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The new financial tools of the European The new financial tools of the European Neighborhood and Partnership Instrument Neighborhood and Partnership Instrument
(ENPI) – (ENPI) –
Direct Budgetary SupportDirect Budgetary Support
22
SummarySummary
Legal Bases and Eligibility for EC Budget Support Under ENPILegal Bases and Eligibility for EC Budget Support Under ENPI
What is Budget Support?What is Budget Support?
Budget Support and Aid Delivery MethodsBudget Support and Aid Delivery Methods
Sectors – Key conceptsSectors – Key concepts
The Language of Budget SupportThe Language of Budget Support
The cycle of operation The cycle of operation
Potential Risks and benefits of budget supportPotential Risks and benefits of budget support
33
What is said on budget support in What is said on budget support in European Neighbourhood and Partnership European Neighbourhood and Partnership
Instrument ENPIInstrument ENPIRegulation EC N° 1638/2006Regulation EC N° 1638/2006
Art 15 “Community Assistance may also be used…for sectoral or Art 15 “Community Assistance may also be used…for sectoral or general budget support if the partner country's management of general budget support if the partner country's management of
public spending is sufficiently transparent, reliable and public spending is sufficiently transparent, reliable and effective, and where it has put in place properly formulated effective, and where it has put in place properly formulated
sectoral or macroeconomic policies approved by its principal sectoral or macroeconomic policies approved by its principal donors, including, where relevant, the international financial donors, including, where relevant, the international financial
institutions”institutions”
Art 15 “Community Assistance may also be used…for sectoral or Art 15 “Community Assistance may also be used…for sectoral or general budget support if the partner country's management of general budget support if the partner country's management of
public spending is sufficiently transparent, reliable and public spending is sufficiently transparent, reliable and effective, and where it has put in place properly formulated effective, and where it has put in place properly formulated
sectoral or macroeconomic policies approved by its principal sectoral or macroeconomic policies approved by its principal donors, including, where relevant, the international financial donors, including, where relevant, the international financial
institutions”institutions”
44
EU Objective (in addition to the Paris EU Objective (in addition to the Paris Declaration objectives)Declaration objectives)
Channel 50% of government-to-Channel 50% of government-to-government assistance through government assistance through country systems, including by country systems, including by
increasing the percentage of our increasing the percentage of our assistance provided through budget assistance provided through budget
support and SWAP arrangementssupport and SWAP arrangements
Channel 50% of government-to-Channel 50% of government-to-government assistance through government assistance through country systems, including by country systems, including by
increasing the percentage of our increasing the percentage of our assistance provided through budget assistance provided through budget
support and SWAP arrangementssupport and SWAP arrangements
55
Making Article 15 practical –Eligibility Criteria for Making Article 15 practical –Eligibility Criteria for Budget SupportBudget Support
Sectoral policy Sectoral policy and strategyand strategy
Sectoral policy Sectoral policy and strategyand strategy
Sector Programmes
Annual Reviews
Sector Programmes
Annual Reviews
Macroeconomic Stability
Macroeconomic Stability
Improvements in Public Financial Management
Improvements in Public Financial Management
Largely based on IMF assessments (Take your pick …PRGF, PSI, Article IV)
Largely based on IMF assessments (Take your pick …PRGF, PSI, Article IV)
PEFA-PFM/PMF; Reform Programme; Annual Review of reform programme
Sector PFM (Sector PEFA?); Reform Programme; Annual Review of reform programme
PEFA-PFM/PMF; Reform Programme; Annual Review of reform programme
Sector PFM (Sector PEFA?); Reform Programme; Annual Review of reform programme
66
PFM and EligibilityPFM and Eligibility
EligibilityEligibility: the establishment or implementation of : the establishment or implementation of a credible and relevant programme to improve a credible and relevant programme to improve public financial managementpublic financial management
Weak PFM does not exclude the possibility of Budget Support
Weak PFM does not exclude the possibility of Budget Support
No Thresholds(= static minimum conditions)
No Thresholds(= static minimum conditions)
Dynamic interpretation (= direction and magnitude of change)
Dynamic interpretation (= direction and magnitude of change)
77
What is Budget Support?What is Budget Support?
Budget Support:Budget Support: the transfer of funds to the National the transfer of funds to the National TreasuryTreasury– Forex transferred to central bankForex transferred to central bank– Forex converted to local currency and placed in Forex converted to local currency and placed in
“Treasury Account”“Treasury Account”– Respect of conditions for disbursementRespect of conditions for disbursement– No follow-up on « use » of funds by ECNo follow-up on « use » of funds by EC
Budget support Budget support = Money + Conditions in a context of = Money + Conditions in a context of dialogue, capacity development, and alignmentdialogue, capacity development, and alignment
CoherenceCoherence with Aid Delivery Methods concept used with Aid Delivery Methods concept used in Project and Sector Guidesin Project and Sector Guides
88
EC Funds €
ForeignExchangeReserves €
TreasuryAccount(s)
Budget implementationthrough partner country’sPublic Financial Managementsystem
PARTNER COUNTRY’S CENTRAL BANK
Tax and non tax revenues
What is Budget Support?
Conditions fordisbursement:(i) General conditions(ii) Specific conditions
MONEY
CONDITIONSIn context of dialogue, capacity development and alignment
+
99
EC procurement andgrant award procedures
EC procurement andgrant award procedures
Budget SupportBudget Support
Pooled or basket fundsPooled or basket funds
Global/MacroGlobal/Macro
Aid Delivery Methods
SectorSector
ProjectProject
FINANCING MODALITYAPPROACH
1010
Sector Approacha way of working of governmentsand its partners in a sector
Sector Policy Support Programme (SPSP) The EC tool for supporting a Sector Programme
Sector ProgrammeThe sector policy and operational action plan for the sector
Sectors: Three Key ConceptsSectors: Three Key Concepts
What is a Sector?
Defined by the Partner Government
A “Management Concept”
What is a Sector?
Defined by the Partner Government
A “Management Concept”
1111
General and Sector Budget Support – the General and Sector Budget Support – the originsorigins
BudgetSupport (General or Sectoral)
Structural Adjustment Support
Project Support
Support to PRSP
(PRBS)
Sector Policy Support Programmes (SPSP)
1212
The Language of Budget SupportThe Language of Budget Support
MediumTerm
Sector Budget Support
Short-term
Floating
and
Non-floating
Fixed Tranches
and/or
Variable tranches
Untargeted
or
Targeted
General Conditions
and
Specific conditions
Direct
or
Indirect
Medium TermGeneral
Budget Support
Disbursement Methods
Generation of local currency equivalent of foreign currency transfer
BroadObjectives of budget support
Type of Budget support
1313
Objectives of GBS & SBS
General Budget Support (GBS)
Representing a transfer to the national treasury in support of a national policy and strategy,
General Budget Support (GBS)
Representing a transfer to the national treasury in support of a national policy and strategy,
Sector Budget Support (SBS)Representing a transfer to the national treasury in support of a sector policy and strategy
Sector Budget Support (SBS)Representing a transfer to the national treasury in support of a sector policy and strategy
Short TermOr Medium Term
Short TermOr Medium Term
Medium TermMedium Term
1414
Direct and Indirect Direct and Indirect Budget SupportBudget Support
Direct Budget SupportDirect Budget Support::– when the local currency is convertiblewhen the local currency is convertible
– Transfer into local currency takes place through the Transfer into local currency takes place through the normal channels of the banking systemnormal channels of the banking system
Indirect Budget SupportIndirect Budget Support::– when the local currency is not convertiblewhen the local currency is not convertible
– Transfer into local currency takes place outside the Transfer into local currency takes place outside the normal channels of the banking system – through normal channels of the banking system – through sale of forex on a foreign currency auction, for sale of forex on a foreign currency auction, for example example
1515
Disbursement Methods for budget supportDisbursement Methods for budget support
Targeted budget supportTargeted budget support
Payment against audit of expenditure documents
Payment against performance criteria and indicators
Non-targeted budget supportNon-targeted budget support
1616
But we don’t like target budget supportBut we don’t like target budget support
Does not address systemic problemsDoes not address systemic problems
Large transaction costs for little benefitLarge transaction costs for little benefit
Perverse effects – delays priority spendingPerverse effects – delays priority spending
Apparent “control” is illusory - fungibilityApparent “control” is illusory - fungibility
Becomes a “document chase”Becomes a “document chase”
1717
VariableFixed
Disbursement Methods for budget supportDisbursement Methods for budget support
Fixed tranchesFixed tranches Variable tranchesVariable tranches
AllorNothing
It depends on performance
1818
Floating and Non-floating tranchesFloating and Non-floating tranches
Floating tranchesFloating tranches
– NoNo fixed cut-off date for meeting the disbursement fixed cut-off date for meeting the disbursement conditionsconditions
– Indicative dates onlyIndicative dates only
– Example: HIPC initiativeExample: HIPC initiative
– In practice most EC programmes involve « floating » In practice most EC programmes involve « floating » tranchestranches
Non-floating tranchesNon-floating tranches
– disbursement conditions have to be met by a given datedisbursement conditions have to be met by a given date
– If condition not met by a given date, the money is lostIf condition not met by a given date, the money is lost
1919
Seven areas of assessment for SPSPsSeven areas of assessment for SPSPs
1. National and macroeconomic framework
SPSP
7. Institutional and capacity development
6. Performance measurement
5. Donor coordination4. Public Financial Management systems
3. Budget and Medium Term ExpenditureFramework
2. Sector policy and overall strategic framework
2020
The cycle of The cycle of operationsoperations
IQSGCountry Strategy Paper and National Indicative Programme
Potential Impact + Prospective Eligibility
Programming
Identification
FormulationImplementation
Evaluation
Financing
QSG1:
Identification Fiche Focus on
Eligibility + Next Steps
QSG2:
AAP/AF or Financing Proposal/
Eligibility+ Context+ Conditions
Financing Agreement including Technical & Administrative Provisions
Payment Conditions, including eligibility
Decision process for tranche release
Justification against Payment Conditions, including eligibility
Evaluation
Focus on joint evaluations
2121
Budget Support: where are Budget Support: where are the benefits?the benefits?
Lowertransactioncosts
Lowertransactioncosts
Recognisereality offungibility
Recognisereality offungibility
Greaterharmonisationand alignement
Greaterharmonisationand alignement
Improveddomesticaccountability
Improveddomesticaccountability
Improvedcapacitydevelopment
Improvedcapacitydevelopment
Increasedsustainability
Increasedsustainability
Higheroverallimpact
Higheroverallimpact
Increasedcoherence
Increasedcoherence
Efficientuse ofresources
Efficientuse ofresources
Increasedownership
Increasedownership
Where are theBenefits?
2222
Reputation RiskReputation Risk
EC programmes in difficult countries will tarnish the EC’s reputation
Fiduciary RiskFiduciary Risk
EC funds not used for intended purposes
Development RiskDevelopment Risk
Country & EC objectives (eg MDGs) undermined by key factors – ownership, macro stability, PFM, overloading…
Risks and budget support
2323
Addressing risks through criteria for Addressing risks through criteria for disbursementdisbursement
General ConditionsGeneral Conditions for disbursement for disbursement– Apply to all tranchesApply to all tranches
– Will usually be limited to the eligibility conditionsWill usually be limited to the eligibility conditions
Specific conditionsSpecific conditions for disbursement for disbursement– Apply to individual tranchesApply to individual tranches
– Will usually focus on key performance criteria and Will usually focus on key performance criteria and indicators indicators
2424
Typology of IndicatorsTypology of Indicators
INPUTINPUT
OUTPUTOUTPUT
OUTCOME/RESULT
OUTCOME/RESULT
IMPACTIMPACTWider effectsConsequences of outcomes
Wider effectsConsequences of outcomes Literacy ratesLiteracy rates
Results at the level of beneficiaries(supply meets demand)
Results at the level of beneficiaries(supply meets demand)
Enrolment ratesEnrolment rates
Schools builtSchools builtConcrete consequences of resources or measures taken (supply)
Concrete consequences of resources or measures taken (supply)
Financial resources provided or measures taken
Financial resources provided or measures taken
Resources allocated, used, laws passed
Resources allocated, used, laws passed
IDEAIDEA EXAMPLEEXAMPLE
2525
End “stop-go”andallow graduatedresponse
End “stop-go”andallow graduatedresponse
Why result/outcome oriented approach Why result/outcome oriented approach and variable tranches?and variable tranches?
Focus on“Results”
Focus on“Results”
Createincentives
Createincentives
PolicySpace
PolicySpace
StreamlineConditionality
StreamlineConditionality
Potential benefits ofResults/outcome basedvariabletranches
Encourageattentionon qualitystatistics
Encourageattentionon qualitystatistics
2626
Choosing indicators (1)Choosing indicators (1)
Link between indicators and national policiesLink between indicators and national policies– Indicators should be drawn from the national policy and strategyIndicators should be drawn from the national policy and strategy– Indicators chosen for disbursement purposes should be Indicators chosen for disbursement purposes should be
coherent with the analysis of the country contextcoherent with the analysis of the country context
Technical characteristics of the indicatorsTechnical characteristics of the indicators– Clear and unambiguous definitionsClear and unambiguous definitions– Source of indicators should be identifiedSource of indicators should be identified– Methodology to calculate the indicator should be describedMethodology to calculate the indicator should be described– Sensitivity of the indicator to policy changes should be assessedSensitivity of the indicator to policy changes should be assessed– Timing of the availability of the indicators should be knownTiming of the availability of the indicators should be known
2727
Choosing indicators (2)Choosing indicators (2)
Choosing targets for the indicatorsChoosing targets for the indicators– Get the balance right between being overly Get the balance right between being overly
ambitious and excessively prudentambitious and excessively prudent– Choose indicators and targets with the Choose indicators and targets with the
maximum transparencymaximum transparency
Set the targets early! Set the targets early! At least for first At least for first year, and indicatively for subsequent years, year, and indicatively for subsequent years, including a possibility of revisionincluding a possibility of revision
2828
Methods of performance evaluationMethods of performance evaluation
Fixed trancheFixed tranche – all or nothing – all or nothing
Variable trancheVariable tranche– Individual performance scoreIndividual performance score– Weight for each performance indicatorWeight for each performance indicator
Key issueKey issue – the link between payments and performance – the link between payments and performance
Overall Performance Score
Individual performanceScore
Weight of indicator in all indicators
= XSUMOF
2929
Common problems with indicatorsCommon problems with indicators
Absence of precise and unambiguous definitionsAbsence of precise and unambiguous definitions
Delays in the availability of dataDelays in the availability of data
Lack of comparability of data across yearsLack of comparability of data across years
Lack of relevance of the indicators chosenLack of relevance of the indicators chosen
Difficulty to assess whether objectives missed due to Difficulty to assess whether objectives missed due to weak performance or over-ambitious objectivesweak performance or over-ambitious objectives
3030
ConclusionConclusion
Budget support as money + conditions in a context of Budget support as money + conditions in a context of dialogue, alignment, and capacity developmentdialogue, alignment, and capacity development
Budget support has its own language – but it is not Budget support has its own language – but it is not that difficultthat difficult
Budget support has potential benefits; but it also has Budget support has potential benefits; but it also has risksrisks
Benefits and risks need to be addressed in the design Benefits and risks need to be addressed in the design of programmesof programmes