Trust, but verify

Ronald Reagan and the Belgian law dealing with subsidy conditions

Ronald Reagan used this old Russian proverb (“Doveryai, no proveryai”) when referring to his relationship with the Russians in the context of the nuclear disarmament in the 1980’s. In essence, the proverb refers to the understanding that any agreement needs to be accompanied by some type of verification to ensure compliance. It’s okay to trust, but one should not be too naive about it.

In Belgium, subsidies are agreements that are subject to verification. Actually, if you read the legal framework, which is the law of May 22, 2003, article 121 states that any beneficiary needs to account for the use of the subsidy, unless the law absolves him or her of such an obligation. Article 122 states that by accepting the subsidy, the beneficiary gives the Belgian Kingdom the right to execute verification on the use of the subsidy amounts attributed to the beneficiary, at the premises of said beneficiary. Article 123 of that same law states that if the beneficiary does not comply with the conditions under which the subsidy was granted, does not use the subsidy for its intended purpose, or hinders verification, he needs to repay the part of the subsidy not appropriately accounted for. Finally, article 124 explains that the payment of subsidies are halted for the duration of the time the beneficiary does not provide the information required under article 121 or refuses to be subjected to the verification under article 122.

What we have here are four quite short articles that govern the entire use of subsidies in the Belgian context. They clearly impose a verification requirement. But, there is an issue.

Compliance and verification is costly

A complaint I’ve heard quite often, about both Belgian federal and European subsidies, is that compliance is very costly. Some beneficiaries even comment that the cost of compliance is higher than the actual financial benefit they derive from the subsidy. And that cannot be the purpose.

The same goes for the verification authority itself. Verifications are costly, and are often a combination of administrative and content specific verification. Administrative verification for example would assess whether the money had been spent with authorised suppliers, in authorised contexts.

Aid money can sometimes only be used within the own developing country, as one of the secondary effects is to support the local economy.

Content verification would be an assessment of whether the money spent had been spent on the correct, relevant purchases.

Aid money aimed at supporting the development of an seed based agricultural ecosystem should not be spent on purchasing fish, for example.

And verification is often done by administrations, structures which have seen cut after cut after cut in effective numbers of personnel. So I’m not sure that those administrations are readily equipped to handle this type of work any longer.

So what should administrations do?

I’m a firm believer that administrations, rather than focus on the administrative compliance, should invest in content skills and experience and focus on doing the content verification work in close collaboration with a trusted third party responsible for the administrative verification.

Administrations have an obligation to support a government in decision taking, by providing that government with the necessary deep insights in subject matter under their responsibility. Such decision support activities need to be based on good information, but also on deep understanding of the subject matter. Scenarios where administrations work together with universities and other academic structures are entirely possible.

But there is another actor in this subsidy distribution and verification cycle: the trusted third party.

What is the trusted third party?

The trusted third party is an organisation that manages the entire administrative flow of the subsidy, including appropriate distribution to the correct, entitled beneficiary and ensuring that the use of the subsidy is within subsidy parameters. It significantly lightens the burden on the beneficiary in terms of accounting for the appropriate use of the subsidy, as the use of the subsidy is done within its systems. The party is trusted in that all actors, administrations, beneficiaries and the taxed population – which ultimately provides the tax income that constitutes the budget – trust this party to manage this flow and the administrative verification linked to it.

Ideally, such an organisation can not just manage the flow but support the administrations in distributing the most appropriate amounts to the beneficiaries based on their profiles. The organisation would do this for a nominal fee per transaction.

The verification triangle

In my opinion, the most cost-effective manner to ensure compliance with the applicable legal subsidy framework is therefore a combination of the administration responsible for the budget from which the subsidy stems, a group of content experts from that administration as well as from academic environments and a trusted third party, neutral to the transactions and paid on the basis of such transactions, which can provide the flow management and the verification of the administrative handling of the subsidy.

Can this become a reality?

Of course, what I’ve described already is a reality … it is an abstraction of the subsidy flow related to service vouchers, a means in Belgium’s three regions to pay for household help, with some help from the governments.

The actual end-solution is even more complex and therefore more interesting than the general abstraction described here. The service voucher organisation manages what is in effect a blending engine, a system where a subsidy is being combined with a payment, in this case by the beneficiary, for a certain percentage of the services.

But this solution should not only be limited to the service vouchers. There are many subsidies, both to individuals and to organisations, that could be managed like this subsidy is. It would not only free up the scarce resources the government has to focus on content verification (often referred to as “inspection”) but would also lead to a more efficient subsidy system at an acceptable cost for the tax payer and at an optimal compliance cost to the beneficiary.