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
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? + Foreign Exchange Reserves € Treasury
PARTNER COUNTRY’S CENTRAL BANK
MONEY
Foreign Exchange Reserves €
Treasury
Account(s)
Tax and
non tax
revenues
EC Funds € +
CONDITIONS
In context of dialogue, capacity development and alignment
Now focus on budget support
Budget Support is:
Transfer of funds to the national treasury account (consolidated fund, national treasury fund, le Trésor);
Where the funds are used in accordance with public financial management system
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 Sector
EC procurement and
grant award procedures
Sector
Pooled or basket funds
The same comments as for the previous slide – explain that you will be looking at
The approaches
The modalities
The thin line shows that specific procedures would be used for the Sector Approach.
Specifics procedure means donor procedures
There have been examples of projects supported by CPF – but this is rare and we have no current examples
Meeting with RY:
Use micro/meso/macro level
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. 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
Specific conditions
Direct
Indirect
Medium Term
General 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,
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
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
Traditional budget support arrangements, eg the Structural Adjustment Support Programmes of the 1990s focused on the fulfillment of policy conditions.
The current approach is to allow governments to choose their own policies but to agree on what ought to be the outcomes of their policies and spending programmes.
An additional variable tranche is provided if outcome targets are met in full or in part.
Moreover, the results of the performance review by which the EC variable tranche is decided, are announced to the press and the public so as to encourage wider debate over results/ policies.

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
Traditional budget support arrangements, eg the Structural Adjustment Support Programmes of the 1990s focused on the fulfillment of policy conditions.
The current approach is to allow governments to choose their own policies but to agree on what ought to be the outcomes of their policies and spending programmes.
An additional variable tranche is provided if outcome targets are met in full or in part.
Moreover, the results of the performance review by which the EC variable tranche is decided, are announced to the press and the public so as to encourage wider debate over results/ policies.

18. Floating and Non-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 Expenditure Framework
SPSP
5. Donor coordination
4. Public Financial Management systems

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

21. Budget Support: where are the benefits?
Lower
transaction
costs
Recognise
reality of
fungibility
Greater
harmonisation
and alignement
Improved
domestic
accountability
capacity
development
Increased
sustainability
Higher
overall
impact
coherence
Efficient
use of
resources
ownership
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…
Reputation Risk
Fiduciary 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
Wider effects
Consequences of outcomes
Literacy rates
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. 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
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