|Financial Management Diagnostic Work
Collaboration between Participating Multilateral Development Banks
1. Introduction In February 2001, the Presidents of five Multilateral Development Banks (MDBs) agreed to the creation of a working group to address the harmonization of their policiesand practices in financial management.The working group agreed that there are substantialbenefits to greater collaboration among MDBs on country- and sector- level diagnostic work.This note sets out agreements reached by the participating MDBs on collaboration in planning,conducting and sharing the results of diagnostic reviews in financial management and accountability.
2. Purpose of Diagnostic Reviews. Diagnostic reviews provide knowledge of financial accountability arrangements in the public and private sectors in the client countries of MDBs.They support both the discharge of the MDBs’ fiduciary responsibilities and the achievement of their development objectives—fiduciary responsibilities, by identifying the strengths and weakness of accountability arrangements in the public sector and the risks that these may pose to the use of MDB funds; development objectives, by facilitating a common understanding by the borrower, the MDBs and where possible development partners of the country’ s financial management arrangements in both the public and private sectors, thus facilitating the design and implementation of capacity building programs. Diagnostic reviews are more likely to deliver impact when there is ownership of the process by the authorities in the country concerned, broad participation by affected shareholders, and effective collaboration between interested MDBs and other donors.
3. Diagnostic reviews add value to MDB programs in several ways. They inform assessment of risks in considering strategic options for country support, and can thus influence the overall nature and level of the support to be provided. They are a useful reference point in carrying out the assessment of the financial management capacity of individual project implementing agencies. They provide the opportunity for dialogue between borrowers and development partners on financial accountability issues, and promote consistency of response by development partners in their programs to strengthen overall management of public finances. Collaboration between MDBs in carrying out diagnostic work can reduce costs both to borrowers and MDBs themselves.
4. Scope. The diagnostic reviews covered by this MOU are those carried out by the financial management sectors of the participating MDBs to review financial accountability arrangements in the public and private sectors at the national or significant sub-national (state,sector or region) level.2 The products presently available among the participating MDBs are the following:
1 The participating organizations are the African Development Bank (AfDB), the Asian Development Bank(AsDB), the European Bank for Reconstruction and Development (EBRD), the Inter American Development Bank (IADB), and the World Bank (WB). The Islamic Development Bank has since expressed a desire to join.
2 The participating MDBs are separately exploring collaboration in assessing the financial management capacity of implementing entities for individual projects.
Diagnostic Reviews of Financial Management and Accountability
Asian Development Bank Diagnostic Study of Accounting and Auditing Practices
World Bank Country Financial Accountability Assessment (CFAA) (public sector)
World Bank Review of Accounting andAuditing Practices (ROSC) 3 (private sector)
5. The participating MDBs recognize the existence of other diagnostic products that addressfinancial accountability in it broadest sense, and the importance of good collaboration with those products in carrying out the above reviews. For example, the World Bank also carries out Public Expenditure Reviews (PERs) and Country Procurement Assessment Reviews (CPARs), and is developing the concept of an “integrated fiduciary assessment” that brings the findings of CFAAs, CPARs and PERs together. Other relevant products include the International Monetary Funds reviews of country adherence to its Code of Fiscal Transparency and the United Nations Development Program’s recently finalized product known as CONTACT.
6. Collaboration. The participating MDBs agree to collaborate with each other in the overall coordination of diagnostic work in financial accountability, as well as in the planning, conduct and sharing of results of work in individual countries. The extent of collaboration in conducting assignments in each country will be decided on a case-by-case basis taking into account the views of the borrower, the agreed division of labor between MDBs active in that country, and the country strategy of the MDBs concerned.
• Overall coordination. The working gr oup will act as a forum to promote greater collaboration of MDB financial management diagnostic work. This will include discussing the overall scope and coverage of diagnostic work, the development and updating of diagnostic tools, and reviewing and disseminating lessons of experience. Each MDB will advise other members of the group when a new diagnostic product, or significant revisions to an existing product, is under consideration and provide the opportunity for comment.
• Planning. Participating MDBs will promptly share information on their plans to carry out diagnostic work in a particular country with other MDBs whose membership includes the same country.
• Conducting the reviews. Where diagnostic reviews are conducted jointly, the extent of collaboration will be agreed and documented at an early stage in the planning process. This will include: (a) agreeing whether the final product is to be jointly issued, or will be issued by one partner with support from the other in staffing the assignment; (b) where agreed to be a joint product, the preparation of a Joint Initiating Memorandum; (c) the staffing contribution and division of labor among the participating partners; (d) the
3 The Reports on the Observance of Standards and Codes (ROSC) initiative is a joint program by the IMF and the World Bank to review the adoption of internationally recognized standards, or codes of good practices, that can help to improve economic policy making and strengthen the international financial system.
budget contributions of each partner; and (e) processes for communicating with the borrower and other stakeholders.
• Sharing completed reviews. Participating MDBs will share completed diagnostic reviews with other MDBs and donors within the constraints of their individual disclosure policies. Where the policy is to disclose with the agreement of the government, MDBs will encourage the governments concerned to allow the reviews to be shared.
• Quality Assurance. Participating MDBs have a shared interest in ensuring that the quality of diagnostic work is acceptable. Where reviews are carried out jointly, quality assurance arrangements should be agreed at the planning stage and recorded in the Joint Initiating Memorandum. These will normally provide for regular review of work done by each participating organization, and for clearance by each before the report is issued.
Each MDB will share findings of internal quality reviews of their products with other members of the group and, where appropriate, involve partners in periodic quality reviews.
• Follow-up Activity. The implementation of recommendations is critical to the impact of diagnostic work. From the start of each review, participating MDBs will work to develop an understanding with the government that the review is intended to form the ba sis for remedial action to address any significant deficiencies in public financial management. MDBs that participate in a review will collaborate on the agreement of an action plan with the government, including, where consistent with their individual country strategies and programs, on the provision of support for capacity building.
13. Amendments to this agreement. The MDB Financial Management working group is aware and supportive of the work of other organizations and initiatives to strengthen donor collaboration in the conduct of diagnostic work. 4 This note may be amended from time to time to reflect agreements reached through those efforts.
March 19, 2002
4 These groups include the OECD-DAC Task Force on Donor Practices and the Economic Commission for
Africa/Strategic Partnership for Africa Financial Management Working Group.