Risk Management Relating to Budget Support – A New Assessment Framework

The Communication on the Future Approach to Budget Support announces that EuropeAid has developed a new Risk Management Framework for budget support operations.  Lars Wilke of EuropeAid A2 introduces the new concept and explains how to use it.

When the European Court of Auditors produced a special report on Budget Support at the end of 2010, one of the key recommendations was to develop a specific, structured tool to assess risks and to link it to policy dialogue, capacity development and disbursement conditions.  A Risk Management Framework was developed and it became a key element of the new Budget Support Communication of October 2011.



The Team Leader for designing this framework and tool is Lars Wilke, a Policy Officer at EuropeAid, Unit A2 (Budget Support, Public Finance, and Macroeconomic Analysis).  Drawing on the approaches and lessons learned by other donors, he and his team proposed a new approach that considers political risks, macroeconomics, developmental risks and also looks into public financial management and corruption and fraud.



“The Risk Management Framework for Budget Support operations is a part of the Budget Support Guidelines, and we will publish those guidelines in the near future,” said Mr Wilke recently in his office in Brussels. 

According to Mr Wilke, the Risk Management Framework has four purposes:



(i) To identify and assess risks linked to the provision of Budget Support

(ii) To prompt mitigating measures – for example, capacity development measures or setting disbursement conditions and safeguards

(iii) To assist identify key issues for policy dialogue

(iv) To provide a tool to monitor the development of risks and also the impact of the mitigating measures.



The Risk Management Framework introduces the concept and terminology as well as guidance on how to assess, address, and monitor risks. The tool is based on excel sheets and will rely on existing assessments, so colleagues may breathe a sigh of relief that it will not involve a heavy additional workload. “The challenge will be to look at the country situation from a new perspective – a risk perspective,” said Mr Wilke.

The Risk Management Framework is not about risk avoidance, he added, and it is not a tool that establishes thresholds where risk may be deemed too high to support budget support provision.  “The idea is to manage risk and to come to informed decisions,” he said, “You can think about the possible benefits of the Budget Support and compare them with the risks you have identified”. 

Balancing risks with the expected benefits is crucial. Budget Support in fragile situations, for example, very often means engaging in high-risk environments, but the costs of non-intervention may outweigh the identified risks.

The Risk Assessment Tool consists of three templates. The first is a Risk Questionnaire covering the different risk categories including political governance, macroeconomics, developmental risk and public financial management, corruption and fraud. It allows the definition of a risk rating – Low , Moderate, Substantial or High – and requires  a very brief justification.  “This step also assists in identifying major risks,” said Mr Wilke.



The second template is the Risk Register, which combines the risk rating with a narrative assessment, providing a delegation with the discretion to provide more information on risks that are not covered by the questionnaire. The Risk Register also generates average risk ratings, where risk rating is done by calculation by the software.The Risk Register also is in place to identify mitigating measures, such as capacity development support (most often technical assistance), to address the risks and assess the impact of such measures on the risk.  The mitigating measures may also be linked to the engagement of other donors.

The third template is the Country Risk Profile, where a short summary of the risk assessment provides the top management in EuropeAid with all risk ratings, key concerns, expected benefits of the programmes, and mitigating measures.

The Risk Management Framework and the assessment and ratings are linked to a new Budget Support Steering Committee within EuropeAid, led by the Director General. “ In cases where there is substantial or high risk involved, the Steering Committee will take a decision as to whether they will accept the risk or if they require more mitigating measures, or indeed if the risk is too high to engage,” said Mr Wilke. “This is why the tool is an internal European Commission instrument.”

During September and October there will be half-day seminars on Risk Management in Brussels.  Training is also integrated in existing EC trainings on Budget Support and Public Financial Management.

Addressing colleagues directly, Mr Wilke said, ”Do ask us to provide support.  We developed and designed this instrument and we can help you to fill in the information and come up with a good solid, assessment.”

This collaborative piece was drafted with input from Lars Wilke, Jos Gallacher and Susanne Wille, with support from the capacity4dev.eu Coordination Team.