Summary

1. The new financial tools of the European Neighborhood and Partnership Instrument (ENPI) – Direct Budgetary Support

2. Summary • Legal Bases and Eligibility for EC Budget Support Under ENPI • What is Budget Support? • Budget Support and Aid Delivery Methods • Sectors – Key concepts • The Language of Budget Support • The cycle of operation • Potential Risks and benefits of budget support

3. What is said on budget support in European Neighbourhood and Partnership Instrument ENPIRegulation EC N° 1638/2006 Art 15 “Community Assistance may also be used…for sectoral or general budget support if the partner country's management of public spending is sufficiently transparent, reliable and effective, and where it has put in place properly formulated sectoral or macroeconomic policies approved by its principal donors, including, where relevant, the international financial institutions”

4. EU Objective (in addition to the Paris Declaration objectives) Channel 50% of government-to-government assistance through country systems, including by increasing the percentage of our assistance provided through budget support and SWAP arrangements

5. Making Article 15 practical –Eligibility Criteria for Budget Support Sector Programmes Annual Reviews Sectoral policy and strategy Largely based on IMF assessments (Take your pick …PRGF, PSI, Article IV) Macroeconomic Stability PEFA-PFM/PMF; Reform Programme; Annual Review of reform programme Sector PFM (Sector PEFA?); Reform Programme; Annual Review of reform programme Improvements in Public Financial Management

6. PFM and Eligibility • Eligibility: the establishment or implementation of a credible and relevant programme to improve public financial management Weak PFM does not exclude the possibility of Budget Support No Thresholds (= static minimum conditions) Dynamic interpretation (= direction and magnitude of change)

7. What is Budget Support? • Budget Support: the transfer of funds to the National Treasury • Forex transferred to central bank • Forex converted to local currency and placed in “Treasury Account” • Respect of conditions for disbursement • No follow-up on « use » of funds by EC • Budget support = Money + Conditions in a context of dialogue, capacity development, and alignment • Coherence with Aid Delivery Methods concept used in Project and Sector Guides

8. What is Budget Support? PARTNER COUNTRY’S CENTRAL BANK MONEY ForeignExchangeReserves € Treasury Account(s) Tax and non tax revenues EC Funds € + CONDITIONS In context of dialogue, capacity development and alignment Conditions for disbursement: (i) General conditions (ii) Specific conditions Budget implementation through partner country’s Public Financial Management system

9. Aid Delivery Methods APPROACH FINANCING MODALITY Project EC procurement and grant award procedures Sector Pooled or basket funds Global/Macro Budget Support

10. Sectors: Three Key Concepts Sector Approach a way of working of governments and its partners in a sector Sector Programme The sector policy and operational action plan for the sector Sector Policy Support Programme (SPSP) The EC tool for supporting a Sector Programme What is a Sector? Defined by the Partner Government A “Management Concept”

11. General and Sector Budget Support – the origins Structural Adjustment Support Support to PRSP (PRBS) Budget Support (General or Sectoral) Sector Policy Support Programmes (SPSP) Project Support

12. Type of Budget support Broad Objectives of budget support Generation of local currency equivalent of foreign currency transfer Disbursement Methods General Budget Support Medium Term Direct or Indirect General Conditions and Specific conditions Untargeted or Targeted Fixed Tranches and/or Variable tranches Floating and Non-floating Short-term Sector Budget Support Medium Term The Language of Budget Support

13. Objectives of GBS & SBS General Budget Support (GBS) Representing a transfer to the national treasury in support of a national policy and strategy, Short Term Or Medium Term Sector Budget Support (SBS) Representing a transfer to the national treasury in support of a sector policy and strategy Medium Term

14. Direct and Indirect Budget Support • Direct Budget Support: • when the local currency is convertible • Transfer into local currency takes place through the normal channels of the banking system • Indirect Budget Support: • when the local currency is not convertible • Transfer into local currency takes place outside the normal channels of the banking system – through sale of forex on a foreign currency auction, for example

15. Disbursement Methods for budget support Targeted budget support Non-targeted budget support Payment against audit of expenditure documents Payment against performance criteria and indicators

16. But we don’t like target budget support Does not address systemic problems Large transaction costs for little benefit Perverse effects – delays priority spending Apparent “control” is illusory - fungibility Becomes a “document chase”

17. Disbursement Methods for budget support Fixed tranches Variable tranches Fixed Variable It depends on performance All or Nothing

18. Floating and Non-floating tranches • Floating tranches • No fixed cut-off date for meeting the disbursement conditions • Indicative dates only • Example: HIPC initiative • In practice most EC programmes involve « floating » tranches • Non-floating tranches • disbursement conditions have to be met by a given date • If condition not met by a given date, the money is lost

19. Seven areas of assessment for SPSPs 7. Institutional and capacity development • National and macroeconomic framework 2. Sector policy and overall strategic framework 6. Performance measurement 3. Budget and Medium Term ExpenditureFramework SPSP 5. Donor coordination 4. Public Financial Management systems

20. IQSG Country Strategy Paper and National Indicative Programme Potential Impact + Prospective Eligibility Evaluation Programming Focus on joint evaluations QSG1: Identification Fiche Evaluation Identification Focus on Eligibility + Next Steps QSG2: AAP/AF or Financing Proposal/ Financing Implementation Formulation Decision process for tranche release Justification against Payment Conditions, including eligibility Eligibility+ Context+ Conditions Financing Agreement including Technical & Administrative Provisions Payment Conditions, including eligibility The cycle of operations

21. Greater harmonisation and alignement Increased sustainability Improved capacity development Increased ownership Higher overall impact Improved domestic accountability Increased coherence Efficient use of resources Lower transaction costs Recognise reality of fungibility Budget Support: where are the benefits? Where are the Benefits?

22. Risks and budget support Development Risk Country & EC objectives (eg MDGs) undermined by key factors – ownership, macro stability, PFM, overloading… Fiduciary Risk Reputation Risk EC programmes in difficult countries will tarnish the EC’s reputation EC funds not used for intended purposes

23. Addressing risks through criteria for disbursement • General Conditions for disbursement • Apply to all tranches • Will usually be limited to the eligibility conditions • Specific conditions for disbursement • Apply to individual tranches • Will usually focus on key performance criteria and indicators

24. Typology of Indicators IMPACT IDEA EXAMPLE Literacy rates Wider effects Consequences of outcomes OUTCOME/RESULT Results at the level of beneficiaries (supply meets demand) Enrolment rates OUTPUT Schools built Concrete consequences of resources or measures taken (supply) INPUT Financial resources provided or measures taken Resources allocated, used, laws passed

25. Why result/outcome oriented approach and variable tranches? End “stop-go” and allow graduated response Encourage attention on quality statistics Potential benefits of Results/outcome based variable tranches Create incentives Focus on “Results” Policy Space Streamline Conditionality

26. Choosing indicators (1) • Link between indicators and national policies • Indicators should be drawn from the national policy and strategy • Indicators chosen for disbursement purposes should be coherent with the analysis of the country context • Technical characteristics of the indicators • Clear and unambiguous definitions • Source of indicators should be identified • Methodology to calculate the indicator should be described • Sensitivity of the indicator to policy changes should be assessed • Timing of the availability of the indicators should be known

27. Choosing indicators (2) • Choosing targets for the indicators • Get the balance right between being overly ambitious and excessively prudent • Choose indicators and targets with the maximum transparency • Set the targets early! At least for first year, and indicatively for subsequent years, including a possibility of revision

28. Overall Performance Score Individual performance Score Weight of indicator in all indicators SUM OF = X Methods of performance evaluation • Fixed tranche – all or nothing • Variable tranche • Individual performance score • Weight for each performance indicator Key issue – the link between payments and performance

29. Common problems with indicators • Absence of precise and unambiguous definitions • Delays in the availability of data • Lack of comparability of data across years • Lack of relevance of the indicators chosen • Difficulty to assess whether objectives missed due to weak performance or over-ambitious objectives

30. Conclusion • Budget support as money + conditions in a context of dialogue, alignment, and capacity development • Budget support has its own language – but it is not that difficult • Budget support has potential benefits; but it also has risks • Benefits and risks need to be addressed in the design of programmes