Fiduciary Risk Management

1. Fiduciary Risk Management Evolving principles and practice in DFID DFID India - 15 January 2002

2. 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,

3. 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?

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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)

10. 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.)

11. 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