11

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

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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

+

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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”

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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)

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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

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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

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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”

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VariableFixed

Disbursement Methods for budget supportDisbursement Methods for budget support

Fixed tranchesFixed tranches Variable tranchesVariable tranches

AllorNothing

It depends on performance

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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

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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

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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?

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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

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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

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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

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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

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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

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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