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Managing Fiduciary Risk When Providing Direct Budget Support

Author: Department for International Development Governance Department
Date: 2002
Size: 25 pages (396 KB)

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Summary

The UK Department for International Development (DFID) is accountable to parliament for ensuring that aid funds are used for the intended purposes, properly accounted for and used in an efficient and economical manner. But how can DFID satisfy these fiduciary requirements when providing direct budget support?

This draft policy paper by DFID provides guidelines to assess and monitor fiduciary risk in the case of budget support. DFID has little control over funds that are directly channelled through central governments or sector ministries. Instead, DFID will need to provide reasonable assurance that direct budget support represents an effective use of aid. This will entail making an ex-ante assessment of the fiduciary risk inherent in the recipient government's accounting and procurement system; deciding whether the level of risk is acceptable and taking appropriate measures to mitigate and monitor the risks. Examples of recent DFID direct budget support programmes in Africa are given in the paper's annex.

Most developing countries are a long way off having a public expenditure management system that meets internationally accepted standards. Instead, a set of more basic standards need to be defined as benchmarks to assess the recipient government's accounting and procurement system and its associated risks.

• Accounting and procurement standards will evolve around the principles of transparency, comprehensiveness, timeliness and consistency.
• When assessment shows that there is a high level of fiduciary risk involved in channelling funds through central government or sector ministries, it may still be possible to apply short-term safeguards.
• The main monitoring tools include in-year financial reports and independent audited accounts of government expenditures.
• The acceptable level of fiduciary risk will be a matter of judgement in each case: Where the developmental arguments in favour of direct budget support is strong, a higher level of fiduciary risk may be justifiable.

Even when the conditions for direct budget support do not exist, DFID may still be able to adopt some of the principles of budget support, providing the government takes some essential steps to bring standards of public financial management to an acceptable level.

• Every effort should be made to avoid stopping or reducing funding. Instead, problems should be identified early through monitoring, and action should be taken to modify the way in which funding is provided, including the introduction of additional safeguards.
• DFID will need to devote more resources to helping developing countries' governments to strengthen public financial management and accountability.
• DFID will also need to continue to work with other development agencies and international financial institutions to harmonise their risk assessment and monitoring procedures, identify generally accepted standards of good practice, and co-ordinate their long-term programmes to strengthen public management systems in developing countries.

Access full text: available online

Source: Department for International Development Governance Department, 'Managing Fiduciary Risk When Providing Direct Budget Support', DFID, London.