The Future Approach to EU Budget Support

October 2011

Main messages

• Continued importance of budget support instrument• Stronger link with fundamental values of the EU (human rights,

democracy and rule of law)• Greater differentiation of budget support operations, allowing the EU

to respond better to the political, economic and social context of the partner country

• Strengthened eligibility criteria and more rigorous assessment• Stronger focus on accountability and transparency• Strengthened risk management framework• Continued emphasis on results, performance tranches, government

ownership and predictability• Strengthened EU Coordination

Summary

1. What is Budget Support, and Why

2. A Modern Approach to Budget Support

3. EU Coordinated Approach

4. Design and Implementation

5. Conclusions

Communication- Outline

BS as package: Policy dialogue, financial transfers, performance assessment and capacity building

Means of delivering better aid (not an end in itself) Most suitable form of aid consistent with aid

effectiveness agenda But not a blank cheque, nor provided to every country Green Paper October 2010 – Wide consultation process

of stakeholders, both from EU and partner countries. In this Communication, the Commission sets out a new

policy on budget support and puts forward policy proposals for an EU coordinated approach

What is Budget Support, and Why

Positive experiences OECD-DAC evaluations Encouraging results from new pilot evaluation

methodology – Tunisia, Mali and Zambia Budget Support and MDG performance

Scope for Improvement Court of Auditor findings and recommendations Calls for greater coherence and consistency of EU

support Need for more transparency and accountability

Lessons Learned

Building on success Predictability, ownership, performance related tranches,

results Use of more intermediate process and output indicators to better

demonstrate and communicate partner country development results

Dynamic approach to eligibility criteria But more structured assessment

Portfolio approach: no global targets for use of budget support

Risk management to be strengthened

A Modern Approach to Budget Support

Differentiating EU Budget Support

Good Governance and Development Contract Sector Reform Contract State Building Contract

A Modern Approach to Budget Support

Budget support as a vector of change to address the following 5 development challenges and objectives:

1. Promoting human rights and democratic values Good Governance and Development Contracts should be provided

where there is trust and confidence that aid will be spent pursuing the values and objectives to which the EU subscribes, and on which partner countries commit to move towards meeting international standards.

Where commitment deteriorates: adequate and coordinated EU+MS response, but also progressive and proportionate. Possibility to adjust fixed tranche

Sector budget support (sector reform contract) remains a useful tool to address the basic needs of populations even where the conditions do not exist to permit the use of a Good Governance and Development Contract.

A Modern Approach to Budget Support

Charter of fundamental rights of the European Union

Everyone has the right to respect for his or her physical and mental integrity (art. 3)

Prohibition of torture and inhuman or degrading treatment or punishment (art. 4)

Everyone has the right to respect for his or her private and family life, home and communications (art. 7)

Everyone has the right to freedom of thought, conscience and religion (art. 10)

Everyone has the right to freedom of expression (art. 11) Any discrimination based on any ground such as sex, race, colour,

ethnic or social origin, genetic features, language, religion or belief, political or any other opinion, membership of a national minority, property, birth, disability, age or sexual orientation shall be prohibited (art. 21)

A Modern Approach to Budget Support

2. Improving PFM, macroeconomic stability, inclusive growth and the fight against corruption and fraud Budget support, in particular Good Governance and Development

Contracts, should be used to strengthen core government systems, such as public finance management and public administration

Promote macroeconomic stability and fiscal sustainability, making the systems more effective and accountable and lead to a comprehensive and transparent budgetary allocation process.

address constraints on sustained growth and to promote the "green economy", including the protection and sustainable use of public goods and natural resources, while ensuring that the benefits of growth are widely shared.

As part of its objective to improve core government systems, particularly procurement, budget support will contribute to the fight against corruption and crimes involving fraud.

A Modern Approach to Budget Support

3. Promoting sector reforms and improving sector service delivery Sector Reform Contracts can be provided to a specific sector or a set

of interlinked sectors Clear objectives should be defined, mainly in terms of improvements in

public access and use of quality services and, in particular in the neighbourhood countries, support for the partnership agenda

Sector specific conditions should lead to a regular policy dialogue, including on budgetary allocations to the sector, implementation of reforms, strengthening of institutions and systems, progress towards sector objectives, and efficient service delivery.

Emphasis will be on issues relating to frontline service delivery, particularly pro-poor, gender and children's issues, and the capacity to absorb and use sector research results.

A Modern Approach to Budget Support

4. State-building in fragile states, and addressing development challenges of SIDS and OCTs Fragile states: focus on state building, coherent and coordinated

approaches, reinforced political and policy dialogue. Decisions case by case. State Building Contracts

SIDS and OCTs: BS to address cross-cutting, long-term and structural challenges

5. Improving domestic revenue mobilisation and reducing dependency on aid BS should complement, not substitute, domestic revenue mobilisation Promote natural resource governance and transparency in resource rich

countries

A Modern Approach to Budget Support

Objective– to increase effectiveness of this modality in contributing to development and

reform policies, and to provide coherent and consistent responses to challenges encountered

– Work towards a “single EU Good Governance and Development Contract”– Acting together to increase critical mass and leverage

Key principles– Sovereign decision making– systematic information exchange as a minimum, with coordinating responses the

ultimate goal– EU coordination should always be supportive of wider donor coordination and

country-led co-ordination– Coordination at both HQ and field level and must build on existing bodies and

mechanisms of cooperation as well as existing legal frameworks.

EU Coordinated approach

Key elementsshare initial assessment on commitment of partner country to the EU fundamental values; share, where relevant, diagnostics and assessments of eligibility conditions (but decisions on compliance remain the responsibility of each donor);harmonize, as far as possible, risk assessment tools and promote a coordinated dialogue on mitigating actions;perform joint assessments at country level and regular joint evaluations; ensure high level of expertise for effective policy dialogue with the partner countries by using delegated cooperation and transfer arrangements;carry out high level political dialogue, including monitoring of commitment to fundamental values and appropriateness of pursuing good governance and development contract; jointly communicate to local stakeholders budget support disbursements and compliance with disbursement conditions.

EU Coordinated approach

Precondition EU to assess whether preconditions for Good Governance and Development Contract exist:

Human rights, Democracy and Rule of Law

Eligibility Criteria Stable macroeconomic framework

Increased focus on domestic revenue mobilisation National/sector policy and reform

Continued focus on national ownership Focus on sustainable growth and poverty reduction (link to “Agenda for Change”)

Public financial management Assessment of PFM system to establish a baseline upon which dynamic approach will be based May require short-term measures from PFM reform strategy before commencing BS Partner countries to be actively engaged in fight against fraud and corruption

NEW: transparency and oversight of budget Public availability of budgetary information “Entry point” to be defined, combined with dynamic approach

Design and Implementation

Managing Risk Improved risk management framework

Political governance, macroeconomic, development, PFM, corruption and fraud Complementary tool in programming, design and implementation, and to inform

decision-making and policy dialogue Focus on risks with high impact and high likelihood

How Much Budget Support Financing needs Budgetary allocations according to policy objectives and priorities Effectiveness, VFM, and impact Track record and absorption capacity Result orientation

Design and Implementation

Policy Dialogue To ensure that major reforms are discussed and fully resourced, objectives

are identified and results assessed Involvement of relevant Commission services, delegated cooperation with

MS, improved access to TA and training Committed to promote inclusion of domestic stakeholders in policy dialogue

and annual reviews

Performance Incentives and Conditions Base tranches linked to eligibility Performance tranches linked to progress against indicators (mix of process,

output and outcome indicators) Good governance and development contracts: conditions may be attached

to supporting democracy and human rights

Design and Implementation

Predictability Eligibility related conditions to be as clear as possible Longer term commitments where strong track record, informed by review of

experience with MDG-Contracts (late 2011)

Strengthening domestic and mutual accountability

Strengthening openness, transparency and accountability of the budget process

Supporting a participatory budget support approach Integrating programmes to support national legislative and oversight bodies

and CSOs Increasing transparency by publishing relevant information on budget

support financing agreements and performance reviews

Design and Implementation

Capacity development Needs to be identified and assessed systematically as part of BS operations To be based on demand, linked to clear outputs, harmonised and aligned

initiatives

Monitoring, evaluation and communication Importance of credible and functioning M&E system and identified actions to

address weaknesses, especially regarding: Institutional set-up of M&E system Link between M&E plan and policy development Quality, regularity and reliability of data

M&E system should contribute to strengthening voice of national stakeholders

Need better communication of results of evaluations and lessons learned

Design and Implementation

Communication seeks to Make budget support more efficient and effective in

delivering development results Equip the EU and Member States with an “EU

Coordinated Approach” on budget support

New guidelines to reflect guiding principles

Conclusions