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 ENPI Regulation 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 Sectoral policy and strategy Sector Programmes Annual Reviews Sector Programmes Annual Reviews Macroeconomic Stability Improvements in Public Financial Management 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

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

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

10 Sector Approach a way of working of governments and its partners in a sector Sector Policy Support Programme (SPSP) The EC tool for supporting a Sector Programme Sector Programme The sector policy and operational action plan for the sector Sectors: Three Key Concepts Sectors: 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”

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

12 The Language of Budget Support Medium Term 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 Broad Objectives of budget support Type 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, 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 Term Or Medium Term Short Term Or 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 Payment against audit of expenditure documents Payment against performance criteria and indicators Non-targeted budget support

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

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 1.National and macroeconomic framework SPSP 7. Institutional and capacity development 6. Performancemeasurement 5. Donor coordination 4. Public Financial Management systems 3. Budget and MediumTerm ExpenditureFramework 2. Sector policy and overall strategic framework

20 The cycle of operations IQSG Country 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

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

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

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

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

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 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 Overall Performance Score Individual performance Score Weight of indicator in all indicators =X SUM OF

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