----

----

I Information

Court of Auditors

----

SPECIAL REPORT No 2/2005

concerning EDF budget aid to ACP countries: the Commission's management of the public finance reform aspect, together with the Commission's replies

(presented pursuant to Article 248(4) second subparagraph of the EC Treaty)

(2005/C 249/01)

CONTENTS

ABBREVIATIONS AND TERMINOLOGY

ANNEX 1 — Six tables illustrating the importance of budget aid

ANNEX 2 — The draft new Public Finance Management Performance Measurement Framework

ANNEX 3 — The performance indicators used by the Commission

ANNEX 4 — Mozambique: an example of good practice in inter-donor coordination

The Commission's replies

ABBREVIATIONS AND TERMINOLOGY

SUMMARY

Description of the mechanism

The Court's audit

Audit results

INTRODUCTION

AUDIT FIELD: DIRECT NON-TARGETED BUDGET AID

Definition

Improving public finance management: one of the objectives of budget aid

Advantages: ownership and greater simplicity for beneficiary countries

Disadvantage: risks associated with the weakness of national public finance systems

Implementation: aid is conditional

Regulatory provisions

THE COURT'S AUDIT

Audit objective

Audit approach

AUDIT FINDINGS

Assessment of the initial public finance management situation

Definition of methodological framework

Methodological framework improved, but should be expanded

Dynamic interpretation of eligibility conditions

Cohesion between programmes should be made more explicit

Implementation of the methodological framework

Initial assessments generally comprehensive and linked to the national reform programme

Fighting corruption: an issue that needs to be developed

Institutional support coordinated but not always part of an overall framework

No recommendations from the Heads of Delegation

Information reflects the true picture

Commission's decisions insufficiently argued

Monitoring the progress of reforms

Methodological framework under development

Delegations' monitoring reports could be improved

Performance indicators are being improved

Implementation of the methodological framework

Delegations' monitoring reports incomplete

Performance indicators sometimes offer too little incentive

Unequal progress in different countries as regards coordination with other donors

Relations with parliaments and Supreme Audit Institutions to be strengthened

Human resources shortfall at the Commission

Situation on the ground: progress on reforms but beneficiary countries' management still very weak

Commission's reactions appropriate

CONCLUSIONS AND RECOMMENDATIONS

Conclusions

Recommendations

This report was adopted by the Court of Auditors in Luxembourg at its meeting of 29 and 30 June 2005.

For the Court of Auditors

Hubert WEBER

President

----

(1)  See Special Report No 5/2001 of the Court of Auditors (OJ C 257, 14.9.2001).

(2)  See the Resolution of the European Parliament containing the comments accompanying the decision concerning discharge to the Commission in respect of the implementation of the budget of the sixth, seventh and eighth EDFs for the 2002 financial year (OJ L 330, 4.11.2004).

(3)  See the Council's ACP/FIN Working Party document No 6107/04 of 19 February 2004 on the discharge to be given to the Commission in respect of the financial management of the sixth, seventh and eighth EDFs (financial year 2002).

(4)  In 2000, the Commission recognised that targeting was of limited effectiveness, owing largely to its side effects (delays in implementation and fragmentation of the budgetary process), the clumsiness of targeting procedures and, above all, the fungibility of the budget.

(5)  See Resolution No 55/2 adopted by the United Nations General Assembly on 8 September 2000.

(6)  This practice inhibits budgetary comprehensiveness. However, some projects, although managed outside the budget, are recorded in the annual accounts, thus resolving the problem of disclosure.

(7)  The practice of separate management often deprives government departments of qualified staff, who are employed to run these projects at ad hoc management centres offering higher rates of pay.

(8)  According to the universality principle, in a public budget all revenue is available for all expenditure, instead of revenue being assigned to a specific category of expenditure.

(9)  The main information gathered during the on-the-spot visits was corroborated by an Interministerial Conference on the public finance implications of results-based management, the medium-term expenditure framework and budget support, which was jointly organised by the Senegalese Ministry of Economy and Finance and IDEA International, in partnership with the Economy and Finance Ministries of Benin, Burkina Faso, Cape Verde and Mali and the development partners (WB, IMF, EU, Canada and the Netherlands). Auditors from the Court also attended.

(10)  Ethiopia's budget year begins in July.

(11)  A protocol assigned a further 16,4 million euro to Mozambique, as funding for the elections held in 2004.

Source: Financing agreements and National Indicative Programmes (NIPs) under the 9th EDF.

(12)  In each country, meetings were held with the parliamentary finance committee, various departments of the Ministry of Finance, two spending ministries, usually health and education (from central departments to outlying units such as schools or local health centres), internal and external audit bodies and the Central Bank, as well as representatives of the main donors, civil society and, where present, anti-corruption NGOs.

(13)  See Special Report No 5/2001 of the Court of Auditors on counterpart funds from structural adjustment support earmarked for budget aid (OJ C 257, 14.9.2001) and Special Report No 1/2002 concerning macrofinancial assistance (MFA) to third countries and structural adjustment facilities (SAF) in the Mediterranean countries (OJ C 121, 23.5.2002).

(14)  While revenue is often taken into account in government reforms (see paragraph 70), the Commission must incorporate this aspect into its programmes more systematically.

(15)  In the meantime, the Commission should put all the instructions needed for operational management of budget aid on its Intranet site, where they would be accessible to Commission staff.

(16)  Section 3.4 of the Guide says, ‘it is important to ensure both beforehand and in the course of implementing any support, that the direction on public finances taken by the country concerned may be deemed to be satisfactory’.

(17)  The exception, however, is the initial assessment on Chad. Already sparse at the proposal stage, it no longer exists in the financing agreement, which includes only a few scattered scraps of information from it.

(18)  From section 3.4(a), of the Guide: ‘the assessment of how well public expenditure is managed must [...] analyse any programme prepared by the government of the country concerned for improving the management of its public finances (including possible matrices for corrective measures) and the role played by the donor community. Such a programme should detail the action plan for implementing the reforms, which will be the subject of specific monitoring by the Commission’.

(19)  Footnote does not concern English version.

(20)  Government financial management system.

(21)  Footnote does not concern English version.

(22)  Consultative committee of representatives of the Member States.

(23)  Article 9(3) of the Cotonou Agreement makes it clear that combating corruption is a key part of European Community development assistance.

(24)  In December 2004, the OECD's Development Assistance Committee and Transparency International organised a Development Partnership Forum on the theme ‘Improving donor effectiveness in combating corruption’.

(25)  Section 1.3 of the Guide says, ‘All institutional support must be provided as part of an overall support programme, drawn up by the government and supported by the donors, and must be complementary to any other funding provided by other donors’.

(26)  Footnote does not concern English version.

(27)  Footnote does not concern English version.

(28)  Section 3.4(i), of the Guide says, ‘The Head of Delegation will write a recommendation on the quality of public finance management in that country and the prospects for improvement. [...] AIDCO will then decide whether to draft a financing proposal’.

(29)  These arrears correspond to services rendered and billed (and therefore awaiting settlement) but contracted outside the scope of budgetary commitments and not included in the accounts. They are therefore not covered by the monitoring of arrears, which is carried out by the donors. It is not yet known precisely how much they are worth.

(30)  Footnote does not concern English version.

(31)  From section 5.3 of the Guide: ‘the Delegation monitors the evolution of public finances through its relations with the local institutions (Ministry of Finance, Supreme Audit Institution, Central Bank, Public Accounts Committee of the National Parliament), other donors and civil society. It obtains from these institutions their regularly published reports and sends them to Headquarters with comments. The Delegation should pay particular attention to programmes of public finance reform and, where appropriate, to the implementation of measures agreed with donors and the European Commission (matrix of measures)’.

(32)  The form and content of the half-yearly monitoring reports are specified in note no 24972 of 18 September 2003 from EuropeAid C3 to the Heads of Delegation.

(33)  PEFA was set up in 2001 as a partnership between the World Bank, the European Commission, DFID, the Swiss State Secretariat for Economic Affairs, the French Ministry of Foreign Affairs, the Norwegian Ministry of Foreign Affairs and the IMF.

(34)  The Guide specifies that the Heads of Delegation must initiate an early warning procedure if major problems arise which could impede the smooth running of the programme.

(35)  See note No 17450 of 9 June 2004 from the Directorate-General for Development and EuropeAid to the 14 Delegations concerned.

(36)  The reports examined in the five countries were usually the first such to be published since the current programmes got underway.

(37)  Footnote does not concern English version.

(38)  In Chad, the two indicators for the delivery rate to beneficiary structures, while useful, provide for checks based on bills of receipt, which are not sufficient. Goods must be physically inspected.

(39)  Footnote does not concern English version.

(40)  Footnote does not concern English version.

(41)  Poverty reduction action plan.

(42)  Footnote does not concern English version.

(43)  The PEFA Steering Committee, on which the Commission is represented, meets twice a year. The results of PEFA's work are brought to the attention of the other main donors in bodies of the OECD.

(44)  The SAIs of several donor countries meet regularly in the context of a coordination body known as HOAP (Harmonisation of Overseas Audit Practice). The aim is to develop a coordinated approach which relies on the work of beneficiary States' SAIs and, with their agreement, audits the use of the budget aid disbursed by their respective (donor) governments.

(45)  The financing proposals and agreements make formal provision for dialogue with the government.

(46)  Footnote does not concern English version.

(47)  In December 2004, Court staff took part in a seminar organised by the Commission on the theme of developing the capacities of Supreme Audit Institutions.

(48)  Sharing the monitoring of public finance management between the EuropeAid Cooperation Office (AIDCO) and the Development Directorate-General (DEV) results in a situation that is far from ideal and only works because of good interpersonal relations.

(49)  Standard list of points to be checked in order to ensure that documents have been systematically and fully analysed and to identify who carried out the checks.

(50)  Court staff took part in the three main training courses on budget aid that the Commission organised for its own staff (two courses — introductory and advanced — on macroeconomic budget aid and one on sectoral budget aid).

(51)  As well as the general weakness relating to the capacity of government departments in the beneficiary countries, weaknesses often affect, for example, procurement, purchasing follow-up (no materials accounting or inventory), cash management, accounting, management tools and the procedures and resources of internal and external audit bodies.

(52)  In practice, government reforms often take account of domestic revenue, but it is not adequately emphasised in the Commission's Guide (see paragraph 24).

(53)  The negotiations towards the end of 2003 between the IMF and the government on the sixth review of the programme financed by the poverty reduction and growth facility (PRGF) failed to deliver an agreement. Since the PRGF programme expired on 6 January 2004 and was not extended, Chad was no longer automatically eligible for budget aid under Article 67(4) of the Cotonou Agreement.

----

ANNEX 1

SIX TABLES ILLUSTRATING THE IMPORTANCE OF BUDGET AID

Table A

Relative importance of budget aid (1) in EDF aid (commitments and payments), 1999 to 2004

Table B

Relative importance of direct non-targeted budget aid for 2003 and 2004

Table C

Total EDF budget aid (commitments and payments) by country, 2003 and 2004 (excluding HIPC)

Table D

Relative importance of budget aid (EDF and other donors) in the national budget in 2004 for the five countries visited

Table E

Proportion of budget aid relative to total aid paid by principal donors in 15 African countries (8) in 2003

Table F

Budget aid disbursed by various donors in 2004 in the five countries visited

----

(1)  In the form of structural adjustment before the Cotonou Agreement entered into force.

(2)  Includes highly indebted poor countries initiative (HIPC).

Source: Commission figures.

(3)  Payments are booked to the commitments for the year or the commitments outstanding from previous financial years.

(4)  The HIPC (Heavily Indebted Poor Countries) Initiative seeks to ease the external debt of the countries concerned. It has a similar impact to budget aid but is not subject to the same audit arrangements. The commitments and payments are entered in the EDF accounts by the EDF when they are effected to the European Investment Bank (EIB) and the World Bank (WB).

Source: Commission data.

(5)  Payments are booked to the commitments for the year or the commitments outstanding from previous financial years.

(6)  Payments in 2004 include the variable tranches for Mozambique (9,1 million euro), Niger (8,25 million euro) and Zambia (29,5 million euro).

Source: Commission data.

(7)  The budget figure for Chad relates to 2003.

Source: Commission data.

(8)  The 15 countries are: Benin, Burkina Faso, Ethiopia, Ghana, Kenya, Madagascar, Malawi, Mali, Mozambique, Niger, Uganda, Rwanda, Senegal, Sierra Leone and Tanzania.

(9)  The World Bank aid essentially consists of loans.

Source: SPA — Strategic Partnership with Africa — Survey of the alignment of budgetsupport and balance of payments support with national poverty reduction strategy processes — final draft dated 7 February 2005.

The figures in the above document are rough estimates.

(10)  Loans as aid.

Source: Commission data.

----

ANNEX 2

THE DRAFT NEW PUBLIC FINANCE MANAGEMENT PERFORMANCE MEASUREMENT FRAMEWORK

Table H

Cardinal data (indices) linked to the indicators, as proposed in the measurement framework

----

(1)  Footnote does not concern English version.

(2)  Footnote does not concern English version.

(3)  Footnote does not concern English version.

(4)  Footnote does not concern English version.

(5)  Footnote does not concern English version.

(6)  Footnote does not concern English version.

(7)  Footnote does not concern English version.

(8)  PEFA was set up in 2001 as a partnership between the World Bank, the European Commission, DFID (the United Kingdom Department for International Development), the Swiss State Secretariat for Economic Affairs, the French Ministry of Foreign Affairs, the Norwegian Ministry of Foreign Affairs and the International Monetary Fund. The Commission is a founder member and one of the leading players.

(9)  Tests of controls, which were previously known as compliance tests, are a part of internationally recognised auditing standards. See in particular International Federation of Accountants (IFAC), ISA (International Standards on Auditing) 330, 430 and 530.

(10)  The delivery rate to final beneficiaries of centrally purchased goods could be used as an index for this indicator.

(11)  Perception indicators such as those of Transparency International could be used as indices for this indicator.

----

ANNEX 3

THE PERFORMANCE INDICATORS USED BY THE COMMISSION

----

(1)  Of these five indicators, four were only partially achieved.

Source: Assessment documents for the tranches disbursed.

----

ANNEX 4

MOZAMBIQUE, AN EXAMPLE OF GOOD PRACTICE IN INTER-DONOR COORDINATION

----

THE COMMISSION’S REPLIES

SUMMARY

INTRODUCTION

AUDIT FIELD: DIRECT NON-TARGETED BUDGET AID

THE COURT'S AUDIT

AUDIT FINDINGS

CONCLUSIONS AND RECOMMENDATIONS

----

----

OPINION No 7/2005

on a draft Commission Regulation amending Regulation (EC) No 1653/2004 as regards the post of accounting officers of executive agencies

(2005/C 249/01)

THE COURT OF AUDITORS OF THE EUROPEAN COMMUNITIES,

Having regard to the Treaty establishing the European Community, and in particular Article 248(4) thereof,

Having regard to the request by the Commission’s Director-General for Budget (1) of an opinion on a draft Commission Regulation amending Regulation (EC) No 1653/2004 as regards the posts of accounting officers of executive agencies,

Whereas Article 30 of Commission Regulation (EC) No 1653/2004 on a standard financial regulation for the executive agencies (2) provides that the management board of an executive agency shall appoint an accounting officer, who is an official subject to the Staff Regulations,

Whereas, having encountered problems in finding among officials appropriate candidates to be seconded to the posts of accounting officers of executive agencies, the Commission proposes to amend Article 30 of Regulation (EC) No 1653/2004, so as to allow the appointment of members of temporary staff as accounting officers of executive agencies,

HAS ADOPTED THE FOLLOWING OPINION:

The Court has no observations on the proposal of the Commission. The Court invites, however, the Commission to consider including in Article 30 of Regulation (EC) No 1653/2004 the qualifications required for an accounting officer, as in Article 55 of Regulation (EC, Euratom) No 2342/2002, laying down detailed rules for the implementation of the Financial Regulation (3).

This Opinion was adopted by the Court of Auditors in Luxembourg at its meeting of 6 July 2005.

For the Court of Auditors

Hubert WEBER

President

----

(1)  Letter of 1 June 2005 to the President of the Court of Auditors.

(2)OJ L 297, 22.9.2004, p. 6.

(3)OJ L 357, 31.12.2002, p. 1.

----