The Impact of Accounting Systems on Project Funds Absorption Capacity, Case Study of Agricultural Research Projects in Rwanda

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The Impact of Accounting Systems on Project Funds Absorption Capacity Case study of agricultural research projects in Rwanda
By: Laurent NDIRAMIYE, BAS, MBA
Maastricht, September 2008
This paper was written in the framework of an MBA thesis at the Maastricht School of Management (MSM) under the supervision of Prof Eno L. Inanga

ABSTRACT

The absorption capacity is one of key indicators on which financing agencies base the allocation of financial resources to sponsored projects, and should hence be closely monitored. Its level was reported to be low in developing countries, according to studies conducted by the World Bank, the OECD and ODI. However these studies focused on macroeconomic indicators and less on developing measurements of institutional funds absorption capacity, as pointed out by EU experts. Low absorption capacity was also suspected in agricultural research projects in Rwanda, pointing at the financial set up and especially the ability of the accounting system to effectively and efficiently address proper management needs in research project funds. Using tools utilized by the EU to assess the administrative funds absorption capacity (NEI, 2002) of countries candidate to its recent enlargement, and financial indices used by Manasan and Mercado (2001) to measure the financial absorption capacity of public works agencies in the Philippines, the researcher measured the Overall Absorption Capacity in agricultural research projects in Rwanda, and highlighted the impact of project financial management and accounting systems. The study showed that the administrative funds absorption capacity in agricultural research projects in Rwanda is currently 65%, ranked as ‘not yet sufficient’ by NEI, 2002. Financial indices showed that for 61% of the projects, the OACI is less than unit, confirming the ‘not yet sufficient’ level. However, 39% were found to perform above unit, giving hope that if highlighted weaknesses were corrected, the absorption capacity would improve.

Key words: Accounting systems, Funds absorption capacity, Financial Management, Project Management
INTRODUCTION
Development financing
Development financing has been externally assisted for a long time. According to the Organisation for Economic Cooperation and Development (OECD), the annual Official Development Assistance (ODA) to developing countries has doubled from 1997 to 2006, rising from $32.394 billion to $76.96 billion (OECD, 2008). This trend was significant for Africa, one of the main destinations of ODA, and especially for the Sub-Saharan Africa, which continues to depend on official aid for its development; as a result of low industrial development, increasing population pressure, and the impact of frequent climate, social and political instabilities. ODA to Sub-Saharan Africa, excluding South Africa, increased from $11.7 billion in 2000 to $37.5 billion in 2006 (Ratha, Mohapatra and Plaza, 2008), with half of total ODA in 2006 being allocated to this sole region. On the other hand, most economies and communities in developing countries depend largely on agriculture, and part of the ODA, even though decreasing - according to IFAD (2008), ODA going to agriculture declined from 18% in 1979 to less than 3% in 2007 - is complemented with countries’ development investments to this sector, to incease agricultural production. However, sustainable agricultural productivity requires the development of environment friendly production technologies, adapted to and easily accessible to low income populations. To this end, part of agricultural development financing in these countries is allocated to Agricultural Research. Agricultural research share in development financing

The share of financing allocated to agricultural research, also referred to as Agricultural Research Intensity Ratio (ARI), is the percentage of agricultural gross domestic product (AgGDP) that is reinvested in the form of agricultural research expenditures....
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