Budget support training
Module 6Risk Management
Version October 2013
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Outline
1. What is risk management? Risk management framework?
2. Why is risk management important for BS?
3. How to identify, assess and manage risks?3.1 Risk categories, dimensions and levels
3.2 The Risk Management Framework templates
3.3 Risk response and early warning systems.
3.4 Risk monitoring and reporting
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Risk management: definitions Risk:Any event or issue that could occur and adversely impact the achievement of the Commission’s political, strategic, and operational objectives. Lost opportunities are also considered as risks . (Risk Management in the Commission, Implementation Guide, 2010)
Risk management:A continuous proactive and systematic process of identifying, assessing and managing risks in line with accepted risk levels, carried out at every level of the Commission to provide reasonable assurance as regards achievement of the objectives. (Idem)
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Risk Management Framework (RMF)The RMF is an internal tool (risk is not assessed jointly with the partner)
Aiming at: A structured way, mostly based on existing assessments, of
identifying risks related to BS. Ensuring that these risks are managed in line with the
Commission’s guideline on risk management (2010)
Allowing: To inform the policy dialogue To compare the risks with the costs of non intervention when
deciding on the use of BS
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Main functions of the RMFRMF Provides basis for decision making process by:
1. Identifying specific risks linked to the provision of BS leading to a decision on risk level
2. Identifying mitigating measures and risk responses (risk strategy)
3. Informing Budget Support dialogue
4. Monitoring the identified risk and mitigating measures during implementation
5. Identifying the framework to react to immediate deteriorations of a partner country’s situations
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The RMF Process: key steps
Risk assessment Risk response and mitigation
Risk monitoring and reporting
one risk assessment for all contracts in a particular country
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RMF, who does what.Director General DEVCO
Responsible for risk management and its effectiveness
Geographical Directors
Responsible for the implementation and monitoring of the risk management in their region
EEASLeads on the political risks involved in BS and instructs the HoD on the line to take in relation to political dialogue
Geographical directorates, with support from DEU and Regional teams
Provide specific information and propose alternative options for decision making
HoDEnsures consistency at country level between the BS dialogue and the political dialogue
Regional teamsSupport EUD and Geographical directorates in providing inputs to inform on risks levels and in formulating mitigating measures and risk responses
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Outline
1. What is risk management? Risk management framework?
2. Why is risk management framework needed for BS?
3. How to identify, assess and manage risks?3.1 Risk categories, dimensions and levels
3.2 The Risk Management Framework templates
3.3 Risk response and early warning systems.
3.4 Risk monitoring and reporting
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Why is a RMF needed? (1/2)
• Special Report: Management of General Budget Support (European Court of Auditors, 12/2010)
Risk management framework is not well developed and risks are not managed in an appropriate manner.
Key recommendations:
• Perform a structured and explicit assessment of fiduciary and development risks at the outset and during implementation
• Build into conditions, dialogue, and capacity building support measures to monitor and reduce the main risks
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Why is a RMF needed (2/2)• Budget Support Communication (10/2011)
Specific risk profile of budget support covering political governance, macroeconomic stabiliity, developmental risks, public financial management, corruption / fraud
RMF as complementary tool in programming, designing, and implementing programmes
• 4th High Level Meeting on Aid Effectiveness in Busan Risk Management Tools are widely used by donors (incl. MS) Efforts and plans to strengthen core systems and policies
should aim at managing rather than avoiding risks Manage risks to use country systems in fragile situations
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Outline
1. What is risk management? Risk management framework?
2. Why is risk management framework needed for BS?
3. How to identify, assess and manage risks?3.1 Risk categories, dimensions and levels
3.2 The Risk Management Framework templates
3.3 Risk response and early warning systems.
3.4 Risk monitoring and reporting
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3.1 Risk categories and dimensions
Macroeconomic
Developmental
PFM Corruption/ fraud
Human rights Macroeco-nomic policy
and financial sector
Public policy Comprehensiveness of the budget
Corruption and fraud
Democracy Debt sustainability
Government effectiveness
Controls in budget
execution
Rule of law Vulnerability & exogenous
shocks
Procurem-ent
External audit
Insecurity and conflict
Fun
dam
en
tal valu
es
Political Risk Management Framework
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Risk categories, major risks and risk management (1)Category of risks Major risks Risk monitoring
The partner country's overall commitment and adherence to the fundamental values
Fundamental values prerequisite
Regularly monitor the commitment and adherence to the fundamental
values.
Political and social destabilisation
Regional tensions
Support of policies and powers that may exacerbate tensions
Analyse risk of political and social destabilisation
Monitor regional situation
Analyse emerging forces and related policies
Macroeconomic policies cease to be stability orientedEligibility crit. 2
External shocks
Developmental
Policies put in place by the government will be discontinued or may not attain their desired
outcomes. Eligibility crit. 1
Identify the main factors: inadequate policy design, lack of
ownership of policies, lack or participation of stakeholders,
insufficient capacities
Regularly monitor the main economic development and policies
Political
Macroeconomic
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Risk categories, major risks and risk management (2)Category of risks Major risks Risk monitoring
Weaknesses in regulatory framework, financial
compliance and control systems may lead to
inappropriate management of public funds
(eligibility criteria 3 and 4)
Use PEFA assessment.Assess:- budget comprehensiveness, - controls in revenue collection and budget execution, - procurement and external audit. - whether PFM reforms address weaknesses and risks
.
Resources are diverted away and power is abused
for private gain
Linked to PFM and developmental risks.Focus on:- Perceived risk level of corruption and fraud- Legal, regulatory and institutional framework- Government responsiveness- enforcement
PFM
Corruption and fraud
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Assessment of risk Is part of identification, formulation and implementation
During identification: Delegation prepares draft RMF for regional teams and headquarters, including mitigation measures but no residual risk rating
During formulation: Delegation revises RMF to take account of feedback from regional teams and headquarters revision is based on the more in depth analysis made for the
assessment of eligibility criteria Political risk validated by the EEAS in consultation with GD Iterations until final version of RMF is joined to the Action Fiche
During implementation: the RMF is updated periodically, at least once a year
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Assessment of risk level: risk rating rules
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Outline
1. What is risk management? Risk management framework?
2. Why is risk management framework needed for BS?
3. How to identify, assess and manage risks?3.1 Risk categories, dimensions and levels
3.2 The Risk Management Framework templates
3.3 Risk response and early warning systems.
3.4 Risk monitoring and reporting
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The risk questionnaire See Excel file attached to annex 7 of the Guidelines Is designed to guide risk identification For each question
Provide risk rating according to above rules, Justify with a short narrative comment
Aggregation of scores is done automatically for each risk dimension
Keep in mind that the risk assessment: is forward looking over the whole contract period is an internal document not done jointly with the partner
country
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Risk questionnaire: example
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The risk register Summarises the rating and the risk level of each risk
dimension as identified in the questionnaire Provides an average rating and score for each category of risk Allows/requires to fill in supplementary information for each
dimension of risk: an assessment of the risk trend (changes in risk ratings from
previous assessment a narrative justification of the major risks and possible
consequences an enumeration of suggested mitigation measures an estimation of the residual risk (i.e. risk after mitigation
measures) a narrative of the monitoring of the mitigating measures
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Risk register: example
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The country risk profile Based on the risk register it provides:
per category of risks, a summary of score, level, trend and residual risk rate.
The same indicators aggregated at country level A chart summarising the risk situation
It allows/requires to provide narratives on: Overall recommendations Major risks Risk of non intervention/benefits Key mitigating measures
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Country risk profile: example
Highlights key elements of the assessment based on the risk register
• Major risks and benefits• Key mitigating measures• Overall recommendation• Average ratings (inherent/residual) on
country and category level• Risk levels and risk trends
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Outline
1. What is risk management? Risk management framework?
2. Why is risk management framework needed for BS?
3. How to identify, assess and manage risks?3.1 Risk categories, dimensions and levels
3.2 The Risk Management Framework templates
3.3 Risk response and early warning systems.
3.4 Risk monitoring and reporting
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Risk response: a balancing act
Zero risk does not exist
Non engaging can result in higher risks and higher costs in the long run
Expected impact
Risks
High risk may be acceptable in a context where expected impact of BS is higher than the potential risk: particularly the case for SBC.
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The aim is not to avoid risks at all costs
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Responding to the risks
Identification of mitigation measures
Assessment of residual risk
Decision on risk acceptance or
avoidance
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Identification of mitigation measures
Should be the most common response to risks Is a joint effort of partner country & donors May cover the whole contract period or be specific for a shorter
time If the risk level for a risk dimension is substantial or high :
definition and implementation of clear and comprehensive action plan
Satisfactory progress is required during implementation
If the political risk is substantial or high in case of a GGDC: Policy matrix needed: clear milestones and benchmarks for
action plan’s implementation Contingency plans needed
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Examples of mitigation measures Further analyses and surveys (e.g. PEFA, PETS, PER…)
Capacity development and technical cooperation when commitment to reform but lack of capacity
Enhancing transparency, accountability, participation in budget process: to strengthen nationally owned safeguard and oversight mechanisms. Involve citizens and civil society.
Conditions for the disbursement of the variable tranches. Allows addressing risks without jeopardizing predictability.
Requirements: implement specific controls, legislation and reform steps. May be specified in the financing agreement (or in a rider during implementation); disbursement of BS is dependent on adhesion to specific conditions
Further adaptations regarding the design of a budget support programme
•
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Assessment of residual risks and risk trend
Residual risks: Risks that remain after mitigation Assessment is done by Headquarters (DEVCO, EEAS)
A risk trend: compares current risk level with that of past assessments. permits to identify deteriorations in risks.
Assessment of risk trend is done by HQ.If risk level of one of the risk categories is substantial or high, then the BS programme, mitigating measures and residual risks need to be discussed in the BSSC
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DecisionRisk acceptance or risk avoidance? (See table in section
3.3 of annex 7 of the Guidelines)
Decision is made by the BSSC in case of:
one of the risk categories is substantial/high,
a deterioration of a risk category from low/moderate to substantial
for GGDC: one of the political risk dimensions is high/substantial
Risk acceptance when level of risk is low or when mitigating measures are expected to be adequate
Risk avoidance: if risks are too high reconsider providing BS
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In case of significant deterioration Contingency plans for GGDC : Actions to be undertaken in
case of significant deteriorating political risks : e.g. Resizing fixed tranche Reallocating funds to sector programmes Channelling funds via NGOs Reinforcing other aid modalities
Early Warning System: any immediate and severe deterioration of the situation having a major impact on the programme objectives should be reported immediately to HQs
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Outline
1. What is risk management? Risk management framework?
2. Why is risk management framework needed for BS?
3. How to identify, assess and manage risks?3.1 Risk categories, dimensions and levels
3.2 The Risk Management Framework templates
3.3 Risk response and early warning systems.
3.4 Risk monitoring and reporting
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Risk monitoring and reporting
Risk Management Framework is applicable to all contracts and will be updated periodically in order:
to check that identified risks are being adequately managed
to assess progress in the implementation of the mitigation measures
to identify any new risk or change in circumstances
During implementation, the Risk Management Register will be updated annually in January/February and if necessary in June/July or as part of taking a decision for a new disbursement.
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Key messages (1/2)
Risk management is an essential component of every BS programme. Its aim is
to identify and assess the risks that the objectives of the BS programme cannot be achieved
to develop a risk strategy to limit the likelihood of occurrence of the risk, to mitigate its impact in case it materialises and, on this basis, to decide whether risk should be avoided or accepted
in case of acceptation or the risk, to monitor its evolution and the implementation of the mitigating measures.
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Key messages (2/2) Summary of risk management
RISK STRATEGY
Balancing Risks & Benefits
RISK AVOIDANCERISK MITIGATIONRISK ACCEPTANCE
RESIDUAL RISK & BENEFITS
RISK ACCEPTANCE RISK AVOIDANCE
RISK MONITORNG