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Managing Fiduciary Risk When Providing Poverty Reduction Budget Support

Author: Department for International Development
Date: 2004
Size: 4 pages (588 KB)

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Summary

Do the potential developmental benefits of providing Poverty Reduction Budget Support (PRBS) justify the risks involved? DFID is accountable to Parliament for the use of taxpayers’ funds. Making sure that aid resources are utilised for the intended purposes, properly accounted for and that they deliver value for money is therefore part of DFID’s main responsibilities. This document by DFID provides operational guidance on how to assess fiduciary risk in relation to PRBS.

Analysing the extent to which fiduciary risk requirements can be met in specific country situations allow staff to make informed judgements to guide aid decisions. Once partner governments receive the grants DFID is no longer in control of their use. To provide reasonable evidence to support decision-making, fiduciary risk assessments involve evaluating partner countries’ Public Financial Management and Accountability (PFMA) systems and their credibility. If the level of risk is acceptable, adequate mechanisms to monitor and mitigate risk have to be developed. The document provides good practice principles and benchmarks to guide the assessment process.

Fiduciary risk is likely to be a problem in many developing countries. DFID will engage with countries that have not met a minimum standard of public financial management performance if there is evidence of a credible programme to improve it. The key issues to consider in this process are:

• The historical, governance and institutional context of PFMA systems and processes.
• The dynamics of power underpinning PFMA processes and their potential for positive change, along with the existence of incentives to reinforce accountability and transparency.
• The risk of corruption and the existence of credible anti-corruption efforts. Explicit mechanisms should be in place across the various levels of the PFMA systems.
• The participation of non-state actors in a comprehensive assessment that can promote ‘citizen voice’ and accountability.
• The adequate ways to provide substantive fiduciary protection against key risks. Short-term safeguards are fragmented and ineffective in PRBS initiatives.

Before committing to a PRBS agreement, DFID should ensure that the issues identified by the fiduciary risk assessment are addressed and that explicit mechanisms to monitor risk and measure progress are in place. Key matters to consider are:

• DFID should continue to carry out fiduciary risk assessments. These facilitate comparability over time and enable the development of a consistent approach across countries.
• DFID should develop, in dialogue with the partner, an adequate and sustainable set of measures to achieve sequenced improvement of PFMA systems. The focus should be on the key fiduciary risks identified.
• DFID should restrict the burden and transaction costs imposed on partner governments. Fiduciary risk assessments should draw on existing information and diagnosis if possible.
• DFID should continue to support a harmonised approach. Ideally, assessments should be based on partner government’s own analysis and carried out in co-ordination with other donors, involving civil society.
• DFID should continue to enable consultation amongst its different teams to ensure the consistency of findings. Analysis should be reviewed and concerns highlighted by teams with specific expertise.

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Source: Department for International Development, 2004, ‘Managing Fiduciary Risk When Providing Poverty Reduction Budget Support’, DFID How to Note, DFID, London.
Author: Department for International Development (DFID), http://www.dfid.gov.uk