This report sets out an approach for assessing the risks associated with choices of aid instruments. These risks are specific to the instrument and the recipient country. The methodology involves subjective assessments of as many as 29 risks, their outcomes, probabilities (on a 6-point scale) and risk factors. It also identifies potential mitigation strategies and the probabilities of the risk outcome after mitigation. This methodology was applied to common localised and non-localised aid instruments in Afghanistan, a country where good information on the risks of different aid instruments is available.
Key Findings:
- The risks of localising aid in Afghanistan were not greater, and probably smaller, than not doing so, despite the fact that Afghanistan scores close to the bottom of most international assessments of institutional capacity and accountability. This implies that this finding may also be true in countries with better-functioning institutions. In the Afghanistan example, localised aid carries a slightly higher fiduciary risk but significantly lower programmatic, contextual and institutional risks.
- The choice of aid instrument depends on the interrelation of the donor’s objectives, timeframe and tolerance for risk and a particular country context. The recipient will have its own objectives and timeframe for results which may not coincide with those of the donor. Donors with low tolerance for fiduciary risks are less likely to use localised aid instruments. The risk profiles of localised and non-localised aid instruments differ and choosing among them will depend on the weight assigned to each risk by the policymaker.
Recommendations:
Donors are advised to develop explicit tools and capacity for risk management. They should communicate what risks are worth taking in a particular country context, and ensure that decisions on risk taking are communicated upward and reviewed by senior managers. This means creating focal points for risk management, such as the country programme manager. Donor organisations might also consider borrowing risk management tools from the private sector. The report suggests five key policy recommendations for donors to manage risk:
1. Go beyond project- (transaction-) based approaches to managing fiduciary risk.
2. Tailor the choice of aid instrument to the country context.
3. Implement special risk mitigation measures in high-risk environments.
4. Manage trade-offs among donor objectives so as to minimise the risks of doing harm
5. Strike a balance between allowing bureaucratic autonomy and rules-based processes.
