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Fiduciary Risk ManagementEvolving principles and practice in
DFID
DFID India - 15 January 2002
Context
DFID commitment to increase direct budget support, i.e.– Financial support linked to poverty reduction
strategy– Reliance on government systems – Long term commitment – National, sub-national or sector budget,
Case for Direct Budget Support
Perceived advantages of DBS– Country driven/owned
– Raises level of dialogue to address issues of poverty at policy and strategic level
– Vehicle for addressing cross cutting issues such as PSR and PFM
– Less distorting of expenditure priorities
– Lower transaction costs
But what happens to the money?
What is fiduciary risk?
Fiduciary = “position of trust or stewardship over funds” DFID has responsibility for making proper use of the funds voted by
Parliament DFID’s Accounting Officer is responsible for ensuring that resources
are;– Properly accounted for (Government Accounting Rules)
– Used only to the extent and for the purposes authorised (i.e. as set out in the Overseas Development Act and the budget)
– Achieve economy efficiency and effectiveness (i.e.value for money) Fiduciary risk is the risk that these objectives will not be met
Why is management of fiduciary risk an issue?
DFID is putting more of its resources through other governments PEM systems
DBS linked to pro poor budget and service delivery rather than economic policy reforms (programme aid)
Need to demonstrate that direct budget support is an effective form of aid (external audiences)
Risk to DFID’s reputation HIPC has led to international focus (esp. US and Japan) on
perceived risks of direct budget support
A key governance issue
Sound management of public finances are intrinsically important to development
Transparency about how public resources are raised and then used is basic to democratic accountability
Improvements can lead to big changes which benefit the poor (viz Uganda education)
Off budget expenditure financed by donors undermines accountability
Active scrutiny by legislature and public is essential
Should we be worried?
Evidence shows that these systems are in very poor shape in many of our partner countries
Assessment of accounting in countries receiving direct budget support from DFID – No country met the proposed minimum standard
IMF/WB review of HIPC countries– Little upgrading = 2
– Significant upgrade = 6
– Substantial upgrade = 14
What’s wrong with the old approach to fiduciary risk?
Notional funding of specific areas of government spending, e.g teachers salaries - ignores fungibility
Audit of expenditure items equivalent in value to DFID funds - tells us nothing about impact
Main focus on allocations in the budget, not on where money ends up
Few links between the state of financial management and accountability and programme design/conditionality
A new approach - I
Aim to improve Government systems so we can rely on them to make effective use of all resources, including DFID funds.
Willing to take risks by putting money through government systems,provided:– risks are known and outweighed by benefits – Government has a credible programme to improve PFMA– Safeguards can be put in place to address key weaknesses
Key risk areas;– Accounting (where has the money gone?)– Procurement (corruption and VFM)
A new approach - II
Building PEM improvement into the PRS and monitoring frameworks for PRSC/PRGF
Long term technical and financial support to improve systems
Incentives (+ and -) for governments to improve their effectiveness and accountability
Work with others who share our agenda (GoI, WB etc.)
Relevance to India
Moving towards poverty reduction strategies in partner states
SWAP approaches developing in some sectors Financial problems in state budgets undermine PRS Short term focus on fiscal sustainability Long term potential through focus on
– Efficiency and effectiveness of public sector– Transparency– Accountability– Probity