need to bring those who will be using the systems into the design process. In AID's case these customers are all over the globe. This critical process cannot be cut short, and will require a commitment of resources from the innovation fund to ensure adequate participation of all customers, particularly overseas missions. The systems implemented should serve both the user at the country mission level and the managers in Washington. There must be incentives for each user to support the system. Focus should be on the three areas outlined in the second recommendation.

5. Implementation of the Army Corps of Engineers Financial Management System (CEFMS) should be expedited.

This system has been made available to AID as a solution to its project-oriented financial management systems requirements. It is viewed as an alternative to more costly private sector off-the-shelf systems. Tests are underway to determine modifications necessary to meet AID and core financial system requirements. OMB has recommended to GSA that a waiver under OMB circular A-127 be granted, to permit AID to acquire CEFMS, if AID meets several specific OMB-imposed conditions.

Implications

The recently completed information systems plan is a large step forward for AID, but more than a good plan will be required to gain the confidence of the agency's critics. The recommendations will result in quicker and more comprehensive implementation of AID's information systems. The financial decision making on these substantial capital expenditures will be made more transparent, and the return on these investments will be better understood and documented. With competent business process reengineering, work will be performed more efficiently and be better understood by both management and those at the implementation level.

Fiscal Impact

A thorough reengineering of management systems has the potential for creating substantial operational savings; however, these savings cannot be estimated at this time.

Endnotes

1. Agency for International Development, Federal Managers' Financial Integrity Act Report (Washington, D.C., December 22, 1992), p. 6.

2. See U.S. General Accounting Office (GAO), Foreign Economic Assistance: Better Controls Needed Over Property Accountability and Contract Close Outs, GAO/NSIAD 90-67 (Washington, D.C.: GAO, January 22, 1990); U.S. General Accounting Office, Foreign Aid: Problems and Issues Affecting Economic Assistance, GAO/NSIAD 89-61BR (Washington, D.C.: GAO, December 30, 1988); U.S. General Accounting Office, Foreign Assistance: Funds Obligated Remain Unspent for Years, GAO/NSIAD 91-123 (Washington, D.C.: GAO, April 9, 1991); U.S. General Accounting Office, AID Management: Strategic Management Can Help AID Face Current and Future Challenges, GAO/NSIAD 92-100 (Washington, D.C.: GAO, March 1992); U.S. General Accounting Office, Foreign Assistance: A Profile of the Agency for International Development, GAO/NSIAD 92-148 (Washington, D.C.: GAO, April 1992). See also, U.S. Congress, House, Committee on Foreign Affairs, Background Materials on Foreign Assistance (February 1989); and The President's Commission on the Management of AID Programs (the Ferris Commission), Report to the President: An Action Plan (Washington, D.C., April 1992).

3. See U.S. General Accounting Office, Information Resources Management: Initial Steps Taken But More Improvements Needed in AID's IRM Program, IMTEC-92-64 (Washington, D.C.: GAO, September 29, 1992).

4. Joint OMB-AID SWAT Team, Improving Management at the Agency for International Development (Washington, D.C., 1992), p. 12.

5. AID cable 143458 requested field perspectives on AID's goals and priorities.

6. Agency for International Development, Action Plan for Implementing the Recommendations of the Joint OMB-AID SWAT Team (August 31, 1992), p. 11.

7. A useful example is the Treasury Department's Working Capital Fund, which is used primarily for information resource purchases. The Treasury operating manual is called Management Plan for Information Systems TD P 84-02.

8. The Department of Commerce operates the Commerce Pioneer Fund, which makes cash grants of up to $50,000 to finance innovations and productivity improvement projects. The funding source is an annual appropriation set-aside.

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