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MEMO/11/696

Brussels, 13 October 2011

Background information on Communications "Agenda for Change" in EU development policy and EU budget support

Why does EU development policy need to be changed?

Europe and the world are facing far-reaching political shifts; the world is going through economically uncertain times. At the same time, the challenges we face are becoming ever more complex and not enough progress is being made towards eliminating poverty. To make sure that EU policy has the greatest possible long-lasting impact on reducing poverty, it must refocus its efforts.

The context of development cooperation is changing. New actors are become increasingly involved in development cooperation, including the private sector; large emerging countries are becoming active as donors and some of them establishing their own cooperation agencies. Finally, the EU has undergone institutional changes with, among other things, the establishment of the European External Action Service.

With the Arab Spring, movements for reform and democracy have swept an entire region. One of the lessons for the EU from these recent events is that greater weight needs to be given to good governance, human rights, democracy and the rule of law in deciding what instruments and methods of aid delivery are used in specific countries.

Some of the EU's partner countries have embarked on development paths of sustained growth with their own resources at their disposal (e.g. effective tax systems). Development cooperation needs to reflect this: future aid should be allocated in a way which better addresses the distinct needs, capacities, commitments and performance of partner countries.

Recent developments in food and commodity prices show that the exposure of developing countries to shocks arising from climate change and volatile food and energy prices needs to be better addressed, for example with investments in areas such as agriculture and energy.

Studies have shown that billions of Euros could be saved if donors coordinated their work better. The EU and international donors have already made considerable efforts in recent years to harmonise their activities, in order to avoid duplication and increase the impact of their work. But more work is needed in coordinating and making sure that labour is divided sensibly among the different actors.

How can the EU ensure more transparency in its aid?

The European Commission is already one of the most transparent aid bodies in the world. Such transparency is in itself an important tool in ensuring effective value for money.

This has also been recognised by the UK organisation "Publish what you Fund" which ranked the European Commission in 4th position (out of 30) in it is first aid transparency assessment of donors in February this year.

However, in order to make its work even more transparent, the European Commission has signed up to the International Aid Transparency Initiative (IATI). Readily-available information about aid will help development stakeholders to better track what aid is being used for and what it is achieving – from the taxpayers in donor countries who provide the money, to those in developing countries who benefit from aid spending.

By providing a common international standard for the publication of aid information, IATI will make information about aid spending easier to access, use and understand.

What is budget support?

Budget support involves financial transfers to the national treasury of the partner country, combined with intense policy dialogue. It includes performance assessment of the partner country's policies and capacity-building measures and is based on the principle that the EU and the recipient country work as partners and are mutually accountable. Budget support should not be seen as an end in itself, but as a means of delivering better aid and achieving sustainable development objectives by fostering partner countries' ownership of development policies and reforms. It addresses the source, not just the symptoms, of under-development, and provides the strongest platform that we have to engage in a broad policy dialogue with our partner countries on key development issues.

The Commission does not provide budget support to all developing countries. Governments in the developing world need to satisfy eligibility criteria covering macroeconomic stability and public financial management, and to implement agreed national or sectoral policies in order to qualify for budget support.

Why does the EU use Budget support modality to deliver aid?

Budget support is one of a number of aid instruments used by the Commission alongside projects and pooling of funds with other donors. It intends to overcome weaknesses of the traditional project approach, such as (a) financing specific projects for a short period of time without ensuring sustainability or consistency, (b) high transaction costs for partner countries and (c) the setting-up of parallel systems for implementing aid. Budget support improves the predictability of aid and is used as a means of fostering partner countries' ownership of development policies and reform processes. Since the governments are accountable to their own institutions for the spending of the budget, this form of support strengthens national accountability bodies, such as Parliament, Supreme Audit Institutions and also civil society.

What are the main elements of today's proposal?

Budget support will continue to be an important instrument of EU development cooperation, but the Communication also aims at modernising the budget support approach in order to improve its quality, value for money and impact. Budget support will strengthen the contractual partnerships with developing countries in order to build and consolidate democracies, pursue sustainable economic growth and eradicate poverty.

Budget support will be provided as a driver for change to address five key development challenges and objectives:

  • Promoting human rights and democratic values,

  • Improving financial management, macroeconomic stability, inclusive growth and the fight against corruption and fraud,

  • Promoting sector reforms and improving sector service delivery,

  • State building in fragile states and addressing the specific development challenges of small island development states (SIDS) and overseas countries and territories (OCTs)

  • Improving domestic revenue mobilisation and reducing dependency on aid.

To support these objectives, the European Commission will provide three different categories of budget support programmes:

  • Good Governance and Development Contracts will replace general budget support and will be used when there is trust and confidence that aid will be spent pursuing the fundamental values of human rights, democracy, and rule of law.

  • Sector Reform Contracts will be used to provide sector budget support in order to address sector reforms and improve service delivery.

  • State Building Contracts will be used to provide budget support in fragile situations.

Budget support will focus more on strengthening core government systems; partner countries should be committed to inform the EU of allegations of possible fraud or corruption. The Commission will also place more emphasis on accountability and budget transparency of a partner country with a new eligibility criterion. In addition, the Commission will strengthen its approach to assessing and managing risks and give stronger emphasis to domestic resource mobilisation (e.g. fair and transparent tax systems and natural resources), so that partner countries are able to reduce aid dependency and finally finance their own development.

Budget support can help fragile states to ensure vital state functions, to support the transition towards development, to promote governance, human rights and democracy and to deliver basic services to the population. The decision to provide EU budget support should be taken case by case, based on an assessment of the expected benefits and potential risks.

The Commission also proposes to strengthen the coordination with EU Member States and to work towards a single "EU Good Governance and Development Contract". The EU coordinated approach aims at increasing the effectiveness of budget support in contributing to development and reform policies, and providing coherent and consistent responses to challenges encountered.

How is the use of budget support controlled?

Budget support is only disbursed when eligibility criteria and additional agreed conditions on results are met. Therefore, it is subject to strict and rigorous systems of control to regularly monitor progress towards clearly defined targets. Should serious concerns be raised on the use of Budget Support during a given programme, the Commission can freeze disbursements and has done so in the past. In Malawi, for instance, the Commission withheld its payments in the second half of 2009 pending the resolution of issues relating to macroeconomic performance and budget management. The Commission concluded that the disbursements could be resumed in March 2010 following the approval of the IMF programme review and improvements in budget management.

Figures on EU budget support

Over the period 2003-2009, the European Commission made budget support commitments totalling over €13 billion (about 25 % of all commitments in this period). About 56% of commitments were made in Africa, Caribbean and Pacific (ACP) countries, 24% in neighbourhood countries, 8% in Asia, 6% in Latin America and 5% in South Africa. In 2010, overall budget support commitments of the Commission amounted to €1.96 billion.

Examples of successful use of budget support

  • Ghana is a successful example of coordinated donor support through general budget support and the all-encompassing dialogue which is part of it. 70% of EU aid to Ghana is delivered through budget support, of which 50% is general budget support. Over the years, EU intervention has been progressively moving to a multilateral budget support mechanism ―the Multi-Donor Budget Support (MDBS) initiative. This approach enables the donors to further align their support to the country's own development strategy and to improve the effectiveness and efficiency of aid delivery.

    In Ghana, general budget support is delivered through a MDG-Contract that improves the effectiveness of budget support in accelerating progress towards the Millennium Development Goals by increasing its long term predictability and focusing on results. In this regard, the country has recently seen impressive improvements in economic growth and poverty reduction and is considered to be the first Sub-Saharan country to have achieved the Millennium Development Goal of halving extreme poverty by 2015.

    National social protection programmes such as the livelihood Empowerment Against Poverty (LEAP), National Health Insurance Scheme (NHIS), School Feeding Programme, free exercise books and school uniform programmes have significantly contributed to the reduction of poverty in the country. Although there still remains a wide poverty gap between the north and south of the country (characterized by deep poverty especially in the northern savannah area), the government aims at tackling the north-south development gap with the Savanna Accelerated Development Authority (SADA) designed to attract investments in the northern zone whilst providing employment and income generating opportunities for the people.

  • Rwanda: Sector Budget Support Programme for Environment and Natural Resources "Global Climate Change Alliance". €4.555 million (2010-2012)

    The programme supports an ambitious land registration programme to reduce the vulnerability of the rural population. It provides incentives through a new tenure system to protect land resources against climate change effects, encouraging long-term investments in land improvement and thereby increasing soil fertility. By the end of 2011, more than 6.5 million allotments are expected to be settled and almost 2.5 million of titles are expected to be issued.  The process of land registration is contributing to the solution of land disputes and conflicts. Issuing land titles to the owners will also facilitate their access to bank loans and help them improve their economic status.

  • Rwanda: Sector Budget Support Programme for Decentralised Agriculture. €20 million (2010-2014)

This programme has endorsed Rwanda's Strategy agricultural transformation (2009-2012) and supports in particular decentralization of the agricultural sector, food security and environmental sustainability. There has been remarkable progress (exceeding the original targets) in crop intensification, increasing the production of key food security crops, and soil conservation. Various measures have been taken to successfully tackle the serious problem of land erosion in Rwanda.

For more information

IP/11/1184

The full text of the Communications can be found at …

Consultation on the future of development policy

http://ec.europa.eu/europeaid/how/public-consultations/5241_en.htm

Consultation on the instrument of budget support:

http://ec.europa.eu/europeaid/how/public-consultations/5221_en.htm

Website of EuropeAid:

http://ec.europa.eu/europeaid/index_en.htm

Website of the European Commissioner for Development, Andris Piebalgs

http://ec.europa.eu/commission_2010-2014/piebalgs


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