DFID ASSESSMENTS OF FIDUCIARY RISK

The U.K. Department for International Development (DFID) recently decided to channel more of its resources through direct budget support. But while it is highly committed to this initiative, DFID realizes that in many cases the conditions are not yet appropriate. As a result only about a quarter of DFID funding takes the form of direct budget support or sectorwide approaches.

To improve its ability to conduct fiduciary risk assessments, DFID has prepared a series of internal papers, including Managing Fiduciary Risk When Providing Direct Budget Support (March 2002). The purpose of this paper and related documents is to provide guidance to DFID staff- many of whom are not specialists in financial management-on how the public expenditure elements of fiduciary risks should be assessed and managed when DFID provides funds directly to recipient governments to be spent as part of their budgets. The paper also sets out DFIDs approach to using additional safeguards to ensure that such budget support focuses on poverty reduction, and proposes directions for future collaboration with other development agencies to harmonize approaches.

A fiduciary risk assessment must be completed before DFID can provide budget support. Thus such assessments are key inputs into DFID decision-making about many of its client countries. The timing of an assessment is determined by the needs of the relevant country desk.

DFID assessments of fiduciary risk are mainly derived from data and analysis gleaned from other instruments such as CFAAs, CPARs, HIPC AAPs, and Fiscal ROSCs. The 2002 DFID paper defines fiduciary risks and states that assessments should focus on whether it is reasonable to expect that transferred resources will be used for the intended purposes and properly accounted for and that the expenditures will represent value for money. The paper recognizes that in many of the poorest countries that DFID supports, financial management and accountability systems fall below internationally accepted standards

A review of government and donor action plans to strengthen public expenditure management and monitor improvements.

Establishment of performance indicators-in the context of national action plans or country assistance programs-that are monitored and evaluated with beneficiary governments and other donors. Annual updates of the compliance tests will contribute to this process (EC 2002).

but that direct budget support may be the most effective way to deliver assistance-provided that a thorough evaluation of fiduciary risk has been undertaken, the government has a credible program to improve public expenditure management, the potential development benefits outweigh the risks, and the risks are explicitly recorded as part of DFIDs decisionmaking process.

As noted, DFIDs assessments rely heavily on the results of CFAAs, CPARs, and Fiscal ROSCs, and in some countries (such as Malawi) it has collaborated with the Bank in carrying out CFAAs. (DFID has also produced an interim guide for staff on the conduct and uses of CFAAs; see DFID 2001a.) DFID staff are given a list of good practice principles and related benchmarks for assessments. Monitoring should be closely tied to the governments budget cycle, linked to the governments poverty reduction strategy, and shared with other donors.

In Uganda, for example, the government and DFID have reached an understanding on how fiduciary risk will be monitored over time based on four information sets: one annual expenditure tracking survey per sector, an annual review of the governments audited accounts, the outcomes of PER updates, and technical assistance and dialogue built around the governments public expenditure reform program.

DFID expects that in most cases its fiduciary risk assessments will show that governments are working to address their weaknesses in financial management. In such cases DFID is prepared to complement its budget support with long-term capacity enhancement programs-including, in close collaboration with other donors, provision of technical assistance and training. DFID will also combine such support with efforts to address some of the root causes of poor accountability and transparency, such as by emphasizing the importance of voice mechanisms in the private sector and civil society, enhancing civil service incentives, and fighting corruption. DFID is undertaking political economy research to explore these issues further. In addition, DFID is increasing its resources for public expenditure management by training staff and hiring more advisers with relevant professional skills and experience.

EC AND OECD SUPPORT FOR IMPROVEMENT IN GOVERNANCE AND MANAGEMENT IN CENTRAL AND EASTERN EUROPE

Support for Improvement in Governance and Management (SIGMA) in Central and Eastern Europe-a joint initiative of the European Community

and OECD financed mainly by the Community-involves two separate instruments: baseline assessments and peer reviews. Baseline assessments use defined criteria to measure changes in public expenditure management systems, with the results used by the European Commission in its monitoring of Central and Eastern European countries progress toward achieving the necessary conditions for EU membership. Peer reviews help supreme audit institutions and ministries of finance meet requirements for EU membership by developing their institutional capacity.

Baseline assessments

Baseline assessments describe and analyze changes in public management systems as a contribution to EC progress reports on countries that are candidates for joining the EU. The assessments also offer recommendations on areas where systems require further strengthening. Baseline assessments have been carried out every year since 1999 and cover:

Civil service and administrative frameworks.

Public rxpenditure management.

Public internal financial control, including internal audit.

External audit.

Policymaking and policy coordination.

Public procurement.

Efforts to combat fraud (in 2001 only).

The baseline assessments were designed for the 10 EU candidate countries in Central and Eastern Europe (Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovak Republic, and Slovenia, but in 2000 it was also applied in two additional Balkan countries (Albania and the Former Yugoslav Republic of Macedonia) and may be extended to others in that region.

The methodology used in preparing the annual baseline assessments has three parts. First, an agreement is reached with the European Commission on the conditions that a country must meet to satisfy accession criteria for the subject areas listed above. These conditions-including legal, operational, and institutional capacities-are based on the acquis commu-nautaire and common European practices and take into account any