budget support training module 6 risk management version october 2013

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


2. Why is risk management framework needed for BS?





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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







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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







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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







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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







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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

budget support training module 6 risk management version october 2013

Documents

risk assessment risk

definitions risk

risk categories

identified risk

risk levelidentifying

risk management version

risk management important

internal tool risk