ABBREVIATIONS

CAO : Central Audit Organisation

CSF : Civil Society Facility

CSOs : civil society organisations

CSP : country strategy paper

DCI-NSA : Development Cooperation Instrument — non-state actors

EEAS : European External Action Service

EED : European Endowment for Democracy

EIDHR : European Instrument for Democracy and Human Rights

ENP : European neighbourhood policy

ENPI : European Neighbourhood and Partnership Instrument

FGM : female genital mutilation

GDP : gross domestic product

IfS : Instrument for Stability

IMF : International Monetary Fund

MEDA : Measures to accompany the economic and social reform in the Mediterranean non-member countries

MoF : Ministry of Finance

MTEF : medium-term expenditure framework

NCCM : National Council for Childhood and Motherhood

NCHR : National Council for Human Rights

NCW : National Council for Women

NGO : non-governmental organisation

NIP : national indicative programme

PEFA : public expenditure and financial accountability

PETS : public expenditure tracking survey

PFM : public finance management

SBS : sector budget support

SCAF : Supreme Council of the Armed Forces in Egypt

SIGMA : support in governance and management

TA : technical assistance

TSA : treasury single account

EXECUTIVE SUMMARY

I. Egypt is the largest country in the Arab world and has traditionally played a leading role in north Africa and the Middle East. It has also been a major part of the Arab Spring through the uprising against the Mubarak regime in early 2011.

II. Both before and after the uprising Egypt was one of the main beneficiaries of assistance from the European Neighbourhood and Partnership Instrument (ENPI) which the EU uses to support its European neighbourhood policy (ENP).

III. For the period 2007–13 Egypt received an allocation of approximately 1 billion euro. Approximately 60 % of these funds are channelled through sector budget support (SBS) to the Egyptian government, the rest through projects agreed with the Egyptian authorities. The EU has also made much smaller amounts available directly to civil society organisations (CSOs), notably through the European Instrument for Democracy and Human Rights (EIDHR).

IV. The audit addressed the question of whether the European Commission and the European External Action Service (EEAS) managed effectively the EU support to improve governance in Egypt before and after the 2011 uprising.

V. The audit covered the period up to September 2012. It focused on two key areas of governance: human rights and democracy on the one hand, and public finance management (PFM) and the fight against corruption on the other hand. The audit examined 25 projects and the three main SBS programmes. It also examined how the EU managed the wider ENP cooperation framework with Egypt to achieve progress in these areas.

VI. The audit found that overall the Commission and EEAS have not been able to manage EU support to improve governance in Egypt effectively. This was partly due to the difficult conditions they have faced in Egypt but also to shortcomings in the way the Commission and EEAS have managed their cooperation with Egypt.

VII. Before the uprising the Commission managed to include a large number of human rights and democracy issues in the ENP EU–Egypt action plan for reforms and also made this area one of its priorities for ENPI assistance. However, it was unable to achieve progress either in the framework of its ENP dialogue or through the main ENPI project it funded in this area. Notwithstanding these difficulties the Commission continued to provide significant financial assistance to the Egyptian government, notably through budget support.

VIII. Before the uprising, projects which directly funded CSOs tended to be relatively more successful but received very limited funding. Despite the considerable funding provided through budget support, this instrument has not been effective in promoting PFM and only slow progress has been made. The Commission funded a very relevant anti-corruption project but the project has also been slow to start and has not been sufficiently closely monitored.

IX. After the uprising the ENP review marked a significant effort by the newly created Commission and EEAS to improve the effectiveness of EU support. However, the review has not yet been translated into a significant revision of EU support to Egypt. While the review’s focus on promoting "deep democracy’ is very relevant to Egypt, women’s and minorities" rights are key issues in Egypt which have not been strongly emphasised in the review and subsequent new assistance. The added value of new mechanisms to support civil society remains to be demonstrated while additional funding allocated to CSOs in Egypt has been modest.

X. The related review of EU budget support identifies some important ways to strengthen Commission management but these changes will not be effective unless the Commission is more strict in applying its conditionality.

XI. The report sets out recommendations on how to strengthen support to human rights and democracy and PFM and the fight against corruption and on the need to review the use of budget support to Egypt.

INTRODUCTION

1. This audit report assesses the European Commission’s and European External Action Services’ (EEAS) efforts to promote good governance in Egypt before and after the events of 2011.

RECENT DEVELOPMENTS IN EGYPT

2. Egypt with 84 million inhabitants is the largest country in the Arab world and has traditionally played a leading role in north Africa and the Middle East. It also has one of the biggest Muslim populations in the world but with a significant Christian minority. Its relations with neighbouring Israel are of critical importance to peace in the region and beyond.

3. Following the overthrow of the monarchy in 1952, Egypt was ruled until 2011 by three autocratic presidents, each with a military background: firstly, Colonel Nasser until his death in 1970, then Colonel Sadat before his assassination by Muslim radicals in 1981 and from 1981 to 2011 by Sadat’s Vice-President, Hosni Mubarak, who had also been the Commander of the Air Force.

4. Mubarak maintained the emergency laws, originally put in place following Sadat’s assassination, throughout his 30 years in power. Until 2005, he was the only candidate to run for the presidency and consequently won five consecutive elections with a huge majority. His National Democratic Party similarly dominated the parliament. He finally yielded to pressure to allow competitive presidential elections in 2005 but then placed such restrictive conditions on them that it was hard for a viable competitor to run against him.

5. In contrast, particularly from 2005, Mubarak undertook a range of liberalising economic reforms which were generally welcomed by the international community. However, these reforms reinforced rather than reduced inequality with both the military and circles linked to his family holding major interests in the economy.

6. On 25 January 2011 a popular uprising began with demonstrators protesting against the continued emergency laws, including related police brutality and torture, the lack of free elections and limited freedom of speech. The protests were also directed against widespread corruption and high levels of unemployment coupled with rising food prices. These largely unexpected events led to Mubarak’s resignation on 11 February 2011.

7. From February 2011 to June 2012 Egypt was de facto run by the Supreme Council of the Armed Forces (SCAF). The SCAF in many ways continued the authoritarian approach of previous governments, including a major crackdown on foreign NGOs starting in autumn 2011. Nevertheless, following several postponements, presidential elections held in May and June 2012 led to the candidate of the Muslim Brotherhood, Mohamed Morsi, gaining a narrow victory.

8. This success of the Muslim Brotherhood was consistent with their strong showing in the parliamentary elections at the end of 2011 where their candidates won 235 out of the 498 seats. At the same time, a more conservative Islamic bloc led by the Salafists won 123 seats. Secular, liberal groups, despite having played an important role in the uprising, only obtained approximately 20 % of the seats. However, in June 2012 the Supreme Court ruled aspects of the election were unconstitutional and new elections are now scheduled for 2013.

9. In December 2012 Egyptians voted in favour of a new constitution. However, large sections of Egyptian society expressed strong concerns about what they perceived to be a shift towards Sharia law, restrictions on both the freedom of expression and women’s and minorities’ rights, and the continued privileged role of the military.

EU COOPERATION FRAMEWORK

10. Egypt’s association agreement with the EU, which entered into force in 2004, provides the legal basis and institutional framework for its cooperation with the EU. An association council is foreseen to meet at ministerial level at least once a year for dialogue on major issues related to the agreement or on other bilateral or international issues of mutual interest. An association committee, supported by subcommittees, is intended to enable dialogue at the level of senior officials to ensure the implementation of the agreement.

11. A key feature of the association agreement is its insistence on the respect of democratic principles and fundamental human rights (Article 2). This reflects the EU’s long-standing commitment to promoting human rights and democracy in its international relations which is also enshrined in Article 21 of the Treaty on European Union [1].

12. Egypt is the largest country in terms of population covered by the EU’s ENP [2]. The ENP was launched in 2004 with the objective of avoiding the emergence of new dividing lines between the enlarged EU and its southern and eastern neighbours by strengthening the prosperity, stability and security of both the EU and its neighbours.

13. Central to the ENP are the bilateral action plans between the EU and each ENP partner country. These set out a range of short- and medium-term priorities for political and economic reforms agreed between the two sides. The EU–Egypt action plan was adopted by the EU–Egypt Council in March 2007 and covers six areas [3]. It was due to expire in March 2012 but its duration has been extended while a new action plan is prepared in conjunction with the new Egyptian authorities. The European Commission publishes ENP progress reports annually on the implementation of the planned reforms set out in the action plans.

14. Up until the end of 2010 the European Commission was responsible for developing the ENP approach and then programming and implementing the assistance and the overall ENP cooperation framework. Following the establishment of the EEAS in December 2010, the EEAS became responsible for policy development and the overall cooperation framework and the EEAS and Commission shared responsiblities for programming assistance. Implementation of assistance remains the responsibility of the Commission.

EU FINANCIAL ASSISTANCE

15. The ENPI [4] was launched in 2007 to provide financial assistance to help partner countries implement the action plan. The ENPI replaced the previous EU "MEDA" financial assistance programme, which had just covered southern and eastern Mediterranean countries [5]. ENPI assistance is conditional on the respect of democracy and human rights (Article 28). Egypt is one of the main beneficiaries of the ENPI, receiving an allocation of approximately 1 billion euro in the framework of EU’s Egypt country strategy paper (CSP) for 2007–13. The CSP identifies three priority areas for ENPI assistance (see Annex I for details of allocations):

(a) supporting reforms in the areas of democracy, human rights and justice (90 million euro);

(b) developing the economy’s competitiveness and productivity (409 million euro);

(c) ensuring the sustainability of development (508 million euro).

16. Approximately 40 % of ENPI assistance to Egypt is used to finance projects while in the order of 60 % of ENPI assistance to Egypt is being implemented through SBS. This involves the channelling of EU funds directly to Egypt’s national budget subject to Egypt meeting sectoral and PFM reform conditions [6]. In recent years the Commission in its aid programmes has placed a major emphasis on improving PFM — how beneficiary governments plan, implement and control their budgets — in order to help improve the economy, efficiency, effectiveness and transparency of both how they use their own national finances and also EU funds. Budget support is the main instrument the Commission has used for this purpose in Egypt.

17. While EU assistance in Egypt is mainly financed through the ENPI, further, much smaller support in the area of governance has been provided through the European Instrument for Democracy and Human Rights (EIDHR), and thematic programmes funded from the Development Cooperation Instrument (DCI), the Instrument for Stability (IfS) and the more recently established Civil Society Facility. A key characteristic of this support is that the Commission can provide it directly through grants to civil society organisations (CSOs) and other non-state actors (NSAs) without having to enter into financing agreements with the national authorities.

AUDIT SCOPE AND APPROACH

18. The audit addressed the overall question:

"Have the European Commission and the European External Action Service (EEAS) managed effectively the European Union support to improve governance before and after the 2011 uprising?"

19. The audit covered the period from the launch of the ENPI in 2007 to September 2012 [7].

20. The audit focused on two key areas of governance: democracy and human rights on the one hand, and PFM and the fight against corruption on the other hand.

(a) In the area of democracy and human rights the audit examined:

(i) the largest human rights programme funded from the ENPI (17 million euro);

(ii) the annual funding from the EIDHR and the related DCI thematic programme on NSAs, including a sample of 15 projects with a total value of 2,95 million euro;

(iii) two projects funded from the Instrument for Stability with a total value of 2,86 million euro.

(b) In the area of PFM and the fight against corruption:

(i) the three largest SBS programmes (total value of 304 million euro) [8];

(ii) the main anti-corruption project financed by the ENPI (2,5 million euro).

More detailed information on all the interventions audited is given in Annex II.

21. For each of these areas of governance the audit also assessed the EU–Egypt action plan, the dialogue between the EU and Egypt on the implementation of the action plan, and the Commission’s progress reports.

22. The Court gathered evidence for its assessment through documentary review and interviews with the EEAS, the Commission, the Egyptian authorities and CSOs, as well as other donors. The audit included a 2-week visit to Egypt in June 2012. An international expert provided advice to the audit team in the field of democracy and human rights.

OBSERVATIONS

FEW RESULTS ACHIEVED BEFORE THE UPRISING

INEFFECTIVE TREATMENT OF HUMAN RIGHTS BEFORE THE UPRISING

23. As for all ENP countries, before negotiating the action plan with the Egyptian authorities, the European Commission issued in 2005 a country report [9] setting out its assessment of the situation in Egypt. The report included critical observations on the political situation and highlighted the negative impact of the emergency law on human rights and democracy.

24. Following negotiations with the Egyptian authorities, the Commission was able to have three high priority areas relating to human rights and democracy included among the 19 high priorities areas in the action plan [10]. However, at a more detailed level, the action plan contained as many as 39 priority actions in the field of human rights and democracy. This represented an overly ambitious agenda which was not based on clearly spelled-out priorities on the part of the Commission.

25. The actions foreseen covered sensitive topics such as cooperation in the field of elections, the right of assembly and association, and the rights of detainees. Nevertheless, a number of key issues which had been raised in the country report were not directly addressed, in particular the continuance of the emergency law, the role of military and state security courts and the widespread use of torture. In addition some actions were rather vaguely defined and without clear benchmarks to assess progress.

MAIN HUMAN RIGHTS PROJECT LARGELY UNSUCCESSFUL

26. The 2007–13 CSP was the first time that human rights and democracy had been selected as a priority area for EU financial assistance (see paragraph 15). This represented a success for the Commission in its efforts to push these topics up the political agenda in its relations with Egypt.

27. The main intervention launched in this area in the framework of the CSP was an ENPI programme for the promotion and protection of human rights and civil society. It aimed to increase the capacity of Egyptian institutions as well as CSOs to effectively implement international conventions in this area. The programme was intended to help address the high priority given in the action plan to human rights. It was approved in 2008 for 17 million euro (for details see Annex II).

28. There were several weaknesses in the programme’s design. It was to a large extent the continuation of different projects financed under the 2002–06 CSP [11]. However, these projects were not well integrated with each other in the new programme, particularly the project "Promotion of environmental rights through CSOs". Moreover, the Commission when designing the programme did not sufficiently take into account lessons learnt from these earlier projects. Two of the organisations selected to implement the programme, while reformist in their approach, were public bodies created by the Mubarak regime, and specifically linked to the President’s wife, rather than government ministries [12]. This link has become a handicap for the programme after the uprising.

29. Implementation of the programme has been subject to major delays, largely attributable to a lack of commitment from the Egyptian authorities.

(a) The financing agreement was signed by the Egyptian authorities only on 23 December 2009, the last day before the deadline for this. This followed a difficult negotiation process between the Commission and the Egyptian authorities over the content of the programme and how it was to be implemented.

(b) Implementation following the signature continued to be very slow. After 30 months, and just 6 months before the contracting deadline, only 53 % of the programme funds had been contracted and 22 % paid. There were particular delays in getting the programme management unit operational which have affected implementation of the programme as a whole.

(c) The cancellation in April 2012 of the component for enhancing CSO capacity (4 million euro) was a major setback for the programme. It was the result of the lack of agreement between the Egyptian authorities and the Commission on the wording to be used in relation to minorities and gender when drafting the call for project proposals. The Commission services themselves did not take a clear decision on these points.

30. Despite the efforts the Commission made to keep the programme alive, it has produced few outputs so far and their sustainability is very much dependent on political developments in Egypt. While the Commission intended the programme to be a way to raise the profile of human rights issues, in practice it was not able to use it as a means of developing dialogue with the Egyptian authorities on this subject.

LITTLE FUNDING BEFORE UPRISING FOR CIVIL SOCIETY THROUGH EIDHR AND DCI-NSA THEMATIC PROGRAMME

31. The Commission has used the EIDHR to address some very sensitive subjects such as the electoral process and the combating of torture and ill-treatment. These could not be addressed in the framework of the ENPI assistance given that this requires the Commission to enter into financing agreements with the national authorities. While the EIDHR initially was used more to focus on socio-economic rights, the Commission’s introduction of the DCI-NSA thematic programme in this area since 2010 has allowed it to concentrate the EIDHR on democracy and political rights. The funding was used to build up the capacity of CSOs to act effectively in these areas and to provide support to the victims of human rights abuses.

32. However, the very limited funding made available before the uprising for these two instruments does not reflect the policy importance which the EEAS and Commission gave to democracy and human rights in the action plan (see paragraph 24). It is also low compared to the assistance allocated from the ENPI to human rights and democracy (see previous section) [13] and the amounts allocated to budget support. For the EIDHR the average annual funding from 2008 to 2010 was as little as 875000 euro, despite there being an average of 40 applications a year. Only between four and seven grants were awarded each year for an average amount of approximately 150000 euro. Allocations were equally modest for the DCI-NSA thematic programme when it was introduced in 2010 [14].

33. The Commission has not yet carried out a mapping exercise on Egyptian CSOs. Its lack of detailed information on CSOs made it harder to ensure that the views of a variety of CSOs on the content of the annual calls for proposals for EU programmes were taken into account. It also made it more difficult to design calls for proposals appropriate to their capacity [15].

34. Implementation of assistance through the EIDHR and the DCI-NSA thematic programme was slowed down by the length of the procedures for the Commission’s call for proposals. The average time between the deadline for CSOs to submit their project proposals and the Commission’s signature of the grant contract to fund the project was 8,5 months for the sample of contracts examined. This is despite the small contract amounts and the fact that the timeframe for their implementation is often only 24 months.

35. Nine of the 14 signed projects in the sample suffered delays due to long approval procedures by the Egyptian Ministry of Solidarity and Social Justice [16]. In these cases the Commission adopted a flexible and supportive approach, systematically suspending the timeframe for project implementation until the CSOs received the necessary approval.

36. Of the five projects in the sample that had been completed, three had delivered the planned outputs to the benefit of the target groups. The other two projects did not fully achieve their objectives, mainly due to interference from the Egyptian authorities. The projects’ contribution to improving governance has been mostly at very local level.

DIALOGUE BUT LITTLE ACTION ON HUMAN RIGHTS AND DEMOCRACY

37. After lengthy negotiations, the Commission was able to obtain the agreement of the Egyptian authorities to set up a subcommittee on political matters within the framework of the association committee. However, the name of the subcommittee reflected the compromise involved: "Subcommittee on Political Matters: Human Rights and Democracy — International and Regional Issues". While the Commission wished to focus dialogue on human rights and democracy, the Egyptian side wanted to concentrate on international security issues in line with its ambition to develop a strategic partnership with the EU.

38. The subcommittee met once a year from 2008 to 2010. The EU side increasingly raised critical issues relating to human rights and democracy in Egypt, including torture, freedom of association and expression, the restrictive law on NGOs [17] and the continuance of the emergency law itself. However, the response of the Egyptian side was to focus on international issues and reassure the EU side that action was being taken on domestic governance issues or to play down their importance. The Egyptian authorities also argued that they were addressing human rights issues through the ENPI programme on this subject although in reality they were constantly delaying this project (see paragraph 29).

39. The Commission did not succeed in ensuring that the issues it brought up in the subcommittee dialogue were subsequently followed up by the Egyptian authorities with concrete actions. Even when issues raised were included as action items at the end of the meeting, they were not generally implemented. For example, the 2009 subcommittee included as an action point "exploring the possibility to use EU technical assistance to advise Egypt on NGO legislation in Member States". This was not followed up.

40. The Commission’s progress reports on the implementation of the action plans similarly raised sensitive issues concerning human rights and democracy and took an increasingly critical stance. However, they did not refer to the problems faced in implementing EU assistance intended to address these issues. At the same time, until the 2011 progress report [18], no proposals were made by the Commission in the reports on measures to be taken by the Egyptian authorities to tackle the issues raised.

41. The Commission made no link between its criticisms of human rights violations made in the progress reports and the option of reducing or suspending EU assistance. This is despite the fact that human rights clauses are included in the association agreement, the ENPI regulation (see paragraphs 11 and 15) and the financing agreements for individual programmes. While the reduction or suspension of budget support, given that it was directly financing the national budget, could have been a particularly potent way of backing up human rights concerns, this was not done before the uprising.

NO PFM REFORM PLAN

42. The EU–Egypt action plan addresses a number of PFM reform priorities although not in a detailed way. It also referred to the need for more transparency and a revised anti-corruption policy but without emphasising the importance of tackling corruption and including it among the 19 high priority areas.

43. Budget support is a key instrument used by the Commission for promoting PFM reform in partner countries. Commission policy emphasises the need for countries receiving budget support to put in place a PFM reform plan in order to prioritise and coordinate reforms. However, despite the fact that approximately 60 % of EU assistance is being channelled through budget support, the Commission did not require the Egyptian authorities to establish such a plan.

44. In 2009 the Commission funded a public expenditure and financial accountability (PEFA) assessment on the state of PFM in Egypt which highlighted weaknesses in key areas of PFM, including external audit and legislative scrutiny of audit reports. However, the PEFA exercise was not followed up by firm steps to put in place a reform programme. Only in December 2011 did the Ministry of Finance (MoF) endorse an International Monetary Fund roadmap which provided the basis for a PFM reform programme [19].

45. Egypt still does not have an anti-corruption strategy although one of the objectives of the ENPI anti-corruption project launched in 2011 is to produce such a strategy (see paragraph 52).

MAJOR SHORTCOMINGS IN PFM NOT TACKLED

46. The pace of PFM reform in Egypt has been slow and SBS programmes have made only a limited contribution to reforms. For example:

(a) No significant progress has been made in introducing an effective internal audit function despite this area being highlighted in the 2007 EU–Egypt action plan. The MoF originally requested the Commission’s support in this area in June 2009 but the Commission’s only concrete input at the time of the audit was the organisation of a regional seminar on the subject held in June 2011 [20].

(b) The Egyptian authorities initiated work in 2006 on establishing a treasury single account (TSA), which is an essential tool for consolidating and managing government cash resources. By June 2012 approximately 500 of the government’s accounting units out of a total of 2600 had been integrated in the TSA. Although the Commission included progress in this area as a condition in the health SBS programme, this condition did not have a significant incentive effect.

(c) Progress in implementing the government financial management information system (GFMIS) has also been slow due to a lack of resources and the low priority attached to it by the MoF. This is again despite Commission conditionality in this area.

(d) Progress was made in developing a pilot medium-term expenditure framework (MTEF) and programme-based budgeting for the education sector. However, subsequent roll-out of these pilot projects to other ministries is still ongoing.

47. The Commission has not used its SBS programmes to address the following major shortcomings in PFM.

(a) Important areas of the budget are not transparent. Military expenditure is not declared and there is also no information on presidential expenses.

(b) The Egyptian authorities hold at least 36 billion Egyptian pounds (approximately 4 billion euro), equivalent to 2,4 % of Egyptian GDP, outside the state budget in so-called "special funds". Their exact size is unknown, as are the purposes for which, and the way in which, they are used. The Commission has not used the SBS programmes to specifically address this issue.

(c) No progress has been made in reforming external auditing. The Central Auditing Organisation (CAO), the supreme audit institution in Egypt, reported directly to President Mubarak and its audit reports are largely secret. The CAO’s lack of reform and transparency is a serious impediment to improving PFM.

48. According to Commision policy, the satisfactory overall implementation of PFM reforms is a general condition for budget support. However, the Commission did not establish clear criteria in terms of annual reform milestones and benchmarks for monitoring and assessing what constituted an adequate pace of reform and continued to disburse budget support despite the slow implementation of reforms.

49. The Commission has been the only donor providing budget support to Egypt. As a result there has been no scope for coordinating with other donors to increase the funding attached to conditions and thereby strengthen their incentive effect.

50. While EU budget support programmes in most countries are generally accompanied by technical assistance (TA) to advise on PFM reforms, little use has been made of such TA in Egypt. In addition, no specific TA project on general PFM reforms was funded until December 2011 [21]. The SBS programmes have also not been accompanied by any funding for CSOs to develop their role in monitoring the national budget.

LITTLE PROGRESS IN FIGHTING CORRUPTION

51. Despite Egypt’s serious problems in the area of corruption [22], the SBS programmes have done little to directly address this issue. Some EU budget support programmes in other countries have included specific conditions on corruption but this was not the case in Egypt. The main exception was the provision in the framework of the education SBS programme of TA for a public expenditure tracking survey (PETS). The survey was partly intended to identify "leakages" in the education sector but the exercise was not very effective.

52. The main EU project specifically directed at fighting corruption was approved in 2008 for 2,55 million euro. It was the only significant donor project launched in this area in the years before the uprising. However, its implementation has been difficult and the Commission has not sufficiently monitored the project despite its importance. Given the recent start of the project and the delays already encountered, its outputs so far are limited. Nevertheless its prospects for sustainability appear good given the current widespread public concern in Egypt about corruption.

THE COMMISSION DID NOT ADEQUATELY USE THE ENP COOPERATION FRAMEWORK TO ADDRESS PFM AND CORRUPTION

53. Neither the Commission nor the Egyptian authorities put PFM issues on the agenda of the association committee, while none of the eight subcommittees included PFM in its remit. The annual EU–Egypt economic dialogue meetings could have potentially been used to address PFM issues, but were not.

54. Corruption matters were discussed in the Subcommittee on Justice and Security, which met annually from 2007 to 2010. There was some exchange of information on anti-corruption initiatives but regular calls for cooperation from both sides were not followed up by concrete actions. The dialogue also did not lead to new ENPI projects nor did it address the difficulties faced in starting up the 2008 ENPI project (see paragraph 52). The broad scope of the subcommittee and the limited time scheduled for its meetings made more in-depth discussions, decision-making and follow-up difficult.

55. The ENP progress reports have devoted little attention to PFM. The reports have, however, become more critical. Thus the 2010 report noted the overall slow pace of PFM reform while the 2011 report touched for the first time on the military budget, criticising the military’s efforts to keep its budget outside any civilian or democratic control, although this subject still warrants much more attention.

56. Similarly, the Commission only briefly addressed the subject of corruption in the progress reports. From 2007 to 2010 the reports were moderately positive on progress made, ignoring fundamental challenges in this area. The 2011 report adopted a more critical stance, recognising corruption as a major issue.

FEW CHANGES IN RESPONSE TO THE UPRISING

ASSISTANCE PROGRAMMES REMAINED LARGELY UNCHANGED DESPITE ENP REVIEW

57. Before the Arab Spring in 2011, the High Representative and the Commission launched an overall review of the ENP in July 2010 involving consultations with Member States, partner countries and civil society to assess how it could be made more effective. The outcome of this review was published in a joint communication in May 2011 entitled "A new response to a changing neighbourhood" [23]. Its main focus was to emphasise the EU’s support for democratic reform and it proposed to give countries incentives to move in this direction by offering what it termed "more for more": more EU funding, better trade access to the EU and better travel possibilities to the EU in return for more democratic reforms [24]. An EU special representative (EU SR) for the southern Mediterranean was appointed in July 2011 to help implement the review [25].

58. In fact a 2007 Commission communication following the launch of the ENPI had already referred to a "more for more" approach: "The ENP is a partnership for reform that offers "more for more": the more deeply a partner engages with the Union, the more fully the Union can respond, politically, economically and through financial and technical cooperation" [26].

59. While overall the ENP review involved an extensive consultation process, consultations specifically with stakeholders involved in Egypt were quite limited.

(a) No specific in-depth study or evaluation to identify the reasons for the limited effectiveness of ENPI assistance to Egypt prior to the uprising was made.

(b) While the Commission organised a meeting for senior officials from ENP partner countries, including Egypt, in October 2010 as part of the ENP review, the planned ministerial meeting in early 2011 was not held.

(c) ENP review consultations with NGOs working in Egypt were very limited. While the Commission organised a meeting in November 2010 in Brussels with NGOs from all ENP partner countries, the invitation was sent at short notice to only six Egyptian NGOs, of which just one attended.

60. Following the uprising the EEAS and Commission also carried out a review of the CSP 2007–13 and NIP 2011–13 to assess their continued relevance. The EEAS and Commission concluded that there was no need to formally revise these two documents as the assistance set out in them was sufficiently broad-ranging and flexible. The NIP 2011–13 had been based on a 2009 review of the CSP which took a positive view of developments in Egypt in the area of human rights and democracy, referring to the need to "consolidate achievements made so far and to encourage further bold steps towards political reform". Similarly the EU delegation’s review of the proposed ENPI assistance programme for 2011 did not lead to major changes [27].

61. Particularly at the level of the CSP and NIP, it would have been expected that the EEAS and Commission would propose more changes in the light of the uprising and the ENP review. This is notwithstanding the fact that the SCAF, while in power as a caretaker government in the 18 months after the uprising, limited the scope for developing a completely new assistance strategy with the Egyptian authorities.

LESS ATTENTION TO WOMEN’S AND MINORITIES’ RIGHTS

62. The ENP review emphasises the need for "deep democracy", highlighting the importance not only of elections but the independence of the judiciary, the accountability of the police and army, and the need to combat corruption. All of these are major issues in Egypt, the concept of "deep democracy" contrasting with the lip service paid to democracy by the authorities before the uprising.

63. On the other hand the review pays less attention to two aspects of "deep democracy" which are particularly important in Egypt and under threat after the uprising.

(a) The rights of minorities: sectarian violence has been increasing with Christians suffering the brunt of the violence. Investigations into the violence have been sluggish or non-existent [28].

(b) The rights of women: while this was an area where some advances were made over the last decade of the Mubarak regime, this progress is at risk since the uprising. Following the uprising the new parliament called for the abolition of several institutions supporting women’s rights. It also demanded a reduction in the age of marriage, the decriminalising of female genital mutilation (FGM) and a review of the personal status law and child law in line with Sharia principles.

Apart from the human rights aspects, further regression in these areas also threatens to exacerbate current economic problems, particularly through their negative impact on tourism and foreign and domestic investor confidence.

64. The EEAS and Commission have so far taken only a few new funding initiatives in these two areas as a result of the review. They included new themes in the 2011 and 2012 EIDHR calls for proposals on promoting tolerance, pluralism and intercultural dialogue although funding only amounted to approximately 500000 euro for the 2011 budget. The main new funding initiative on women’s rights was a proposal to transfer the 4 million euro from the cancelled component of the ENPI human rights and democracy programme (see paragraph 29(c) to a project with UN Women to support women’s rights and livelihood.

NEW SUPPORT FOR CSOS HAS SO FAR HAD LITTLE IMPACT

65. As part of its stress on developing "deep democracy", the review underlines the important role of civil society. Accordingly it proposes two new initiatives in this area: the Civil Society Facility (CSF) instrument and the European Endowment for Democracy (EED) foundation.

66. One particular purpose of the EED is to support unregistered CSOs. This is potentially a useful measure to address the problems which CSOs faced in Egypt both before and after the uprising. The EED is also intended to allow more flexible procedures for funding CSOs than is currently the case. However, the EED is yet to start delivering assistance as it was only still in the process of being set up in mid 2012 and experiencing difficulties attracting funding.

67. The CSF was only starting to become operational at the time of the audit and Egypt’s allocation for 2011 was only 600000 euro. Additional funding for the EIDHR and the DCI-NSA thematic programme following the uprising has also been modest despite an increase in the number of applications from CSOs. There is a risk of overlap between the CSF, the EED, and the existing EIDHR and the DCI-NSA thematic programme.

68. While the Egyptian authorities have been reviewing the current restrictive law on NGOs, it remains unclear how far the new law foreseen for 2013 will bring significant liberalisation.

BUDGET SUPPORT: POTENTIAL PROGRESS BUT REVISED CONDITIONS NEED TO BE STRICTLY APPLIED

69. The ENP review also referred to planned changes in budget support. The actual changes were subsequently set out in the Commission communication "The future approach to EU budget support to third countries" [29]. Several elements of the revised approach are relevant to Egypt:

(a) as part of its PFM general condition for budget support, the Commission will pay particular attention to the fight against corruption;

(b) transparency and oversight of the budget will be a new eligibility criterion for budget support;

(c) closer coordination with other donors to increase leverage on political and policy reform dialogue and the impact of the funds.

70. However, the potential benefits of the new approach will not be realised unless the Commission takes a stricter approach than before the uprising to assessing whether the eligibility criteria have actually been met. Moreover, while the revised approach to budget support now makes a commitment to human rights and democracy a condition for GBS (now termed "good governance and development contracts"), this is not so clearly the case for SBS (now termed "sector reform contracts") which has been the form of budget support used in Egypt [30].

71. Ongoing SBS programmes in Egypt have not been modified following the uprising to take account of the revised approach. Work on implementing the IMF roadmap (see paragraph 44) did not start during the first half of 2012.

CONCLUSIONS AND RECOMMENDATIONS

CONCLUSIONS

72. Overall the EEAS and Commission have not been able to effectively manage EU support to improve governance in Egypt. This was partly due to the difficult conditions they have faced in Egypt but also to shortcomings in the way the EEAS and Commission have managed EU cooperation with Egypt. Before the uprising, the Commission attempted to address some key governance issues but was unable to find a way to obtain concrete results. After the uprising, the EEAS and Commission’s review of the ENP highlighted a number of areas where cooperation needed to be made more effective but little has been achieved so far.

73. Before the uprising the Commission included a large number of human rights and democracy issues in the action plan but did not have a clear strategy for prioritising and implementing them. While it also raised important issues in the framework of its dialogue, it did not ensure that discussions were followed up by specific actions. This was similarly the case for its annual "progress reports" on Egypt.

74. Before the uprising, the Commission made considerable efforts to set up and implement a sizeable ENPI programme on human rights but the programme has so far achieved few ouputs due, principally, to the lack of cooperation from the Egyptian authorities. Despite the lack of progress on human rights and democracy the Commission continued to provide large sums of money to the Egyptian government, notably through budget support. While the projects which the Commission funded directly through CSOs, were more successful, the money allocated to this area was very limited.

75. PFM and corruption issues were not given a high priority in the EU–Egypt action plan despite the significant challenges in these areas. No forum was established for dialogue on PFM within the framework of the association committee while the progress reports devoted only limited attention to these areas and until recently tended to take too optimistic a view of results being achieved in these areas.

76. Budget support has been the main Commission mechanism for implementing assistance to Egypt, and one of budget support’s main objectives is to improve the management of public finances. Progress towards achieving this objective has been very slow and some key shortcomings in PFM were not addressed. The Commission, the only donor to use budget support, has been too flexible in its assessments that the Egyptian authorities were satisfactorily implementing PFM reforms, a key condition for granting budget support.

77. The Commission did not use budget support to directly address corruption although this was common practice in other countries. The Commission has funded an important anti-corruption project but the project has been delayed and the Commission has not monitored it sufficiently. It has not yet achieved major results and its prospects for sustainability will depend on the follow up given by the Egyptian authorities to the public demand for action in tackling corruption.

78. After the uprising, the ENP review marked a significant effort by the EEAS and Commission to improve the effectiveness of support to ENP countries, including Egypt. However, they have not yet translated the review into significant changes in the support to Egypt, mainly because of the difficult conditions prevailing on the ground in Egypt. The emphasis on "deep democracy" is very relevant to Egypt but women’s rights and minority rights are key issues in Egypt which have not been strongly emphasised in the review and subsequent new assistance. Two new mechanisms have been established to support civil society but so far new assistance on the ground in Egypt has been limited.

79. The recent review of budget support identifies some key areas for improvement and specifies new stricter eligibility conditions. The impact of these new conditionalities will greatly depend on the rigour with which they are implemented.

RECOMMENDATIONS

80. In relation to human rights and democracy the EEAS and Commission should use the new context following the uprising to:

(a) identify a limited number of benchmarked human rights and democracy priorities, and develop an intensive dialogue on them with the Egyptian authorities;

(b) review the budget for the EIDHR and DCI-NSA thematic programme in line with the ENP review’s commitment to "deep democracy" and reallocate resources from ENPI assistance to these instruments in cases where the Egyptian authorities do not sufficiently cooperate in ENPI governance programmes;

(c) avoid overlap and dispersion of funding between the different instruments used in this area (EIDHR, DCI-NSA, CSF, EED);

(d) accelerate support to CSOs, notably at the calls for proposals stage, and make it more flexible and responsive to their organisational capacity;

(e) apply conditionality rigourously in relation to human rights and "deep democracy".

81. In relation to PFM and the fight against corruption the EEAS and Commission should accelerate the progress made in this area by:

(a) placing more emphasis on these issues in the new action plan, particularly in relation to guaranteeing budgetary transparency and fully independent external auditing;

(b) establishing an association agreement subcommittee specifically devoted to PFM and the fight against corruption;

(c) supporting the Egyptian authorities in the implementation of the IMF roadmap and agree on clear milestones for its implementation.

82. Specifically in relation to strengthening the management of budget support, the EEAS and Commission should carry out a review on the basis of the revised EU approach to budget support of the appropriateness of providing budget support to Egypt. Eligibility criteria such as respect for human rights, transparency and oversight of the budget and tackling seriously the issue of corruption should be strictly applied.

This report was adopted by Chamber III, headed by Mr Karel PINXTEN, Member of the Court of Auditors, in Luxembourg at its meeting of 14 May 2013.

For the Court of Auditors

+++++ TIFF +++++

Vítor Manuel da Silva Caldeira

President

[1] Article 21(1) of the Treaty on European Union states that: "The Union’s action on the international scene shall be guided by the principles which have inspired its own creation, development and enlargement, and which it seeks to advance in the wider world: democracy, the rule of law, the universality and indivisibility of human rights and fundamental freedoms, respect for human dignity, the principles of equality and solidarity, and respect for the principles of the United Nations Charter and international law. The Union shall seek to develop relations and build partnerships with third countries, and international, regional or global organisations which share the principles referred to".

[2] The other ENP beneficiary neighbours are: Algeria, Armenia, Azerbaijan, Belarus, Georgia, Israel, Jordan, Lebanon, Libya, Moldova, Morocco, occupied Palestinian territories, Syria, Tunisia and Ukraine.

[3] 1. Enhanced political dialogue, economic and social development and reform; 2. Trade-related issues, market and regulatory reform; 3. Transport, energy and environment; 4. Migration, social integration, justice and security; 5. Science and technology, research and development, information society and audiovisual cooperation; 6. People-to-people contacts.

[4] Regulation (EC) No 1638/2006 of the European Parliament and of the Council of 24 October 2006 laying down general provisions establishing a European Neighbourhood and Partnership Instrument (OJ L 310, 9.11.2006, p. 1).

[5] Council Regulation (EC) No 2698/2000 of 27 November 2000 amending Regulation (EC) No 1488/96 on financial and technical measures to accompany (MEDA) the reform of economic and social structures in the framework of the Euro-Mediterranean partnership (OJ L 311, 12.12.2000, p. 1).

[6] The Commission’s budget support can take two forms: general budget support (GBS) or sector budget support (SBS). GBS focuses more on supporting national development plans while SBS focuses on sector strategies. In accordance with its general approach to providing budget support in lower middle income countries, the Commission has used exclusively SBS in Egypt.

[7] The audit did not include EU support provided through the previous "MEDA" programme (see paragraph 15).

[8] The audit examined only the PFM and anti-corruption aspects of these programmes.

[9] COM(2005) 72 final of 2 March 2005.

[10] (i) enhance political dialogue and cooperation on shared values; (ii) enhance the effectiveness of institutions entrusted with strengthening democracy; (iii) promote the protection of human rights in all its aspects.

[11] Funding for the 2002–06 CSP came from the MEDA instrument (support in the field of democratisation, human rights and civil society programme and children at risk programme).

[12] National Council for Childhood and Motherhood (NCCM), National Council for Women (NCW).

[13] Some of the CSOs which the audit team met with during its work in Egypt expressed particular frustration at the limited EU funding channelled to CSOs for human rights and democracy support compared to the amounts allocated to the Egyptian authorities.

[14] The 2010 NSA thematic programme allocation was 970000 euro. Forty-eight applications were received and three grant contracts awarded.

[15] For example, the size of the grants to be awarded or the required level of co-financing.

[16] In order to comply with Law 84/2002, NGOs must obtain approval of each project funded from foreign sources before carrying out the activities.

[17] Law 84/2002.

[18] From 2011, the progress report is a joint staff working document between the Commission and the EEAS, and is under the responsibility of the latter.

[19] This report has not been made publically available by the Egyptian authorities.

[20] The Commission organised a regional seminar covering several north African countries using SIGMA (support in governance and management).

[21] A "Support to public administration reform" project (9 million euro), for which the financing agreement was signed in December 2011, foresaw the contracting of TA contract for PFM reform.

[22] Egypt was ranked 77th in the Transparency International Corruption Perception Index in 2004, and 112th in 2011 (183 countries surveyed). The World Bank’s worldwide governance indicators (WGIs) show that the control of corruption in Egypt has worsened over the period from 2001 to 2011.

[23] COM(2011) 303 final of 25 May 2011.

[24] These potential benefits offered by the EU are sometimes described as the three "M"s: money, markets and mobility.

[25] Council Decision 2011/424/CFSP of 18 July 2011 appointing a European Union special representative for the southern Mediterranean region (OJ L 188, 19.7.2011, p. 24).

[26] "A strong neighbourhood policy", COM(2007) 774 final of 5 December 2007 (p. 2).

[27] Two projects, one on family planning (20 million euro) and one on demining (10 million euro) were cancelled because they were not considered high priority. They were replaced by one on support to agricultural SMEs (22 million euro) and the doubling of funding for a project to improve slums in Cairo.

[28] "Egypt: investigate violence against Coptic Christians", Human Rights Watch, 10.10.2011 (http://www.hrw.org/news/2011/10/10/egypt-investigate-violence- against-copticchristians).

[29] COM(2011) 638 final of 13 October 2011.

[30] The communication refers to the reduction or suspension of GBS as a response to a "significant" deteriorating trend in a country’s commitment to human rights and democracy. However, in such cases funding may be transferred to SBS programmes. In the case of SBS political governance issues are to be weighed against the needs of service delivery. Thus SBS programmes are only to be suspended as part of the suspension of all assistance programmes following a "severe" deterioration in political governance.

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ANNEX I

ENPI PROGRAMMED ALLOCATIONS FOR EGYPT 2007–13

Source: Egypt national indicative programmes 2007–10 and 2011–13.

(million euro) |

| NIP 2007–10 | NIP 2011–13 |

Priority 1 — Supporting reforms in the area of democracy, human rights and justice | 40 | 50 |

Support for political development, decentralisation and promotion of good governance | 13 | 5 |

Promotion and protection of human rights | 17 | 15 |

Support for the modernisation of the administration of justice | 10 | 10 |

Upgrading of regulatory, institutional and legislative environment | 0 | 20 |

Priority 2 — Developing the competitiveness and productivity of the economy | 220 | 189 |

Support for the implementation of the action plan programme (SAAP) | 220 | |

—Trade facilitation and customs reform | | 20 |

—Economic legislation and the business environment | | |

—Agriculture and sanitary and phytosanitary system | | |

—Transport, energy science and technology | | 169 |

—Modernisation of the statistical system | | |

Priority 3 — Ensuring the sustainability of development | 298 | 210 |

Support for education reform | 120 | 105 |

Support for public health reform | 120 | 0 |

Interest rate subsidies (transport, energy, environment) | 58 | 0 |

Water and waste water services | 0 | 50 |

Support to rural development | | |

Local community development | 0 | 35 |

Support to agricultural SMEs | | |

Solid waste management | | 20 |

TOTAL NIP | 558 | 449 |

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ANNEX II

OVERVIEW OF AUDITED PROGRAMMES AND PROJECTS

HUMAN RIGHTS AND DEMOCRACY

ENPI programme on the promotion and protection of human rights and civil society in Egypt (17 million euro) |

Component title | Contracted amount (euro) | Paid amount (euro) |

"Family and child rights" programme | 2000000 | 821736 |

Support NCW Ombudsman Office in promoting women’s rights and increase its efficiency | 1200000 | 578666 |

Support NCHR Ombudsman Office to enhance a culture of Human Rights through its structure | 1000000 | 470224 |

Promotion of environmental rights through civil society organisations — Percso | 500000 | 282654 |

Technical assistance to the "Protection of human rights and civil society" and "Support to political development and good governance" programmes | 1161700 | 531915 |

Ministry of International Cooperation. Start-up programme — estimate for the Programme Management Unit (PMU) "Promotion and protection of human rights and civil society in Egypt" and "Support to political development and good governance" programmes | 128035 | 76821 |

"Abandonment of FGM and empowerment of families" joint programme | 3000000 | 1006320 |

Subtotal ENPI Programme | 8989735 | 3768336 |

EIDHR |

Title | Contracted amount (euro) | Paid amount (euro) |

Supporting women leadership and participation in elections "Elections supportive to women’s engagement in public life" | 134071 | 134071 |

Combating impunity and stopping torture in Egypt (a multi-level integrated approach) | 135457 | 75986 |

Socio-economic rights advocacy empowerment programme for marginalised producers network | 56123 | 28649 |

Enforcing economic and social rights through transition to adult life disabled children and young people in Minia governorate | 72780 | 72136 |

The Egyptian platform for non-partisan parliamentarian and presidential electoral observation | 300000 | 269149 |

Legislative and judicial obstacles to economic and social rights | 111645 | 106051 |

Protect the at-risk children through giving them access to their rights | 111280 | 53002 |

Mechanisms for legal protection of oppressed women | 173578 | 156220 |

Speak up Egypt! Women’s voices | 235046 | 87884 |

Get it right! Enhancing knowledge of legal professionals on public law and fundamental rights | 246239 | 95920 |

Promoting intercultural dialogue: Building civic values and capacity for peaceful coexistence and cooperation | 213840 | 49045 |

Subtotal EIDHR | 1790059 | 1128113 |

DCI-NSA |

Title | Contracted amount (euro) | Paid amount (euro) |

Water and sanitation for the poor in upper Egypt | 257000 | 167107 |

Support services for the reintegration of street children and youth into society | 350000 | 87442 |

Empowering street children to claim their rights as citizens | 281237 | 85918 |

Civic engagement through social networking | Originally planned amount: 272787 | Cancelled |

Subtotal DCI-NSA | 1161024 | 340647 |

IfS |

Title | Contracted amount (euro) | Paid amount (euro) |

Support to democratisation in Egypt | 1654235 | 846171 |

Support activities to electoral processes in Egypt | 1203431 | 962745 |

Subtotal IfS | 2857666 | 1808916 |

PUBLIC FINANCE MANAGEMENT AND FIGHTS AGAINST CORRUPTION

Grand total:

25 projects for 17,3 million euro contracted.

3 SBS programmes for 304,8 million euro contracted.

Source: Common Relex Information System (CRIS) at 30.9.2012.

ENPI — sector budget support [1] | |

Title | Allocated amount (euro) | Contracted amount (euro) | Paid amount (euro) |

Transport sector policy support programme (TSPSP) | 80000000 | 78947955 | 36543674 |

Education sector policy support programme (ESPSP) | 120000000 | 118178898 | 75549034 |

Education sector policy support programme (ESPSP) — additional commitment | 20000000 |

Health sector policy support programme II (HSPSP II) | 110000000 | 107700000 | 20700000 |

Subtotal ENPI–SBS 3 SBS programmes (plus one additional commitment) | 330000000 | 304826853 | 132792708 |

ENPI programme on the support for political development, decentralisation and promotion of good governance (3 million euro allocated) |

Supporting measures to combat corruption and money laundering, and to foster asset recovery in Egypt one project | 2548657 | 487528 |

[1] The auditors examined only the aspects of the SBS programmes relating to PFM and the fight against corruption at country or sector level.

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