budget support training module 1 new budget support approach and fundamental values version october...

Budget support training

Module 1

New Budget Support approach and fundamental values

Version October 2013

2

Outline

1. What is Budget Support?

2. Why using BS: objectives and intervention logic

3. The new approach for Budget Support

4. The three type of contracts

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5. New governance mechanisms and cycle of operations

6. BS in decentralised context

7. BS and the EU Fundamental values

8. Eligibility criteria

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Definition of Budget Support (BS)

•- EU BS guidelines: Transfer of financial resources of an external financing agency to the National Treasury of a partner country, following the respect by the latter of agreed conditions for payment;

It is not a blank cheque

Eligibility criteria + disbursement conditions

- The resources transferred are:

part of the global resources of the partner country

used in accordance with its public financial management system

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BS funds in most cases non-targeted and non-traceable

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Fiduciary responsibility stops with Budget Support transfer; responsibility for results remains

EC external assistance€

Budget implementation through partner country’s Public Financial Management System

Partner’s Country Central Bank

Tax & non tax revenues

Conditions fordisbursement:(i) General Conditions(ii) Specific Conditions

Foreign Exchange Reserves €

Treasury Account

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4 Major Elements of BSPolicy dialogue

Performance & assessment criteria

Capacity building

Financial transfers

+

Other characteristics of BS Partnership and alignment with

national policies and procedures;

Mutual accountability;

Harmonised donor approaches.

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Specificities of BS Financing Modality

Make the national budget and the policy dialogue with the partner country important

Help partners to implement their policies through the Budget and to build sustainable, accountable institutions

Use of recipient PFM country public finance management systems (planning, management and use of funds, monitoring, reporting, Internal control and auditing done by recipient governments)

Respect domestic ownership/responsibility

Align aid with national priorities, plan and processes

Focus on results

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BS: one among three financing modalities

Support approaches and funding needs

Project : Funding a set of predefined activities

Sector : Funding a set of predifined activities and/or a sector complex policy

National (macro): funding complex government policies

Financing Modality

EC procurement and grant award procedures

Common Pool Funds

Budget Support

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Potential benefits of BS Financing Modality Strengthen ownership of development process and domestic

accountability

Better alignment of aid with national priorities, minimised aid-related transaction costs and greater harmonisation of donor practices

Stronger focus on results through result-based policy dialogue

Improved capacity development

Improved aid efficiency (lasting effect)

A more stable macro-economic framework and a more coherent framework for public policy & budget

Higher funding for public services

Risks of limiting factors: too many conditions and safeguards, micro management and intrusive conditions, earmarking/targeting/audit of BS funds...

Deserve an efficient risk management.

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General objectives of EU budget support

Eradication of poverty. Promotion of sustainable and inclusive economic

growth. Consolidation of democracy.

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Specific objectives of a BS programme

Formulation of specific objectives to be based on two

principles: Alignment with policies, priorities and objectives of the

partner country; Consistency with EU development policies.

Specific objectives should also reflect the development

challengesEU sees BS as a “vector of change” addressing the five key

development challenges (cf. BS COM)

Specific objectives specified by type of contract in annex 2 of the guidelines.

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Intervention logic of budget support

Inputs

Direct outputs

Induced outputs

Outcomes

Impact

Funds

Improved relations between external support and policy

processes

Strengthened publicSector institutions

Policy dialogue

Disbursement conditions

Improved relations between external support and national

budget

Capacity development

Improved public spending

Strengthened public policies

Improved public service delivery

Empowerment and social inclusion

Poverty reduction

Positive responses by beneficiaries of improved public services (increased and more effective use; more results at beneficiary level)

Sustainable economic growth

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Difficulties to use

performance based

indicators/conditions for assessing

progress and for policy dialogue

Insufficiently effective policy

dialogue

Underdeveloped risk

management

Weaknesses in programming

Eligibility criteria not applied rigorously enough

Initial assessment often superficial

Specific context of the partner country not sufficiently taken into account

Too much and too general objectives

Higher fiduciary risk especially in the case of weak PFM systemsDevelopment risk still to be considered and well understood

too much focused on disbursement conditions, indicators and timing issues rather than on government policy priorities and reforms.

unsatisfactory measures/indicators

complex evolutions to analyse

statistical weaknesses

EC response: Green Paper on BS

New approach for BS

More than 10 years of BS programmes experiences

Growing criticisms from ECA, EP, and MS: BSeffectiveness into question

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A comprehensive response from the EC

Differentiation More rigorous and continuous assessment of

eligibility criteria More accountability and transparency New governance mechanisms Structured risk management framework

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EC Communication on BS: key messages BS not an end but a mean of delivering better aid by fostering

partner countries ownership of development policies and reforms One among several instruments in EU comprehensive policy as

regards aid to partner countries (portfolio approach) Not a blank cheque, not provided to every country

Underlying principles and policy dialogue matter: stronger link with « fundamental values »

Strengthened eligibility criteria (but continued dynamic approach) Stronger focus on accountability and transparency (new criterion) and more rigorous assessment.

Differentiating budget support: three types of contracts, cf. module 2. Continued emphasis on results, performance measurement and

predictability. Strengthened and formalised risk management framework Strengthened EU coordination

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New BS Guidelines (1)

Finalised and officially approved in September 2012 To be effective from January 2013 onwards

• Part I: Executive Guide• Part II: Programming, Design and Management of Budget Support• Part III: Thematic Topics and Procedural Requirements

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The new BS Guidelines: content of Part III

1. Glossary

2. Objectives and Intervention Logic of Budget Support

3. Assessing Public Policy (National/sectoral development strategy) Eligibility

4. Assessing Macroeconomic Eligibility

5. Assessing Public Financial Management (PFM) Eligibility

6. Transparency and Oversight of the Budget

7. Risk Management Framework

8. Performance Assessment and Variable Tranche

9. State Building Contract for Fragile States

10.Budget Support in context of SIDS/OCTs

11.Domestic Revenue Mobilisation (DRM)

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1. National or sectoral policy/ strategy

2. Macro-economic stability

3. PFM & Accountability systems

4. Transparency and oversight of the budget

Structured risk management framework to inform decision making and policy dialogue

New Guidelines: a revised approach to eligibility and assessment

1. National or sectoral policy/ strategy

2. Macro-economic stability

3. PFM & Accountability systems

4. The Budget & MTEF: sector allocations

5. Coordination Framework (esp. Donor coordination)

6. Performance measurement

7. Institutional Framework & Capacities

New Guidelines: 4 eligibility criteria + structured risk management framework

Previous Guidelines: 3 eligibility criteria, 7 assessments

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Three types of BS contracts

Good governance and development contracts (GGDC),

aimed at promoting a national development strategy

and national level reforms. Sector reform contracts (SRC), aimed at strengthening

implementation of sector policies and reforms and at

improving service delivery. State building contracts (SBC), aimed at strengthening

fragile states, ensuring vital state functions and basic

public services and supporting transition towards

democratic governance.

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Specific objectives of a GGDC

Improving financial capability of government to achieve

(overall) policy objectives. Fostering domestic accountability. Strengthening national control mechanisms and core

government systems. Supporting broader reforms as regards: macroeconomic

management, PFM, domestic revenue mobilisation, public

sector reform, etc. Addressing constraints to sustained and inclusive growth. Improving public service delivery (a.o in order to achieve

MDGs).

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Specific objectives of a SRC Improving governance and financial capability of

government to achieve sector policy objectives. Promoting sector policies and reforms. Improving service delivery and governance at sector level. Addressing basic needs of the population.

Emphasis to be put on equitable access and quality of public

service delivery.

Financial additionality may be key feature of many SRCs.

Sectors/ministries could be linked for the purpose of a SRC, in

case of coherent policy and budgetary and institutional

framework.

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Additionality (in case of SRCs)

Increase in sector

expenditure is not the

key prerequisite for

achieving the SRC

objectives

Distinguish

Running Head 12-Point Plain, Title Case

Increase in sector

expenditure is the key

prerequisite for achieving

the SRC objectives

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Increase in sector expenditure is not a main

objective of the SRC

Objective of SRC is to get better sector results but not necessarily via higher sector spending

SRC will add value by improving effectiveness & efficiency:

• better budget execution

• reallocation of budgets

• accelerating reforms

• capacity building

• etc


Increase in sector expenditure is an important objective of the SRC

• Identify a baseline to serve as a starting point for defining the future sector expenditure path:

o Focus on historical trendso Choose how to express the baseline (per capita terms, % of GDP or government expenditures, growth rate of expenditure in real terms…

• Discuss with government the desirable/required increases in sector spending

• Assess fiscal sustainability of planned/required increases in sector spending

• Where appropriate and/or necessary, formulate disbursement conditions as regards expenditure increases

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Specific objectives of a SBC

SBC to be used to help fragile partner countries: to improve financial capability of Govt to restore peace and

macro-ec. stability and to achieve short-term policy

objectives; to ensure vital state functions; to support the transition towards development and

democratic governance.

SBC to be based on forward looking political commitment and

on institutional reforms (not on track records).

SBC requires a strong political and policy dialogue.

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Choice of contract

Specific objectives and expected results will determine

type of contract. Content of the policy dialogue, the performance

indicators and the disbursement conditions will be

determined by objectives and expected results. A GGDC and SRCs have their own specific objectives and

may be provided simultaneously in one country. SBCs are generally not combined with other forms of BS.

SBS prepares the ground for future GGDC and/or SRC.

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Coffee Break

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Outline





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New governance mechanisms: objectives

Five objectives to strengthen the capacity of the Commission to manage budget support:

1° Strengthen continuous policy steering at senior management and Commissioner level.

2° Enhance and ensure coherence of the EU budget support dialogue with partner countries.

3° Ensure policy coherence across countries and regions.

4° Reinforce risk management and risk mitigation mechanisms.

5° Support EU Delegations and HQ in programming, design and implementation of budget support programmes

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New governance structures:

At Headquarters level Budget Support Steering Committee (BSSC)

To involve the Director General in the decision making process early enough to provide strategic guidance

To consult the Commissioners (Development, Neighbourhood, HR/VP) as appropriate

ROLE: Continuous political and policy steer of BS programmes. Assessment of the pre-conditions for GGDC May review BS financing and disbursement proposals wherever

there are substantial or high political & policy implications.

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At Delegations level Regional Budget Support Teams

ROLE: To provide advice and support to Delegations and to Geographical

Directorates on BS operations in the region To support EU Delegations and Geographic Directors in

implementing the risk management strategy To participate with HoD in the BS dialogue with partner countries. To be involved in GGCD & SBC dialogues (unless GD decides

otherwise) To be involved in SRC which present substantial or high risks.

Role of the EEAS: In charge of the overall political dialogue

Leads on the political risks in BS Instructs HoD on the line of the political dialogue

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BS Cycle of Operations

Programming

Identi-

fication

Formulation

Implementation

Evaluation and Follow-up

Evaluation: focus on joint evaluations

Decision process for tranche release:

Monitoring and dialogue, assessment of payment conditions

oQSG2 - Action Fiche:

focus on eligibility + context+ conditions. Supporting documents, financing agreement and TAPs

oQSG1 - Identification Fiche: Validation of choice for BS

focus on eligibility criteria + next steps

EC Development Policy

Partner Government Policy

National Indicative Programme:

identify sectors of engagement

BSSC: assessment of fundamental values

Budget Support Steering Committee (BSSC): Continuous political and policy steer of BS programmes. Should be informed of any formulation and disbursement process and may review budget support financing and disbursement proposals wherever there are substantial or high political and policy implications.

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EU Delegations responsible for:

Effective policy dialogue. Monitoring of fundamental values, eligibility criteria,

performance criteria and disbursement conditions. Monitoring of reputational risks possibly caused by

dysfunctioning of country systems. Providing technical assistance for capacity

development.

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Key messages BS is an effective aid instrument, in particular to support partner

country’s policies and reforms, but it must be (more) rigorously implemented. Hence the greater focus on preconditions, assessment of eligibility criteria and risk management

BS is one among several instruments of the EU’s comprehensive assistance (portfolio approach).

Stronger link with fundamental values Greater differentiation and selectivity Stronger focus on accountability and transparency Continued emphasis on results, performance tranches,

Government ownership and predictability More rigorous and formalised risk assessment and management

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Budget support and decentralisation


Let’s first consider the three dimensions of decentralisation

POLITICAL

Decentralised political powers

includingformulation &

adoption of public policies

FISCAL

High autonomy for decision &

management of significant share of revenues and expenditures by

sub-national entities

ADMINISTRATIVE

Decentralised resources and responsibilities for delivery of

specified public services and

functions

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Budget support and decentralisation

GGDC: decentralisation can be promoted via policy dialogue,

performance and disbursement conditions,. A SRC can support decentralisation of service delivery to sub-

national governments. A SRC can be provided to support the implementation of a

decentralisation policy. A SRC can be provided to a sub-national government having

extensive political, administrative and fiscal powers (e.g. in a

Federal system). It is not advised to provide a GGDC to a sub-national

government.

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BS for the decentralisation of

public services

If sub-national governments have extensive administrative power but limited political and fiscal authority:

SRC can be provided to support the geographic decentralisation of services.


Budget support and decentralisation: 3 cases

BS to support a decentralisation

process

If support for decentralisation is the objective of the BS:

The programme

• should focus on reforms and institutional aspects of the decentralisation.

• Could cover the 3 dimensions (political, administrative, fiscal)

BS provided to a sub-national government

If sub-national gov. has extensive political, administrative and fiscal powers:

• a SRC can be provided to sub-national government

• a GGDC is not advised.

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Take into account both central & sub-national levels in design and implementation (incl. eligibility criteria)

Focus on sub-national level

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What are the FV and relations with aid policy

The Main legal basis and principles

Articles 21 of the TUE: 3 FV- guiding principles for EU external action: human rights, democracy and rule of law.

Art 208 of the EU Treaty: Development policy/cooperation conducted in the frame of principles/objectives of EU’s external action

FV essential elements of all the EU’s partnerships/cooperation agreements with third countries

Agenda for change: “objectives of development, democracy, human rights, good governance and security are intertwined”.“EU support to governance should feature more prominently in all partnerships, notably through a focus on partners’ commitments to FV”.

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Why FV matter for EU Budget Support

• A new policy framework strengthening the contractual

partnership on EU Budget Support putting a stronger

emphasis on the FV.

• FV are values in themselves but also conducive to the

objectives of Budget Support

• Budget Support is provided as vector of change to address

several development challenges and objectives including the

promotion of democracy.

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FV and the different BS Contracts

• Differentiation among BS contracts to better respond to the

specific political, economic and social context of the partner

country.

• Relative importance to promote FV will vary according to

the forms of BS Impact the way FV are assessed.

Question: identify the differences between the three types

of BS contracts (GGDC, SRC, SBC) with regards to the

assessment of FV.

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GGDC

A mutual and shared commitment to universal FV.An implicit recognition that a partner country’s overall policy stance and democratic governance is on track or moving in the right direction.


BS Contracts: why a FV assessment

SRC

A vector to improve governance when conditions for a GGDC not fulfilled.

Country’s adherence to FV should be taken into account

Particular care to supported sectors such as justice, security (strong links with FV)

SBC

State building and transition process towards development and democratic governance.

Country’s commitment to FV (track record?) and/or political response to improve the situation should be taken into account.

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- FV assessment: not a precondition. A forward looking approach when engaging with the country.

- Opportunity intervention vs. risk of inaction.

- Separate assessment and RMF to prepare informed decision of BSSC for identification/formulation and future monitoring.

gggg

- FV matter but does not constitute a precondition (no separate assessment as for GGDC). - Assessment of adherence

to FV is part of the RMF during identification/formulation/

implementation.- BSSC consultation when

high risks on political governance.

-Positive assessment of country’s adherence and commitment to FV is a precondition.- Assessment during programming phase, submission to BSSC and monitoring during implementation through the Risk Management Framework (RMF).

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Sequencing of the FV Assessment GGDC: Delegation’s assessment at programming phase, reviewed by

the EEAS/consultation with DEVCO. Brief assessment (4/5 pp) + summary

section on fulfilment of precondition in the Identification Fiche (IF) and

Action Fiche (AF). Submission to the BSSC for political guidance and

validation.

SRC: Adherence to FV assessed as part of the RMF (political risk

category) during the identification and formulation phase (summarised in

the IF and AF). If substantial or high political risks: submission to

BSSC for political guidance. SBC: Adherence to FV assessed as part of the RMF with summary in IF

and AF. Submission to BSSC is required for political guidance and

to validate the choice of contract.

In the case of SBC and SRC, the BSSC should balance the related

political risk/FV concerns with the need to provide/protect basic public

services.

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GGDC: How to assess FV

A two step approach:

Step 1:does the country meet the core Internationally

recognized benchmarks on human rights, rule of law and

democracy incl. screening of country's stand on

international commitments.

Not satisfactory/not eligible- satisfactory/go step 2 Step 2: More in depth analysis of HR, Rule of Law and

Democracy guided by a specific set of questions (annex 12)

Analytical tools: political analysis of programming phase, EU Human Rights Country Strategies, EU Election Observation Missions’ reports, Delegations’ political reporting, UN open sources...

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GGDC: How to assess FV

Steps 1 & 2 assess the country’s commitment and political willingness

Relevant reform programmes/action plans addressing key constraints and weaknesses identified above.

Credibility in terms of political commitment, quality of the reform process, and realistic in terms of implementation.

The country's track-record and the likelihood that violent conflict could undermine the adherence to fundamental values.

Reminder: Delegation Assessment (4 pp max) is used

- to recommend whether FV pre-condition is met

- to answer relevant set of questions in the RMF

- to identify issues to be monitored during implementation and to

be discussed in the BS dialogue/political dialogue.

- to improve the overall design of programme (formulation).

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SRC: How to assess FV

• Identification/formulation: Sector analysis should take into

account the human rights based approach. Cf. EEAS/COM Joint

COM: “HR and democracy at the heart of EU external action – Towards a more

effective approach” (12.12.2011) + Annex 12 (issues to focus on under HRBA).

• Particular care when supported sector closely linked with FV.• Most important/critical issues relevant to the concerned sector

to be highlighted in the IF/AF and reviewed as part of RMF.

Delegation Assessment = input to strengthen design of the

programme, identify specific issues to be monitored during

implementation (RMF) and to be discussed in BS/policy

dialogue

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SBC: How to assess FV A forward looking assessment to inform the opportunity

of intervention when deciding to engage with the country. Consider different nature of fragile countries (track records?,

risk of resumption/emergence of conflict?...). Focus on government’s commitment to FV and particularly

the political response to address them. Elements of Steps 1 & 2 (GGDC) can guide the analysis for

SBC. Delegation Assessment = input to strengthen design of

programme, inform the BSSC decision, identify baselines and

specific issues to be monitored during implementation (RMF)

and to be discussed in BS/policy dialogue .

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Monitoring FV during Implementation

Political reporting of the Heads of EU Delegations.

Political dialogue between the EU and the partner country.

Periodic reviews of the EU human rights country strategies.

These mechanisms should fed in the BS dialogue

Reminder:

- EU coordination in the appreciation of the situation of FV (GGDC)

- The Risk Management Framework: useful monitoring tool.

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Possible situations during implementation as regards FV

Some concerns are arising but still overall respect of FV. Mitigating

measures and or financial or contractual adjustments might be

needed.

Significant deterioration of fundamental values. Re-orientation of

planned BS (GGDC but also possible with SRC) towards other aid

modalities might be considered/needed - Consultation BSSC.

Extreme cases where overall cooperation needs to be suspended

(art 96 of Cotonou Agreement, Art 1 of agreements under DCI and

ENPI): possible reallocation of funds (all BS aid modalities) to non-

governmental channels.

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Graduated response

Possible EU responses to deterioration of respect of FV should be

proportionate and progressive:

1. Enhancing the dialogue.

2. Delaying/Reallocating/Reducing GGDC disbursements (BSSC

decision) with definition of roadmaps.

3. Suspending GGDC/SRC/SBC (BSSC last resort decision). Under specific conditions GGDC funds can be reallocated to

SRC. All BS aid modality concerned in case severe/significant FV

deteriorations.

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Eligibility criteria of EU budget support

Relevant and credible national or sector development

strategy. Stability oriented macro-economic policy. Relevant and credible PFM reform programme. Publication of the budget (transparency and oversight of the

budget).

During formulation, the relevance and credibility of the

Government’s policies and strategies will be assessed.

During implementation, emphasis will be put on progress made.

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Thank you very much for your attention

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