OPERATIONAL GUIDE ON DIRECT BUDGET SUPPORT AND POOLED FUNDING TO RECIPIENT COUNTRIES - May 2005

 
OPERATIONAL GUIDE
ON DIRECT BUDGET SUPPORT AND POOLED
   FUNDING TO RECIPIENT COUNTRIES

                    Prepared by Finance Division
      of the Human Resources and Corporate Services Branch
in collaboration with the Direct Budget Support and Pooled Funding
                           Working Group

                          May 2005
Table of Contents
Acronyms ...................................................................................................... v
Overview ...................................................................................................... vi
1    General Introduction ................................................................................ 1
       1.1     Introduction................................ ................................ ................................ ........... 1
       1.2     Scope of the Guide ................................................................................................ 1
       1.3     The Guide as a Living Document............................................................................ 2
       1.4     Planning Control Checklist ..................................................................................... 2
2      Initial Assessments.................................................................................. 5
       2.1     Introduction................................ ................................ ................................ ........... 5
       2.2     Initial Judgments ................................ ................................ ................................ ... 5
       2.3     Subsequent Judgments ......................................................................................... 7
       2.4     Selected Reference Material .................................................................................. 9
3      Managing for Results and Risk Mitigation.................................................... 10
       3.1     Introduction................................ ................................ ................................ ......... 10
       3.2     Supporting the Shift to Host-country Government Accountability............................. 10
       3.3     Principles for Managing for Results in Direct budget support and Pooled Funding.... 11
       3.4     Required Results Management Documentation ..................................................... 11
       3.5     The Role of Risk Management in Managing for Results ................................ ......... 11
       3.6     Principles for Risk Management ........................................................................... 12
       3.7     The Risk Management Process............................................................................ 12
       3.8     Action Plan for Capacity Development .................................................................. 16
       3.9     Selected Reference Material ................................................................................ 16
4      Diagnostic Work and Fiduciary Risk Assessment                     When
       Using Host-country Government                                Financial
       Management Systems................................ ................................ ............. 17
       4.1     Introduction................................ ................................ ................................ ......... 17
       4.2     Diagnostic Work .................................................................................................. 17
       4.3     Diagnostic Process.............................................................................................. 17
       4.4     Scope................................ ................................ ................................ ................. 18
       4.5     Choice of a Diagnostic Tool.................................................................................. 19
       4.6     Available Tools.................................................................................................... 19
       4.7     Collaborative Efforts ............................................................................................ 19
       4.8     Due Diligence...................................................................................................... 20
       4.9     Financial Management Fiduciary Risk Assessment and Mitigation.......................... 20
       4.10    Financial Management Capacity Building Plan ...................................................... 21
       4.11    Procurement Fiduciary Risk Assessment and Mitigation................................ ......... 21
       4.12    Selected Reference Material ................................................................................ 21
5      Financial Authorities .............................................................................. 22
       5.1     Introduction................................ ................................ ................................ ......... 22
       5.2     Current Financial Authorities ................................................................................ 22
       5.3     Cash Management and Reporting Options ............................................................ 22
6      Approval Process and Documentation ........................................................ 24
       6.1     Introduction................................ ................................ ................................ ......... 24
       6.2     When to Seek Treasury Board Approval ............................................................... 24
       6.3     Preparing and Processing TB Submissions ........................................................... 24
       6.4     Program Review Committee (PRC) ...................................................................... 24

Operational Guide on Direct Budget Support and Pooled Funding to Recipient Countries                                                  ii
7     Development of the RRMAF................................ ................................ ...... 26
      7.1     Introduction................................ ................................ ................................ ......... 26
      7.2     The Team Approach............................................................................................ 26
      7.3     Results and Risk-Based Management and Accountability Framework (RRMAF) ...... 26
      7.4     Guiding Principles for the Development of RRMAFs .............................................. 27
      7.5     Roles and Responsibilities for RRMAFs ................................................................ 28
      7.6     Selected Reference Material ................................................................................ 29
8     Arrangements Among Partners ................................................................. 30
      8.1     Introduction................................ ................................ ................................ ......... 30
      8.2     Documents Operationalizing Direct Budget Support or Pooled Funding.................. 30
      8.3     Process .............................................................................................................. 30
      8.4     Joint Financing Arrangements .............................................................................. 30
      8.5     Bilateral Contribution Arrangements...................................................................... 31
      8.6     Selected Reference Material ................................................................................ 32
9     Payments............................................................................................. 33
      9.1     Introduction................................ ................................ ................................ ......... 33
      9.2     Channelling of Funds - Pooled Funding................................ ................................ . 33
      9.3     Channelling of Funds – Direct Budget Support ...................................................... 33
      9.4     Channelling of Funds - Questions to Ask............................................................... 34
      9.5     Basis, Timing and Frequency of Payments............................................................ 34
      9.6     Unspent Funds at Year -End ................................ ................................ ................. 36
      9.7     Suspension or Termination................................................................................... 36
10    Auditing............................................................................................... 37
      10.1    Introduction................................ ................................ ................................ ......... 37
      10.2    Internal Auditing .................................................................................................. 37
      10.3    Recipient Auditing ............................................................................................... 37
      10.4    Audit Planning ..................................................................................................... 37
      10.5    Annual Audited Financial Statements/Reports ....................................................... 37
      10.6    Choice of Auditors ............................................................................................... 38
      10.7    Audit Findings and Recommendations .................................................................. 38
      10.8    Standards for Auditing of Public Funds ................................ ................................ . 38
      10.9    Accounting Standards.......................................................................................... 38
      10.10   Interim Alternate Measures or Safeguards ............................................................ 39
      10.11   Selected Reference Material ................................................................................ 39
11    Monitoring, Reporting and Evaluation ......................................................... 40
      11.1    Introduction................................ ................................ ................................ ......... 40
      11.2    Monitoring of Progress toward Results.................................................................. 40
      11.3    Reporting on Results ........................................................................................... 42
      11.4    Evaluation ........................................................................................................... 43
      11.5    Selected Reference Material ................................................................................ 44
12    Financial Reporting ................................................................................ 45
      12.1    Introduction................................ ................................ ................................ ......... 45
      12.2    Principles and Practices for Financial Reporting .................................................... 45
      12.3    Consolidated Financial Reporting................................ ................................ ......... 46
      12.4    Common Financial Report .................................................................................... 46
      12.5    Frequency of Accounting by Recipient .................................................................. 47
      12.6    Format ................................................................................................................ 47
      12.7    Capacity Building................................ ................................ ................................ . 47

Operational Guide on Direct Budget Support and Pooled Funding to Recipient Countries                                               iii
Annex A        Key Definitions
    Annex B        The Decision to Engage in Direct Budget Support
    Annex C        Overview of Initial Assessment Areas for Direct Budget Support and Pooled Funding

    Other Relevant Links
    DAC Guidelines and Harmonisation Series – Harmonising Donor Practices for Effective Aid Delivery (OECD, 2003)
    World Bank Aid Harmonisation website: www.aidharmonization.org

Operational Guide on Direct Budget Support and Pooled Funding to Recipient Countries                                iv
Acronyms

      CAW                Country Analytical Work
      CDF                Comprehensive Development Framework
      CDPF               Country Development Programming Framework
      CEAs               Canadian Executing Agencies
      CFAA               Country Financial Accountability Assessment (World Bank)
      CIDA               Canadian International Development Agency
      CPAR               Country Procurement Assessment Review (World Bank)
      DAC                Development Assistance Committee (OECD)
      EA                 Executing Agency
      EC                 European Commission
      GPRP               Good Practice Reference Paper (DAC Donor Task Force)
      INTOSAI            International Organization of Supreme Audit Institution
      IFAC               International Federation of Accountants
      IPSAS              International Public Sector Accounting Standards
      JFA                Joint Financing Arrangement
      LFA                Logical Framework Analysis
      MAF                Management Accountability Framework
      MoF                Ministry of Finance
      MTEF               Medium Term Economic Framework
      NGO                Non-governmental Organization
      OECD               Organisation for Economic Co-operation and Development
      PAD                Project Approval Document
      PEM                Public Expenditure Management
      PER                Public Expenditure Review (World Bank)
      PKMB               Performance and Knowledge Management Branch
      PMF                Performance Measurement Framework
      PRS                Poverty Reduction Strategy
      RD                 Reference Desk (CIDA Roadmap)
      RBAF               Risk-based Audit Framework (Treasury Board)
      RBM                Results -based Management
      RMAF               Results -based Management and Accountability Framework (Treasury Board)
      RRMAF              Results and Risk-based Management and Accountability Framework
      SAI                Supreme Audit Institutions (of recipient country)
      SAE                Strengthening Aid Effectiveness
      SWAp               Sector-Wide Approach
      TB                 Treasury Board
      TBS                Treasury Board Secretariat
      Ts&Cs              CIDA Terms and Conditions for International Development Assistance
      WB                 World Bank

Operational Guide on Direct Budget Support and Pooled Funding to Recipient Countries               v
Overview

                                        Acknowledgements
The Guidelines are based on the work of the Direct Budget Support and Pooled Funding Working
Group (WG), chaired by the Finance Division of the Human Resources and Corporate Services
Branch. The WG was established in May 2002 and included representatives from Program Branches
as well as from Policy Branch, Performance and Knowledge Management Branch, Contracting
Division, Finance Division and Legal Services. It accomplished its objectives of: revisiting old and
seeking new Treasury Board authorities; standardizing various operational aspects of direct budget
support and pooled funding initiatives; developing this operational guide to assist program officers in
their management of Direct Budget Support and pooled funding; identifying tools and options
available; and providing a level of confidence that public funds are utilized with due diligence and in
accordance with Central Agencies’ policies.
Special thanks go to the CIDA employees who developed or contributed to certain sections or
chapters.

                                               Inquiries
Requests for clarification/interpretation on any aspect of financial management in the branches should
be directed first to the Branch Financial Management Advisors (FMA’s).
Any further policy development required for this guide should be addressed with the Director of
Financial Policies and Systems Section, Finance Division, Human Resources and Corporate Services.

                                   Purpose of the Guidelines
This document provides operational guidelines for direct budget support and pooled funding
initiatives to recipient countries when the onus for program planning and delivery, financial
administration and reporting is put squarely on developing country governments. This Guide is the
first of this nature to be issued. The Human Resources and Corporate Services Branch intends to
work closely with Program Branches, Performance and Knowledge Management Branch, and Policy
Branch to update this Guide as more experience is gained in the use of direct budget support and
pooled funding.
CIDA, over the next few years, will build on its experiences by sharing knowledge internally and
externally with program partners. Program officers are encouraged to share their experiences and best
practices so that these may be incorporated into future versions of the Guide. This document should
be considered a starting point. It will evolve over time as we learn by doing.
Since the primary audience of the Guide is program officers, the emphasis is on the operational
aspects of direct budget support and pooled funding. Two equally important aspects are covered.
The first focuses on the new forms of financial, contractual, and legal requirements that have
emerged. These represent a dramatic shift from the more typical bilateral approach with a discrete
project, a Canadian Executing Agency, and well-documented procedures for CIDA implementation.
The Guide highlights these changes and provides a base for understanding the new requirements.
The second focuses on the changes needed in te rms of developmental and managerial considerations.
Here, changes are required in attitudes, skills, and judgmental abilities needed to plan and implement

Operational Guide on Direct Budget Support and Pooled Funding to Recipient Countries             vi
direct budget support and pooled funding. It is not sufficient to deal with issues simply on a process
or regulatory level. A need also exists to ensure that contextual issues are covered. The Guide
indicates the kinds of essential judgments involved in operating direct budget support and pooled
funding.

                                     Structure of the Guide
The Guide has been structured in a way to cover the elements of the program cycle as well as provide
information on financial, contractual, and legal issues. Helpful documents that support the Guide are
found at the end of each chapter and in the Annexes.
An overview of the contents of the Guide is presented below.
Chapter 1 begins with an overview of the context for new types of programming in CIDA. Canada
Making a Difference in the World: Strengthening Aid Effectiveness called for new approaches to
development cooperation and, with this, has come a need to adapt to funding instruments. Chapter 1
also defines the scope of the Guide and provides a Planning Control Checklist.

            The next six Chapters provide information on the program and approval cycle.

Chapter 2 provides an overview of the initial and subsequent judgments CIDA officers must make in
identifying and designing direct budget support and pooled funding. The information is a starting
point for reviewing the feasibility of employing direct budget support or pooled funding, not a
comprehensive framework for making those judgments.
Chapter 3 provides an overview of the principles for managing for results in pooled funding and
direct budget support.     It also provides insights into the areas that need to be considered to
understand and manage associated risks. To date, there has been a great deal of emphasis placed on
fiduciary risks. Other types of risks or benefits associated with direct budget support and/or pooled
funding has not been investigated to the same extent. This Section provides a more comprehensive
view of the management of risks and results.
Chapter 4 details the fiduciary risk assessments required when using host-country government
financial management systems. When CIDA engages in direct budget support, in particular, it moves
toward using host-country government financial management and accountability systems. Fiduciary
risks require a highly specialized assessment that is not typical within CIDA.
Chapter 5 details the financial authorities that govern direct budget support and pooled funding when
the host-country government is in the lead.
Chapter 6 provides an overview of when approval is needed from Treasury Board. In cases where
TB approval is not required, the CIDA Business Process Roadmap provides direction.
Chapter 7 discusses Risk-based Audit Frameworks, Results-based Management and Accountability
Frameworks, and the possibilities for a combined approach. These frameworks are essential elements
for the proper design, approval and management of direct budget support and pooled funding.

    The next three Chapters cover financial, legal, and contractual requirements.

Chapter 8 outlines the formal arrangements among signatories to direct budget support or pooled
funding. Traditionally, projects have been executed through Memorandum of Understandings
(MOU) between the host-country government and CIDA. Direct budget support and pooled funding
require new arrangements. The Nordic Plus Donor Group, of which CIDA is a member, has agreed
that a Joint Financing Arrangement (JFA) and an additional bilateral contribution arrangement
constitute the contractual agreements required.

Operational Guide on Direct Budget Support and Pooled Funding to Recipient Countries           vii
Chapter 9 covers specific issues related to payments. Issues such as the basis, timing, frequency, and
benchmarks for payments are covered.
Chapter 10 reviews CIDA’s internal audit requirements and those by the host-country government.

    The last two Chapters deal with ongoing monitoring and tracking of progress and reporting.

Chapter 11 outlines on-going monitoring and evaluation of direct budget support and pooled funding
initiatives. It is becoming increasingly evident that direct budget support and pooled funding require
more monitoring and a clearer focus on results tracking than do more traditional CIDA projects.
Chapter 12 covers financial reporting. This Section outlines how CIDA program officers can ensure
that proper financial reporting is undertaken.

Operational Guide on Direct Budget Support and Pooled Funding to Recipient Countries           viii
1     General Introduction
1.1     Introduction

Over the years, CIDA's principal form of bilateral intervention in developing countries has been in the
form of discrete projects with well-defined objectives and deliverables. Most of these projects have
been managed by Canadian Executing Agencies (CEAs) operating under a contract (directive
projects) or contribution agreement (responsive projects) with CIDA. Today there is increased
emphasis on more programmatic mechanisms. While movement in this direction had begun prior to
the 2002 publication of Canada Making a Difference in the World: A Policy Statement on Aid
Effectiveness, the use of new programming instruments and heightened integration with host-country
government plans, policies and programs has gained momentum since then. Furthermore, in 2003,
the Treasury Board approved amendment to CIDA’s Terms & Conditions for International
Development Assistance particularly in the areas of cash management and reporting provisions
applicable to initiatives involving direct budget support and pooled funding to recipient country
governments and their institutions. Thus, the Guide responds to the new programmatic changes, and
the requirement from Treasury Board to develop tools and processes that will assist staff in planning
and managing all aspects of direct budget support and pooled funding to recipient country
governments and their institutions.
This Guide draws on existing CIDA procedures, regulations, policies, and other reference documents
including the draft document on ‘CIDA Primer on Program-Based Approaches’. In particular, the
Guide relies on, and complements the main Agency document for operations, the CIDA Business
Process Roadmap. For example, direct budget support and pooled funding uses the Core Funding
business delivery model. The Roadmap provides staff with guidance on the application of this model.

1.2     Scope of the Guide

This Guide applies to initiatives involving direct budget support and pooled funding to recipient
country governments and their institutions. It applies whenever CIDA uses direct budget support, or
as part of a coordinated effort, pools its financial resources with other funding agencies (i.e. pooled
funding). Specifically, this guide applies:
         • under a host-country government-led initiative (i.e. when the onus for program planning
             and delivery, financial administration and reporting is put squarely on developing country
             governments); and
         • when the Bilateral Aid Channel, government-to-government mechanism is used.
The application of the guide is also valid for initiatives identified by the PRC committee in its
mandate i.e. Program Based Approaches (PBAs). The definition of PBAs as found in the PRC
mandate is:
        A PBA is a way of engaging in development cooperation based on the principle of
        coordinated support for a locally owned program of development. The approach includes four
        key elements:
            • Leadership by the host country or organization;
            • A single program and budget framework;
            • Donor coordination and harmonization of procedures; and
            • Efforts to increase, over time, the use of local procedures with regard to program
               design and implementation, financial management and monitoring, and evaluation

Operational Guide on Direct Budget Support and Pooled Funding to Recipient Countries             1
This Guide does not apply to initiatives under the Multilateral channels of delivery involving grants to
a trust fund or a multilateral organization. In these cases, recipients of grants are multilateral
organizations; they become accountable for the funds.
Under the Bilateral Aid channel, funding is made by contribution payments. All payments are
conditional. It should be noted that the CIDA Ts&Cs prohibit the Agency from providing “assistance
whose primary aim is unconditional direct fiscal support to recipient country governments” (i.e.
grants).

Generic Definitions
Direct budget support is provided directly to host-country institutions to be spent as part of their
overall program budget using their ow n financial management systems.
Pooled funding refers to a situation in which a number of donors agree to contribute to a common
fund or basket. This is done in a way that separates donor funds from those of the recipient partner.
Pooled funding usually involves the use of a holding account reserved for particular purposes
identified by agreement between the recipient government and donors participating in the pool.

1.3     The Guide as a Living Document

It is expected that this Guide will be revised as CIDA gains more experience with direct budget
support and pooled funding instruments. With increased attention to capacity development issues,
such instruments are liable to receive increased attention in the future. As CIDA demonstrates that
the ability to manage these programming instruments and to utilize the new authorities accorded by
the TB, it is likely that this Guide will be expanded to encompass a wider range of programming
activities.

1.4     Planning Control Checklist
The checklist on the following two pages provides an overview of the planning cycle for direct
budget support and pooled funding. The checklist refers to specific chapters in the Guide where
program officers can obtain detailed information on the planning cycle and its requirements; e.g.,
expected contents of RRMAFs, JFAs, risk assessments, etc.

Operational Guide on Direct Budget Support and Pooled Funding to Recipient Countries              2
Steps to follow for approval

                             Steps                              Reference                   Notes

    1.   Development of these complex programs requires
         a team approach. At a minimum, the CIDA team
         responsible for developing approval documentation
         (PAD) should comprise the Program Officer, one or
         more sectoral specialists, a financial officer, a
         contracting officer, a performance review officer
         and relevant field staff.
    2.   Team meetings should be scheduled to identify the                     Depending on the level and
         strategy for getting the initiative approved.                         type of approval required,
                                                                               corporate resources could be
                                                                               asked to join the team.
    3.   The team must assemble and analyze documents          Chapters        Adequate knowledge of the
         needed to draft the PAD. They include:                2, 3 & 4        host-country government and its
                                                                               institutional capacity requires
    w    Program framework and Poverty Reduction
                                                                               extensive input by field staff.
         Strategy, national development plan or equivalents
    w    Country procurement assessment review (CPAR)                          The team may use specialists to
                                                                               help analyze certain
    w    Country financial accountability assessment                                      1
                                                                               documents. Field visits may be
         (CFAA)                                                                necessary, based on emerging
    w    Public expenditure review                                             analysis needs, and on the joint
                                                                               donor approach to which CIDA
    w    Program expenditure reports                                           is committed.
    w    Multi-donor arrangement (if one already exists);
                                                                               Analysis of these documents
    w    Any joint-donor results framework                                     will influence the program or
    w    Prior audits and evaluations by the Agency, the                       project management strategy.
         host-country government or other donors                               CIDA’s Internal Audit Division
    w    Risk analyses carried out by other donors                             should be consulted, depending
                                                                               on the situation.
    w    All other documents produced by the host-country
         government on financial and procurement systems
    4.   The team adjusts the design of the CIDA program                       If the team decides to rely on
         based on the institutional capacity assessment as                     reports already produced by the
         well as the strategy for managing the initiative .2                   host-country and on existing
                                                                               audit mechanisms, the team
                                                                               must ensure that the country
                                                                               can produce quality reports
                                                                               (data integrity) that will allow
                                                                               program result monitoring.
    5.   Performance and Knowledge Management Branch
         representatives must be consulted to identify
         evaluation requirements.
    6.   Determine if a TB Submission is required.             Chapter 6

1
  For financial matters, please contact your Branch's Financial Management Advisor. For contracting matters,
please contact your Branch's Contracting Officer.
2
  These evaluations go further than CPAR or CFAA. There is a necessity to make institutional assessments on
the existing and (future) desirable institutional capacity to effectively plan and implement programs meeting
beneficiary needs; to assess the institution’s or executing agency’s risks in handling the contracting and financial
functions; to develop an action plan, as required, to shore up identified weaknesses; and to propose a monitoring
plan, including audits.

Operational Guide on Direct Budget Support and Pooled Funding to Recipient Countries                           3
Steps                            Reference                    Notes

  7.   Prepare a project approval document (PAD)            Roadmap         Among other things,
       following instructions in the Roadmap.                               management / contracting
                                                                            strategies consider the results
       The PAD must contain a management strategy, a
                                                                            of sectoral economic analyses
       contracting strategy, risk analysis and mitigation
                                                                            (CPAR, CFAA, PER). They
       measures.                                                            must also consider key risks
  8.   Prepare an RRMAF (an integrated RMAF/RBAF or         Chapter 7       identified in the risk analysis
       Results and Risk based Management and                                within these documents.
       Accountability Framework)                                            In situations involving direct
  9.   The approval process follows its normal course.                      budget support and pooled
                                                                            funding, the strategies and
       For projects of $5 M or more, go to the Program      Chapter 6       analyses identified above must
       Review Committee (PRC).                                              be especially well documented.
  If a Treasury Board approval is required
  10. Initiate discussions with the CIDA Coordinator for    Chapter 6,7     CIDA/Finance TB Submission
      submissions                                                           Coordinator @ 994-0989
  11. Consult the upcoming CIDA Guidelines on
      Preparing and Processing Treasury Board
      Submissions, the following documents are
      required:
       • The Submission document (PAD content)              Chapter 6       Several drafts may have to be
         prepared in accordance with the upcoming CIDA                      produced to meet TB
         Guide on Treasury Board Submissions                                requirements
       • Results and ris k-based management and                             Consult the Performance and
         accountability framework (RRMAF)                   Chapter 7       Knowledge Management
       • Memorandum from the President to Minister          Chapter 6       Branch on RRMAFs.

  12. Prepare the Contribution Arrangement to be signed     Chapters 7,     Consult the Branch Contracting
      with the host-country government, and a Joint         8, 9, 10 & 11   Officer, and Legal Services
      Financing Arrangement where applicable.
                                                            TB Policy on
                                                            Transfer
                                                            Payments

Please note that CIDA managers and officers are also responsible to ensure that attention to
significant elements of the planning cycle (notably, the RRMAF) continues as the initiatives are
implemented, monitored, reported on and evaluated.

Operational Guide on Direct Budget Support and Pooled Funding to Recipient Countries                      4
2     Initial Assessments
2.1      Introduction

CIDA is committed to ensuring that its move towards increased use of direct budget support and
pooled funding is grounded in sound management practices. In this regard, the Agency is adapting its
practices and modifying a number of systems, policies, and procedures. While the existing regulatory
framework continues to apply 3, additional measures are being adopted.
Currently, there are no Agency accepted criteria for assessing the appropriateness or feasibility of
direct budget support or pooled funding. To help fill this gap, this Chapter indicates the judgments
that CIDA program officers should make when selecting and planning direct budget support or
pooled funding. Section 2.2 discusses the type of issues considered when the initial “go” / “no go”
decision is made. Section 2.3 presents the more detailed judgments that would follow a positive
initial assessment.

2.2      Initial Judgments

Individual Country Development Programming Frameworks (CDPFs) outline the nature of a CIDA
bilateral program and the level of engagement with a host-country government’s policies and
programs4 . A high level of engagement would typically involve, among other funding instruments,
the use of direct budget support or pooled funding.
Recent discussions with the Treasury Board (TB) and TB documents indicate external as well as
CIDA specific considerations necessary to judge the appropriateness of undertaking direct budget
support and pooled funding. Such considerations would include, for example:
   • the extent of country ownership and commitment;
   • the probability for effective donor harmonization;
   • the extent of CIDA’s internal capacity to manage its participation using such funding
        instruments.

Adequacy and Consistency of the Country’s Level of Owners hip and Commitment

The adequacy of host-country government ownership of a poverty reduction program and its
commitment to improve its planning and implementation capacity over time is a critical area to
assess. National poverty reduction strategies or similar policies provide the opportunity for a host-
country government and a donor consortium to focus efforts. Such a concerted effort, with an
emphasis on the progressive use of host-country government processes and institutions, can result in
building sustainable host-country government capacity.
To assess the levels of ownership and commitment, CIDA must make judgments based on empirical
evidence. This includes assessing factors such as the steps already taken by host-country government
to implement a particular plan, the convergence between the government’s plan and its actions to
develop and implement it, formal undertakings, the degree to which these are being met, and the
longer term prospects for consistency of the commitment. The degree to which the national
development plans represent government and stakeholder priorities is also an important part of the
3
 The Financial Administration Act (FAA), Appropriations Act, Environmental Assessment Act, CIDA Ts&Cs, TB
Policy on Transfer Payments, Tied-Untied Aid Policy, as well as current operational procedures, as described in
Roadmap, remain valid for all initiatives involving direct budget support and pool funding to recipient countries.
4
  For a full discussion of this topic, see “Implementing the Strengthening Aid Effectiveness Policy: Principles,
Approaches and Instruments” currently being translated and to appear on Entre Nous under CIDA Policy
documents as well as linked to the CIDA Roadmap.

Operational Guide on Direct Budget Support and Pooled Funding to Recipient Countries                         5
ownership equation. The plans should be driven by a vision, which emerges within the country —
not primarily through donor priorities. Some of the initial questions which need to be assessed are:
    •   What analysis has been done or needs to be made to assess the political will and leadership to
        improve program effectiveness and accountability? How has this been demonstrated to date?
        What are the prospects for continued commitment and leadership?
    •   What is the actual and potential involvement of stakeholders in the design, implementation,
        monitoring, evaluation, risk assessment, auditing and reporting of the program?
    •   What is the program's contribution to poverty reduction and how is it linked to the national
        poverty reduction strategy (e.g. the PRS)? Is there a full understanding of the implications of
        implementing the program by the government?

Commitment of Donors to Harmonization
Successful programming requires a donor/host-country government consensus on key policy and
management issues. Ownership implies a host-country government role in leading a coordinated
effort. Where a host-country government led coordination process is not possible, alternative
arrangements should progressively transfer responsibility to the host-country government.
At a minimum, donors must agree to harmonize practices, namely: common results framework,
common financial reporting framework, and common monitoring, reporting and evaluation
approaches and systems for these results. Mu ltiple inconsistent donor practices burdens the host-
country government. Where it is not possible to use host-country government systems, donors can
ease this burden by adopting common systems and procedures. Such harmonization can lead to more
sustainable development, assuming that the host-country government is active participants in
decision-making.
With a great deal of hard work, donor coordination, led by the host-country government, will improve
over the life of the initiative. However, to assess the probability of such an outcome, initial judgments
such as the following need to be made:
    •   Is there broad consensus between the host-country government and donors on key policy and
        management issues? Are conditions adequate for all partners to develop a satisfactory on-
        going dialogue?
    •   Are the donors willing to provide support within an agreed framework to harmonize
        practices? Is there a willingness to burden share, that is, assume responsibilities for specific
        items such as institutional assessment on behalf of other partners? To what extent do the
        capacities of donor partners complement host-country government capacities and priorities?
    •   Is there a broad consensus between the host-country government and donors on the
        parameters and conditions for an effective and transparent expenditure management
        framework?

Operational Guide on Direct Budget Support and Pooled Funding to Recipient Countries                6
Conditions within CIDA
CIDA officers must make judgments regarding the extent of internal CIDA capacity needed to
undertake this type of programming. Such assessments often focus on:
      •   The extent to which the program supports CIDA’s CDPF for that country;
      •   The adequacy of approaches to attaining in-depth country knowledge sufficient to ascertain
          commitment, progress and emerging risks;
      •   Whether existing relationships with the host-country government and other donors are such
          that they have the potential to be expanded into the stronger partnership required for this type
          of initiative;
      •   The ability to form and manage a team with specialized CIDA or external sectorial, technical
          and managerial competencies.

2.3       Subsequent Judgments

Once a judgment is made that conditions warrant consideration of direct budget support or pooled
funding, a more systematic analysis is required. Such analysis requires more than some sort of
“yes/no” check against a set of criteria. Rather, the in-depth due diligence assessment called for in
the TB Policy on Transfer Payments requires program officers to make a series of complex
judgments, many of which are not typically included in more traditional project designs. Such
analysis needs to be done in partnership with other donors and above all with the host-country
government. A high level of host-country government involvement is necessary to ensure that there is
full understanding of the implications of implementing the program and a commitment to common
objectives. In some situations, this process may be easier. For example, in the case of direct budget
support to a national development strategy, donors and the host-country government jointly do much
of the analysis and program development. In other cases, such as pooled funding, this degree of host-
country government involvement may be lower.
The judgments required at this stage fall into two broad categories – those that deal with the specific
host-country and its program to be supported; and those that deal with CIDA internal processes.

In-Depth Host-country Government Assessment
Seven assessment areas require attention when developing interventions involving pooled funding or
direct budget support. These assessments in the pre–PAD stage will determine whether the
conditions for CIDA participation can be met, the likely magnitude of part icipation and the choice of
instrument. From these assessments, it becomes possible to further develop the initiative. The seven
areas are:

1. Macroeconomic assessment -- Does the national development strategy provide a sound
   framework for overall planning? Is the macro situation sufficiently stable to allow a level of
   predictability in sector funds?

2. Sector policy and overall poverty reduction strategic framework -- What is the host-country
   government aiming to achieve in the sector and how? Is there an adequate sector policy in place?
   Is it consistent with the National policy framework? Are there links with CIDA’s CDPF? Is the
   vision within the sector policy appropriate, affordable, and feasible, particularly in terms of the
   role of government? At what stage of economic growth will the host-country government be able
   to fund the program itself?

Operational Guide on Direct Budget Support and Pooled Funding to Recipient Countries                 7
3. Sector Medium Term Economic Framework -- Is there a sector MTEF in place and approved at
   the political level? Is it comprehensive and realistic in its coverage of revenues and proposed
   spending? If not, is there a coherent action plan from which it is derived and steps in place to
   improve the MTEF?

4.   Donor coordination/harmonization system -- Is there a host-country government organized donor
     co-ordination system in place? Does it include all the key donors (bilateral and multilateral)? Is
     it based on a clear structure of rules and partnership principles including harmonization? It there
     an aid harmonization plan or strategy contemplated or in development?

5. Institutional capacity -- Is there adequate leadership in the sector to direct and manage the sector
   program over time? Is there adequate capacity in the institutions to effectively implement the
   programming? What strategies are in place to promote capacity development and are these
   adequate? To what degree is there an alignment of “vision/results” and accountabilities /
   responsibilities in government, ministers, public sector managers in ministries, and beneficiaries?

6. Accountability and public financial management and procurement systems -- Is the quality of
   accountability and budgetary expenditure management sufficiently good to contemplate sector
   support? If not, are reforms to procurement and public expenditure management (PEM) systems
   being put in place to address the key weaknesses? Have CIDA and partner donors developed
   mitigations strategies to address the weaknesses?

7.   Performance monitoring and client consultation mechanisms -- Is there a performance
     monitoring system in place to track progress in achieving results? Is there a systematic
     mechanism for consultations with clients and beneficiaries?
Annex C provides more details on the seven areas of assessment. In addition, specific information
can be found in the European Commission Guidelines for EC Support to Sector Programmes.
To perform these assessments, CIDA may be able to use work done by the host-country government
and by other donors. Still, CIDA program officers and other members of the CIDA team need to
analyze such work to judge if it is adequate for CIDA’s purposes and the Agency’s level of risk
tolerance as well as whether further init iatives are needed to fill gaps in the analysis of other partners.
Finally, direct budget support or pooled funding instruments do not assume that a country has a level
of capacity such that there is no probability of risk. An institutional capacity assessment that
identifies capacity gaps is an essential component to develop a management and risk mitigation
strategy. In particular, judgments, based upon an in-depth understanding of the context, host-country
government institutional commitment, existing capacity and the potential for capacity development
will determine ways to both mitigate risk and foster progressive host-country government ownership.
In-Depth Assessment of Internal CIDA Requirements

The concrete development results in terms of benefic iary benefits and institutional capacity building
for sustainability will be defined in the programming stage. As noted above, the results and risks are
highly dependent on the conditions within the country. Intertwined with the assessment of external
issues, are a number of internal CIDA requirements that must be continuously re-visited as CIDA’s
planning stage progresses.
Attainment of development results depends upon factors internal to CIDA and judgments must be
made about the adequacy of internal conditions, such as the strength of CIDA’s management
approach.

Operational Guide on Direct Budget Support and Pooled Funding to Recipient Countries                  8
The following are examples of judgments that need to be made in addressing CIDA’s capacity to
manage and assume accountability:
      •   Are there gaps in CIDA’s corporate results and risk management regime that could have a
          negative impact on the proposed investment? How can these, if any, be remedied?
      •   Are the set of CIDA staff and field staff competencies – managerial, technical, and financial –
          as well as the competencies to engage in and leverage this type of programming adequate?
          More particularly, to what extent is there a capacity to systematically gather, analyse and use
          information strategically?
      •   Is CIDA able to contribute more than simply money, that is, does it have the mix of skilled
          individuals who are able to work within a harmonized host-country/donor consortia so as to
          foster the effective delivery of beneficiary benefits and foster capacity building needed for
          local ownership? If not, can this mix be assembled or recruited in a timely manner?
      •   Is there internal capacity to address downstream ‘delivery’ of CIDA’s value-added role in a
          way that is consistent with the due diligence requirements implied in the in the TB Policy on
          Transfer Payments5 ?
      •   Does an adequate strategy exist to capture learning and keep knowledgeable staff involved
          over the long-term; are there succession strategies in place?
      •   Has adequate consideration of the principles of decentralization – that a decision is best made
          by those closest to an issue – been applied in defining the roles of HQ/field personnel?
      •   What is CIDA’s capacity to play a role in a probable long-term game-plan for gradually
          developing host-country government capacity and progressively devolving accountability and
          responsibility to host-country government institutions in terms of managing, monitoring,
          evaluating, etc.?
2.4       Selected Reference Material

      •   Annex C to this Guide
      •   Guidelines for EC Support to Sector Programmes, European Commission (Feb 2003)
      •   DAC Guidelines and Reference Series – Harmonisation Donor Practices for Effective Aid
          Delivery
      •   Guidelines for preparing a Country Development Programming Framework (CDPF) (Jan
          2003)

5
 CIDA Value Added: In reviewing submissions, Treasury Board analysts have asked CIDA to substantiate that
Canadian participation can bring specific value-added in fostering development results. This is particularly
important where Canada is a minor participant in a pooled funding arrangement when a seemingly large
Canadian contribution of $93 million represents only 4% of the total pool. Questions then arise as to what
developmental difference the Canadian contribution could make and what specific value-added Canada could
achieve with its contribution. Hence, in assessing the appropriateness of CIDA’s participation, such questions
should be addressed.

Operational Guide on Direct Budget Support and Pooled Funding to Recipient Countries                      9
3     Managing for Results and Risk Mitigation
3.1      Introduction

This Chapter covers a key element in the preparatory phase of direct budget support and pooled
funding initiatives. It provides an introduction to managing for results assessing and managing risks
associated with the targeted results. The information gathered in the preparatory phase will support
dialogue with funding partners and the host-country government, including the strategies and
priorities within which specific donor interventions may be identified, and lay the groundwork for
joint managing of, and accountability for the investment.

3.2      Supporting the Shift to Host-country Government Accountability

Involvement in direct budget support and pooled funding involves a radical shift in the way that
accountability and responsibility for results-based performance are assumed and fostered. This
paradigm shift requires CIDA staff and field staff, in dialogue with partners, to not only focus on
traditional developmental results. For example, an activity such as the vaccination of all school
children could result in healthy, happy 100% vaccinated children. This approach entails shared
accountability with our partners for the achievement of these development results.
In structuring CIDA’s participation, the team must develop its performance measurement framework
(PMF) to take into account not only development results, but also measure ways of Canada’s
involvement in making a unique contribution. For example, CIDA’s enabling result, could be evident
in the following results areas:
     • Promoting local ownership
     • Promoting the enhancement of local capabilities (program planning, delivery and
         management of resources - financial and contractual, as well as performance management
         and reporting)
     • Promoting accountability of local institutions to their own constituencies
     • Engaging in collaborative procedures and behaviour that enhance partnership and coherence
         and reduce transactions costs
     • Adopting new strategies for risk management that involve an optimal balance between donor
         control and local control and that promote rather than hinder local ownership. 6
The shift to host-country government accountability requires that a CIDA team’s terms of reference
reflect the need to ensure that the consortium of program partners addresses such issues of local
accountability. This assessment is essential to determine the reasonableness of expectations in
attaining development results that initiatives involving direct budget support and pooled funding aim
to achieve. This joint approach is thus an element of a risk mitigation strategy.
Assessment of the partner country’s institutional capacity and governance will identify gaps in these
areas, which constitute risks to attainment of program results. These aspects may present
opportunities for a unique Canadian contribution in the area of capacity building. For example,
opportunities may exist for partnership between partner country and Canadian civil society entities to
work with beneficiaries in facilitating participation and ownership as well as transparency and
accountability on the part of government.7

6
  An initiative is underway to develop a framework to help teams establish an evaluation framework that will
evaluate an initiative’s contribution to implementation of the SAE/DAC principles such as local ownership,
recipient led-donor coordination, RC policy coherence, etc.
7
  ‘… donors have … taken a rather narrow …technocratic view of what is needed for public sector reform,
interacting exclusively with government, … funding consulting services, computers … in the absence of deep

Operational Guide on Direct Budget Support and Pooled Funding to Recipient Countries                     10
3.3      Principles for Managing for Results in Direct budget support and Pooled Funding

Management for results and measurement of results entails a process that begins with the design of
the program and evolves over time. Achieving results in an effective way is in the common interest
of both donors and the host-country government. A joint PMF, outlining desired results, appropriate
indicators, responsibility for gathering data, and the mechanisms for assessing and measuring
progress, as well as reporting, should be agreed between all parties as part of the overall multi-partner
arrangement (see Chapter 8).
The challenge for CIDA in the context of direct budget support and pooled funding is to adequately
monitor, measure and report on results in a manner that meets the requirements of both the Agency
and TBS. It must do this in a multi-stakeholder context, which seeks to achieve development results
while applying the principles of donor harmonization and minimizing the administrative burden on
host-country partners. This is a challenge shared by all donors. Specific to CIDA, this approach is
also based on enabling results. TBS will want evidence that there is value added by the Canadian
contribution to the investment, and thus information on both development results achievements of the
joint effort, and CIDA’s support to it through enabling results must be monitored and reported upon.
(For more information, refer to Chapter 11.)

3.4      Required Results Management Documentation

Given the complexity of direct budget support and pooled funding initiatives, the high visibility of
this type of support and the concomitant risk factors, CIDA requires that a Logical Framework
Analysis (LFA), and a PMF be prepared based upon the value-added of CIDA’s role and contribution.
These documents should be consistent with the arrangement agreed on by partners regarding expected
development result, and they should also reflect the value-added of CIDA’s contribution.
The level of budget typically attached to direct budget support and pooled funding investments
anticipates that many will require a TB submission including an RRMAF (Results and Risk-based
Management and Accountability Framework). In this case, TBS will also require a visual, one-page
logic model to complement the CIDA LFA. Refer to the RRMAF Guide (November 2004) for more
details.
CIDA also encourages development of an RRMAF for pooled funding and direct budget support
arrangements that do not require a TB submission since these documents provide a better framework
for managing and reporting on results. The development of an RRMAF establishes the commitment
for outcomes measurement and lays the groundwork for performance monitoring, reporting, audit and
evaluation activities (Chapters 7 and 11).

3.5      The Role of Risk Management in Managing for Results

Risk management is the process by which CIDA managers, field staff, implementing organizations
and other partners identify, analyze, assess, mitigate, monitor, communicate and report on risks
throughout the program life cycle. Risk management strengthens management practices, decision-
making and priority setting. CIDA must manage its resources in a manner designed to achieve
maximum value -for-money in an environment that is high risk. Every day program comple xities are
compounded by the certainty that unplanned changes will occur. Risk management is a key element
of CIDA’s due diligence by ensuring that appropriate measures are in place to address unfavorable
possible impacts and benefit from opportunities to enhance performance.

and sustainable demand for institutional reform, … insensitive to underlying demand and potential for change,
(they) have not been good at focusing resources where they might have had he greatest long term impact.’
Reforming Public Institutions and Strengthening Governance, World Bank , Nov. 2001p. 7.

Operational Guide on Direct Budget Support and Pooled Funding to Recipient Countries                     11
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