Special Report No 5/2001 on counterpart funds from structural adjustment support earmarked for budget aid (seventh and eighth EDFs), together with the Commission's replies
Date: 2001-06-27
Institutions: European Court of Auditors
Subjects: ACP countries, EU aid, European Court of Auditors, European Development Fund

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I

(Information)

COURT OF AUDITORS

on counterpart funds from structural adjustment support earmarked for budget aid (seventh and
eighth EDFs), together with the Commission’s replies

SPECIAL REPORT No 5/2001

(pursuant to Article 248(4), second subparagraph, EC)

(2001/C 257/01)

CONTENTS

Paragraph

Page

SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Counterpart funds from structural adjustment support

. . . . . . . . . . . . . . . . . . . . . . . . . . . .

The Court audit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PROGRAMME DESIGN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Scope of expenditure targeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Choice of target expenditure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

CONTROLLING PROGRAMME EXECUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Support timetable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Controls on the constitution of counterpart funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Use of technical assistance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Auditing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The Commission’s administrative organisation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

THE CHALLENGES OF BUDGET AID . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Public finance management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Volume of expenditure in social sectors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Impact of expenditure on social sectors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Redirecting the monitoring and control of budget support . . . . . . . . . . . . . . . . . . . . . . . . . .

CONCLUSIONS AND RECOMMENDATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

General appraisal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Recommendations on the organisation of monitoring . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Recommendations on coordination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1-8

1-5

6-8

9-16

9-11

12-16

17-39

17-20

21

22-25

26-34

35-39

40-56

40-44

45-46

47-50

51-56

57-68

57-61

62-64

65-68

ANNEX I — Amounts allocated and disbursed under the seventh and eight EDFs . . . . . . . . . . . . . . . . . . . . . .

ANNEX II — Main guideline documents issued by the Commission and the Council

. . . . . . . . . . . . . . . . . . .

ANNEX III — Programmes examined . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

ANNEX IV — Previous observations by the Court . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The Commission’s replies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3

4

4

5

5

5

6

7

7

8

8

9

12

13

13

14

14

15

16

16

17

17

19

20

21

22

28

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ABBREVIATIONS USED

African, Caribbean and Pacific States signatory to the Lomé Convention

European Development Fund

Enhanced structural adjustment facility

CFA franc

Heavily indebted poor countries

International Monetary Fund

Poverty-reduction and growth facility

Poverty-reduction strategy paper

Common Service for External Relations

System for the stabilisation of export earnings, provided for by the Lomé Convention

System of aid for mining products

Table of government financial transactions

ACP

EDF

ESAF

FCFA

HIPC

IMF

PRGF

PRSP

SCR

Stabex

Sysmin

TOFE

WAEMU

West African economic and monetary union

References used

COM(2000) 58 final

Communication from the Commission to the Council and to the European Parliament of 4 Febru-
ary 2000 on Community support for economic reform programmes and structural adjustment —
Review and prospects

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SUMMARY

I. The Court examined the Commission’s monitoring of the use of the counterpart funds from EDF support
for structural adjustment in ACP States, but did not examine the structural adjustment programmes per se.
The audit mainly considered 23 Financing Agreements concluded with eight ACP States between 1994 and
1999. Most of the support took the form of direct aid to beneficiary countries’ budgets and was subject to the
national implementing and control procedures applicable to public expenditure in the ACP States, not the EDF
procedures.

II. The observations concerning the Commission’s management are about the extent of budget expenditure
targeting, the provision of funds, the use of technical assistance and auditing and the administrative organisa-
tion of the Commission departments. Some of the weaknesses that were noted in these different areas confirm
the importance for the Commission of monitoring more closely the quality of public finance management in
beneficiary countries, the volume and regularity of the social sector expenditure and the refocusing of pro-
grammes, in coordination with all the parties concerned, in order to achieve effective poverty reduction in the
beneficiary countries.

III. Control of the expenditure targeted by EDF support was affected by the Commission’s wishing to support
balances of payments and priority sectors, and social sectors in particular, at one and the same time by re-
financing expenditure. The controls were not always effective, because the data on the actual implementation
of budgets were, in some cases, non-existent or inaccurate. Technical assistance was underused. Monitoring
the quality and regularity of expenditure is the key to improving social services, but it was slow. From 1998
onwards the Commission’s programme audit organisation improved. The irregularities that were uncovered
did not result in funds being repaid to the EDF, but in several cases further aid was suspended pending cor-
rective action.

IV. Given the weaknesses in the national implementation and control procedures for public expenditure, it is
unrealistic to think that in the priority sectors the beneficiary States’ expenditure will always be effected regu-
larly and will have a real impact on the level and quality of social services. The reforms that have been under-
taken by these countries in the area of public finance management are recent and will only be fully effective in
the longer term. The reality of this was confirmed by the audits that have been undertaken by the Commis-
sion from 1998 onwards. The budgetary authority must be aware of the inherent risks of the approach that
has been adopted, must insist that the risks be evaluated through audits of public expenditure and should
endeavour to reduce the extent of them gradually by encouraging effective implementation of reforms in the
ACP States and, in particular, by means of concerted action by all the donors together.

In order to improve control over the implementation of support and ensure that it develops in line with

V.
the new guidelines from the budgetary authority, the Commission should:

(a) base its programmes on a strategy and a plan for the reform of public finance management and on inten-

sive coordination between all the parties concerned;

(b) draw up clear guidelines so that its departments are better able to assess progress in the management of
public finance in each of the countries concerned and to carry out a qualitative appraisal of the expendi-
ture, otherwise there is a risk that programme objectives might not be achieved;

(c)

lay down procedures for monitoring and control of each programme, before the Financing Agreements
are concluded;

(d) effect a better distribution between its own departments of responsibility for monitoring general macro-
economic and institutional support, on the one hand, and, on the other, responsibility for appraising the
operation of the social sectors;

(e)

in coordination with the IMF, improve the predictability of annual budget support, irrespective of the
source of the funding;

(f) within the framework of multilateral approaches integrate its sectoral support into the budgets of the ben-

eficiary countries wherever possible.

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INTRODUCTION

Counterpart funds from structural adjustment support

1. At the beginning of the 1980s many ACP States had substan-
tial balance of payments and budget deficits, which they financed
by recourse to external debts on a scale that was often excessive
compared with their growth and revenue prospects. In order to
counteract these difficulties the countries in question, under the
aegis of the Bretton Woods institutions (1), embarked on struc-
tural adjustment programmes consisting of a set of macroeco-
nomic measures that aimed to restore economic equilibrium and
reduce their financial deficits, both domestic (budget) and external
(balance of payments). The European Community joined this pro-
cess, with the Fourth Lomé Convention (2), Articles 243 to 250
of which introduced a structural adjustment support facility. In
consequence the Commission had, by the end of 2000, disbursed
2 320 million euro to 42 ACP States by way of this new Instru-
ment, in order to support the reforms agreed between the ben-
eficiary countries and the Bretton Woods institutions. These pay-
ments represented 22 % of the total payments from the seventh
and eighth EDFs (see Annex I).

2. The EDF contributions are paid, in euro, into an account
opened by the beneficiary government, usually with its central
bank. The counterpart of these contributions is a deposit for the
equivalent amount in national currency in a bank account, with
two signatories (3), with the same bank. The national currency
amounts improve the government’s financial position with the
issuing institution by that amount and can be used to finance the
beneficiary country’s public-sector spending (see Table 1). The
funds provided by means of EDF structural adjustment support
have taken the form of:

(a) balance-of-payments support, contributing to the economic
and financial equilibrium of each country within the frame-
work coordinated by the IMF;

(b) support for the budgets of the beneficiary countries, giving
priority to the social sectors. In actual fact, structural adjust-
ment programmes usually entail a rescaling of public expen-
diture, which may be reflected in a reduction in social services
for the poorest segments of the population.

Mechanism for mobilising EDF structural adjustment support

Table 1

BENEFICIARY COUNTRY'S CENTRAL BANK

EDF treasury
(Commission)

Foreign
exchange
reserves

Treasury accounts

Counterpart
(joint-signature
 account)

Treasury
current account

Fiscal revenue

Public-sector
borrowing

Other national
income

External trade
payments

External debt
servicing

Budget
implementation
(national
procedures)

International Monetary Fund (IMF) and World Bank.

(1)
(2) The Fourth Lomé Convention was signed on 15 December 1989 with
a duration of 10 years (from March 1990 to March 2000), together
with a five-year Financial Protocol corresponding to the seventh EDF;
it was revised on 4 November 1995, together with a second five-year
Financial Protocol corresponding to the eighth EDF.

(3)

Joint signatures of the Commission Delegate and the national autho-
rising officer.

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3. The EDF aid arrangements are subject to a joint management
system put in place under the Lomé Conventions. Each structural
adjustment support programme is the subject of a financing
agreement between the Commission and the national authorising
officer for the ACP State in question. In most of the beneficiary
countries the financing agreements are supplemented by proto-
cols of agreement which lay down conditions and procedures for
using the counterpart funds.

support to ACP States. The appraisal was mainly based on exami-
nation of a sample of 23 Financing Agreements concluded with
eight beneficiary countries between 1994 and 1999 for an amount
which, at the end of 2000, represented 23 % of the structural
adjustment support from the seventh and eighth EDFs (see
Annex III). For these programmes, the audits at Commission head-
quarters were supplemented by site visits to the Delegations and
to the national authorities responsible for the use of the funds.

4. The Commission neither authorises nor accounts for the use
of the counterpart funds and they do not appear in its accounts.
However, by insisting that the funds are deposited in a joint-
signature account and that the financing agreements and proto-
cols specify the conditions under which they may be used, the
Commission has tried to ensure that the counterpart funds con-
tribute to the development and good governance objectives pur-
sued by the European Union.

7. This report shows that many of the observations that were
published on the subject of counterpart funds between 1990 and
1996 in various annual reports and special reports of the Court
(see Annex IV) are still relevant, despite the advances that have
been made by the Commission in organising the follow-up to
them.

5. Since the beginning of the seventh EDF the Commission has
actively participated in consultations between fund providers and
has adapted its support to the changing constraints in ACP States.
In so doing it has switched from import aid to more general bud-
get aid, placing the emphasis on the results of administrative
reforms and on evaluation of the actual poverty situation. The
terms ‘import programme’ and ‘counterpart funds’ ought to have
been abandoned, since they have helped to sustain a certain
amount of confusion about the reality of budget aid operations.
In 1999, the main fund providers decided that, in return for aid,
beneficiary countries should draw up and introduce poverty-
reduction strategy papers (PRSP). This applies to IMF and World
Bank loans, debt relief under the heavily indebted poor countries
(HIPC) initiative, and European Community budget aid subsidies.
When it replaced the enhanced structural adjustment facility
(ESAF) with the poverty-reduction and growth facility (PRGF), the
IMF made poverty reduction an objective and a criterion for
evaluating the success of its programmes. The main guidelines
presented by the Commission and the Council over this period
are shown in Annex II.

8. This report is concerned only with the counterpart funds gen-
erated by EDF structural adjustment support. Other EDF financial
instruments may also work towards the same objectives and take
the form of budget aid (2). The Stabex (3) and Sysmin Instruments,
in particular, gave rise under the seventh and eighth EDFs to pay-
ments that amounted to 2 043 million euro as of the end of
2000. Food aid (4) and the dues paid through the Community
budget under fisheries agreements are also sources of funds for
the budgets of some ACP States.

PROGRAMME DESIGN

Scope of expenditure targeting

The Court audit

6. The audit was a follow-up to the European Parliament dis-
charge resolution for the financial year 1998 (1), with the objec-
tive of assessing the Commission’s supervision, not of the struc-
tural adjustment programmes as such, but of the use of the
counterpart funds resulting from EDF structural adjustment

9. The aim of targeting was to encourage satisfactory execution
of the public expenditure that was considered to be a priority area
for the ACP States, the most important being budget expenditure
for social sectors (5). In some cases it was also possible for the dis-
bursement conditions contained in the Financing Agreements to
make a contribution to the satisfactory execution of public expen-
diture. In Benin, for all the programmes examined, the conditions
in question referred to the real level of budget implementation
rather than budget allocation forecasts. On the other hand, in two
of the countries reviewed (Senegal and Zambia) the Financing
Agreements did not contain any quantified objectives for budget
implementation.

(1) Resolution of the European Parliament containing its comments
accompanying the European Parliament Decision giving discharge to
the Commission in respect of the sixth, seventh and eighth EDFs for
the financial year 1998 (OJ L 234, 16.9.2000). In recital D of the
Resolution Parliament said that the use of counterpart funds suffered
at times from inadequate management, poor supervision and insuf-
ficient evaluation.

(2) Article 226(c) of the Fourth Lomé Convention.
(3) See COM(2000) 58 final, section 2.1.1.
(4) See COM(2000) 58 final, section 2.1.4.1.
(5) See (COM)2000 58 final, section 2.1.3.2.

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In half the countries examined the Financing Agreements
10.
and Protocols of Agreement concluded between the national
authorising officer and the Commission Delegate detailed the
support targets by means of a list of specific expenditure items
selected from the social sector expenditure. In practice this target-
ing of specific expenditure items allowed the Commission to
check how far the expenditure had been effected in the priority
sectors and to see how expenditure was handled by the benefi-
ciary country, but it also enabled it to confine its examination of
supporting documents and the execution of selected expenditure
items to an amount equivalent to the Community financing.

11.
In all the countries where the EDF provides structural adjust-
ment support, the IMF exercises surveillance over public finance
in general. In 1996 the World Bank (1) observed that, given the
fungibility of all government funds, it was more important for the
Bank, in the context of structural adjustment loans, to look at the
foreign exchange reserves and budget management as a whole,
rather than concerning itself with the detailed application of its
aid. At the time of the seventh EDF, fund providers in general
were still only moderately interested in the qualitative aspects of
public expenditure, which was why, starting with the audits of
counterpart funds undertaken from 1995 onwards, the Commis-
sion gradually began to seek assurance as to the regularity and
relevance of public expenditure by beneficiary countries in the
sectors targeted by counterpart funds. However, it often confined
itself to identifying expenditure to the amount of the Community
finance, despite the fungibility of the budget support provided. In
2000, the Commission recognised the limited effectiveness of tar-
geting, as well as its perverse effects, in certain cases, on the pro-
cedures and deadlines for budget implementation (2), but it has
still to define its approach to controlling expenditure, by seeking
joint action with other donors.

Choice of target expenditure

12. The choice of target expenditure was not just dictated by the
desire to achieve a particular impact on social sectors: it is pos-
sible to achieve an impact by means other than disbursement
conditions in financing agreements. In some cases it was the will
to provide a rapid input of resources to the budget that prevailed,
whilst in other cases the priority was to make it easier subse-
quently to provide administrative and accounting justification for
the use of funds (see Box 1).

Box 1

Expenditure targeted

In Malawi, the programmes financed 98 % of the Ministry of Health’s
1.
administrative expenditure (excluding salaries). Without this support the level
of expenditure would have remained low.

2.
In Benin, the effect of refinancing past expenditure, in the health sector
especially, was to encourage the authorities to effect expenditure, at the same
time providing a rapid input of additional resources to the national budget.

3.
In Burkina Faso, the ease with which expenditure could be identified was
one of the criteria that determined the choice of target, especially in the case of
centrally administered expenditure, whilst in the health sector the budget head-
ings that were targeted were not always directly linked to the priority accorded
to the decentralised structures that were providing health services for the popula-
tion.

In Senegal, it was mainly the expenditure with a strong chance of being
4.
executed regularly that was selected as targets in the health sector. On the other
hand, the support for decentralised expenditure proved difficult to monitor.

13.
In many countries the IMF considers that the question of
domestic arrears is crucial, because of its repercussions on the
country’s financial situation, as well as that of the private sector,
and the banking sector in particular. Funding the arrears helps to
redress the financial situation. It also makes it possible to free up
resources quickly and can be equated with general budget sup-
port. There is, however, a risk that by taking over the residual
results of past bad management or unauthorised expenditure,
donors will take the responsibility away from the authorities and
endorse the practices that gave rise to the arrears. Moreover, pro-
viding the finance to clear arrears constitutes action to improve
public finance only if it is part of effective reforms that will pre-
vent their resurgence. Whereas measures were being adopted in
Benin, this condition was not satisfied when the Commission
took over the responsibility for arrears in Tanzania and Zambia.

In Ghana, Zambia and Côte d’Ivoire, treasury bonds, or sim-
14.
ply the financial costs which they generate, were redeemed (3).
This type of use, too, can be equated with rapid, general budget
assistance, but does not have any direct impact on sectoral reforms
and protecting the operation of social sectors.

15. The Lomé Convention provides that the counterpart funds
may also be used as part of EDF project financing. Since it is dif-
ficult to reconcile these provisions with budgetary discipline when
projects are implemented out of public funds but are not entered
in the national budget, the Commission has gradually stopped tar-
geting extra-budgetary projects. Until 1998, however, such alloca-
countries
tions were being

adopted in three of

the

(1) World Bank Operation Memorandum ‘Simplifying disbursements
under structural and sectoral adjustment loans’, 8 February 1996.

(2) See COM(2000) 58 final, sections 2.1.3.2 and 2.3.4.3.

(3) See Box 5, paragraph 1.

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reviewed (Ghana, Malawi and Tanzania). In Tanzania, there was
no provision for these allocations in the Financing Agreement,
but they were justified by the risks inherent in the poor quality of
the public expenditure management.

16. The Commission communication of February 2000 gives
very few figures concerning the nature of the target expendi-
ture (1). In particular, there is no mention of the fact that, accord-
ing to the Commission’s estimates, taking over the arrears absorbed
about 7 % of the support from the seventh EDF.

CONTROLLING PROGRAMME EXECUTION

Support timetable

17. The Commission divided the structural adjustment support
among the eligible countries for two-year periods. As the Com-
mission did not think it possible to obtain reliable budget deficit
statistics for the various countries (2), the link between these

allocations and real financial needs is tenuous and is only one of
the criteria for allocating resources. In the case of Senegal in 1998,
whereas the Commission had provided the EDF Committee with
justification for the Community support on the grounds of imme-
diate financial need, at the end of 2000, FCFA 7 000 Mio (10,7
million euro) remained unutilised in the counterpart funds account
and the authorities appeared to be in no hurry to use it (3).

18. Table 2 shows that the calendar followed by the Commission
in making support available to the beneficiary countries differed
markedly from the intentions expressed in the financing propos-
als submitted to the EDF Committee. The time differences can be
explained by the inherent delays of the EDF decisional procedures
and the time required for ACP States to meet the disbursement
conditions imposed by the Financing Agreements, with a total
suspension of support if those conditions were not met. Under
the prevailing system beneficiary countries could not be certain
of financial support until just before it was actually disbursed by
the Commission staff, often at the end of the financial year and
after the countries in question had drawn up the budget for the
financial year for which the support was programmed.

Differences between actual and expected payments for budget years 1995 to 2000 for the 23 programmes examined

Table 2

50

40

30

20

10

0

10

20

30

40

o
r
u
e
n
o
i
l
l
i

M

Payments above forecast

1995

1996

1997

1998

1999

2000

Payments below forecast

Benin

Burkina Faso

Ghana

Malawi

Mozambique

Country

Senegal

Tanzania

Zambia

Source: Commission decisions and accounts.

(1) COM(2000) 58 final, section 2.1.3.2.
(2)

Information note to the EDF Committee dated 22 June 2000.

(3) Similarly, at the end of 2000, 29 million euro paid under Stabex,
mainly from 1996 to 1998, remained unused in bank accounts in
Europe.

 
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19. After the foreign exchange had actually been disbursed by
the Commission, in three of the eight countries examined (Malawi,
Mozambique and Zambia), there were delays in the creation of
the counterpart funds by the central bank. After that the transfer
of funds to the general treasury accounts took place at varying
rates. Due to these variations in the timetabling, the already tenu-
ous relationship between the support granted and the treasury
needs for particular budget years was stretched still further. This
situation does not make it any easier for beneficiary countries to
meet their foreign and domestic payment deadlines, nor does it
help them avoid a build-up of payment arrears (see Box 2).

Controls on the constitution of counterpart funds

21.
In several of the Commission Delegations checks on bank
statements and the conversion rates applied were insufficient.
None of the 23 Financing Agreements examined contained detailed
information about determining the exchange rates to be used to
calculate the national currency equivalents of payments made in
European currency by the Commission. The Protocols of Agree-
ment subsequently dealt with this point, but did not apply uni-
form rules (see Box 3).

Box 2

Box 3

Shifts in the support timetable

Controls on the constitution of counterpart funds

1.
In Malawi, a payment of 16 million euro scheduled for July 2000 was
disbursed by the Commission at the end of December 2000, after several
reminders from the Delegation to Commission headquarters. For its part, the
central bank was late in paying funds into the counterpart funds account for
the previous payment. The World Bank has estimated that the financial cost to
Malawi of payment delays by all fund providers is around 11 million US dol-
lars per year (1).

2.
In Zambia, the counterpart funds were paid into the joint-signature
account six months after a payment of 20,6 million euro under the fourth
structural adjustment programme.

In Ghana, it was not possible to establish a correlation between the annual
3.
volume of counterpart funds released from the joint-signature account and the
amounts in foreign exchange decided by the Commission as support for the
budget years in question.

1.
In four countries (Malawi, Mozambique, Tanzania and Zambia), the cen-
tral banks used unfavourable rates, thereby reducing the amount transferred to
the exchequer.

2.
In Mozambique, the exchange rate applied by the central bank in order to
constitute the counterpart funds was 3 % below the most favourable rate. Fur-
thermore an additional 1 % was levied by way of handling charges. According
to the Court’s estimates, the margin thus obtained by the central bank was
four million euro.

3.
In Mozambique and Senegal, the Delegations did not have any bank state-
ments that could be used to check that the counterpart funds had been set up
correctly. In Mozambique, in addition, the counterpart funds were not set up
as a joint-signature account and the constitution of the counterpart funds cor-
responding to the 8 million euro paid under the first import programme (1992)
could not be confirmed (4).

20. There is no generally agreed practice among the IMF and the
beneficiary countries as regards the procedures and timetable for
incorporating Community financial support into the national
accounts. Depending on the country or period, the support is (or
is not) included in the calculation of the government’s net posi-
tion with its central bank. Similarly, it may be taken into account
before the budget deficit estimates are established or, conversely,
as a source of funding for the deficit. Such accounting procedures
and delays do not make it easier to incorporate the support in the
estimated budget revenue (2), nor do they facilitate compliance
with public accounting standards (3) and the coordination of
assistance, that the Commission wishes.

(1) Report ‘Administrative procedures for macroeconomic assistance to
Malawi’, table ‘Cost of delays in macroeconomic aid and inflows 1996
to 1998’.

(2) Note to the Member States concerning convertibility and direct bud-

get support, 3 February 1997.

(3) For example, the WAEMU guidelines for compiling the table of gov-

ernment financial transactions.

Use of technical assistance

22. Technical assistance is one of the three forms of structural
adjustment support provided for in Article 247 of the Fourth
Lomé Convention. Article 20(e) of the Internal Agreement for the
seventh and eighth EDFs defined its role only in relation to the
monitoring of import programmes. This was the Commission’s
main concern in 1990, but it should have been adapted for the
eighth EDF in 1995, in view of the emphasis placed on budget
support. The Commission’s operations manual, which was updated
in July 1998, states that technical assistance may be employed to
supervise and direct the operational side of programme imple-
mentation and to monitor budget implementation (programming,
execution, control), but it does not contain any details about the
timetabling or substance of these activities. The Financing Agree-
ments rarely provided more detail and left the definition of needs
and activities for the Protocols of Agreement concluded on the
spot and for the remits technical assistants.

(4) As regards the difficulties experienced in connection with the central
bank in Mozambique, see also paragraph 4.52 of Special Report
No 2/94 on the import programmes carried out under the sixth EDF
(OJ C 97, 6.4.1994).

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23. Table 3 gives an overview of the budgets allocated for techni-
cal assistance and their implementation for the programmes exam-
ined. These budgets were underutilised and often late in terms of
the timetable for releasing the counterpart funds, to such an extent
that only 31 % of the total finance provided had been subject to
payments as of the end of 2000. With the exception of Benin, it
was not possible to cite local conditions as the explanation for

the limited use of technical assistance and an objective reason for
dispensing with it. The cumbersome nature of the Commission’s
centralised procedures for recruiting technical assistance and, in
some cases, the reluctance of the national authorities, slowed
down the release of the resources earmarked for these essential
support functions.

Implementation of the technical assistance provided for in the financing agreements examined

Table 3

o
r
u
e
n
o
i
l
l
i

M

3,5

3,0

2,5

2,0

1,5

1,0

0,5

0,0

Technical
assistance
budget forecast

Contracts
accounted for

Payments
accounted for

Benin

Burkina Faso

Ghana

Malawi

Mozambique

Country

Senegal

Tanzania

Zambia

Source: Financing agreements and EDF accounts at 31 December 2000, according to the breakdown in Annex III.

24.
In the eight countries examined the technical assistance per-
sonnel following the progress of operations in the target sectors
were sometimes already working in place on other social-sector
programmes, or even in budgetary and financial areas. This indi-
rect monitoring did little for the transparency of the objectives
pursued or the work carried out, which focused more on quanti-
tative analysis of budgets than on the regularity and impact of the
expenditure. Some technical assistance did make it possible for
the Commission to monitor programme execution, but it was
only indirectly that it had any operational advantages for the ben-
eficiary administrations (Senegal). The division between expatri-
ate assistance and local assistance was not based on any genera-
lised policy. Amidst all this diversity some measures did have an
impact (Burkina Faso, Tanzania), but the cases where tasks were
badly defined and resources inappropriately mobilised were not
always resolved and, on balance, there were very marked varia-
tions in the use of technical assistance.

25.
In Benin, Ghana and Malawi, the finance for technical assis-
tance was taken from the counterpart funds up until 1999 (1),
especially as regards the audits and evaluations provided for in the
programmes. In such cases the activities are not recorded in the

(1) The Financing Agreements concluded in 1999 broke with this prac-
tice and provided for an audit and evaluation budget separate from
that for budget aid.

Commission’s management systems, which have no provision for
analytically monitoring the technical assistance employed. As
with EDF direct-financing, mission statements and contracts are
negotiated on the beneficiary country’s initiative. Commission
control over these activities is much weaker than for the contracts
concluded at central services level from other resources, especially
as regards the actual content of the works, the harmonisation of
methods and the time required to put them in place.

Auditing

26. The Financing Agreements make provision for financial
audits to be carried out at the instigation of the Commission or
the national authorities. Table 4 provides an overview, for the pro-
grammes under consideration, of the audits carried out and the
follow-up to them. In half the countries concerned the audits cov-
ered all the programmes. In Zambia there were no audits, but the
reasons for this exception were not clear. In only two countries
(Benin and Burkina Faso) were the audits annual audits that cov-
ered all the support for one budget year, rather than a number of
financial years receiving support from one, or even several, pro-
grammes. It was found that annual audits made a more timely
contribution to programme-monitoring. They intermesh with the
budgetary arrangements and reinforce the national public finance
control systems.

 
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Position at 31 December 2000 as regards audits of use of counterpart funds for the programmes examined

Table 4

Benin

Burkina Faso

Ghana

Malawi

Mozam-
bique

Senegal

Tanzania

Zambia

Yes
Yes
Yes
From 1999

Audit periodicity and coverage
Annual audits
Audit of all counterpart funds
Examine level of expenditure
Examine ’quality’ of expenditure
Follow-up of established irregularities
Specific corrective action
Signature of protocol of agreement
Agreement on total ineligible expendi-
ture (Mio EUR)
Reconstitution of counterpart funds
Repaid to EDF treasury
(1) Negotiations in progress.
(2) Financial audit by SCR in 2000.
(3) Audit performed end 2000 — Final report in preparation.
(4) In some cases the follow-up reports cover several years.

No
No
No

Yes
No

Yes
Yes
Yes
From 1999

No (4)
Yes
Yes
From 2000 (2)

Yes
Yes

3,7
Yes
No

Yes
Yes

10,2
Yes
No

No
(3)
Yes
(3)

(3)
(3)

(3)
(3)
(3)

No
No
Yes
No

No
No

No
No
No

None
None
None
None

None
None

None
None
None

No
No
Yes
From 2000

No
Yes
Yes
From 2000 (2)

Yes
Yes

1
Yes
No

(1)
(1)

(1)
(1)
(1)

Box 4

Results of audits financed by the EDF

1.
In Benin, the audit of health expenditure for 1998 revealed anticipations
of the service rendered, poor inventory control and shortcomings in connection
with tendering. In addition to verifying the reality of the arrears, the audit of
arrears that was performed in 2000 also considered the plan of action proposed
by the Government for preventing a recurrence of the situation.

2.
In Burkina Faso, the auditors noted a number of irregularities in 1998
then, in 1999, stated that the accounts did not give a true view of the level of
expenditure. In April 2000, an extended audit confirmed the weaknesses
affecting the accounting systems and procurement procedures, highlighted fresh
anomalies, questioned the administration and financial management of a
public-sector institution and evaluated the impact of the various anomalies
found in the financial years 1997 to 1999.

In Ghana, an extended financial audit of budget years 1996 to 1999 was
3.
carried out by SCR in February 2000. Apart from establishing the ineligibil-
ity of around 25 % of the expenditure, the final report in April 2000 gave
numerous accounts of the weaknesses of the operational side of public finance,
and of the control systems and tendering procedures as well.

4.
In Tanzania, an audit was carried out by SCR in 2000 in order to check
the 1999 support for the plan to clear internal indebtedness. Apart from the
absence of supporting documents for 4 % of payments, the report highlighted
the inefficiency of the internal control systems and the unreliability of the
accounts.

30.
In 1999 and 2000, SCR organised several financial audits in
countries (2) where independent audit of the use of counterpart
funds was felt to be a matter of priority. With a framework
financial
provided

specialising

service

by

in

a

Source: Commission files.

27. Even where the controls on which the audits focused were
similar, their terms of reference and the resources devoted to them
varied significantly from one country to another. The disparity of
the situations is not mirrored by any pragmatic policy of per-
forming audits according to a reasoned evaluation of the condi-
tions prevailing in each of the countries concerned. As in the case
of technical assistance, a general framework outlining the objec-
tives, defining the checks to be carried out and the scope of them
and describing the auditing strategy would have facilitated the
programming of resources by serving as a benchmark for all the
countries.

28. Until 1998 the audits financed by the programmes were
mainly concerned with the constitution of the counterpart funds,
the eligibility of expenditure and the level of budget implementa-
tion. In some cases, however, the auditors devoted most of their
work to understanding ill-defined expenditure systems, recon-
structing accounts and producing quantitative overviews, without
being able subsequently to examine the reliability of the accounts
or the execution and regularity of the transactions, so that the
reports proved to be inconclusive.

29. Following the irregularities established in Côte d’Ivoire in
1998 (1), the Commission had a better idea of the risks associated
with its approach. As of 1999, the financial audits in several
countries were reinforced with checks that focused more on the
nature of expenditure, the reliability of the accounts and the
soundness of the management and control systems (see Box 4).

(1)

Ineligible expenditure amounting to 27,4 million euro.

(2)

Including Ghana and Tanzania, see Table 4 and Box 4.

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C 257/11

audit, on the basis of carefully drafted terms of reference that
were capable of yielding consistent, quantified results that would
be comparable from one country to another, this initiative by SCR
illustrates the advantages of a coordinated approach. Table 5 gives
an overview of the main results of these audits. However, the

initiative did not cover all the countries. As regards the countries
reviewed in October 2000, there were no audits of this type in
Malawi, Mozambique or Zambia, countries where the risks of
public finance management are similar to those identified in other
countries.

Table 5

Results of audits organised by SCR in 1999 and 2000

Côte
d’Ivoire

Chad

Cameroon

Guinea

Mauritania Madagascar

Mali

Protocol of agreement signed
Agreement on ineligible expenditure
total (Mio EUR)
Yes
CF reconstituted
Repaid to EDF treasury
No
(1) Negotiations in progress at 31 December 2000.

Yes
27,4

Source: SCR files.

Yes
1,0

Yes
No

Yes
5,5

Yes
No

(1)
(1)

(1)
(1)

(1)
(1)

(1)
(1)

Yes
0

No
No

(1)
(1)

(1)
(1)

31. The extent of the problems revealed by the financial audits
from 1998 onwards persuaded the Commission to improve the
follow-up to their results. In 2000, in three of the countries
reviewed (Burkina Faso, Ghana and Tanzania), the implementa-
tion of programmes was suspended pending the signature of Pro-
tocols of Agreement on the treatment of the irregularities estab-
lished. In Malawi and Mozambique the audits were not organised
by Commission headquarters and were unsound, so that it was
not possible to follow them up. In Benin the Commission simply
took note of the Government’s undertaking that it would in the
future take steps to correct the weaknesses found during the
audits.

32. The Protocols of Agreement that followed the audits pro-
vided for the counterpart funds to be reconstituted by the benefi-
ciary country to the amount of the ineligible expenditure. In prin-
ciple this reconstitution entails for the Commission a right to
review the execution of new expenditure. The Protocols of Agree-
ment set out the measures which the governments agree to under-
take in order to reinforce their public finance management, using
part of the reconstituted counterpart funds for the purpose. These
arrangements are a significant advance in the Commission’s atten-
tion to tangible reform of the mechanisms for sound manage-
ment of budget execution in beneficiary countries.

33. The Protocols of Agreement that stem from the audits make
no provision for resources to be returned to the EDF. The recon-
stitution of counterpart funds is a transfer of funds between two
government accounts for the equivalent of the ineligible expen-
diture (see Table 6). The impact of this is greater where the joint-
signature account is omitted from the government’s net position.
Payments already made in support of the balance of payments,
and those for servicing external debt in particular, thus become
final. In Ghana a link was, however, established between the
implementation of corrective measures and the provision of new
foreign exchange aid by the Commission. In addition, there were
several cases where suspensions of payment in connection with

the audits led to the cancellation of the final instalments for pro-
grammes that had exceeded the completion deadlines (Côte d’Ivoire
and Ghana), or to cuts in potential new allocations of foreign cur-
rency (Cameroon, Côte d’Ivoire, Guinea and Tanzania).

Table 6

Mechanism for repaying ineligible expenditure

BENEFICIARY COUNTRY'S CENTRAL BANK

Repayment
(ineligible expenditure)

Treasury accounts

Counterpart
(joint-signature
account)

Treasury
current account

Agreement on amount
of ineligible expenditure

Ex post facto financial
audit

Budget
execution
(national
procedures)

34. The Commission has sometimes simply identified other eli-
gible transactions to the amount of the Community finance as a
way of correcting for ineligible expenditure that has been included
in the accounts (see Box 5). This tendency first became apparent
import programmes were being monitored
when the

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Official Journal of the European Communities

14.9.2001

and in the preliminary audit of budget expenditure in certain
countries, which turned into a ‘hunt’ for eligible invoices for
amounts equivalent to the Community finance.

Box 5

Substitution of qualifying expenditure for ineligible expenditure

1.
In Côte d’Ivoire, 18 000 million CFA francs (approximately 27,4 million
euro) was returned to the counterpart fund account in January 2000, follow-
ing audits in 1998 and 1999, bringing the total counterpart funds available
to 28 800 million CFA francs (1). The audits having shown that the practices
in question would have to be improved before the Commission could again pro-
vide budget support for the Ministry of Health (2), the funds were reallocated
in June 2000 to refinancing treasury bonds that had already been redeemed
(9 500 million CFA francs), to payment of arrears (5 000 million CFA francs),
to support for the electoral process (6 000 million CFA francs), to implementa-
tion of corrective measures (4 300 million CFA francs), and to priority public
health activities (3 000 million CFA francs). The Commission, in fact, gave
preference to the objective of releasing the counterpart funds quickly in order to
help the country meet foreign deadlines and relegated the social sector measures
to a lower level of priority.

2.
In Gabon, in order to allow programmes to continue in spite of the sever-
ity of the conclusions of the 1996 financial audit (irregularities, inadequate
documentation, poor accounting management) the Commission accepted the
principle of a new audit that sought to demonstrate that there had also been
other, regular expenditure equivalent to the amount of the Community contri-
bution. By doing this a new ‘hunt’ for invoices made it possible to turn a blind
eye to the financing of ineligible transactions.

The Commission’s administrative organisation

35. From 29 July 1989 to 18 June 2000, 40 internal notes on
structural adjustment support were issued, most of them reviews
or forecasts. Two precise sets of instructions on the procedures
for monitoring counterpart funds date back to 14 March 1991.
The instructions were not updated when the programme empha-
sis switched to budget aid and the quality of public finance man-
agement, so that they are still vague compared with the scope of
the questions to be dealt with. It would have helped the Delega-
tions to be consistent in their monitoring of different countries
and managers had they been able to consult detailed information
on the role of technical assistance, conditions for the release of
counterpart funds to the general exchequer accounts, the line to
be followed as regards arrears and the refinancing of past expen-
diture, respect for the annuality of the budget, and the nature and
scope of the checks to be made by the various parties concerned.
In most of the Financing Agreements this omission was remedied
by a reference to subsequent Protocols of Agreement (see para-
graph 10), which in many cases continued to be terse or irrel-
evant.

36. The Commission central services responsible for the design
and monitoring of support for structural adjustment programmes
were afflicted by the lack of organisation in their file manage-
existed
ment. Although a

and archives plan has

files

since 1999, the application of it and the structure of files are left
to the discretion of individual members of staff. This is not sound
administrative practice and is particularly damaging to the conti-
nuity of programme management. Owing to the heavy workload,
the amounts at stake, the small number of staff, and the high staff
turnover, these departments should be able to rely on an informa-
tion system that is rigorously maintained, complete and reliable.

37. The Delegations’ minutes vary in form and quality and the
only model document, which was drawn up in 1991, is limited in
scope. Under these circumstances the headquarters services have
not been able to monitor the situation as a whole, especially not
by means of summary management information on programme
implementation. In order to assess the results of seventh EDF sup-
port, the Commission had to call in a consultant to collect the
basic information on programme implementation which it lacked.

38. Monitoring and appraising the use of the counterpart funds,
interaction with aid from other fund providers and mastery of
macroeconomic and sectoral policies are difficult and complex
tasks which call for a variety of skills. Quality of public finance
management and sectoral policies using performance indicators
have widened and complicated the area to be monitored. The
respective duties of the headquarters departments and the Delega-
tions varied between countries and, at the level of individual
countries, between periods, according to the capabilities and incli-
nations of the departments responsible. These contrasts are attrib-
utable to the lack of detail in the instructions (see paragraph 35),
and also to the unstable ratio of resources to requirements. From
1999 onwards the Commission headquarters departments have
produced breakdowns of their duties, activities and resource allo-
cations (3). As of the end of 2000, however, the Commission, in
the context of its reform of external aid, had still not defined the
human resources and skills required at headquarters and in the
Delegations to monitor the use of budget aid, particularly as
regards the overall qualitative appraisal of public finance manage-
ment.

39.
It is important for the department specialising in macroeco-
nomic questions, which is currently responsible for structural
adjustment support programmes, to examine balance-of-payments
aid in consultation with the IMF, the Member States and forums
such as the Club of Paris, but taking into account as well the
evaluation of the individual circumstances of EDF support. It is,
however, inappropriate for this department to be involved in
assessing the operation of social sectors as well. Monitoring and
auditing the use of support in these sectors call for other skills,
which are already available in other Commission departments
(see paragraphs 30 and 50). Responsibilities for setting and moni-
toring the performance indicators in these sectors still have to be
defined as part of the establishment of the external aid depart-
ment (EuropeAid).

(1) Not including 7 200 million CFA francs for Stabex 1993, also avail-

able for use since the end of 1997.
(2) Protocol of Agreement dated June 2000.

(3)

‘Mission statements’ 2000 and 2001.

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THE CHALLENGES OF BUDGET AID

institutional framework to limit the risk of anomalies in the man-
agement of public funds, and it was difficult to judge how long it
would be before the reforms began to take effect (see Box 6).

Public finance management

Box 6

40. EDF budget support is mobilised according to the benefi-
ciary country’s own public expenditure procedures. It is subject
to the same internal controls, and the same risks, as the expendi-
ture that is financed from national income and differs in this
respect from project aid, which is implemented according to the
procedures imposed by individual fund providers. Many financ-
ing proposals evaded the question of the quality of public finance
management. Only the macroeconomic aspects and questions
concerning the structure and drawing up of the budget were cov-
ered. More attention was paid to sectoral budget allocations than
to their implementation (see paragraph 9). Although the Com-
mission started to provide budget aid on a large scale with the
seventh EDF, it was not until 1998 that it began to carry out quali-
tative appraisals of public expenditure management in ACP States.

41.
In most of the countries examined the reform of public
finance initially focused on the framework for drawing up bud-
gets and was beginning to have an impact on the quality of the
programming. The place of the public sector in social policies and
government’s capacity to collect and analyse sectoral statistics
have still not received sufficient attention. These aspects are essen-
tial for appraisal of the sectoral effects of budget finance, espe-
cially as the NGOs and religious organisations often provide a
substantial proportion of the social services available to the popu-
lation.

42. Reforming the chain of expenditure and accounting was only
tackled at the second stage. It was, however, in these areas that the
various audits revealed the weaknesses that caused most concern
as regards the proper use of budget aid. In general there were sub-
stantial delays in the forwarding of the accounts showing the
implementation of the budget and they were insufficiently audited.
The shortcomings in expenditure procedures were fairly similar
from one country to another. Compliance with the national rules
on budget annuality was jeopardised by disbursement delays and
there was frequent use of exceptional procedures, so that pay-
ments were not always correctly authorised or accounted for and
arrears began to accumulate. Imperfect mastery of procurement
procedures led to excessive costs, because contracts were not put
out to tender. Budget allocations were poorly mobilised as regards
the more remote and less central levels. Administrative discipline
(documentary evidence in support of expenditure, archives) was
poor. The consolidation and the reliability of the accounts were
affected by the lack of harmonised accounting procedures and by
incomplete or late end-of-year adjustments.

43.
In a number of the countries under review the recent reforms
must be welcomed as a very positive advance. Nevertheless they
sound
were

from ensuring that

there was

still

far

a

Public finance controls in beneficiary countries

1.
In Benin, the rationalisation and computerisation of the expenditure chain
was undertaken in 2000. Financial controls and internal audits have been
introduced, but with insufficient resources. The first discharge bill (1998 bud-
get) was tabled for debate by the National Assembly in 2000, but could not
be discussed for procedural reasons. The national audit institution and the par-
liament still did not have the resources needed for them to play to a full part in
the budgetary control process.

In Senegal, many of the reforms that have nevertheless been undertaken
2.
by other countries were still at the project stage (notably the modernisation and
computerisation of the expenditure chain), to such an extent that the undertak-
ing to implement the WAEMU guidelines by 2002 seemed rather unrealistic.
As of October 2000 the discharge bills for financial years 1997 to 1999 had
still not been adopted. The Cour des Comptes was set up at the beginning of
1999 but only 12 of the complement of 60 magistrates were in office.

3.
In Burkina Faso, the expenditure flows have been computerised since 1996,
but the end-of-year closure procedures were still unsatisfactory. The discharge
bills for financial years 1995 to 1998 had been drafted. However, as of the
end of October 2000, they had not been sent to the national audit institution
nor tabled in the national assembly. The national audit institution was reformed
in 2000, but the new institution was still not operational at the end of that
year.

4.
In Ghana, a major public finance reform project that was started in 1996
in partnership with, amongst others, the World Bank and the European Com-
munity and with United Kingdom and Canadian cooperation, has made little
progress in the area of dealing with expenditure and drawing up accounts, so
that the first results are not expected until 2002. In the meantime heavy decen-
tralisation, combined with a sectoral approach that has been well coordinated
among the fund providers, has made it possible for the Ministry of Health to
improve the quality of its financial management alongside the more general
reforms. A restructuring of the national audit institution (800 auditors) was
undertaken in 2000. The consolidated national accounts for the 1998 finan-
cial year have been audited and the consolidated national accounts for 1999
have been prepared. In 2000 the Parliament reported on the implementation
of the 1996 and 1997 budgets and severely criticised the handling of expen-
diture.

In Mozambique, a strategy for reforming the management of public
5.
expenditure was drawn up in 1997. In 2000 the first quarterly reports on the
implementation of the budget were prepared by the Government, as were the
annual accounts (the first since 1975) for the financial year 1998. The audit
of these accounts was Delegated to the Administrative Court (which reported
to Parliament in 2000 on the 1998 accounts). This court is also responsible
for ex ante financial control of expenditure, but the effectiveness of the latter
was limited.

44. Not until 1999, as an aid to its examination of new loan
applications, did the World Bank begin to evaluate beneficiary
countries’ ability to account for the implementation of their
national budgets (1). The IMF, for its part, offered beneficiary
countries a framework for evaluating budget transparency. Other
bilateral donors have recently begun to audit public finances and
the governments of the ACP States themselves are placing more
importance on the reform of public finances. The Commission
has begun to appraise the overall management of public

(1) Country financial accountability assessment.

C 257/14

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Official Journal of the European Communities

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finance in ACP States, but since the appraisal is derived from the
Commission’s own audit results, it does not cover all beneficiary
countries. At the beginning of 2001, as a consequence of the
recent awareness of the significance of this omission, reinforced
by the results of audits carried out on the Commission’s initia-
tive, the latter, with the World Bank, began to consider introduc-
ing an enhanced form of cooperation, with joint objectives and
pooled financial resources (1), and coordinating it with the work
of all the parties concerned.

46. The Delegations usually monitored the mobilisation of bud-
get appropriations through the government’s central accounts,
but it was only in 1999 that the Commission began to pay atten-
tion to the question of whether these accounts were reliable, when
ex post facto audits brought this issue to light in two of the coun-
tries examined (Burkina Faso and Mozambique), showing that the
accounts overstated the real execution of expenditure in the target
sectors.

Volume of expenditure in social sectors

45.
In three of the eight countries examined (Benin, Burkina
Faso and Ghana), the impact of support on the social budgets
situation was carefully monitored and documented by the Delega-
tions. It is difficult to establish a chain of causality between
increased expenditure in social sectors and EDF aid, but some
examples illustrate the positive role of the Delegations in respect-
ing budget implementation objectives in Benin and Ghana. In
Burkina Faso the complexity of the monitoring machinery did not
ensure that the funds were actually spent during the budget year
(see Box 7). In the other countries the limitations of the monitor-
ing that had been applied meant that it was not possible to dis-
cern any relationship between the support provided and the bud-
get input to the social sectors.

Box 7

Quantitative monitoring of expenditure by the Delegations

1.
In Benin, the Delegation drew up a comparison for each budget year
between the rate of health sector expenditure and the objectives that appeared
in the financing Agreements. The correspondence between the Delegation and
the Ministry of Health showed that in 1999 the Commission’s determination
not to release the counterpart funds until the objectives had been achieved had
a decisive effect on the Government’s respect for its undertakings.

In Ghana, the Delegation intervened actively in 1999 in order to speed up

2.
the release of budget appropriations in favour of social ministries.

3.
In Burkina Faso, despite an overall increase in the budgets allocated to
social sectors, the complex system of adding amending clauses to the Protocols
of Agreement masked the take-up problems, as well as the delays in imple-
menting budgets. By failing to compel respect for the budget timetable the sys-
tem helped to institutionalise an excessive number of derogations to the length
of the budget year, in the social sectors in particular, contrary to the principles
of sound public financial management. In order to mop up 2 300 million CFA
francs that remained in the accounts under the heading of support for the 1998
budget, the Delegation, in May 1999, proposed using an accounting device
which would allocate the residue retrospectively to other 1998 budget headings
where implementation had been satisfactory. The headquarters departments,
quite rightly, opposed this and in November 1999 the residue was allocated to
the 1999 budget.

(1)

‘Trust Fund for Public Expenditure’.

Impact of expenditure on social sectors

47. Commission monitoring has recently taken account of the
objectives of the Financing Agreements that aim to improve social
services for the population. For example, out of the 23 Financing
Agreements examined, only two, signed in 1999 (Benin and
Burkina Faso), included conditions relating to the results obtained
in the social sectors. Very few resources were devoted to on-site
appraisals of the utility, effectiveness and impact of the expendi-
ture. Under these circumstances the Commission cannot evaluate
the impact of the budget support contributed under the seventh
and eighth EDFs on the quality of social services.

48. Since 1996 (2) the use of summary management informa-
tion has been recommended as a way of including measured
results in the mechanisms for assessing and controlling expendi-
ture. The pilot experiment that was carried out in Burkina Faso
made it possible to steer the political dialogue away from inten-
tions and towards results. It also highlighted (3) the main difficul-
ties that have to be overcome in order to permit credible use of
summary management information: tight definition, preset levels
of achievement, existence and reliability of systems for measur-
ing results and, lastly, agreement between the partners as regards
the choice of indicators within the framework of poverty reduc-
tion strategy papers (PRSP).

49. The problems of regularity and good governance (4) brought
to light by the financial audits have a direct impact on the quality
of expenditure and the situation of vulnerable and disadvantaged
members of society. The public spending reviews that are carried
out in many countries still have too little regard for the quality of
expenditure and are usually only carried out intermittently, so
that they cannot alleviate the shortcomings of the internal control
mechanisms applicable to public finance in beneficiary countries.

(2) Commission working paper on the reformulation of conditions,

December 1996.

(3) Commission internal note of 22 June 2000.
(4) Relevance of and justification for expenditure, reality of the service
performed, fair price, absence of favouritism and distortions of com-
petition.

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C 257/15

50. Although the Commission’s sectoral adjustment support
encouraged sectoral reforms, the latter were sometimes under-
taken without any direct link to the structural support, even when
the expenditure targeting related to the sector or sectors con-
cerned. The extent of these reforms was such that in several coun-
tries they were accompanied by coordinated multilateral initia-
tives, particularly as part of a global approach. The Commission’s
structural adjustment support programmes have so far not tack-
led the problem of integrating budget aid into these initiatives (see
Box 8).

52. These financing proposals gave as justification for abandon-
ing targeted expenditure the absence of cash-flow problems and
the sufficiency of the budget implementation (quantitative aspects),
rather than the soundness of the public finance management.
Some of the proposals include elements of management quality
appraisal, but there is no explanation of what the consequences
of the appraisal might be in terms of programme procedures and
the release of funds.

Box 8

Multilateral sectoral approaches

1. A multilateral sectoral approach was started in the education sector in
Mozambique in 1998. Not until the financing proposal for the 2001 pro-
gramme of structural adjustment support, however, did the Commission tackle
the question of promoting improved access to social services in the areas of
health, education and water as part of a sectoral approach. It would be better
if the tasks associated with such participation were clearly defined, so that the
number of sectors supported was compatible with the Delegation’s resources.

2.
In Ghana, alongside structural adjustment support, the EDF participated
with other fund providers in a global sectoral approach in the area of health.
Part of it concerned budget aid to a fund monitored and serviced jointly by
several fund providers. The advantages and main features of this approach are
very relevant in the context of redirected EDF budget support, especially as
regards the management of public finance, result indicators and control proce-
dures. In the delicate area of quality of expenditure it has had a real impact on
the relevance of the investments.

Redirecting the monitoring and control of budget support

53.
It is difficult to assess whether the conditions for effective
use of the performance indicators adopted in the financing pro-
posals might be met in the future (see paragraph 48). In the area
of sound public finance management, the performance indicators
are still primarily quantitative and take too little account of the
weaknesses identified by the audits carried out in 1999 and 2000.
In the case of Senegal the choice of performance indicators was
still under discussion when the Financing Agreement was signed
in October 2000.

54. The new programmes drawn up in the second half of 2000
comprise several instalments. In every case the first payment is to
be disbursed in the light of IMF macroeconomic evaluations. One
instalment, which in the case of Benin represents half of the pro-
gramme total (but only one third in the case of Burkina Faso,
Senegal and Zambia), will be disbursed in varying proportions,
depending on the level reached by the performance indicators.
The systematic disbursement of a minimal sum is intended to
ensure that the beneficiaries plan their use of resources better (see
paragraph 18), but the procedures for releasing further instal-
ments often require further definition, in order to ensure that
poor performance is actually taken into account.

In the first half of 2000, on the basis of the review and per-
51.
spectives drawn up by the Commission (1), the Council (2) advo-
cated less-detailed allocation of funds (untargeted, direct budget
aid) in the countries whose public finance management was sat-
isfactory and recommended establishing a link between the effects
of reforms and disbursements of aid in foreign exchange. The
financing proposals submitted to the EDF Committee in the sec-
ond half of 2000 for five of the countries examined (Benin,
Burkina Faso, Mozambique, Senegal and Zambia) anticipate the
progress made in the management of public finances. At the end
of 2000 the Commission departments expected that, following
an audit in Senegal, the implementing arrangements for that
country would be modified, because of shortcomings that had
been found in the execution of recent programmes.

(1) Commission communication on structural adjustment, COM(2000)

58 final of 4 February 2000.

(2) Resolution of 18 May 2000 on structural adjustment.

55. Although the system of targeting that has been established
for selecting individual ‘eligible’ expenditure items is to be aban-
doned because of its artificiality and low impact on the quality of
public finance management in terms of reducing the administra-
tive cost, the Commission cannot forgo the controls that are nec-
essary for it to assess whether the Community finances entrusted
to it are properly used (see paragraph 43). In addition to a general
review (for which the outlines still have to be defined), the new
programmes provide for audits of a volume of transactions equiva-
lent to the volume of support provided. There is little sense in the
link that has been established between the extent of the checks
and the amount of support. With the retention of targeted checks
there is the risk of a tendency to pick out eligible expenditure
items to the amount of the Community finance in order to obtain
assurance (see Box 9). A sample check in order to assess the regu-
larity of the transactions as a whole, in one or more expenditure
sectors, would be more appropriate.

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Official Journal of the European Communities

14.9.2001

Box 9

Justifying the eligibility of expenditure

In the latest programmes for Benin and Burkina Faso, the role of audit in
1.
justifying European aid by verifying amounts of priority budget expenditure
equivalent to the support given and certifying the eligibility of the financed
expenditure lacks clarity.

2. The financing proposal for Mozambique is the only one that reflects an
overall audit approach. It is, however, far from clear whether the work of the
external auditors is consistent with that of the national audit institution and
under what conditions the Commission will rely on it in order to produce an
independent appraisal.

56. The Commission Communication of February 2000 did not
go into the question of expenditure controls (1). In the context of
untargeted budget aid the necessary assurance can only be obtained
by means of overall appraisal of public expenditure, but the most
recent Financing Agreements (year 2000) do not give any indica-
tion of a general audit approach combining the work of national
audit institutions, external auditors and technical assistance and,
when possible, other budget aid providers. In the absence of a
soundly based approach, the results of the 1999 and 2000 audits
are still not sufficiently taken into account by the performance
criteria for sound public finance management.

CONCLUSIONS AND RECOMMENDATIONS

General appraisal

57.
In beneficiary countries counterpart funds are made avail-
able as part of the national public expenditure procedures and
because of that and the inherent risks of those procedures it is
unrealistic to think that the quantitative objectives being pursued
in the priority sectors can be achieved without any hitches (see
paragraphs 45 and 46), that expenditure will always be executed
regularly (see paragraphs 26 to 34 and 40 to 43) and that it will
always have a positive impact on the situation in the social sec-
tors (see paragraphs 47 to 50).

58. The desire to provide balance of payments support and sup-
port for social sector budgets simultaneously has sometimes
affected the decisional mechanisms (see paragraphs 11, 33, 39, 52
and 54). The controls on the counterpart funds have, in some
cases, been reduced to formal administrative justification and ex
post facto checks on expenditure (see paragraphs 10, 12, 34 and

(1) COM(2000) 58 final, section 2.3.4.3.

55) with no direct relation to properly functioning, government-
run, social services for the benefit of vulnerable and disadvan-
taged people (see paragraph 47).

59. The Commission’s headquarters departments did not pay
sufficient attention to certain aspects of overall supervision (see
paragraphs 17 and 37) nor to the technical aspects of the use of
programme funds (see paragraphs 21 and 22, 35 and 36, 40 and
46). The new guidelines, and especially the increased importance
attached to strengthening the management and control of public
finance (see paragraph 51), should improve the effectiveness of
the mechanism, provided that the framework for monitoring
reforms has been improved, by means of institutional support if
necessary, and that the Commission deploys appropriate resources
to ensure that implementation is consistent and coordinated with
the main providers of funds (see paragraphs 22 to 25, 27, 30 and
35 to 39).

60.
In-country monitoring of the EDF programmes is based on
combined action by various parties: the Delegations, public admin-
istration in the beneficiary countries, national audit institutions,
technical assistance, and external auditors. The roles of those con-
cerned within the organisational structure have not been defined
sufficiently. Monitoring, carried out by the Delegations chiefly at
central administration level, is hampered by the unreliability of
public accounts, particularly as regards decentralised expenditure
(see paragraphs20, 38 and 46). Technical assistance was not suf-
ficiently exploited as support for action by the Delegations (see
paragraphs 22 to 25). The audits financed under the programmes
rarely highlighted the internal control weaknesses that affected
the use of the counterpart funds (see paragraph 28). The financial
audits subsequently ordered by the Commission proved to be
much more effective (see paragraph 30). It is important for these
audits to be retained, but there is no guarantee that there will be
provision for this under the current reorganisation. Any ineligibil-
ity discovered did not result in funds being repaid to the EDF (see
paragraph 33), but in several cases new programmes were sus-
pended pending corrective action.

61. With the support of fund providers, a number of countries
have undertaken wide-ranging reforms that aim gradually to
improve the management of their public finances. The process
will, inevitably, be slow, because it is very complex and addresses
a variety of situations and the beneficiary governments’ resources
are limited. As of the end of 2000 it is not possible to expect that
budget aid will immediately be released in accordance with the
principles of sound financial management and under conditions
that are always regular (see paragraphs 41 to 43). The budgetary
authority must be aware of the inherent risks of the approach
adopted and must try gradually to reduce the extent of it by
encouraging effective implementation of reforms in the ACP
States, especially through concerted action by the donor commu-
nity.

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Recommendations on the organisation of monitoring

62. Recommendation 1 — In order to remove the ambiguities
from programmes and ensure that support changes to follow the
new direction being taken by poverty reduction, clear guidelines
should be laid down for use by Commission managers and national
authorising officers. The linkage of the remits of the main parties
involved in the chain of monitoring and control must receive
close attention. In particular:

(a) criteria for assessing the progress made in the management of
public finances (see paragraph 52) should be laid down and
should include monitoring the remedies applied to weak-
nesses and shortcomings highlighted by financial audits (see
paragraphs 42 and 56);

(b) procedures for reviewing expenditure in a context of untar-
geted budget support should be defined and should give the
budgetary authority an indication of the extent to which the
funds are being soundly managed. Financial audits should be
an integral part of this mechanism and could take the form
of a set of sectoral appraisals where necessary (see para-
graphs 55 and 56). They should preferably be carried out
annually and aligned on the budget years of the beneficiary
countries (see paragraph 26);

(c) the various possibilities for making use of reliable perfor-
mance indicators in the social sectors, and their relation to
budget expenditure (see paragraphs 41 and 48) should be
defined;

(d) technical assistance for beneficiary administrations should be
clearly distinguished from the technical assistance that helps
EDF authorising officers and the Commission Delegations to
fulfil their obligations (see paragraphs 24 and 25);

(e) the nature and level of the Delegations’ own supervision of
expenditure should be specified. Although they cannot be
held responsible for the management errors of the national
departments
(see para-
that execute national budgets
graphs 40 and 42), the Delegations must be able to perform a
qualitative appraisal of the expenditure in priority sectors (see
paragraph 47), one of the ways being concerted action by
fund providers.

64. Recommendation 3 — As part of the reform of its external
departments, the Commission should establish a clearer separa-
tion between the responsibilities of, on the one hand, the depart-
ments responsible for examining programmes, for the overall
monitoring of macroeconomic support and for the reform of
public finance in beneficiary countries and, on the other, the
departments responsible for assessing the functioning of social
sectors (see paragraph 39).

Recommendations on coordination

65. Recommendation 4 — The Commission should, each year,
according to a timetable that is compatible with the drawing-up
of the beneficiary budgets and coordinated with that of the IMF,
decide the amounts of money that are to be disbursed for the fol-
lowing year, for each country, notify the beneficiaries of the
amounts, then check that they are included in public accounts in
accordance with a clearly agreed scheme (see paragraphs 18 and
20).

66. Recommendation 5 — Increased coordination between all
the parties concerned with the improvement of public finance
management in general, and within the PRSP framework in par-
ticular, would allow fund providers and beneficiary countries to
define the tangible weaknesses in public finances (see para-
graph 42) and would facilitate the piloting and periodic evalua-
tion of the remedies applied and the progress achieved (see para-
graph 62(a) and (b)).

67. Recommendation 6 — Wherever possible, the Commission,
in association with other fund providers, should take care that its
sectoral support is incorporated into the budgets of beneficiary
countries. This type of approach would facilitate the desired
cooperation with the bodies responsible for auditing public finance
in the beneficiary countries (1), since concerted action is essential
if the objectives of qualitative improvement of public expenditure
are to be achieved (see paragraphs 50 and 56). Furthermore, par-
ticipation in multilateral sectoral programmes would be a visible
demonstration of the Commission’s intention of concentrating its
efforts on a smaller number of sectors and activities (2)

63. Recommendation 2 — The principles and procedures for
the monitoring and control of aid (see paragraph 62), which are
defined in detail when the programmes are drawn up, should be
included in the financing Agreements (see paragraph 35).

(1) 1999 Annual Report, paragraphs 46 and 47 (OJ C 342, 1.12.2000).
(2) Declaration of the Council and of the Commission of 10 November
2000 on the European Community’s development policy, section 12.

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Official Journal of the European Communities

14.9.2001

68. Recommendation 7 — In order to facilitate the introduction
of
the above recommendations, programmes should place
increased reliance on:

the direction followed in decisions and new measures is taken
in full knowledge of what is involved;

(a) a strategy and an overall plan for reforming public finance
management for each country, highlighting the progress
achieved in public expenditure systems. This development
should be assessed and documented as part of an ongoing
process, in coordination with other fund providers, so that

(b) an overall approach in the social sectors, including mecha-
nisms for qualitative control of expenditure (impact and man-
agement), here too, in intensive coordination with the main
fund providers in the countries concerned, and with Member
States in particular.

This report was adopted by the Court of Auditors in Luxembourg at the Court meeting of 27 and 28 June
2001.

For the Court of Auditors

Jan O. KARLSSON

President

14.9.2001

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Official Journal of the European Communities

C 257/19

AMOUNTS ALLOCATED AND DISBURSED FOR STRUCTURAL ADJUSTMENT SUPPORT UNDER THE SEVENTH AND EIGHTH EDFS
AS AT 31 DECEMBER 2000

ANNEX I

Commitments

Payments

a

b

c

d

e

Total structural
adjustment commitments

Total country
commitments

% = a/b

Total structural adjustment
payments

Total country
payments

(Mio EUR)

f

% = d/e

Benin
Burkina Faso
Burundi
Cameroon
Cape Verde
Comoros
Congo
Côte d’Ivoire
Djibouti
Dominica
Ethiopia
Gabon
Gambia
Ghana
Grenada
Guinea
Guinea-Bissau
Guyana
Haiti
Solomon Islands
Jamaica
Kenya
Lesotho
Madagascar
Malawi
Mali
Mauritania
Mozambique
Niger
Uganda
Papua New Guinea
Central African Republic
Dominican Republic
Rwanda
São Tomé and Principe
Senegal
Sierra Leone
Tanzania
Chad
Trinidad and Tobago
Zambia
Zimbabwe
Admin., Intra ACP, misc

Total

% of total for the seventh and
eighth EDFs

Total for the seventh and eighth
EDFs

Source: EDF accounts as at 31 December 2000.

118
225
12
94
22
7
14
138
23
2
163
20
17
177
2
57
27
19
55
4
32
24
29
84
145
164
44
207
127
187
37
39
31
75
7
117
63
191
81
9
222
60
8

3 183

17 %

19 103

329
557
210
594
89
51
49
650
43
57
818
124
68
466
24
426
113
112
263
120
283
550
154
454
509
524
296
589
360
699
238
190
275
327
32
453
221
668
327
62
678
295

36 %
40 %
6 %
16 %
25 %
13 %
29 %
21 %
54 %
4 %
20 %
16 %
25 %
38 %
8 %
13 %
24 %
17 %
21 %
4 %
11 %
4 %
19 %
18 %
28 %
31 %
15 %
35 %
35 %
27 %
16 %
21 %
11 %
23 %
20 %
26 %
29 %
29 %
25 %
14 %
33 %
20 %

85
193
4
75
9
7
9
122
13
2
137
16
13
128
2
56
13
16
49
2
24
0
29
56
112
140
44
140
86
111
27
16
31
16
2
77
28
155
49
9
156
60
4

141
340
78
409
46
39
24
483
27
44
484
63
44
235
23
232
51
66
157
70
133
228
102
253
299
282
175
348
201
429
172
131
144
174
16
257
87
387
143
41
388
199

60 %
57 %
5 %
18 %
18 %
17 %
36 %
25 %
48 %
5 %
28 %
25 %
30 %
55 %
9 %
24 %
26 %
24 %
31 %
3 %
18 %
0 %
28 %
22 %
37 %
50 %
25 %
40 %
43 %
26 %
15 %
12 %
22 %
9 %
14 %
30 %
32 %
40 %
34 %
22 %
40 %
30 %

13 347

24 %

2 320

22 %

10 480

7 643

30 %

C 257/20

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Official Journal of the European Communities

14.9.2001

MAIN GUIDELINE DOCUMENTS ISSUED BY THE COMMISSION AND THE COUNCIL

ANNEX II

Date

Institution

Title and subject

Reference

14.3.1991

Commission

14.3.1991

Commission

27.5.1991

Council

4.12.1991

Commission

4.5.1992
10.11.1992

Council
Commission

9.3.1993

Commission

27.10.1994

Commission

24.4.1995

Commission

20.5.1996

Council

14.1.1997

Commission

22.1.1997

Commission

25.3.1997

Commission

Note to headquarters departments and Delegations — principle
for using counterpart funds (instruction note 1)
Procedures for setting up and financial monitoring of counterpart
funds (Instruction note 2)
Resolution on the use of counterpart funds generated by the vari-
ous development assistance instruments
Communication from the Commission to the Council: Progress
report on the Community’s involvement in the structural adjust-
ment process in the ACP States
Resolution on structural adjustment
Communication from Mr Marin. Community support for struc-
tural adjustment of the ACP States: lessons learned and perspec-
tives
Information note on the state of implementation of resources for
structural adjustment support under Lomé IV
Communication from the Commission — Community support
for structural adjustment in the ACP States: towards the consoli-
dation and strengthening of a realistic and concerted approach
Information note on the state of implementation of resources for
structural adjustment support under Lomé IV
Resolution on structural adjustment

support under the seventh EDF
Conclusions on the implementation of counterpart funds from
Community support for structural adjustment in the ACP States
Note to the Member States on convertibility and direct budget
support under Lomé IV
Note — Schedule for drawing up financing proposals for struc-
tural adjustment
Communication from the Commission: support for structural
adjustment and debt relief in heavily indebted ACP States. A
Community response to the HIPC debt initiative
Update of instructions. Provisional edition for some parties

1.6.1995
15.2.1996

Council
Commission Working paper: Facts for an assessment of structural adjustment

19.7.1998
9.1998

Commission
Commission Working paper: facts for an assessment of structural adjustment

4.2.2000

Commission

18.5.2000

Council

support under the seventh EDF
Communication from the Commission to the Council and the
European Parliament: Community support for economic reform
programmes and structural adjustment: review and prospects
Resolution on economic reforms and structural adjustment in
developing countries

VIII/C/2 — 43872

VIII/C/2 — 43872

6379/91

SEC(91) 2320
6038/92

SEC(92) 2082

COM(94) 447

7711/95

VIII/257/96

7329/96

COM(97) 129 FINAL
VIII D(98) — 47796

External report

COM(2000) 58 FINAL

8571/00

14.9.2001

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Official Journal of the European Communities

C 257/21

ANNEX III

PROGRAMMES EXAMINED

Total

of which: technical assistance

(Mio EUR)

Country

EDF

Project

Instrument

Year of
financing
agreement

Programme

Type
(1)

Committed

Paid

Budget
forecast

A
B

B

A

A

A

B
B

A

A
B

A

1997

1995

1996

1999

1998

1998

1995

7
8
8
8

7
7
8
8
8
8

1997
1999

1997
1998

1998
1999

BK/7200/004

BK/7200/003

BK/7200/005

BK/7200/006

GH/7200/004

BEN/7200/004

BEN/7200/003

FAS
PIN
PIN
FAS

PIN
FAS
PIN
FAS

FAS
PIN
PIN
FAS
PIN
FAS

GH/7200/005
GH/7200/006

MAI/7200/003
(1997-1999)

56
2 + 3
11
12 + 13

97
99
6
7 + 8
15
16 + 17

64
65
99
100
127
128
3 + 5 + 6

FAS
PIN
PIN
FAS
FAS
PIN
FAS
18 + 19 + 20 FAS

BEN
BEN
BEN
BEN
Subtotal Benin
7
BK
7
BK
7
BK
7
BK
7
BK
7
BK
8
BK
BK
8
Subtotal Burkina Faso
35
7
GH
36
7
GH
48
7
GH
GH
5
8
Subtotal Ghana
MAI
MAI
MAI
MAI
MAI
MAI
Subtotal Malawi
82
7
MOZ
2
8
MOZ
MOZ
3 + 4
8
Subtotal Mozambique
74
7
SE
75
7
SE
8
SE
4 + 5
8
SE
Subtotal Senegal
TA
TA
TA
Subtotal Tanzania
ZA
ZA
ZA
ZA
Subtotal Zambia
Total examined
%
Total structural adjustment support from the seventh and eighth EDFS.
(1) A = import programme, B = budget aid.
(2) To be financed with counterpart funds.
(3) Does not include budget implementation audit to be financed with counterpart funds.
(4) Budget not specified.
Source: EDF accounts at 31 December 2000.

FAS
PIN
FAS
16 + 17 + 18 FAS

MAI/7200/003
(1999-2001)

SE/7200/003
SE/7200/004

62
63 + 78
2 + 3

71
72
6 + 7
8

FAS
PIN
FAS
PIN

MOZ/7200/002

MOZ/7200/001

ZA/7200/005

ZA/7200/004

PIN
FAS
FAS

PIN
PIN
FAS

TA/7200/002

TA/7200/004

SE/7200/002

1998
1999

7
7
8
8

1999

1995

1999

1998

1998

1995

1994

1997

7
7
8

A

B
B

A

B

A

A

A

B

B

B

10,0
20,1
8,0
21,9
60,0
18,3
11,7
5,2
1,2
5,9
5,0
27,0
49,0
123,2
17,0
4,4
15,0
21,4
57,8
12,0
5,0
13,5
8,5
10,0
42,1
91,1
15,0
15,0
52,8
82,8
12,5
11,6
27,9
39,1
91,1
16,6
18,4
71,2
106,2
13,7
3,1
46,7
7,0
70,5
682,7
21 %
3 183

0,3
0,5

0,5

1,3

0,85

0

0,85

0
0,8
2,5

0,1

0,1
0,4
0,6

0,7

0,7

0,6

2,0
0

1,9

1,9

0,3

1
1,3
2,6

1,4

1,5
2,9

0,05

1,09

1,1
14,9

10,0
20,1
8,0
3,5
41,6
18,3
11,6
5,2
1,2
5,4
5,0
21,0
46,3
113,9
17,0
4,3
14,9
10,6
46,8
12,0
5,0
13,5
7,8
0,0
20,0
58,3
15,0
15,0
51,6
81,6
12,5
11,6
27,0
0,0
51,0
16,5
18,4
35,5
70,4
13,7
3,1
40,6
6,0
63,4
527,0

23 %
2 320

Contracts
accounted
for

Payments
accounted
for

Note

(2)
(2)

0,08

0,1

0,63

0

0,44

0
0,5
1,6

0,04

0
0,08
0,1

0

0,26

0,01

0,3
0

0,98

1,0

0,3

0,21
0
0,5

1,33

0,74
2,1

0,11

0,11

0,2
5,8

0

0,0

0,6

0

0,4

0
0,13
1,1

0,03

0
0,04
0,1

0

0,21

0,01

0,2
0

0,66

0,7

0,3

0,11
0
0,4

1,22

0,37
1,6

0,1

0,06

0,2
4,2

(3)

(3)

(2)

(4)

C 257/22

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Official Journal of the European Communities

14.9.2001

MAIN COMMENTS MADE BY THE COURT IN THE PAST ON THE MONITORING OF COUNTERPART FUNDS

ANNEX IV

Annual/Special Reports

Extracts — Court observations

Extracts — Commission replies

Annual Report 1989
(OJ C 313, 12.12.1990)
(repeated in Annual Report 1991)

... the Court has been unable to get complete and
13.45.
reliable information regarding counterpart funds. Given
the amounts involved the Court considers that the budget
authority should receive, along with the EDF balance
sheets, information in respect of each beneficiary coun-
try, regarding the establishment of the counterpart funds,
their use, and the amounts remaining available at the end
of the financial year.

Annual Report 1991
(OJ C 330, 15.12.1992)

Annual Report 1994
(OJ C 303, 14.11.1995)

It would be desirable that the existing manual of
17.111.
instructions be amended to address monitoring and
reporting matters such as the aims, frequency, reporting
and follow-up procedures of site visits by advisers, the
financial management and administration of projects, and
the different types of report to be submitted to central
services. As part of this update of the manual, a review
should be undertaken to evaluate the level of detail in
monitoring that can be expected from Delegations with
their present staff resources.

11.39. The fungible nature of budget resources has led
most donors — including the Netherlands, Sweden and
the United Kingdom — not to earmark closely the use to
which their counterpart funds should be put. Their atten-
tion is instead focused on ensuring that the recipient gov-
ernment’s budgetary policy as a whole is directed in an
appropriate manner, and that particular sectoral policies
are being pursued.

11.78.
... The Commission should... develop quantitative
and qualitative targets for priority sectors or subsectors,
in addition to any macroeconomic targets contained in
the structural adjustment programme. The sectoral tar-
gets, which may include objectives for specific projects or
programmes, should be incorporated into the financing
Agreement, and form the prime focus of the monitoring
exercise

It should be made clear that counterpart funds
13.45.
do not belong to the Commission in the same way as
the aid money it dispenses.
From the outset the countries receiving these funds
have tended to consider that the money is now theirs
and they do not have to account for the way in which
it is used.
The increasing amounts involved and the difficulty of
keeping track of utilisation have prompted the Com-
mission to tighten up the rules (joint management)
regarding establishment and use of this money. There
has been some resistance on the part of the recipients
to the introduction of these new rules. Reflecting this,
the information provided by the countries concerned
has been sporadic and incomplete and the Commis-
sion has been unable so far to draw up a full statement
of counterpart funds for inclusion in the annual bal-
ance sheets. The Commission departments concerned
are currently devoting considerable attention to this
problem, however, and will keep the budget authority
and Court of Auditors informed.

17.111. The Commission will take the Court’s obser-
vations into account for a future update of the Manual
of Instructions.

No reply.

11.78. The Commission has always attached great
importance to the integration of counterpart funds
into budgets and budgetary analysis of their targeting.
To this end, it has taken part in, or followed, the bud-
getary reviews conducted by the IMF and World Bank.
A stepping-up of its involvement in the context of the
appraisal of a new structural adjustment operation in
Tunisia should lead to closer dialogue with the States
concerned on priorities and public spending cuts. We
must avoid, however, imposing a plethora of condi-
tions that are disproportionate to the EU’s financial
contribution and liable to hold up the implementation
of programmes as has happened in experiments car-
ried out by the World Bank (stop and go).

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Annual/Special Reports

Extracts — Court observations

Extracts — Commission replies

Annual Report 1995
(OJ C 340, 12.11.1996)

12.14. The Commission gave a very broad interpreta-
tion to the provisions of the Convention relating to the
seventh EDF by introducing a system less directly linked
to the physical implementation of imports and, in prac-
tice, equivalent to global balance-of-payments assistance
and support to the budget of the ACP States.

12.20.
... marked differences occur, depending on the
country, between Financing Agreements governing simi-
lar programmes, as well as in the implementation of these
programmes, even though in terms of management of
public funds or monetary systems there are no funda-
mental differences on first analysis

12.13 and 12.14. The Commission believes that it
has been applying the Lomé Convention properly:
(a) financing is not backdated for reasons of rapid dis-
bursement, but because the availability of foreign
currency is usually concentrated in time, whereas
the timing of imports is geared to the needs of the
economy rather than to disbursements;

(b) Funds are very rarely paid in a single tranche;
(c) The rules have been applied in accordance with the
legislation in force, which provides for a case-by-
case approach. This approach is specified in the
financing proposals presented to the EDF Commit-
tee. Retroactive financing is a practice used by all
the donors.

The Court’s report mainly focuses on the impact of the
Commission’s funding for the social sectors. It accords
limited attention, however, to the impact of balance-
of-payments support. This approach could cause read-
ers to underestimate the role actually played by the
Commission in structural adjustment, especially with
regard to the liberalisation of foreign exchange mar-
kets, support for making currencies convertible, etc.

12.20.
In addition to the definition of the main axes
for the implementation of Community structural
adjustment support to ACP countries when the Lomé
IV Convention became effective, a series of relevant
documents has been presented detailing the modalities
of structural adjustment support, policies on counter-
part funds and public-spending reviews. Among the
relevant documents we can cite:
(1) Commission document on use of CPF (1991) and
Commission Directive on modalities on constitu-
tion and financial follow-up of CPF (1991);

(2) Council resolution on constitution and use of CPF

(1991) and SPA guidelines on CPF (1991);

(3) Council resolution on structural adjustment (1992);
(4) Council resolution on structural adjustment (1995);
(5) SPA guidance on public expenditure review pro-

cess (1995).

These documents present clearly the operational frame-
work concerning the constitution, remuneration and
use of CPF, earmarking, priorities for the social sectors,
modalities of control and follow-up, etc.
It is obvious that no precise directives were produced
on other subjects since this would have worked against
the principle of avoiding standardisation.
While giving a precise framework for policy in the
field of structural adjustment, these documents have
certainly left room for manoeuvre in order to comply
with the Lomé Convention request for adapting our
modalities of intervention to the specific situation of
each country in order to avoid standardisation of pro-
grammes. In particular, modalities of earmarking of
CPF have to take into account sectoral policies and
quality of budgetary processes as well as overall mac-
roeconomic objectives.

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Official Journal of the European Communities

14.9.2001

Annual/Special Reports

Extracts — Court observations

Extracts — Commission replies

12.60.
Finally, budgetary assistance is of only limited
value in countries where the budgetary procedures are
shaky or where the implementation of the budget is slow,
centralised and not very transparent, or where the control
of expenditure is almost non-existent.

12.61.
[Sectoral targeting and global allocation] may be
contemplated only in those countries where the proce-
dures for effecting public expenditure are transparent....
the Commission should regularly assess the quality of
these procedures and it must take a firm line if the ACP
State goes back on its commitments.

Special Report No 2/94 on the import
programmes carried out under the
sixth EDF
(OJ C 97, 6.4.1994)

6.4. The central accounts of the EDF do not make it
possible to monitor the import programmes immediately
and the financial statements give no figures for the coun-
terpart funds (5.25 and 5.26).

6.21.
In Ghana and in Zambia, untimely withdrawals
from the counterpart funds by the authorities totalled
approximately 11,2 Mio ECU (4.51).

6.24. The structure of the Commission’s central depart-
ments remains poorly suited to effective monitoring of
the import programmes (5.12 and 5.13)

No reply.

12.61. Though the revised Fourth Lomé Convention
introduces the possibility of direct budget aid (i.e. with-
out having to prove that imports have been made), the
problem of whether targeting should be more or less
specific remains the same. Methods depend very much
on the quality of public finances in the country con-
cerned. We do, however, share the Court’s view on the
attention to be given to the budget.
Through its participation in public-spending reviews
with the other donors and its own sectoral reviews (in
the social sphere), the Commission is already very
much involved in assessing the quality of public finances
in terms both of the nature and efficiency of spending
and of the budgetary process and procedures. This
approach is currently employed on a country-by-
country basis under the SPA donor group’s new guide-
lines for the improvement of public finance, institution-
building being the very foundation of the Commission’s
action.

6.4. Local currency operations are the responsibility
of the national authorities, even though the Commis-
sion is involved in their running. Information on the
management of counterpart funds was given in the
1992 management accounts, and more detailed data
will be provided in 1993 accounts (5.20, 5.25 and
5.26).

6.21. Commission missions to Ghana and Zambia in
1993 regularised both the situations referred to by the
Court, the amounts in question being entered in the
country’s budgetary spending and allocated to prior-
ity sectors selected jointly by the Commission and the
recipient (4.51).

6.24. The setting-up of the Structural Adjustment
Unit has made it possible to establish an overall policy
for the implementation of import programmes in the
context of macroeconomic stabilisation policies and
structural reforms and in compliance with the politi-
cal priorities of the Council and the Commission,
namely:
— long-term development,
— internalisation of programmes,
— adjustment of the pace of reform to the needs of

the country concerned,

— the social and regional dimension to adjustment.
The Structural Adjustment Unit has also been a means
of establishing a dialogue with the IMF and the World
Bank on structural adjustment and the general macro-
economic environment in which the ACP States find
themselves.

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Official Journal of the European Communities

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Annual/Special Reports

Extracts — Court observations

Extracts — Commission replies

6.25 and 6.26. The creation of the Counterpart Funds
Unit within the Directorate of Finance has made it
easier to get to grips with the situation and problems
on the ground and to draw up guidelines for the Del-
egations.

No reply.

6.25. The scope of the instructions given to the Delega-
tions in 1990/1991 should be extended so that adminis-
trative audits may be more closely related to the risks
which programmes run (5.19) and more details may be
given about what sort of cooperation the Council intends
to establish (2.9(e)) between the Commission and the rep-
resentations of the Member States in the ACP States (5.20).

6.26. The new instructions are proof that the Commu-
nity’s policy with regard to the counterpart funds has
definitely been rationalised. However, the procedures for
monitoring their implementation should be made more
explicit, since it would be illusory to assume that ’reviews’
and entries in the budget will on their own be enough to
ensure that the counterpart funds will be used in priority
sectors. In this regard, close cooperation between the
various suppliers of funds would seem to be unavoidable
(5.23).

6.29. Because the actual execution of the programmes
was in most cases located downstream of the disburse-
ment of EDF funds, the legal framework, the financial sys-
tems and the operational structures of the Lomé Conven-
tion and the Commission turned out to be not very well
adapted to control of either the importation procedures
or the procedures for creating and utilising the counter-
part funds. Given the difficulties it was confronted by, the
Commission reacted fairly swiftly and, with effect from
1991 (the Council resolution on the counterpart funds),
the management of the import programmes was gradu-
ally strengthened. Many of the decisions taken since then
should already have had perceptible effects on the first
waves of the Lomé IV import programmes; for example,
there is now more systematic use of technical assistance,
more precise instructions are sent to the Delegations, the
objectives and the conditions of the Financing Agree-
ments are framed less ambiguously and a unit for moni-
toring the counterpart funds has been created. However,
the application of these measures is uneven and some of
them amount to nothing more than a step in the right
direction. For these reasons, it is important that the Com-
mission should continue with its efforts to discipline the
programmes, in particular in the area of instructions and
resources given to the Delegations and in that of the
impact studies required by the new integrated approach
to the management of the programmes.

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Official Journal of the European Communities

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Annual/Special Reports

Extracts — Court observations

Extracts — Commission replies

Special Report No 2/95 concerning
the Stabex fund in the context of the
first Financial Protocol of the Fourth
Lomé Convention
(OJ C 167, 3.7.1995)

11.9. The changes made by the new Convention have
introduced contradictions between some of its objec-
tives.... Although the Convention does retain, in principle,
the sectoral approach (6.2), the overall economic context
cannot be ignored without the risk of inconsistencies with
the structural adjustment policies applied elsewhere (6.4
and 6.5). Finally, the introduction of frameworks of mutual
obligations brings with it long drafting (6.13 and 6.14)
and implementation periods (7.3 and 7.4), which deprive
the Stabex mechanism of its characteristics as a short-
term, rapid-disbursement instrument (5.5 and 6.24).

11.10. The Convention did not provide for the alloca-
tion of considerable amounts of Stabex funds to general
programmes or sectoral import programmes (7.5). As a
result, it did not provide a framework of management for
the considerable amounts of counterpart funds that these
programmes generate (7.3(c) and Annex 6). There was
therefore nothing to stop the counterpart funds being
allocated several times over to operations that were alien
to the objectives of the Stabex system.

11.12. The payments entered in the accounts by the EDF
overstate the actual use that is made of the transfers by
treating the payments made into intermediate bank
accounts opened in the name of the beneficiary ACP
States as final payments (3.4). Moreover, the Commission
has no consolidated information available as to the use
that is actually made of the transfers (7.1) or of the coun-
terpart funds (7.3).

11.13. The implementation of the frameworks of mutual
obligations has given rise to a second level of manage-
ment of EDF appropriations which is not subject to the
control procedures prescribed by the Financial Regula-
tion, whereas comparable operations (e.g. import pro-
grammes) financed through other instruments are subject
to the Financial Regulation (5.2(a) and 9.4).

11.9. Where the transfer is large in relation to other
economic factors (the country’s budget of balance of
payments, for instance) it inevitably has a macroeco-
nomic impact that should not be overlooked. The uses
to which the transfer is put should therefore at least be
consistent with the country’s general economic policy,
and preferably actively second and further this policy.
What applies at macroeconomic level is all the more
true at sectoral level: transfers that are large in com-
parison with sector variables must be used in a way
that is consistent with, and supportive of, sectoral
policy.
The importance of macroeconomic and sectoral con-
sistency is not confined to Stabex transfers but is true
of all forms of aid. It is particularly true in the case of
countries where Stabex transfers are relatively substan-
tial and are used in a fairly short span of time.
This is not a ‘contradiction’ but a reality that has to be
taken into account in implementing Stabex.
And while it does take more time to negotiate FMOs
and satisfy the conditions for their implementation
than it does to use a transfer not subject to the same
conditions, this is not a contradiction but a desire to
find a balance between quick disbursement and the
checks on their use demanded by the Member States.
Despite the time taken to do this, Stabex funds are
mobilised quite quickly compared with other quick-
disbursing instruments of the Commission and other
donors (see reply to points 6.4 to 6.6).

11.10. The ‘Principles, guidelines and rules for the use
of Stabex transfers under Lomé IV’ of 4 February 1991
referred to by the Court (see point 6.12) has a whole
chapter devoted to the subject of generation of coun-
terpart funds by import programmes. The Commis-
sion had foreseen that Stabex-funded import pro-
grammes under Lomé IV would generate large amounts
of counterpart funds and that a degree of flexibility in
applying the rules on the allocation of foreign exchange
would be called for.

11.12. Although the payment of Stabex transfers and
the entry of these payments in the accounts are the last
steps of the financial procedure, the departments in
Brussels have established a number of measures to keep
track of both the foreign exchange and counterpart
funds. It is planned to strengthen and improve these
measures still further.

11.13. See reply to paragraph 5.2(a).
5.2(a)These funds are no longer EDF funds but belong
to the ACP country concerned, the use to which they
are to be put being stipulated in the FMO. The Com-
mission therefore does not think one can talk about a
second layer of EDF management.

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Annual/Special Reports

Extracts — Court observations

Extracts — Commission replies

11.14. The Commission will ensure technical assis-
tance is used where appropriate; it can easily be financed
with Stabex resources, if need be. As to staffing levels,
the Commission can only, as we said in the introduc-
tion, do the best it can with the resources available.

11.16. Delays in drawing up FMOs usually arose
because of discussions with the national authorities on
the use of transfers and conditionality. Such discus-
sions are only to be expected in the case of transfers of
what are often substantial sums of money and they
can take some time.
Internal consultations within the Commission on how
the FMOs were to be applied (especially as regards
macroeconomic and sectoral consistency) were indeed
needed at the beginning of the FMO implementation
procedure but countries receiving large transfers (Côte
d’Ivoire and Cameroon, for instance), where there was
intensive debate on the best way of ensuring macro-
economic coherence, were also among the countries
that were quickest in approving and implementing
their FMOs. This internal debate did not, therefore,
slow down the adoption of the FMOs; on the contrary,
it paved the way for speedy implementation thanks to
proper identification of the recipient country’s prior-
ity needs.

11.17. The Commission believes that Stabex funds
have usually been used as required by the Lomé
Convention

11.14. The frameworks of mutual obligations have bur-
dened the Commission Delegations with a considerable
amount of preparatory and monitoring work for the sup-
port and reform programmes although their staff num-
bers have not been reassessed in the light of this extra
work (5.2, 6.17 and 7.53).

11.16. The decentralised mechanism for the preparation
and the implementation of the frameworks of mutual
obligation has experienced delays caused by the interven-
tion of the central departments during the preparatory
stages (6.15, 6.22 and 6.23) and has been affected by the
contrasting positions adopted, which varied according to
the country or the financial instrument, when questions
such as the choice of operations to be financed (7.8, 7.13,
7.31, 7.38, 7.42 and 7.43) or observance of the conditions
governing the release of funds (8.9 to 8.23) were con-
cerned.

11.17.
Stabex funds have too often been orientated
towards operations intended to clear up past errors rather
than towards the making of investments in new sectors,
instead of in sectors with no real prospects (6.2, 6.5 and
7.5). These debatable allocations of funds have been facili-
tated by the presence of counterpart funds accompany-
ing the import programmes. These transfers have thus
served to make up for the poor management by public
bodies (7.26, 7.27(d), 7.29 to 7.33, 7.39 and 7.41), the
debatable choice of monetary policy (7.28, 7.37 and 7.38)
or faults of viability in the price support systems (7.42 to
7.49), most usually to the detriment of producers (2.8(d)
and 6.2).

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THE COMMISSION’S REPLIES

SUMMARY

I. The study concerns one aspect of the assistance provided by
the Commission for structural adjustment programmes: the moni-
toring of counterpart funds. The Court of Auditors did not look
into the role of the Commission in such programmes, the use of
conditionality, the impact of assistance on macroeconomic bal-
ances or on the structural and sectoral reforms central to such
programmes.

Structural adjustment programmes, in which the Bretton Woods
Institutions (BWI) play a major role under their international
mandate, are complex. They are aimed at encouraging the ben-
eficiary countries to carry out what are seen as essential reforms:
macroeconomic reforms and structural reforms concerning pub-
lic finances, privatisations, civil service reforms, etc. The support
provided by the international community has always been con-
ditional on adherence to a macroeconomic programme moni-
tored primarily by the IMF and structural reforms guaranteed by
the World Bank. Compliance with the programme’s conditions
enables the donors to provide balance-of-payments support with
a direct impact on governments’ budgets. The Commission has
taken part in such programmes and sought to make sure that cer-
tain of its concerns were taken into account. In line with the
Council’s guidelines, these concerns include shielding priority sec-
tors, especially the social sectors, and supporting reform in those
sectors: the introduction of essential drugs policies, the re-targeting
of budget spending on primary spending, the introduction of vac-
cination policies, etc. This concern has been reflected in Commu-
nity support programmes by specific conditions and by the tar-
geting of counterpart funds generated by assistance. These
programmes have changed considerably in the past two years.
These changes reflect both the lessons learned and the Lomé Con-
vention’s emphasis on a gradual approach that respects a coun-
try’s efforts to implement difficult reforms that cannot be carried
out all at once.

reform programmes

II. The Commission’s approach has been consistent with the
principles of the Lomé Convention: its concern has been to sup-
port
governments
(Article 244(a)) and backed by the donor community, and in par-
ticular the BWI. It has adhered to the principles laid down: respect
for countries’ priorities (244(e)), a realistic pace of reforms (244(g)),
adaptation to needs (248(a)) and flexible implementation (247(4)).

drawn up by

Most of the programmes for which the Court of Auditors exam-
ined counterpart funds belong to what can be described as the
first generation of economic reform programmes, which focused
on priority reforms. The current trend in programmes owes much
to the Commission’s role in the international debate. The Com-
mission has, in the past two years, applied an innovative approach
based on indicators of budget performance and results, especially
in the social sectors.

III.
In these programmes the Commission’s checks have focused
mainly on compliance with the conditions determining the dis-
bursement of aid.

While the other donors have confined themselves to providing
aid for cash-flow, the Commission has sought, by targeting funds,
to make sure that its aid promoted the execution of spending in
priority sectors. The targeting of counterpart funds offers govern-
ments an incentive to execute priority spending and therefore to
increase their volume, since the Community’s money is paid to
the treasury as it executes such spending. The government loses
out if it fails to execute the targeted budget expenditure. Moreover,
the supporting documents necessary for the disbursement of
Community funds oblige the government to monitor budget
execution.

As for technical assistance, it is provided to governments at their
request, in accordance with the Lomé Convention. The support
has fostered an approach whereby technical assistance can be rap-
idly provided to any government expressing the need. Changes
have been made to make sure that unused sums are returned to
the budget support.

It is vital that the developing countries improve their man-
IV.
agement of public finances. This will obviously take time and will
have to be done in stages: the donors will have to coordinate their
activities and monitor the progress made by the beneficiary coun-
tries. Budget support allows this issue, which cannot be addressed
by projects alone, to be raised.

Structural adjustment programmes have brought major reforms
in the management of public finances. Audits by the Commission
have shown that further developments are necessary. Of all the
donors, only the Commission has monitored governments’ bud-
gets and insisted on corrective measures and repayments to the

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central bank accounts requiring the signature of the Commission
and the beneficiary country. In order to promote a concerted
approach by the donors in this matter, the Commission and the
World Bank have decided to set up a trust fund for designing tools
for assessing public finances and measuring progress.

very outset drawn attention to the dangers of cutting public
spending without protecting priority sectors, and in particular
social sectors. It has endeavoured to make sure that structural
reforms redirect budget spending towards the primary sectors (in
particular basic health care and primary schools) or foster improve-
ments in the policies pursued (e.g. essential drugs).

V. The Commission endorses the recommendations of the Court
of Auditors, which in many cases reflect the guidelines followed
in the programmes implemented over the past two years: increased
coordination under the Poverty Reduction Strategy Papers, pur-
suit with the Bretton Woods Institutions of common instruments
for assessing the quality of the management of public finances,
increased importance of issues related to public finances, develop-
ment of budget performance indicators and performance indica-
tors in the social sectors. It will maintain the current approach to
non-targeted programmes recommended by the Court of Audi-
tors in point 55. It will foster the planning of aid with three-year
programmes under the Cotonou Agreement. Last but not least, it
is developing, as a complement to macroeconomic aid, sectoral
approaches within the budget framework, as authorised by the
Cotonou Agreement. It will continue to pursue a consistent
approach based on its delegations and capacities in both the eco-
nomic sphere and specific sectors, especially the social sectors.
New instructions based on these developments and the imple-
mentation of the Cotonou Agreement are now being finalised by
the Commission.

It undertakes to specify the monitoring arrangements in the
financing agreements rather than in the protocols for the use of
counterpart funds. These will reflect the proposals of the Court
of Auditors, namely that the overall quality of public finances be
assessed, as far as possible, with other donors and indicators
specified for measuring the progress made. In addition to the
Court of Auditors’s recommendations, the Commission proposes
to check that a sum matching its aid has been used to fund basic
spending in the priority sectors.

INTRODUCTION

Counterpart funds from structural adjustment support

2. The description of the use of structural adjustment funds is
not wholly consistent with the objectives laid down by the Lomé
Convention. Structural adjustment support has primarily focused
on macroeconomic reforms, an area in which the IMF is the main
player, and structural reforms, in which the World Bank takes the
lead, in accordance with their international mandate. The Com-
mission has backed such reform programmes by means of an
approach geared to developing specific aspects. It has from the

This support for sometimes difficult reforms is voiced in the con-
ditions attached to the disbursement of tranches, an aspect out-
side the scope of the review of the Court of Auditors.

The report therefore concerns only one, Commission-specific
aspect of structural adjustment support, namely the monitoring
of the counterpart funds generated by the foreign exchange pro-
vided. The other donors, and in particular the Bretton Woods
Institutions which offer soft loans, have simply transferred their
aid to treasury departments or central banks with no particular
monitoring.

4. The Commission’s initial objective was to ensure that the sup-
port provided did actually help governments to protect priority
spending.

5. Structural adjustment programmes have evolved in step with
the progressive, realistically paced approach recommended by the
Lomé Convention. The recent shift towards support for Poverty
Reduction Strategy Papers (PRSPs) reflects the Commission’s long-
standing concerns: an increased emphasis on the results for the
population, ownership of programmes by the countries con-
cerned,
increased attention to sound management of public
finances.

This shift towards what can fairly be described as second-generation
reforms reflects a change in priorities now that many of the most
pressing cash-flow problems have been resolved and basic reforms
carried out. Over the last two years the new approach has led the
Commission gradually to review its support mechanisms. The
Commission accepts the proposal of the Court of Auditors that
the term ‘counterpart funds’ be abandoned in the context of bud-
get aid.

PROGRAMME DESIGN

Scope of expenditure targeting

9. The targeting of budget aid supplements the conditions
attached to programmes, which were not reviewed by the Court
of Auditors. Targeting is in itself an incentive to governments to

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execute the targeted spending, since the Community’s money is
paid to the joint-signature treasury account as such spending is
executed. The government loses out if it fails to execute the bud-
get. Moreover, the supporting documents required for disburse-
ments oblige the government to monitor budget execution.

14. The financing of arrears or treasury bonds does not prevent
the Commission from supervising sectoral reforms or making
sure that social sectors are protected. This is done indirectly by
relieving the financial burden on the government and through the
conditions attached to the programme.

The conditions governing budget execution have therefore been
invoked only where targeting itself has proved inadequate or
where the Commission has switched to non-targeted aid.

15. The Commission’s position is to encourage the inclusion of
all external aid in the budget (including project aid) and, it is true,
to move away from project financing: in Ghana, for example, this
aid has been decreasing, and other expenditure requested by the
government but not included in the budget has been refused by
the Commission.

11. The past two years in particular have seen the Commission
switch to non-targeted aid while seeking to develop an overall
approach to supervising spending with the other donors.

16. February 2000’s communication to the Council gives a sec-
toral breakdown of targeted expenditure showing, for example,
that health, education and road maintenance (excluding arrears)
have respectively accounted for 34 %, 27 % and 6 % of counter-
part funds.

Choice of target expenditure

CONTROLLING PROGRAMME EXECUTION

12. The choice of targeted expenditure has in most cases been
dictated by an analysis of what were held to be the most vulner-
able expenditure headings while seeking a rapid input of funds
consistent with the instrument’s purpose. Box 1 shows how the
refinancing of expenditure in Benin sanctions past use of the bud-
get. In very many cases this targeting has had beneficial effects:
increasing the level of budget execution in social sectors in Benin
(Box 7), increasing budget execution in Malawi (Box 1). Other
effects include the implementation of essential drugs policies or
the decentralisation of the supply of materials to Burkina Faso’s
schools. The impact on the social sectors is to a great extent
achieved through conditionality.

Support timetable

17. There are no international standards for budget deficits.
Indeed, they have only recently been established at European
Union level. The criteria used for budget aid are therefore based
primarily on balance-of-payments financing needs. ‘Need’ is obvi-
ously a subjective concept, and we are still a long way off cover-
ing a country’s needs. The concept of overfinancing does not
exist: in the case of a very poor country like Senegal this would
be tantamount to saying that it had too much money (something
even the richest countries would deny).

13. The expenditure covered by Commission programmes is part
of the stabilisation and economic reform programme; this is par-
ticularly the case of arrears. Targeting arrears is not general budget
aid, it is very clearly targeted. There are many economic argu-
ments (presented to the EDF Committee and forwarded to the
Court of Auditors) for targeting such expenditure, which is audited
before repayment. Adjustment support programmes are aimed at
limiting arrears and are supervised by the IMF, an activity that the
Commission does not intend to duplicate. The Commission con-
siders the reform programmes steered by the IMF in the countries
cited to be effective.

19. There are several possible explanations for the differences
between actual and expected payments, in particular difficulties in
discussions between a country and the IMF (‘off track’ or sus-
pended programmes). In the case of Ghana and Tanzania, for
example, IMF programmes were suspended for about two years.
It is no doubt possible to improve the predictability of budget
support but this remains largely contingent on the outcome of
the IMF’s assessment. In other cases delays can be attributed to
failure to comply with specific conditions. The shift to three-year
programmes under the Cotonou Agreement will increase the pre-
dictability of aid for countries that perform well.

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Box 2

Shifts in the support timetables

1.
In Malawi payment was made at the end of 2000 after a review of
compliance with conditions. The analysis of compliance presented by
the Government via the Delegation had been considered inadequate by
the headquarters departments responsible.

2.
In Zambia the Commission paid for a consultant to examine the
issue raised by the Court of Auditors and carried out an audit in the
country.

In Ghana the two-year interruption in the macroeconomic pro-
3.
gramme accounts for the discrepancy between the year of disburse-
ment and the year of use of funds.

20. The Commission regrets that there is no international IMF
standard for the incorporation of external budget aid.

23. Recent programmes adopted by the Commission have tried
to resolve the issue of technical assistance by according countries
greater flexibility in the use of funds for capacity-building. In the
event of such assistance not being used, these programmes pro-
vide for the resources concerned to be reincorporated into the
budget support.

24. The Commission believes that it makes sense to use its vari-
ous instruments in a coherent manner and to make use of any
existing skills. Quite apart from the fact that it is not covered by
the Lomé Convention, the breakdown between local and expatri-
ate technical assistance depends on local skills and governments’
choices.

25.
In the case of technical assistance paid for using counterpart
funds (Benin, Ghana, Malawi), contracts have always been closely
supervised by the delegations, which have consulted headquarters
whenever necessary.

Controls on the constitution of counterpart funds

Auditing

In a country with a convertible currency there is only one
21.
exchange rate for official transactions (the interbank rate) recog-
nised by the country’s financial and monetary rules (that rate
being used for BWI aid to the central bank). However, the Com-
mission will see that it specifies the exchange rate to be used in
future financing agreements.

Box 3

Controls on the constitution of counterpart funds

1. The Commission believes it justified not to use preferential rates
and to align itself on the formula used by the central bank for convert-
ing its foreign-exchange holdings (interbank rate).

2.
In Mozambique the amount of the counterpart funds results from
the formula applied by the central bank. The administrative costs high-
lighted by the Court of Auditors are no longer applied to direct budget
aid to Mozambique.

Use of technical assistance

22. Under the Lomé Convention, technical assistance, including
its terms of reference and the choice of consultants, is the respon-
sibility of the national authorising officer: the Commission is
therefore dependent on the government for the use made of it.

26. With regard to the audits carried out by the Commission,
the Zambian audit began on 14 May this year. The delay was
wholly due to a shortage of resources in the Commission’s audit
department.

It should be stressed that the Commission is the only donor
29.
to have conducted audits covering government budgets in the
course of its budget support programmes. Box 4 confirms the
impact and relevance of the Commission’s audits.

30. The overall audit of budget support to Malawi took place in
November last year; the audit of support for Zambia has just
begun. Only Mozambique has yet to be audited. The implementa-
tion of these audits is constrained by the understaffing of the
department concerned.

Response to table 5: The audit in Mauritania confirmed the ineli-
gibility of certain expenditure already rejected by the Commission
and therefore required neither a protocol of agreement nor the
repayment of funds.

33. Where audits have revealed shortcomings in governments’
budget management, the Commission has taken a number of
measures: (1) repayment to the joint-signature account for coun-
terpart funds. This repayment is, however, much more than a
mere transfer between two government accounts, since the joint-
signature account, which is generally held at the central bank,
cannot be used by the government. These joint-signature accounts

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are not usually included by the IMF in the government’s net posi-
tion and automatically limit the government’s cash-flow. Where
they are taken into account, they enable the government to bor-
row either from the banking sectors or the central bank. As for
possible repayments to the EDF, this does not apply because
counterpart funds are not EDF resources (see point 4) but own
resources of the beneficiary country; (2) the drafting of an action
plan to limit the risks of new shortcomings; (3) the identification
of institutional support needs; (4) in many cases, the reduction or
cancellation of programmes.

34. The acceptance of invoices eligible for European financing is
quite above board as long as it is accompanied by broader mea-
sures to improve the quality of budgets (see also response to points
55 and 56).

Substitution of qualifying expenditure for ineligible expenditure

Box 5

1.
In Côte d’Ivoire, of the planned allocations of repaid funds, only
election support, the refinancing of treasury bonds and certain emer-
gency health spending have actually been implemented, primarily owing
to the suspension of cooperation with the country on political grounds.
As for the concern to release funds quickly, this can only be explained
in the context of the quite exceptional financial and institutional situ-
ation prevailing in the country in the period April-September last year.

2.
In Gabon the acceptance of eligible invoices for European financ-
ing is quite above board: a wide-ranging audit of public finances and
the government’s internal arrears permitted major reforms, in agree-
ment with the IMF. The support programmes of the BWI and the Com-
mission were suspended pending the conclusion of the audits and sign-
ing of a new agreement with the IMF (October last year).

36. The Commission reiterates the commitment it gave in the
1998 discharge to set up an effective archiving system, something
on which it is actively working. Indeed, a filing and monitoring
system has been set up by the unit responsible for macroeco-
nomic support.

37. Supervision by headquarters services has normally focused
on monitoring the overall programme and compliance with pro-
grammes’ conditions. Supervision of disbursements of counter-
part funds according to the rules agreed in the protocols of agree-
ment has been exercised by the delegations under the supervision
of headquarters. The consultant recruited carried out an in-depth
study, including qualitative judgments (based on a questionnaire
sent to all the delegations concerned), something that officials
could not have done in good time.

38. The shortage of human resources means that the Commis-
sion is constantly having to prioritise its activities. In any case, the
issue of the resources needed to supervise the quality of public
finances can only be resolved by an overall approach and a divi-
sion of responsibilities involving the other donors.

39. The macroeconomic unit is not alone in monitoring the sec-
toral impact of aid (this is monitored by the delegations and by
the units responsible for the sectors concerned: roads, agriculture,
social sectors). In order, however, to separate, in macroeconomic
programmes, the assessment of purely macroeconomic aspects
from that of the effectiveness of the policies carried out to reduce
poverty, recent Commission programmes distinguish purely mac-
roeconomic tranches from variable tranches linked to perfor-
mance indicators in the social sectors (a proposal that came out
of the test on the reform of conditionality).

The Commission’s administrative organisation

THE CHALLENGES OF BUDGET AID

Public finance management

35. The instructions concerning counterpart funds were updated
by a Commission communication and a Council resolution in
1996 and by a new DG VIII manual of procedures in 1998. It is,
however, clear, in view of this Court of Auditors report and the
guidelines it lays down and the implementation of the Cotonou
Agreement, that new instructions are being drafted, especially
concerning the abandonment of the term ‘counterpart funds’, the
abandonment of targeting and the assessment of the quality of
budget management.

40. As the Court of Auditors notes in point 11, the IMF exercise
supervision over the entirety of public finances. The Court of
Auditors also noted the developments in the Commission’s
approach to audit (points 26 to 29). At present the shortcomings
in the management of public finances, highlighted in particular
by the Commission’s audits, need to be assessed and monitored
by means of a coordinated approach involving entire donor com-
munity, not just the Commission.

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42. The description by the Court of Auditors of the challenges
of budget management illustrates the scale of the problems
encountered in the developing countries. The Commission’s step-
by-step approach is warranted and consistent with the Lomé
Convention/Cotonou Agreement.

ing of budget aid and making funds totally fungible. With or
without targeting, the donors must pay more attention to the
sound management of public finances.

46. The computerised system set up by Burkina Faso to track
expenditure is one of the best in Africa. As in many other coun-
tries, it requires further development to track devolved expendi-
ture.

53. Along with the use of performance indicators, the Commis-
sion monitors the application of measures negotiated with gov-
ernments in the wake of audits. These measures are far more
numerous and detailed, including in qualitative terms, than the
indicators chosen as conditions for budget aid. The Court of
Auditors is undoubtedly aware of the difficulty of finding univer-
sally relevant and usable indicators, but the Commission has tried
to do so in recent programmes.

Impact of expenditure on social sectors

Wherever possible — financing proposal following the negotia-
tion of an action plan — account has been taken of this in new
aid (Cameroon).

47. The Commission led the way in addressing the question of
the assessment of the quality of public services, introducing per-
formance indicators in its structural adjustment programmes in
1999.

In the case of Senegal, the list of indicators was confirmed in
December last year.

48. Until the Commission involved all donors in a review of
conditionality in the SPA context, donors operated on the assump-
tion that the sectoral and budget reforms required of countries
would automatically increase provision of public services. The
test carried out in Burkina Faso, in which the Commission coor-
dinated the activities of 12 donors, showed that this was not the
case and was followed by proposals for a radical change in meth-
ods with a greater emphasis on performance indicators. This
complex shift, which the Commission alone has made so far, is
beginning to bear fruit. It took two years of discussions in the SPA
for this mandate to be conferred on the Commission.

54. The new programmes consist of a tranche directly linked to
economic performance and another, variable tranche linked to
performance indicators. The relative size of these tranches varies
according to the countries concerned, their financial situation and
the level at which indicators are set. This innovative approach is
currently the object of an outside study aimed at optimising the
approaches used. It is an established principle that poor perfor-
mance will lead to reduced disbursements.

55. The Commission shares the view of the Court of Auditors
that the targeting of funds should be abandoned in all but excep-
tional circumstances. This approach has been applied in Commis-
sion programmes over the past two years.

50. The unit responsible for structural adjustment is involved in
the sectoral approach both at the level of the SPA (analysis and
monitoring of sectoral programmes) and within the Commission,
where it jointly chairs a working party producing guidelines in
the matter. Implementation has remained in the hands of sectoral
units as recommended by the court, with an effort to ensure a
coherent approach.

The Commission’s approach is not confined to checking that an
eligible amount of expenditure has been properly executed in pri-
ority sectors but also includes an overall examination of the qual-
ity of public spending (see below). The proposed approach comple-
ments, and is quite consistent with, that advocated by the Court
of Auditors.

Redirecting the monitoring and control of budget support

52. The absence of cash-flow problems (the result of countries’
efforts and external aid) is the main argument for ending target

Box 9

Justifying the eligibility of expenditure

2. All new financing proposals prepared last year (not just that for
Mozambique) provide for the auditing of ‘eligible amounts’ and wider-
ranging checks on the quality of public finances.

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56. The Commission advocates a dual approach. Firstly, it wants
to make sure that the amount of properly executed spending in
priority sectors exceeds the aid provided by the Commission (a
requirement applied by other donors). Secondly, it wants to assess,
as the Court of Auditors recommends (and where possible with
other partners) the overall quality of the management of public
finances.

59. Supervision by headquarters has normally focused on moni-
toring the overall programme and compliance with the condi-
tions attached to programmes. Audits carried out by the Com-
mission have gradually made it possible to address the question
of public finances in a new way. In particular, they have revealed
the limits of the primarily institutional approach previously imple-
mented. It is not enough to improve the rules, the rules have to
be enforced. The Commission has therefore paid increasing atten-
tion to improvements in the management and control of public
finances. It has played an active role in coordinating other donors’
activities in these areas (trust fund, SPA).

CONCLUSIONS AND RECOMMENDATIONS

General appraisal

57. The Commission is aware that the situation in the develop-
ing countries is difficult and that the situation with regard to gov-
ernments’ management of public finances and the provision of
public services is far from ideal. Its approach seeks to be realistic
and progressive, aimed at making sure that Community support
fosters positive trends, measured according to objective criteria,
in these two fundamental areas.

60. Audits have revealed a number of flaws in the management
of national budgets. On the basis of these findings, the Commis-
sion is the only donor to have asked for ineligible expenditure to
be repaid to the joint-signature (delegation/government) accounts
(repayment to the EDF is inconceivable because the irregularities
concern counterpart funds belonging to the beneficiary country).
It has negotiated action plans aimed at preventing the repeat of
errors or abuses observed and has provided institutional support.
Lastly, it has in many cases reduced support to countries where
major shortcomings have been observed.

58. All structural adjustment support combines balance-of-
payments support with budget support linked to reforms. The
Commission has provided support for these programmes while
underlining a number of specific concerns. This emphasis has in
particular been manifested by the verification of specific condi-
tions not covered by the Court of Auditors’s report. The disburse-
ment decisions for these programmes have a political dimension
and are taken at Commission level. These decisions sometimes
have to tread a fine line between preserving the major financial
balances even though some reforms have yet to be carried out
and blocking all aid even though progress has been made in some
areas. The Commission has for the past two years been applying
an innovative approach aimed at providing variable support rather
than the ‘all or nothing’ approach characteristic of earlier pro-
grammes.

61. The Commission, like the Court of Auditors, is aware that
improvements in the management of public finances in the devel-
oping countries will be gradual and will require time before they
are wholly satisfactory. The Commission is therefore using its
support to foster improvements in such management. Over the
past two years the Commission has gradually introduced into its
programmes performance indicators for budget management,
chiefly with a view to making sure that budgets actually reach the
most decentralised structures and measuring the differences
between the prices charged to the public sector and those obtained
by the private sector. The Commission has, moreover, proposed
the establishment of a trust fund with the World Bank to improve
in a coordinated manner the instruments for assessing the quality
of public finances and progress made and for identifying reforms
to be carried out and institutional support needs. Its current pro-
grammes provide for audits and assessments.

As for the supervision of counterpart funds, which was examined
by the Court of Auditors, it has sought to encourage sound execu-
tion of priority budgets (especially in the social sectors. The very
principle of targeting is to foster such execution by releasing funds
only if budgets are executed. This imposes monitoring of the
execution of the targeted budget headings.

Recommendations on the organisation of monitoring

Such targeting, associated with conditions, has enabled the Com-
mission to propose and implement a number of key reforms in
the interest of the poor: the introduction of essential drugs poli-
cies, an increase in budget execution, decentralisation of educa-
tion budgets to ensure that schools are properly equipped.

62. The Commission shares the opinion of the Court of Audi-
tors and has already begun implementing recommendations 1 (a)
(b) and (c) aimed at developing a coordinated approach enabling
monitoring mechanisms for assessing the quality of budget man-
agement to be clearly defined. As for taking account of perfor-
mance indicators in place of traditional conditions, the Commis-
sion has assigned a team to assess the different mechanisms tested
in its current programmes.

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(b) As for the yearly nature of audits, the Commission has reser-
vations about the feasibility of carrying out annual financial
audits in a context of non-targeted aid and under an approach
coordinated with the other donors. It will, however, commit
itself to annual checks on budget performance indicators.

(d) The Lomé Convention does not provide for the EDF to finance
technical assistance for the delegations. The distinction between
support for the authorising officer (usually the minister of
finance) and that for the administration is complex: most
technical assistance staff assigned to help the authorising
officer in the performance of his duties are also intended to
develop his capacities on a wider basis.

(e) Assessing the quality of the management of public finances
calls for an overall approach involving headquarters depart-
ments and other donors. It is on this basis that delegations
will be able to give an assessment.

63. The Commission undertakes to introduce, as far as possible,
provisions on the monitoring and auditing of aid in financing
agreements rather than protocols of agreement. As recommended
by the Court of Auditors (points 11 and 55), it has for two years
been moving in the direction of non-targeted budget aid and will
take account of the recommendation (point 5) that the term
‘counterpart funds’ no longer be used in the context of budget aid.

64. The distinction between the macroeconomic departments
and the departments handling the social sectors already applies at
the level of programme design (DG DEV) and implementation
(AIDCO). The key issue is to ensure overall consistency in the
work of units, something the Commission is trying to achieve in
relations between units and via the role of delegations and desk
officers.

Recommendations on coordination

65.
Improving the predictability of aid for countries is a matter
of constant concern for the Commission and has not always been

easy to implement (interruption of programmes, failure to com-
ply with conditions). The implementation of three-year pro-
grammes under the Cotonou Agreement should improve predict-
ability for countries that perform well.

66. The Commission can only endorse the recommendation that
coordination of aid under the PRSP be improved. The Commis-
sion’s key role in supporting this process is acknowledged in the
latest World Bank/IMF report.

67. The Commission supports sectoral programmes, which by
definition reflect a coordinated approach by donors. It is, after the
World Bank, the main donor to such programmes (tracking sec-
tor programmes, SPA, December 2000). This approach is aimed
at integrating sectoral support into the budget of beneficiary
countries. The Cotonou Agreement now authorises the Commis-
sion to finance sectoral programmes with budget support where
conditions lend themselves to this.

68. The Commission is keen to make sure that the issue of the
sound management of public finances and the identification of
performance indicators allowing the coordinated measurement of
progress in the provision of public services, especially in the social
sectors, are dealt with as a matter of priority in the PRSPs. In coor-
dination with other donors, it is developing a coordinate approach
to the assessment of public finances (Trust Fund and SPA). This
will enable it to pursue the approach initiated in programmes
implemented since the end of 1999. Controls now focus on what
the Court of Auditors is proposing, namely the assessment of the
overall quality of public finances based on audits carried out,
wherever possible, with other donors, establishing indicators for
measuring progress and developing reform programmes. In
response to the recommendations of the Court of Auditors, the
Commission also proposes to check that a sum equivalent to its
aid has, in priority sectors, enabled fundamental expenditure to
be properly financed: in particular, audited arrears, the wages of
primary schoolteachers, nurses, doctors and other expenditure
vital to reducing poverty.