Budget support training

Module 9State Building Contracts

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Version October 2013

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Outline

1. Rationale for SBC

2. Preparing the decision to provide BS in situations of fragility

3. Eligibility and risk assessment

4. Design

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Manilla Consensus: Balancing opportunities with risks

Working with fragile systems

Accountability to own constituency

Risk of mismanagement(short term, direct)

Strengthening national systems

(medium term, indirect)Final goal: credible systems for poverty reduction and

good governance

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The rationale for SBCWhy should EU provide BS in fragile situations? There are situations where BS might be the most appropriate

modality The cost of non-intervention might be catastrophic (chaos leading

to civil war, crisis spreading regionally, etc..) The potential benefits can be very important: resuming provision

of basic services

Why a specific contract to provide BS in fragile situations? These situations require a commitment to capacity development The eligibility criteria and implementation modalities require

modalities adapted to the context of fragilityNB: SBC are meant to address situations of fragility, not to avoid the

constraints of GGDC or SRC!

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What is fragility?

Fragility refers to weak or failing structures and to situations where the social contract is broken due to the State’s incapacity or unwillingness to deal with its basic functions and to meet its obligations and responsibilities regarding the rule of law, protection of human rights and fundamental freedoms, security and safety of its population, poverty reduction, service delivery, transparent and equitable management of resources and access to power.

Council of the EU, November 2007

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Outline1. Rationale for SBC

2. Preparing the decision to provide BS in situations of fragility Identifying fragility Opportunity to provide BS and risks A road map to streamline/simplify the

preparation of SBC

3. Eligibility and risk assessment

4. Design

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Identifying fragility Main factors:

Post conflict situations Natural disasters Situations of extreme poverty Economic crisis Humanitarian crisis Political or economic transition etc.

Key questions when assessing the case for SBC: Is fragility due to incapacity? Or to unwillingness?

List of crisis countries established by Director General of DEVCO for application of flexible procedures

World Bank list of fragile states and territories

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Opportunities to provide BS

There is an opportunity for providing BS, when it can: support essential elements of state building; consolidate the process of stabilisation; support the country’s emergence from crisis.

The decision to provide a SBC should be based on: a thorough political and economic analysis of the situation of

fragility, and an analysis of risks and opportunities.

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- An assessment of whether the partner country can be considered fragile or in a fragile/transition situation;

-A clear purpose linked to state building and democratic transition objectives;

- An assessment of the partner country commitment and stabilisation strategy to be supported by the SBC;

- An assessment of the eligibility criteria for SBC;

- An assessment of the risks, including the political risk, the mitigation measures and benefits;

- An indication of wider international support, Ms, WB, IMF…

A Framing for Road Map to streamline the preparation of SBC (1)

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Not a blue-print but a tool to

identify and address key weaknesses for the design of a SBC in a specific country

define clear milestones/action plans depending on country circumstances (cf. above assessments on fragility and transition, eligibility criteria, results of the risk management framework) and be used for monitoring progress.

aim at framing policy dialogue (incl. capacity development) with the partner country to allow for, and strengthen the use of country systems.

be developed under leadership of geographic directorates (close collaboration with Delegations and relevant HQ services)

A Framing for Road Map to streamline the preparation of SBC (2)

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Outline

1. Rationale for SBC

2. Preparing the decision to provide BS in situations of fragility

3. Eligibility and risk assessment

4. Design

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Eligibility (1) The road map is an instrument to identify:

whether the country is eligible for a SBC, or; the steps to be taken to become eligible.

Same eligibility criteria as for all BS contracts

Assessment to be adapted to the fragile situation on a case by case basis

For SBC, identification and formulation takes place at the same time.

No Need QSG1. Road Map to be approved by BSSC.

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Eligibility (2)Public Policies:

Assess the relevance and credibility of the policy response to the fragility situation.

National development plans not always there National ownership Not overambitious

Assess whether the government is committed: to integrate its priorities in the budget? to conduct regular joint reviews with the development partners

and, possibly, the civil society?

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Eligibility (3)Macroeconomic framework:

Stability-orientated: crucial importance to step out of fragility

Assessment will focus and rely on:

relations with the IMF and the type of IMF support programme in place;

Macroeconomic situation analysis and debt sustainability; Government revenue and expenditure estimates and an identified

financing gap. Ouitlook for the next 2/3 years

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Eligibility (4)Public Finance Management

Minimum eligibility requirement : basic elements/core functions of a PFM systems in place (budget availability, treasury system, accounting and reporting system on budget execution).

If absence of one or more of these, BS cannot be considered.

Formalised PFM reform programme may not exist. Focus on commitment of the country to an adequate (credibility/relevance) programme of improvement of its PFM.

Short term measures: specific conditions may be required prior to provision of SBC and/or the first disbursement.

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Eligibility (5)

Transparency and oversight of budget The eligibility criterion (publication of Executive's budget proposal

or enacted budget) needs to be adapted to the situation of fragility;

Focus on assessment of the Government’s commitment to meet the criterion rather than meeting the criterion before programme approval. However the criterion remains a specific condition for the first disbursement.

Realistic reform milestones to be defined and used during BS implementation to assess progress.

Key budget documents to be produced and published Timeliness of release of budgetary information Comprehensiveness of release of budgetary information Quality, integrity and accuracy of information

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Risks’ Assessment Crucial for SBC- Forward looking dimension Specific conflict or fragility/political economy assessment, possibly

carried out jointly by donors (ideally with government concerned); EC’s RMF should take into account (narrative) the specificities

related to fragility Delegation’s own analysis of key factors and actors playing a role

in the fragility situation Risks/expected results – Risks of non-intervention/opportunities -

risk response strategies, mitigating measures and capacity development.

- Assessments should be shared with EU-MS represented in the country.

- Consultation with non EU donors (IFIs) recommended.

SBC discussed at BSSC: case by case analysis and possibility for high risk acceptance

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Outline

1. Rationale for SBC

2. Preparing the decision to provide BS in situations of fragility

3. Eligibility and risk assessment

4. Design

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Design (1) Situations of fragility require early engagement for a long period

of sequenced reforms, but also entail high risks.

SBC should be part of a long-term strategy of engagement with fragile/transition countries but should be monitored on a short term basis

Sequence reforms carefully, focus first on quick wins and on building the legitimacy of the state.

Mostly short-term programmes (1 to 2 years) in order to be able to adapt SBC to the pace of reforms and short-term financing gap

Provide follow up SBC’s when transition to SRC or GGDC is not yet feasible.

SBC is generally not combined with another type of BS contract

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Design (2)Risk mitigation:Use Risk Mitigation Framework to identify adequate mitigatingMeasures: When the PFM system is still (very) weak, targeting theuse of BS is an option/ capacity development/specific conditions .

Disbursement profile:. Should be coordinated with the Government, IMF, and other BS donors to be adapted to cash flow needs of the Government.. Larger fixed tranche (high financing gaps, need for more predictable aid)

Performance indicators : limit the number Simple, realistic, related to vital state function Focus on reforms process/output the n/n+1 rule will be applied on the basis of indicators

evaluated on year n.

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Key messages

Keep it simple and realistic

Focus on rapid results

Coordinate closely with IFIs and other BS donors

Regularly reassess risks and opportunities

Strengthen policy and political dialogues

• Thank you very much for your attention.

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