DFID's Methodology for Managing Fiduciary Risks
Our March 31, 2008 post presented the recent DFID's Policy Paper on extending development aid through direct budget support. It indicated that provided that some conditions are in place DFID favors direct budget support. DFID like all the other development practitioners do recognize the fiduciary risks involved by the provision of aid through this form. Therefore, DFID has developed a methodology to manage fiduciary risk in its bilateral aid programs.
This methodology is the object of a DFID "How to note" published on January 30, 2008. Its full text can be accessed by clicking on the following link: Download howtonotefiduciaryrisk1.pdf .
This fairly technical note, which is mainly targeted towards DFID's country office staff, is nevertheless of interest for all PFM practitioners.
Fiduciary risk is defined by DFID "as the risk that funds are not used for the intended purposes; do not achieve value for money; and/or are not properly accounted for. The realization of fiduciary risk can be due to a variety of factors , including lack of capacity , competency or knowledge; bureaucratic inefficiency; and/or active corruption."
"DFID's approach to managing fiduciary risk is based on three mutually reinforcing principles:
- Understanding the fiduciary risk environment
- Mitigating risks to the proper use of funds
- Monitoring performance on an on-going basis."
DFID's standardized method for Fiduciary Risk Assessment (FRA) is remarkable for at least two features.
First, the FRA is built around an assessment of the strengths and weaknesses of the public financial management (PFM) system and of the possibility of improving PFM through a credible reform program. This a clear illustration of the direct link between PFM reform and the provision of aid for development.
Second, the performance of the PFM system is by default based on the Public Expenditure and Financial Accountability (PEFA) Framework indicators and on the related narrative; it is only when results of the PEFA Framework are not available that DFID staff is supposed to use DFID older 15 benchmarks. DFID's note shows how much the PEFA Framework and the PEFA Strengthened Approach (below) have gained importance in the development community in the last few years.
Paragraph 33 of the note indicates in particular that "as far as possible, the FRA should draw on information from a country's most recent PEFA Framework evaluation." Annex 6 to the DFID's note sets out the relationship between PEFA and the FRA in practice, highlighting how PEFA Framework information feeds into the FRA assessments.
Furthermore, as regards mitigating risks, DFID's note states that there are "three main ways to mitigate fiduciary risks through:
- the choice of aide instrument ans use of a mixed aid program to spread risk;
- on-going support to partner government reform programs to strengthen PFM systems, and to related institutional reforms (e.g., Public sector Reform); and
- the use of short-term safeguards around specific aid instruments, if necessary."
Here again, the approach is closely linked to PEFA. Paragraph 80 emphasizes that: "in the medium- to long-term, the most sustainable way to manage fiduciary and corruption risk is to work with partner countries to improve their overall control environment. The PEFA Strengthened Approach is DFID's way of supporting PFM reform. The PEFA Strengthened Approach has three elements:
- a country-led PFM reform strategy and action plan;
- a co-ordinated IFI-donor, multi-year program of work that supports and is aligned with the Government's PFM reform strategy; and
- a shared information pool (provided through the PEFA Framework).
This approach embodies the Paris Declaration principles of ownership, alignment, harmonization, managing for results, and mutual accountability, for the PFM sector."