Budget support training
Module 1
New Budget Support approach and fundamental values
Version October 2013
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
Break
5. New governance mechanisms and cycle of operations
6. BS in decentralised context
7. BS and the EU Fundamental values
8. Eligibility criteria
2
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
3
BS funds in most cases nontargeted and non-traceable
4
Fiduciary responsibility stops with Budget Support
transfer; responsibility for results remains
Partner’s Country Central Bank
EC external
assistance
€
Conditions for
disbursement:
(i) General Conditions
(ii) Specific Conditions
Foreign
Exchange
Reserves €
Treasury
Account
Tax & non
tax
revenues
Budget implementation through
partner country’s Public
Financial Management System
5
4 Major Elements of BS
Policy 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.
6
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
7
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
Break
5. New governance mechanisms and cycle of operations
6. BS in decentralised context
7. BS and the EU Fundamental values
8. Eligibility criteria
8
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
9
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.
10
General objectives of EU budget support

Eradication of poverty.

Promotion of sustainable and inclusive economic
growth.

Consolidation of democracy.
11
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
challenges
EU 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.
12
Intervention logic of budget support
Inputs
Direct
outputs
Induced
outputs
Funds
Policy
dialogue
Capacity
development
Improved relations between
external support and national
budget
Strengthened
public policies
Disbursement
conditions
Improved relations between
external support and policy
processes
Strengthened public
Sector institutions
Improved public
service delivery
Improved public
spending
Outcomes
Impact
Positive responses by beneficiaries of improved public services
(increased and more effective use; more results at beneficiary level)
Sustainable
economic growth
Poverty
reduction
Empowerment and
social inclusion
13
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
Break
5. New governance mechanisms and cycle of operations
6. BS in decentralised context
7. BS and the EU Fundamental values
8. Eligibility criteria
14
More than 10 years of BS
programmes experiences
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
Underdeveloped
risk
management
Higher fiduciary
risk especially in
the case of weak
PFM systems
Development risk
still to be
considered and well
understood
Growing criticisms from
ECA, EP, and MS: BS
effectiveness into question
Insufficiently
effective policy
dialogue
too much focused
on disbursement
conditions,
indicators and
timing issues rather
than on
government policy
priorities and
reforms.
EC response:
Green Paper on BS
New approach for BS
Difficulties to
use
performance
based
indicators/condi
tions for
assessing
progress and
for policy
dialogue
unsatisfactory
measures/indicators
 complex
evolutions to analyse
statistical
weaknesses
15
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
16
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
17
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
20
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)
21
New Guidelines: a revised approach to
eligibility and assessment
New Guidelines: 4 eligibility
criteria + structured risk
management framework
Previous Guidelines: 3 eligibility
criteria, 7 assessments
1.
National or sectoral policy/
strategy
1.
National or sectoral policy/
strategy
2.
Macro-economic stability
2.
Macro-economic stability
3.
PFM & Accountability systems
3.
PFM & Accountability systems
4.
The Budget & MTEF: sector
allocations
4.
Transparency and oversight of
the budget
5.
Coordination Framework (esp. Donor
coordination)
6.
Performance measurement
7.
Institutional Framework & Capacities
Structured risk management
framework to inform decision making
and policy dialogue
22
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
Break
5. New governance mechanisms and cycle of operations
6. BS in decentralised context
7. BS and the EU Fundamental values
8. Eligibility criteria
23
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.
24
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).
25
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.
26
Running Head 12-Point Plain, Title Case
Additionality (in case of SRCs)
Distinguish
Increase in sector
Increase in sector
expenditure is not the key
expenditure is the key
prerequisite for achieving
prerequisite for achieving
the SRC objectives
the SRC objectives
27
Running Head 12-Point Plain, Title Case
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 trends
o 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
28
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.
29
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.
30
31
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
Break
5. New governance mechanisms and cycle of operations
6. BS in decentralised context
7. BS and the EU Fundamental values
8. Eligibility criteria
32
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
33
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.
34
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
35
BS Cycle of
Operations
National Indicative
Programme:
EC Development Policy
Partner Government Policy
identify sectors of
engagement
BSSC: assessment
of fundamental
values
Programming
Evaluation:
focus on joint
evaluations
Evaluation
and Follow-up
oQSG1 Identification
Fiche:
Validation of
choice for BS
Identification
focus on
eligibility criteria
+ next steps
Decision process
for tranche
release:
Implementation
Formulation
Monitoring and
dialogue,
assessment of
payment
conditions
oQSG2 - Action
Fiche:
focus on eligibility +
context+ conditions.
Supporting
documents, financing
agreement and TAPs
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.
36
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.
37
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
38
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
Break
5. New governance mechanisms and cycle of operations
6. BS in decentralised context
7. BS and the EU Fundamental values
8. Eligibility criteria
39
Running Head 12-Point Plain, Title Case
Budget support and decentralisation
Let’s first consider the three dimensions of
decentralisation
POLITICAL
Decentralised
political powers
including
formulation &
adoption of public
policies
ADMINISTRATIVE
Decentralised
resources and
responsibilities
for delivery of
specified public
services and
functions
FISCAL
High autonomy for
decision &
management of
significant share
of revenues and
expenditures by
sub-national
entities
40
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 subnational 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.
41
Running Head 12-Point Plain, Title Case
Budget support and decentralisation: 3
cases
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.
BS to support a
decentralisation
process
If support for
decentralisation is the
objective of the BS:
BS provided to a subnational government
If sub-national gov. has
extensive political,
administrative and fiscal
powers:
The programme
• should focus on reforms
and institutional aspects
of the decentralisation.
• a SRC can be provided
to sub-national
government
• Could cover the 3
dimensions (political,
administrative, fiscal)
• a GGDC is not advised.
Take into account both central & sub-national levels in
design and implementation (incl. eligibility criteria)
Focus on sub-national
42
level
42
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
Break
5. New governance mechanisms and cycle of operations
6. BS in decentralised context
7. BS and the EU Fundamental values
8. Eligibility criteria
43
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”.
44
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.
45
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.
46
Running Head 12-Point Plain, Title Case
BS Contracts: why a FV assessment
GGDC
SRC
SBC
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.
A
vector
to
improve
governance when conditions
for a GGDC not fulfilled.
State building and transition
process towards
development and democratic
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).
- 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.
gggg
-BSSC
consultation when
high
risks
on
political
governance.
Country’s adherence to FV
should be taken into account
Particular care to supported
sectors
such
as
justice,
security (strong links with FV)
Country’s commitment to FV
(track record?) and/or
political response to improve
the situation should be taken
into account.
- 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
47
and future monitoring.
47
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
48
services.
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...
49
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).
50
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
51
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 .
52
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.
53
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 nongovernmental channels.
54
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.
55
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
Break
5. New governance mechanisms and cycle of operations
6. BS in decentralised context
7. BS and the EU Fundamental values
8. Eligibility criteria
56
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.
57
Thank you very much for your attention
58