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The EU policy on budget support – What is new? And can it work?

21-10-2011

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++ SERIES: ECDPM ANALYSIS OF NEW EU DEVELOPMENT POLICY REFORM PROPOSALS ++

 

EU Development Commissioner Piebalgs presented the EC’s Communication on budget support on October 13. This is amidst drastic changes in some of the EU member states’ attitudes and policies towards this aid modality. The Commission takes a strong position to improve budget support so it can deliver development results more effectively and efficiently. For different reasons this new budget support policy merits more attention.

How to make aid more effective? Budget support as it evolved from the beginning of the new millennium tried to present some answers, and no doubt has raised new questions. Budget support is a composite aid modality that involves financial transfers to the partner country’s treasury, capacity development, policy dialogue and a results focus. It was at the cutting edge of donor attempts to combine and apply key principles on aid effectiveness, including ownership, alignment and harmonisation. The European Commission was an enthusiastic promoter and has become one of the largest providers of budget support. But the climate for budget support has changed drastically. Multiple donors, including EU Member States, are shying away from it, especially in the form of general budget support. Emerging players have also entered the scene, a playing field that previously was dominated by traditional donors who set the tone on aid conditionality.

Last week, the EC has presented an argued case for an ambitious policy for future budget support (The Future Approach to EU Budget Support to Third Countries“). This new policy introduces a number of innovations to the previous EU budget support. The lengthy and well-structured consultation process leading up to this communication has clearly contributed. Yet, there remain a number of unresolved matters, some of which have also been raised during that process.

Today, in this Talking Points post, we elaborate on these unresolved matters and also seek your views.

Ambitious and innovative changes

The EC Communication on budget support no longer refers to budget support as its “preferred aid modality”. No longer is there an ambitious target set as a percentage of total aid to be spent as budget support, nor is there a target date. Instead, budget support now is an “important instrument” in a portfolio of other aid instruments. The EC will try to combine budget support optimally with other instruments so that it fits with the specifics of a particular country context. The new policy also makes a clear distinction between various categories of budget support. It ties general budget support more closely to a commitment of a partner country to “fundamental values of human rights, democracy and rule of law”. Such commitment is in fact a “pre-condition” for the EU. In the case of deteriorations, the EU has to come up with an “adequate and coordinated” response. In certain “clear cut-situations” this can even result in halting general budget support. The emphasis on fundamental values is reflected in a new name: the EC calls its general budget support henceforth the Good Governance and Development Contract. Halting general budget support does not imply that all forms of budget support will be stopped. That can only happen as part of an overall EU assessment of its cooperation with a partner country in which fundamental values seriously deteriorate.

Secondly, the EC sharpens its approach to sector budget support, the so-called Sector Reform Contract. In line with some of the recommendations and findings from research and evaluations, the EC emphasis improving frontline service delivery and strengthening systems and institutions. While some donors are moving out of general budget support into sector budget support – the EC confirms its support for both forms of budget support. Where political governance deteriorates, it can move from general to sector budget support, or even to project aid. Finally, the EC will also judge on a case-by-case basis to which fragile countries it will provide budget support. The change dynamics should be jointly assessed with the aim to contribute to “state building”, hence State Building Contract.

Other new policy orientations include the emphasis on:

  • domestic resources mobilisation (as part of the macro-economic eligibility criteria),
  • mutual obligations for transparency and accountability,
  • sharing assessments, diagnostics, and communicating more openly on disbursements and performance reviews,
  • strengthening domestic accountability through state systems, as well as non-state actors
  • joint assessments and joint evaluations of BS operations.

The Communication also contains some strong wording on EU coordination and the need for a “single EU Good Governance and Development Contract”. The EC proposes the EU Member States and the EU Council of Ministers to endorse four key coordination principles ranging from the basically pragmatic to the ambitious. It also mentions the need to beef up the level and the expertise of personnel through having “regional teams” at EC Headquarters and in Delegations in the field. It also refers to a participation of both the Commission and the European External Action Service. This insistence on more coordinated responses partly reflects the changes in the EU’s external architecture, with a lead role for the EEAS and a revised DG DEVCO.

Some ambiguities

Eleven years after the previous Communication on budget support from 2000, this one contains a number of innovations to contribute to more effective aid. Yet there are also ambiguities that merit closer attention. One of the key difficulties with budget support has been the scope of its ambitions, and the diversity of objectives ranging from the highly technocratic to the highly political. Evidence from research, evaluations, case studies and experience confirm the need for donors to better understand the context in which they engage with the state. This coincides with a stronger focus among a number of donors on political economy analysis. These diagnostic tools zoom in more closely on institutions, day-to-day politics and power plays, coalition building and how that affects the incentives or create obstacles for reforms. The aid community is but one – often fragmented – player among many actors and drivers.

The Communication does refer to “analytical work” and evaluations to be undertaken. Unfortunately, it seems to be more of an afterthought, and not a requirement for calibrating budget support, for addressing systemic and institutional failures at sector level, and for informing approaches to more effective joint action by donors. The EC’s DG DEVCO is already working with political economy approaches, and has developed a sector governance analysis tool. Moreover, it has engaged in evaluations and studies on budget support, and has stimulated consultations and promoted internal learning on political economy analysis, on domestic accountability and non-state actors in a context of budget support, etc. A stronger commitment and incentives to rely more systematic on such studies and promote learning may ensure that some of the innovations in the Communication don’t end up being formulaic and with little bearing on real life transformation processes.

After the broad consultation process and the publication of the Communication, the action is now up to the EU Member States. They have to discuss and deliberate with the EC and with one another how they will contribute collectively to more effective aid through budget support. This process will probably take until the Council of Ministers formulates Conclusions in May 2012.

In your opinion, what sticks out in this Communication that EU Member States should contribute to, or should seek to change prior to these Council Conclusions?

Different ECDPM experts share their analysis of selected elements of the two new EC Communications on development policy and on budget support in a series of articles here on the Talking Points blog. Last week, Niels Keijzer shared some overall impressions and presented an appraisal of the EC’s proposal on improving EU coordination and joint-programming.

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Jan Vanheukelom is Head of Programme, Governance, at ECDPM.

 

This blog post features the author’s personal view and does not represent the view of ECDPM.

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Comments

Vincent de Boer

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2011-12-05 11:15:28

I fully agree with the points raised by Catherine. Many people believe that projects have lower risks of mismanagement, misuse and corruption. One could argue the opposite. Take the example of the Mbarara - Kabale road project which the European Commission is financing in Uganda using the project approach. This road is part of the nothern corridor, and therefore an essential piece of infrastructure. Parts of this road have fallen into a very poor state of affairs. So rehabilitation seems like a good investment. But doing so using the project approach means that (1) we are freeing up an equal amount of public funds to be used for lesser causes, and (2) we are undermining any emering efforts to hold government accountable for the use of public funds. Bad roads are an excellent and very tangible indicator of poor governance, and one that actually gets people excited and complain about in the local media. Unfortunately, be stepping in, the Commission does not allow the negative sentiments held by the population to eventually lead to a reaction through public policy. Instead, the government can continue with an approach that allows public funds to leak away into private pockets. Are we really helping the situation with this new approach and the strong emphasis on good governance? There is a big risk that the Commission will have to withdraw from the budget support debate, which actually puts the efficiency of public expenditures on the table. Certainly, the road project itself will be managed according to the highest standards of public financial managment (by following the EC procedures). But this is a myopic assurance, perhaps sufficient to satisfy stakeholders back at home, but in reality it frees up resources within the recipient country's budget to continue mismanagement, misuse and corruption. It's one thing to make these nice assumption and formulate clear conditions at a political level - but in practice we are faced with widely differing conditions, and we should be able to allow a certain degree of flexibility to allow for the possibility of using budget support as a means to an end, i.e. to improve governance rather than only step in when the highest standards have already been achieved. That would require combining forms of budget support with specific additional safeguard measures into a country specific support instrument.

Dieter Frisch, former DG for Development at the EC

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2011-11-17 16:56:45

Some personal comments following the European Commission Communication on budget support Although the risks of mismanagement, misuse and corruption are clearly greater than with more traditional aid modalities – there is no scientific evidence for this statement, it is just based on common sense and personal experience – budget support offers so many developmental advantages over the project based approach, that I am in favour of budget support, but not without strings attached. Normally, one should request that a country meets minimum standards of sound and accountable public financial management before engaging in budget support (cf. Art. 61(2) Cotonou). However, as these conditions are rarely fulfilled in a perfect manner, one could satisfy oneself with precise commitments for further reform, including anti-corruption programme, provided that there is evidence of concrete progress on such commitments. What are the standards to be met, from the outset or, at least, gradually? I see no justification for specific standards in the area of fundamental values (human rights, democratic principles, rule of law…) as pre-conditions for budget support. Beware of the a-contrario argument: “if these values must be upheld specifically for budget support, then we could do without them for other aid modalities!”. There are, however, clear general rules concerning these values as “essential elements” in “Cotonou” (Art 9 ad 96), which should not be undermined by a specific focus on budget support! I suggest to put two questions in each country situation: 1) Are budget allocations the result of a participatory (we would say: “democratic”) process, so that they reflect fairly the basic development needs and priorities of the country? 2) Has the country a transparent and accountable public financial management system, including efficient domestic resource mobilisation and reliable public procurement rules? If the reply is “yes”, then I would go for 100% budget support. If the reply is “no”, I would refuse budget support. If there is a commitment to reform I would announce the possibility of say 50% in form of performance based tranches. Unless a country clearly qualifies for general budget support, I would give preference to sectoral budget support. While general budget support supposes monitoring seriously the public financial management at large, i.e. the whole budget – technically difficult and politically embarrassing – and makes it almost impossible to identify indicators to trace the utilisation of the funds (“attribution problem”), sector support reduces considerably these difficulties: it is, technically and politically, possible to organise a serious dialogue on a specific sector (e.g. health, education), to determine indicators and to set measurable outcomes which allow the donor to follow the utilisation of his budget support.

Catherine Dom

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2011-11-15 11:01:22

Undoubtedly too late for the first round of commenting… and I haven’t yet read the communication itself, only your and Heidi’s papers about it! My main initial comment is that the EU seems to continue to think there is a hard-and-fast distinction between budget support (any of the three types) and non-budget support. I wonder whether real life experience doesn’t actually increasingly show that this distinction is actually less evident than they make it. How would they classify e.g. the Afghanistan Reconstruction Trust Fund recurrent window, and the kind of instrument that Heidi and I and an ODI/BSI team is trying to develop in South Sudan – a whole range of what I’d call “hybrid instruments” for lack of a better word? I wonder. I call these instruments “hybrid” because they take so many forms, but still use parts of the government Public Finance Management systems but with safeguards and special measures such that it cannot count as budget support, really. It ranges from the Protecting Basic Services programme in Ethiopia (which I call budget support but many donors don’t want to call it that way and it’s true that the package includes things that in my view should be in all budget support operations but at the moment are often not – like direct support to strengthen supply- and demand-side local accountability for service provision and budgeting etc.) to the Afghanistan Reconstruction Trust Fund, which refunds government ex-post after strict auditing of eligible expenditures, to the health Multi Donors Trust Fund in Liberia which mirrors all government systems but doesn’t depend on the Minister of Finance’s disbursement (a quite major difference I agree)… In a way, in itself defining hybrid instruments might necessitate discussion as to whether there is any such thing as ‘pure’ budget support. Otherwise, I would actually be more outspoken than Heidi about THE “game changer” news. I think making budget support an explicitly political instrument may be more honest, but it is a really serious setback – and in more fundamental ways, maybe less honest as donors may then use increasingly often hybrid instruments, if/when they can do this. I am not sure how the EU will square the circle as my understanding is that at the same time as they refined the thinking about budget support they also reduced the scope for hybrid instruments to be used (though I’d need to check and get more details about this).

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