OPERATIONAL GUIDE ON DIRECT BUDGET SUPPORT AND POOLED FUNDING TO RECIPIENT COUNTRIES
OPERATIONAL GUIDE ON DIRECT BUDGET SUPPORT AND POOLED FUNDING TO RECIPIENT COUNTRIES
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
Operational Guide on Direct Budget Support and Pooled Funding to Recipient Countries ii 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 ofRisk 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 iii 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 .
Operational Guide on Direct Budget Support and Pooled Funding to Recipient Countries iv 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 v 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 DevelopmentAssistance WB World Bank
Operational Guide on Direct Budget Support and Pooled Funding to Recipient Countries vi 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 terms 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 vii 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 viii 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.