Special Report No 1/2002 concerning macrofinancial assistance (MFA) to third countries and structural adjustment facilities (SAF) in the Mediterranean countries, together with the Commission's replies
Date: 2002-03-07
Institutions: European Court of Auditors
Subjects: Mediterranean third countries, economic cooperation, emergency aid, financial aid, third country

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I

(Information)

COURT OF AUDITORS

concerning macrofinancial assistance (MFA) to third countries and structural adjustment facilities
(SAF) in the Mediterranean countries, together with the Commission’s replies

SPECIAL REPORT No 1/2002

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

(2002/C 121/01)

CONTENTS

Paragraph

Page

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

I-VIII

Programme overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Framework and legal basis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Design of structural adjustment facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Design of macrofinancial assistance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Assessment of partner government’s budgetary and accounting processes . . . . . . . . . . . . . .

Monitoring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Reporting and evaluation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Conclusions and recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

FINANCIAL AND BUDGETARY SIGNIFICANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

SAF in the Mediterranean countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

MFA to third countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

THE COURT’S AUDIT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

DESIGN OF PROGRAMMES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

SAF in the Mediterranean countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Rationale of Financing Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Conditionality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

MFA to third countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Principle of exceptional character . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Political preconditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Complementarity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

I

II

III

IV

V

VI

VII

VIII

1-7

8-10

8

9-10

11-14

15-46

15-27

15-16

17-19

20-21

22-27

28-46

28-29

30-33

34-35

36-41

3

3

3

3

3

4

4

4

4

5

6

6

6

6

6

6

6

7

7

7

8

8

9

9

9

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Paragraph

Page

Conditionality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

42-45

Financial discipline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

46

ASSESSMENT OF PARTNER GOVERNMENT’S BUDGETARY AND ACCOUNTING
PROCESSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

MONITORING OF MFA AND SAF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

General observations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Approval of SAF payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Fulfilment of conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

REPORTING AND EVALUATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

SAF in the Mediterranean countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

MFA to third countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Consistent approach to similar instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Design, conditions and monitoring of agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Assessment of partner government’s budgetary and accounting processes . . . . . . . . . . . . . .

Evaluations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

47-50

51-60

51-55

56-58

59-60

61-65

61-62

63-65

66-78

66-68

69-70

71-74

75-76

77-78

ANNEXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

10

11

11

11

11

12

12

12

12

13

13

13

14

14

14

15

16

20

ABBREVIATIONS

ACP

BWI

DG

DG ECFIN

DG RELEX

African, Caribbean and Pacific States

the Bretton Woods Institutions (the International Monetary Fund and the World Bank)

Directorate-General

Directorate-General for Economic and Financial Affairs

Directorate-General for External Relations

Ecofin Council

Council Economic and Financial Affairs

EU

EDF

European Union

European Development Funds

FYROM

former Yugoslav Republic of Macedonia

GNP

IMF

MFA

OJ

SAF

VAT

gross national product

International Monetary Fund

macrofinancial assistance

Official Journal of the European Communities

structural adjustment facility

value added taxation

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SUMMARY

Programme overview

I. The European Union helps third countries not only through specific programme and project assistance but
also by supporting general economic transition and structural reform processes with assistance at a macro-
economic level. Such assistance is called ‘macrofinancial assistance’ (MFA) for third countries such as the EU
accession countries, the western Balkans and the new independent States (1) and ‘structural adjustment facili-
ties’ (SAF) (2) for the Mediterranean (MEDA) non-member countries.

Framework and legal basis

II.
In the absence of a framework regulation, the MFA interventions are based on individual Council deci-
sions. MFA is mainly given as loans. It is considered to be an exceptional instrument and is managed by
DG ECFIN. The legal basis for SAF actions is the 1996 MEDA Regulation. SAF are given as grants, are not
considered to be an exceptional instrument and were managed by DG RELEX, until 2001, when EuropeAid
took over the management of SAF (see paragraphs 1 to 5).

Design of structural adjustment facilities

In relation to SAF, the Commission does not document the basis for decisions on the global amount of
III.
the programme nor the timing and amount of instalments. Therefore, the rationale for these decisions is not
clear. In general, the amount of the support is not based on the specific cost of the associated reform pro-
gramme (see paragraph 20). The programmes’ conditions have focused on the presentation of legislation,
action plans etc, which represent intentions rather than being based on results. Generally, the Financing Agree-
ments do not clearly indicate which conditions are shared with the Bretton Woods Institutions (BWI) (3), and
which are the Commission’s alone. Many of the specific conditions relate to the social sector. However, struc-
tural adjustment specialists may lack a comprehensive view of social sectors and technical experts are not
systematically consulted (see paragraphs 23 to 27).

Design of macrofinancial assistance

IV. EU MFA does not always respect the five principles (4) that the Ecofin Council agreed in 1995, which
should govern the policy of MFA to third countries. For example, the assistance is in some cases regular and
continuous rather than exceptional. The political preconditions (5) are not always fulfilled. So far, MFA has

(1) These regions are receiving MFA. In the past, Israel (1991) and Algeria (1991 and 1994) were also beneficiary countries.
(2) The EU also provides structural adjustment assistance to the African, Caribbean and Pacific States (ACP) (see para-

graph 7).

(3) The International Monetary Fund (IMF) and the World Bank.
(4) Exceptional character, political preconditions, complementarity, conditionality and financial discipline.
(5) Geographical proximity to EU, full respect of human rights and rule of law.

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developed primarily as an economic instrument (see paragraphs 34 and 35). The examination of complemen-
tarity between EU MFA and other EU assistance revealed problems of coordination within the Commission
(see paragraphs 36 to 41). Although the principle of including conditions relating to political and economic
reforms is always respected, many of these do not define clear and measurable performance criteria, and are
not easily verifiable. Furthermore the principle of macroeconomic conditionality has been watered down when
urgent and political constraints have been taken into account for a payment decision (see paragraphs 42 to
45).

Assessment of partner government’s budgetary and accounting processes

V.
In budgetary support operations, whether loans or grants, as the money goes directly into the partner
country’s budgetary system and its use cannot be distinguished from the rest of the budget, it is important
that the budgetary and accounting processes in the country are reliable. The Commission has not made com-
prehensive specific assessments of the reliability of these processes in the countries to which it has provided
support (see paragraphs 47 to 50).

Monitoring

VI. There are no job descriptions, no internal rules, and no specific tools in the Commission units responsible
for monitoring setting out how to verify whether the reform policy in the beneficiary countries is satisfactory
and whether the specific conditions are fulfilled. The Commission monitors its assistance in close contact with
the IMF and the World Bank, and in many cases relies largely on work carried out by these financial institu-
tions. In practice, the Commission does not require that all of the conditions are fulfilled in order for the
country to receive a positive progress assessment and for the money to be disbursed. The decision to disburse
may be influenced by many other factors and the Commission should explicitly justify its decision (see para-
graphs 51 to 60).

Reporting and evaluation

VII. The annual report on MFA is comprehensive, however, the explanations concerning macroeconomic
performance and structural reforms do not establish links and causalities with the assistance. The absence of
evaluations (MFA) or their limited scope (SAF) means that the Commission has not yet fully implemented its
general policy for the evaluation of Community expenditure programmes (see paragraphs 61 to 65).

Conclusions and recommendations

VIII. While the instruments certainly encouraged general economic transition and structural adjustment
reform processes, there is considerable room for improvement. It is recommended that (see paragraphs 66 to
78):

— the added value of the European Union’s interventions in comparison to the World Bank and the IMF

should be more clearly established,

— consideration should be given to creating a more harmonised approach between, on the one hand, MFA
for the EU accession countries, the western Balkans and the new independent States, and, on the other,
SAF for the Mediterranean non-member countries, so that countries in similar situations are dealt with in
a similar manner. Lessons learned from experience in ACP States should also be taken into consideration,

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— the Commission should make its decision making for the various phases of the management of macro-
economic assistance more transparent, in particular on the considerations and criteria for the content of
the financing agreement and for disbursements of the instalments,

— the Commission should document its justification for waiving conditions,

— the Commission’s monitoring of the quality of financial management in beneficiary countries should be

considerably improved and involve all relevant DGs,

— more priority should be given to carrying out evaluations.

INTRODUCTION

1. The European Union helps third countries not only through
specific programme and project assistance but also by support-
ing general economic transition and structural reform processes
with assistance at a macroeconomic level. Such assistance is called
‘macrofinancial assistance’ (MFA) for third countries such as the
EU accession countries, the western Balkans and the new inde-
pendent States and ‘structural adjustment facilities’ (SAF) for the
Mediterranean non-member countries.

2. The instrument of MFA was initially created for intra-
Community balance-of-payment support. Since 1990 MFA has
been extended to third countries with a view to supporting their
political and economic reform efforts. The Council decides MFA
actions on a proposal from the Commission after consultation of
its Economic and Financial Committee and of the European Par-
liament (see paragraph 28). The Commission (DG ECFIN) imple-
ments this assistance in consultation with the Economic and
Financial Committee of the Council.

3. Since the mid-1980s, many of the south and east Mediterra-
nean countries have carried out structural adjustment reforms in
agreement with the BWI. The reforms focused on the reduction
of budgetary and external deficits. As the macroeconomic situa-
tions in most Mediterranean partner countries improved, macro-
economic stabilisation objectives have become less important and
programmes concentrate more on structural reforms. The Com-
mission has supported these reforms through the provision of
SAF.

5. The Court noted three main differences in the design and
implementation of MFA for third countries and SAF for the Medi-
terranean non-member countries:

(a) MFA is not seen as a permanent but as an exceptional instru-
ment whereas SAF is considered to be a normal, even essential
instrument. As a consequence there is no framework regula-
tion for MFA (1) whereas SAF is governed by the MEDA Regu-
lation (2);

(b) whereas SAF is always given as a grant, MFA generally takes
the form of loans and only in some special cases are grants
given;

(c) MFA is mainly managed by DG ECFIN, whereas the lead DG
for SAF was DG RELEX. From 2001 EuropeAid took over
responsibility for the management of SAF.

6. Given these differences, where appropriate, the Court makes
separate audit observations for MFA and SAF. Otherwise com-
ments are valid for both areas.

7. The EU also provides structural adjustment assistance to the
African, Caribbean and Pacific States through the European Devel-
opment Fund. Until recently, this aid was given in the form of
targeted support to the budget channelled through so-called coun-
terpart funds. The utilisation of these counterpart funds has been
the subject of a recent special report of the Court (3).

4. The instruments have certain similarities. For both, the pro-
ceeds are as a rule disbursed in instalments to the central bank of
the beneficiary country in order to strengthen its balance-of-
payments situation or help finance the budget. The assistance is
not allocated to specific categories of expenditure. There are no
specific accounting requirements for the money disbursed. The
assistance is generally released in successive instalments, the dis-
bursement of each of them being conditional upon the fulfilment
of agreed macroeconomic performance and structural adjustment
criteria, based on the programmes of the beneficiary countries.

(1) However, according to its work programme DG ECFIN intends to
elaborate a proposal for a Council decision on a framework agree-
ment for MFA.

(2) Council Regulation (EC) No 1488/96 of 23 July 1996, on financial
and technical measures to accompany the reform of economic and
social structures in the framework of the Euro-Mediterranean partner-
ship (MEDA 1) (OJ L 189, 30.7.1996), modified by Regulation (EC)
No 2698/2000 (MEDA 2) (OJ L 311, 12.12.2000).
(3) Special Report No 5/2001 (OJ C 252, 14.9.2001).

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FINANCIAL AND BUDGETARY SIGNIFICANCE

(b) the quality of the Commission’s payment approval and moni-

toring process;

SAF in the Mediterranean countries

8.
In total 955 million euro has been committed to the Mediter-
ranean countries as SAF between 1992 and 2000, of which
600 million euro under the MEDA programme between 1996
and 2000 (1) (see the tables in Annex I). Payments made under the
MEDA programme between 1996 and 2000 amounted to 470 mil-
lion euro. Five countries benefited from these programmes: Alge-
ria, Jordan, Morocco, Tunisia and Lebanon. Thirty-four per cent
of all the funds committed for these countries under the MEDA
programme were in the form of SAF. Jordan and Tunisia were the
largest recipients of funds as SAF under the MEDA programme.

MFA to third countries

9. The disbursements for MFA for the years 1998, 1999 and
2000 amounted to 822 million euro, of which 704 million euro
was given in the form of loans (85,6 %) and 118 million euro in
the form of grants (14,4 %) (see Annex II). Nine countries/provinces
benefited from these disbursements during this period: Bulgaria
and Romania (EU accession countries), Bosnia and Herzegovina,
former Yugoslav Republic of Macedonia (FYROM), Montenegro
and Kosovo (western Balkans) and Armenia, Georgia and Ukraine
(new independent States). For Tajikistan, Moldavia and Albania
decisions were made, but no payments were executed during 1998
to 2000.

10. MFA to third countries given in the form of grants is covered
by specific budget headings in the general budget of the European
Union (2). In the case of loans the effect on the general budget (3)
is limited to contributions to a Guarantee Fund (4). This fund is
used should the debtor default (see paragraph 46).

(c) whether the Commission fulfilled satisfactorily its reporting

duty and made comprehensive evaluations.

12. Concerning MFA the Court reviewed all 23 disbursement
operations for 1998 to 2000, including the underlying decisions
(see Annex II). Bulgaria, as the largest beneficiary country for loans,
was visited. The Court also visited the United Nations Interim
Administration Mission in Kosovo on the occasion of an audit of
the European Agency of Reconstruction.

13. For SAF the audit work included desk reviews in Brussels of
the six programmes relating to Lebanon, Jordan, and Tunisia cov-
ering the period 1996 to 2000 (5) representing a total commit-
ment of 450 million euro (see Annex I). In addition, a more
detailed audit, including a visit to the delegation and to represen-
tatives of the national authorities, was carried out for the pro-
grammes in Jordan and Tunisia.

Information was also obtained from the World Bank and the

14.
IMF on the implementation of MFA and SAF.

DESIGN OF PROGRAMMES

SAF in the Mediterranean countries

THE COURT’S AUDIT

Background

11. The main audit objectives were to assess:

(a) the rationale of the design of the instruments;

(1) The budget heading concerned is B7-4 1 0 MEDA (Measures to
accompany the reforms to the economic and social structures in the
Mediterranean non-member countries).

(2) An MFA budget heading for grants was introduced for the first time
in the general budget of the European Union for the financial year
1998 (Article B7-5 3 1 ‘Exceptional financial assistance to Armenia,
Georgia and Tajikistan’). The 1999 budget introduced a further Article
(B7-5 3 2): ‘MFA to the countries of the western Balkan region’.
In the form of a p.m. entry in Chapter B0-2 1 (Guarantees for bor-
rowing and lending operations to promote development in third
countries).

(4) A Guarantee Fund for external action was established in 1994. Any
defaults on repayments are covered by this fund within the limit of
the amount available.

(3)

15.
Initially the SAF programmes were governed by the fourth
Protocol (6). This Community support consisted mostly of import
support programmes, with the domestic counterpart value of the
foreign exchange (the so-called counterpart funds) spent, in agree-
ment with the Commission, on specified items or activities within
the government’s budget. The Court examined structural adjust-
ment programmes in Mediterranean non-member countries in
1994 (7).

(5)

In both Jordan and Tunisia there was one completed SAF and one
ongoing SAF. In the case of Tunisia, there was also a health sectoral
programme. In Lebanon, there was one ongoing SAF. All six SAFs
examined were under the MEDA programme.

(6) Consisting of country Protocols signed (depending on the country)
between 20 June and 18 September 1991, covering the period
1 November 1991 to 31 October 1996.

(7) See Court’s Annual Report concerning the financial year 1994, para-

graphs 11.9 to 11.81 (OJ C 303, 14.11.1995).

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16. A Council resolution in June 1995 (1) introduced more flex-
ibility to the management of the structural adjustment instru-
ment. This included the possibility of direct budget support for
countries with a freely convertible currency and of less earmark-
ing of the counterpart funds, in cases where control instruments,
and budget programming and execution had become more effec-
tive. As the macroeconomic situations in most Mediterranean
partner countries have improved, macroeconomic stabilisation
objectives have become less important and programmes concen-
trate more on structural reforms.

Framework

17. Following the Barcelona Declaration of 1995 (2), economic
transition and the creation of a free trade area between the EU and
its Mediterranean partners (3), and among the Mediterranean part-
ners themselves, were the principal goals of EU financial coopera-
tion with the Mediterranean region. The MEDA programme is the
principal financial instrument of the European Union for the
implementation of this Euro-Mediterranean Partnership. Its legal
basis is the 1996 MEDA Regulation. It provides structural adjust-
ment support as direct budgetary aid, without specific earmark-
ing.

programme design. This poses particular risks given the major
organisational changes that have taken place in the Commission
in recent years, especially as responsibility for the implementa-
tion of SAF was transferred in 2001 from DG RELEX to Europe-
Aid. However, the Court notes that the Commission is now in the
process of preparing a procedures manual.

Rationale of Financing Agreements

20. The amounts allocated to the beneficiary countries as SAF
are the result of many factors and considerations such as the spe-
cific needs of the country in question, the amounts available in
the EU budget and the country’s capacity to carry out reforms.
However, the Commission does not document the basis for deci-
sions on the global amount of a programme, nor the timing and
amount of the instalments. Therefore, the rationale for these deci-
sions is not clear. The amount of the support is also not justified
by linking it to the social or other costs of the reform programme.
Some progress was made in this respect in the sectoral programme
Tunisia Santé. Its financing proposal (4) includes an annex where
the cost of the reform has been evaluated, but not linked to the
amount of the programme either.

18. The MEDA Regulation states that operations in support of
structural adjustment programmes should satisfy the following
eligibility criteria:

21. Although the adjustments or reforms to be carried out under
the SAF are generally not of a short-term nature, SAF have so far
been planned and approved on a stand-alone basis, without a
long-term commitment for continuity in the programming.

(a) the country concerned must undertake a reform programme
approved by the BWI or implement programmes recognised
as analogous, in coordination with those institutions;

Conditionality

(b) account must be taken of the economic situation of the coun-
try, and particularly its level of indebtedness and its debt-
servicing burden, the state of its balance of payments and the
availability of currency, the budget situation, the monetary
situation, the level of per capital GNP and the unemployment
level.

22. SAF follows the principle of conditionality, which means
that disbursement is conditional upon compliance with mutually
agreed criteria.

19. The Commission has not provided adequate training for staff
covering the evaluation of these criteria and their impact on the

23. The programmes’ conditions have so far focused on the pre-
sentation of legislation, action plans, budgets etc, which repre-
sents intentions rather than actual results to be obtained. Thus the
monitoring does not follow up whether the legislation is actually
adopted and the reform actions ultimately carried out. For example,
in Jordan, SAF I contained a condition that a competition law

(1) Recueil Vol. 2, 06/95-11/97.
(2) The Conference of EU and Mediterranean foreign ministers in Barce-

lona (27 to 28 November 1995).

(3) The 12 Mediterranean partners, situated in the Southern and Eastern
Mediterranean are Morocco, Algeria, Tunisia (Maghreb); Egypt, Israel,
Jordan, the Palestinian Authority, Lebanon, Syria (Mashrek); Turkey,
Cyprus and Malta.

(4) Under MEDA 1, financing proposals of over 2 000 000 euro were
submitted to a Committee (the MED Committee) of representatives of
EU Member States which advises the European Commission in imple-
menting the MEDA programme. The Committee gave its opinion on
the proposals.

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would be approved by the Cabinet. Although the Cabinet approved
the law, it was not adopted by the Parliament. In Lebanon, two
conditions for disbursement of the second instalment were for-
mulated in terms of certain targets to be included in the Budget
Law 2000 (1). This implies that the Commission needs to follow
up conditions systematically even after disbursement, given the
need to take them into account when setting up new programmes.
Given the human resources currently allocated by the Commis-
sion to the management of SAF, this is difficult, especially as
monitoring is largely focused on ensuring conditions have been
met before disbursement (see paragraph 53).

24.
In Lebanon, the Commission decided to carry out its financ-
ing programme while the World Bank postponed its programme
because of Lebanon’s alarming macroeconomic situation at the
time. In the absence of a World Bank financing programme, on
whose appraisal mission the Commission could rely, a condition
was added at a late stage, stating that ‘the disbursement of the first
instalment would take into consideration the examination of the
IMF staff report for the 2000 Article IV consultation’ (2). At the
moment that the first disbursement was planned to be made
no IMF report was yet available. The disbursement was finally
made after an Exchange of Letters between the Commission and
the IMF. Although the IMF gave a rather mixed picture of the
macroeconomic situation in Lebanon, the Commission, neverthe-
less, decided to proceed with disbursement as it considered that
the conditions of the first tranche as defined by the financing
agreement had been sufficiently met.

and a birth-spacing programme. However, the effectiveness of the
specific sector conditions is not ensured as for the preparation
and appraisal of social sector conditions technical experts in the
Commission are not systematically consulted and as structural
adjustment specialists may lack a comprehensive view of social
sectors.

27.
In Jordan’s and Tunisia’s SAF I some conditions for the sec-
ond instalment were left open at the time of signature of the
Financing Agreement. It is clear that it can be difficult when nego-
tiating a SAF to know in advance all the conditions that should
be met by the second instalment, given that circumstances can
change. However, leaving conditions open leads to uncertainty
over how much is still open for negotiation. A contract like a
Financing Agreement should not have such gaps and should at
least lay down properly the criteria and the procedures for condi-
tions to be negotiated at a later stage.

MFA to third countries

Framework

25.
In order to be eligible to receive SAF support, Annex II to the
MEDA Regulation requires that a country undertake a reform
programme, approved by the BWI, or implement a programme,
recognised as analogous, in coordination with those institutions.
Generally, the Financing Agreements do not clearly indicate which
conditions are shared with the BWI, and which are the Commis-
sion’s alone.

28. The legal basis for MFA to third countries has so far been
provided by individual Council decisions taken on the basis of
Article 308, EC (3) (former Article 235). There is no framework
regulation defining the overall strategy and objectives, as MFA
was not seen as a permanent but as an exceptional instrument.
However, the Ecofin Council (4) agreed in 1995 on five principles
which should govern the policy of MFA. The Commission indi-
cated in its 2000 report on the implementation of MFA (5), that
Community operations have continued to incorporate these prin-
ciples, which are:

26. The Commission has introduced specific sectoral conditions,
usually relating to the social sector, in a general SAF. For example,
Tunisia SAF II contained conditions relating to the reduction of
State involvement and to the macroeconomic framework, as well
as conditions relating to reforms to basic and higher education.
Jordan SAF I contained conditions relating to population strategy

i.e. reduction of budget deficit and increase in wages bill.

(1)
(2) Under Article IV of the IMF’s Articles of Agreement, the IMF holds
bilateral discussions with members, usually every year. A staff team
visits the country, collects economic and financial information, and
discusses with officials the country’s economic developments and
policies. On return to headquarters, the staff prepares a report, which
forms the basis for discussion by the Executive Board.

(a) exceptional character;

(b) political pre-conditions;

(3) Article 308, EC: ‘If action by the Community should prove necessary
to attain, in the course of the operation of the common market, one
of the objectives of the Community and this Treaty has not provided
the necessary powers, the Council shall, acting unanimously on a pro-
posal from the Commission and after consulting the European Parlia-
ment, take the appropriate measures’.

(4) Conclusions of the Ecofin Council of 20 March 1995 on principles
of MFA to third countries, which updated the Genval Ecofin conclu-
sions of 9 October 1993 on MFA (the so-called revised Genval guide-
lines).

(5) Report from the Commission to the European Parliament and to the
Council on the implementation of MFA to third countries in 2000
(COM(2001) 288 final of 1 June 2001).

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(c) complementarity;

(d) conditionality;

(e) financial discipline.

In a number of cases the MFA has become regular and con-
33.
tinuous rather than exceptional. In November 1999 Bulgaria and
Romania were promised assistance for the fourth time since 1991.
Three other countries have received MFA three times.

29. The respect of these principles in the design of the pro-
grammes is analysed in paragraphs 30 to 46.

Political preconditions

Principle of exceptional character

30. The first agreed principle is that MFA to third countries
should remain exceptional in nature, as the Community is not an
international financial institution like the World Bank or the IMF,
considered to be the primary institutions to do such financing.
Following proposals by the Commission, the Council made 10
decisions which were implemented during the three years exam-
ined, 1998 to 2000. In each case the Commission provided the
Economic and Financial Committee with an information note,
including an explanatory memorandum and a financial statement.
These preparatory documents do not always clearly indicate why
an exceptional character is considered to exist nor whether there
is any added value to the European Union’s contribution in com-
parison to the international financial institutions. Thus it is not
made explicit whether the European Union follows the same
objectives as the World Bank and the IMF or whether it has addi-
tional distinct objectives for its own action.

31. The number of countries/provinces considered to be eligible
to receive exceptional assistance (19 at the end of 2000) is increas-
ing steadily. The notion of exceptional character has developed in
recent years in particular concerning the MFA given to Armenia,
Georgia and Tajikistan, which is marked as ‘highly exceptional’. In
addition to the usual loans given, a grant is included in this assis-
tance. The grant is made available only in so far as the net debtor
position of the beneficiary countries towards the Commission is
reduced by at least a similar amount (1).

34. The second principle is that MFA should only be given to
third countries which fulfil certain political preconditions: close
political and economic links with the European Union, geographi-
cal proximity, full respect for effective democratic mechanisms
including multiparty parliamentary systems, the rule of law and
guarantees of human rights.

35.
In practice, assistance is also provided to third countries in
which these political preconditions are only partially met. Regard-
ing geographical proximity, Armenia, Georgia and Tajikistan were
not considered eligible according to Genval criteria (see foot-
note 4, page 8) as they do not fulfil this precondition. Regarding
human rights, the Council and the Commission expressed their
concerns (2), particularly as far as minorities are concerned, in
some beneficiary countries. Nevertheless, the dialogue with the
countries in question on the MFA support might provide politi-
cal leverage to improve democratic mechanisms, the rule of law
and to ensure human rights.

Complementarity

36. Complementarity between EU MFA and the assistance pro-
vided by other multilateral or bilateral donors constitutes the third
agreed principle. EU assistance should be limited to a maximum
of 60 % (for EU accession countries) or to one third (other coun-
tries) of total bilateral support (3), in order to ensure an adequate
burden-sharing. The principle of complementarity has a second
aspect: complementarity is also to be sought between EU macro-
financial assistance and other EU assistance, which requires inter-
nal coordination.

32. The MFA given to Kosovo and Montenegro has a different
exceptional aspect: not being sovereign States they cannot benefit
from conventional IMF- or World Bank-supported programmes.

37.
In general, MFA is only mobilised if there is a significant
residual external financing gap (4), over and above the resources

(1) Under the 1 250 million euro Community credit facility made avail-
able to the new independent States in 1992 to import food and medi-
cal products, Armenia and Georgia benefited respectively from 58 mil-
lion euro and 113 million euro in the form of loans. They were unable
to comply with the time limits for repayment of the loan capital or
interest. In order to facilitate the settlement of this debt problem, the
Council decided in November 1997 to provide Armenia and Georgia
with exceptional financial assistance in the form of a combination of
loans and grants. This Council decision was amended in March 2000
in order to extend it to Tajikistan.

(2) European Union Annual Report on human rights 2001, Council of

the European Union, 8 October 2001.
European Initiative for Democracy and Human rights, Compendium
2000, programme financed by the European Commission

(3) Support given by individual countries (not by multilateral institu-

tions).

(4) The Commission distinguishes between the remaining financing needs
which exclude financial support from the IMF and the World Bank,
and the residual financing needs, which take into account support
from these institutions.

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provided by the IMF and the World Bank, which is identified in
common with them. Thus there is usually a close coordination
with the IMF and the World Bank already at the planning stage.
However, problems were encountered in cases where considerable
time lags occurred between the planning of an operation and its
implementation.

sion’s service responsible for MFA decided to disburse quickly the
second instalment of the 35 million euro commitment relating to
the Kosovo budget managed by UNMIK (see Annex III, para-
graph 1).

38. Concerning the fourth loan to Bulgaria decided in 1999
(100 million euro), more than one year passed between the first
estimate of the residual financing needs and the actual disburse-
ment to cover these needs. The Commission’s original calculation
of the assistance was based on an IMF estimate of the financing
needs from September 1998. However, the residual financing
needs estimated for 1999 diminished considerably (1). Therefore,
the Commission’s services considered that Bulgaria did not need
to receive a disbursement in 1999. Nevertheless the first instal-
ment of the loan was disbursed in December 1999 (2).

39. Concerning the disbursement of the second instalment of
the loan to Bulgaria in September 2000 (60 million euro), there
is no evidence that paragraph 9 of the Memorandum of Under-
standing between the Commission and the Bulgarian authorities
was applied before the proposal for disbursement: ‘The amount
of the second instalment will be decided following a Commission
review of Bulgaria’s residual external financing requirements. Due
account will also be taken of the effective mobilisation of financial
assistance to Bulgaria by other bilateral donors …’ In the absence
of such a review at that time, it was not possible to establish if
there were any residual financing needs for 2000 nor was it pos-
sible to establish whether the Community assistance to Bulgaria
represented less than 60 % of total bilateral support given in 1999
and 2000 and therefore remained within the maximum limit for
EU accession countries, which was set to ensure an adequate
burden-sharing.

40. As far as complementarity and coordination between EU
macrofinancial assistance and other EU assistance is concerned,
the approach in Kosovo was not always harmonised between the
different Commission services. The European Agency for Recon-
struction, situated in Pristina and responsible for commitments of
about 400 million euro in 2000, was critical of the efficiency of
the United Nations Interim Administration (UNMIK). The UNMIK
did not supply the reports on the utilisation of EU funds man-
aged by the Agency despite several reminders, including a letter
from the Commission in Brussels, pointing out that UNMIK was
putting further payments at risk. At the same time the Commis-

(1) From USD 205 million in September 1998 to USD 71 million in Sep-

tember 1999.

(2) This was reduced from 50 million euro to 40 million euro.

41.
In the case of Albania in April 1999 the Council decided on
MFA of up to 20 million euro in the form of a loan. However,
there was still no payment by the time of the Court’s audit (Febru-
ary 2001) because Albania benefited from a large inflow of other
EU assistance, mainly in the form of grants (emergency budget-
ary assistance for costs related to refugees under the Food Security
programme). As other countries are receiving MFA in the form of
grants, Albania no longer seems willing to take loans. A cancel-
lation of the loan agreement would seem to be appropriate.

Conditionality

42. Macroeconomic conditionality was agreed as the fourth
principle. The assistance should generally be released in succes-
sive instalments, their disbursement being conditional upon the
fulfilment of macroeconomic performance and structural adjust-
ment criteria, based on the economic programmes of the benefi-
ciary countries, as agreed in standby agreements with the IMF.
The conditions should also take into account progress on open-
ing mutual markets, in the context of the Community’s external
policy.

43. The review of all operations in 1998 to 2000 showed that
this principle of conditionality has been taken into account
throughout the period. However, some of the conditions do not
define clear and measurable performance criteria, but are formu-
lated in a general way with the result that they are not easily veri-
fiable (e.g. Kosovo: ‘take the appropriate measures to develop the
necessary regulatory framework for the various priority sectors’;
FYROM: ‘the government will have made significant progress on
the establishment of a merit system for civil servants’).

44. The rationale behind the conditions is not always clear,
because the relationship to overall objectives is not indicated. In
the case of Romania, the design of the conditions is fragmented,
and their relevance to the Accession process is not specified.

45.
In general the assistance is disbursed in two or three instal-
ments. Most of the schemes foresee a minimum period of three
months between the first and the second instalment. For Mon-
tenegro this minimum period was fixed for only two months.
Such planning creates expectations in the beneficiary State that
the total amount of assistance will be disbursed quickly. However
significant measurable macroeconomic progress is not normally

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achieved over such a short period. In the case of Montenegro pay-
ments were made in January 2001 (i.e. after four and a half
months), and this only after having softened the conditions for
disbursement (see Annex III(6)).

Financial discipline

46. The fifth principle agreed by the Ecofin Council is the respect
of financial discipline. This means that the amounts of the assis-
tance should comply with the annual budget ceilings established
by the Community’s financial perspective, as well as with the
rules and the agreed ceilings of the Guarantee Fund mechanism
for external actions (1). The Court audits the mechanism of the
Guarantee Fund annually (2). The Court has not noted any instances
of non-respect of the principle of financial discipline.

ASSESSMENT OF PARTNER GOVERNMENT’S BUDGETARY
AND ACCOUNTING PROCESSES

47. Recognising the fungible nature of funds provided under SAF
the Commission made these available as untied budget support.
Consequently, all provisions for the audit of SAF-related expen-
diture have disappeared from the Financing Agreements. How-
ever this has not been replaced by any more global control. In
budgetary support operations, whether loans or grants, as the
money goes directly into the partner country’s budgetary system
and its use cannot be distinguished from the rest of the budget, it
is important that the budgetary and accounting processes in the
country be reliable. A high degree of transparency, accountability
and external control in the management of public resources is
vital for ensuring good governance and in helping to combat
fraud and corruption. The Commission should document its own
assessment of these processes in the countries of the Mediterra-
nean region, including the extent to which they have relied on
work carried out by the international financial institutions. So far,
no evidence was found that the Commission had made such an
assessment.

(1) The Guarantee Fund was established on 31 October 1994 by Council
Regulation (EC, Euratom) 2728/94, and is drawn on if the beneficiary
of a loan granted or guaranteed by the Community to or in a third
country defaults. Article 14 of Council Decision 94/729/EC on bud-
getary discipline states that each year a reserve relating to loans and
loan guarantees is entered in the general budget as a provision to
cover the requirements of the Guarantee Fund. When submitting a
new proposal for MFA in the form of loans the Commission provides
information about the budgetary implications of the operation. Thus
the required contribution to the Guarantee Fund is indicated as well
as the consequences in case of a call on the budget guarantee.
(2) Court’s Annual Report concerning the financial year 2000, Chapter 8

(OJ C 359, 15.12.2001).

48. An attempt was made by the Commission to raise the ques-
tion of the reliability of the Government’s budgetary and account-
ing processes as an element in the Financing Agreement for the
Tunisian Education SAF but as this was done very late in the pro-
cess this aspect was finally not included in the Financing Agree-
ment. The introduction of this important issue was, however, not
part of a general policy decision by the Commission applicable to
all countries, but was rather started on an ad hoc basis.

49. A review of the reliability of the management of public
resources was also largely lacking in countries receiving MFA sup-
port. A specific monitoring exercise was only carried out, to a
very limited extent, by external technical assistance, in the case of
Montenegro (see Annex III(6)). In ACP States a start has been
made to coordinate action in this direction with the World Bank.
The Court in its recent report has recommended that the Com-
mission concentrate on monitoring closely the quality of the
management of public finances (3). Such a recommendation applies
equally to all countries receiving budgetary support.

50. Lessons learned from the Commission’s experience with
these instruments should be taken into consideration by all DGs
involved in budgetary support. For example, the Internal Audit
Service of the Commission has also recently carried out an analy-
sis of budgetary support given to ACP States (4). This internal
report makes a number of observations that are applicable to all
countries receiving budgetary support. In particular, it stresses the
importance of financial management issues at the level of the
administrative capacity and accountability system of the benefi-
ciary countries.

MONITORING OF MFA AND SAF

General observations

51. The Commission has the task of verifying whether the eco-
nomic policies in the beneficiary countries are in accordance with
the general objectives of such assistance and whether the condi-
tions laid down are being fulfilled. However, there are no internal
rules defining responsibilities, no job descriptions and no moni-
toring tools (e.g. checklists, operational framework, guidelines) in
the units responsible for monitoring.

52. Programmes are mainly managed and monitored from Brus-
sels. Before payments are made the Commission usually visits the

(3) Special Report No 5/2001, paragraphs 40 to 44.
(4) Report on the managing, monitoring and control arrangements gov-
erning the use of counterpart funds and budgetary support in devel-
opment aid (internal document, Brussels, 4.7.2001).

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country concerned. The role of the delegation varies from one
country to another. In many cases, the Commission’s monitoring
largely relies on work of the IMF and the World Bank, as many of
the conditions are common.

53. The Commission’s monitoring is rather intermittent, due to
limited human resources. It is focused on the need to verify the
fulfilment of conditions in order to approve the disbursement of
the funds rather than a permanent monitoring of the economic
and political conditions of each country.

54.
In the process of monitoring the Mediterranean countries
DG ECFIN, despite its specific expertise, is not closely involved
and its role in this context is not clearly defined.

55. Overall coordination between the World Bank and the Com-
mission was generally very good, particularly at the design stage.
At the monitoring stage, the quality of coordination varied between
countries, as regular close cooperation had not been systemati-
cally established but depended largely on individual personal con-
tacts.

Approval of SAF payments

56. SAF under the first MEDA programme were supposed to be
quick disbursing instruments. Although the Commission may
have succeeded in making payments more quickly than for tradi-
tional projects, approval of payments and the consequent dis-
bursements were still rarely made in line with the timetable indi-
cated in the Financing Agreements. However, predictability of
disbursements is important, once the conditions are fulfilled. It is
essential for countries to know when the funds are going to arrive,
particularly when they include the funds in their budgets. Other-
wise negative effects on the reform process are to be expected.
The IMF also underlined that coordination over the timing of
funding is an important issue.

57. For the first SAF carried out under the MEDA programme
delays in the approval of payment procedures were due to a lack
of clarity in the division of responsibilities between the different
DGs concerned. Coordination was not always good, resulting in
divergent plans (for instance for the organisation of supervision
missions).

which did not provide the Commission with the information con-
sidered necessary. However, delays were also caused because
DG Competition was involved late in the process. In the end
DG Competition’s involvement was not used to best effect as DG
RELEX decided to make the payment, based on the Jordanians’
assertion that the changes DG Competition had proposed would
be incorporated into law, without waiting for the results of a
DG Competition mission to Jordan which was taking place at the
time the payment was being processed. In the end the law con-
cerned was not adopted by the Jordanian parliament.

Fulfilment of conditions

59. According to the Council decisions in the case of MFA, or
the individual Financing Agreements in the case of SAF, the agreed
conditions have to be fulfilled before payments can be made. Gen-
erally disbursements take place if there is a consensus view between
the Commission and the World Bank and IMF on whether the
beneficiary country has made enough progress towards the agreed
reform agenda. In cases however where the World Bank and IMF
do not have programmes (e.g. Lebanon and Montenegro) and also
where the Commission has laid down its own specific conditions,
it has to rely on its own judgement. In practice the Commission
uses a certain margin of manoeuvre in judging the successful
completion of the economic policy conditions. Emergency situa-
tions and political constraints are also taken into account when
the Commission proposes a disbursement (see Annex III).

60. This approach means that in practice a country may receive
a positive progress assessment and the money may be disbursed
even though not all of the conditions have been fulfilled (1).
Whereas the need to have a margin of judgement is inherent to
an instrument like SAF or MFA, the Commission has not always
established clearly enough whether or not certain conditions had
been fulfilled. In those cases, the justification for waiving condi-
tions was not sufficiently documented.

REPORTING AND EVALUATION

SAF in the Mediterranean countries

61.
In 2000 the Commission published an evaluation for the
ACP States and Mediterranean countries receiving Community
for economic reform programmes and structural
support

58. For Jordan’s SAF I there were delays in the payment as the
competition law was not approved. Delay between February and
July 1997 can be attributed largely to the Jordanian authorities

(1) A similar point was made for ACP States. Court’s Annual Report con-
cerning the financial year 1999: report on the activities of the sixth,
seventh and eighth European Development Funds, paragraph 35
(OJ C 342, 1.12.2000).

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adjustment (1). In order to improve current practices in these
countries the evaluation made various recommendations, e.g. on
improving the recipient countries’ ownership of their reform pro-
grammes. It also recommended that conditions should be clear
and verifiable, and not too centred on purely formal commit-
ments to carry out reforms. Its scope was limited, however, by the
fact that it was carried out at a time when only the first instal-
ments of the first SAF under the MEDA programme had been
paid. It recognised that as they had only been introduced in 1996,
and only provisional data had been available for 1997, an in-depth
evaluation was not possible. It means, that only the first instal-
ments of the first SAF under the first MEDA programme have
been independently evaluated. Although, the evaluation was over-
all positive about the impact of the SAF, it is questionable whether
any judgement could have been given on the SAF’s impact on that
basis. The evaluation report itself recognised for these first instal-
ments that certain conditions had been more or less fulfilled
already at the time of the signature of the Financing Agreement.

62. Systematic independent evaluations of individual SAF as
complete programmes have not been carried out (2). The Financ-
ing Agreements do not include clear provision for evaluation of
these programmes. In addition, although the Financing Agree-
ments for the Mediterranean countries state that the recipient
shall submit a report on completion of the project, this has never
been systematically enforced.

however the explanations concerning macroeconomic perfor-
mance and structural reforms would have more relevance if links
and causalities with the assistance were established. The explana-
tory parts on the implementation of the decisions are very short
and cannot be considered as evaluations. The Commission did
not request independent external evaluations either for the activ-
ity as a whole or for individual countries. The MFA given to EU
accession countries, to the new independent States and to the
western Balkans was not subject to evaluations of the kind car-
ried out for other countries receiving similar support (see para-
graph 61).

65. The absence of evaluations for MFA means that the Com-
mission has not yet followed its general policy for the evaluation
of Community expenditure programmes. The SEM 2000 initia-
tive introduced a generalised policy for evaluation of Community
expenditure programmes. According to this ‘the operational DGs
and services are responsible for regular evaluation of their pro-
grammes and for organising the capacity needed for planning and
managing the evaluations needed in their policy area’ (4). The
operational departments should also integrate the programming
of evaluations into their work plans (5). These requirements are
not met in the field of MFA managed by DG ECFIN.

MFA to third countries

CONCLUSIONS AND RECOMMENDATIONS

63. The various Council decisions on MFA state that the Com-
mission shall send to the European Parliament and to the Council
a report (usually at least once a year, for some decisions by 15
September), which should include an evaluation of the implemen-
tation of the decisions. In compliance with this requirement the
Commission established annual reports. The 1997 and 1998
reports were both published only in November 1999 and the
1999 report was not published until the end of October 2000 (3).

64. The 1999 report gives a general overview of MFA (back-
ground, developments in the current year, trends and tendencies,
burden sharing) and also contains a description of the situation
in each beneficiary country. Overall the report is comprehensive,

(1) Communication from the Commission to the European Parliament
and to the Council: Community support for economic reform pro-
grammes
review and prospects
(COM(2000) 58 final of 4 February 2000).

and structural

adjustment:

(2) The MEDA management team (composed of external experts) carried
out an evaluation of the Moroccan programme. This was an interest-
ing document with many pertinent points, which could be of interest
for SAF in other countries.

(3) Report from the Commission to the European Parliament and to the
Council on the implementation of MFA to third countries in 1999
(COM(2000) 682 final of 27 October 2000).

Introduction

66. The two instruments have given the Commission the oppor-
tunity to enter into more meaningful dialogue with governments
over the whole reform process, something traditional develop-
ment projects in particular do not usually allow. There has been
an evolution in the nature of these instruments over the years and
the Commission should continue to reflect, involving all the DGs
concerned, on the best way these instruments can be used as part
of its overall policy towards the beneficiary countries.

67. The Commission does not act on its own. In the context of
MFA, the European Council underlined the fact that the European
Commission is not an international financial institution like the
World Bank or the International Monetary Fund. In that context
it has been underlined that macroeconomic interventions should

(4) Focus on results: Strengthening evaluation of Commission activities;
communication to the Commission from Mrs Schleyer in agreement
with Mr Kinnock and the President (SEC(2000) 1051, 26.7.2000, p. 3).
(5) Spending more wisely: Implementation of the Commission’s evalua-
tion policy, communication to the Commission by Mrs Gradin and
Mr Liikanen, in agreement with the President (SEC(1999) 69/4).

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be exceptional. The role of the European Union as a third inter-
national player in this area, however, has not been clearly defined
and it is not made explicit what the added value of the EU con-
tribution is supposed to be (see paragraphs 30 to 33).

the World Bank. The Commission’s own monitoring is intermit-
tent. It is focused on the need to check the fulfilment of condi-
tions in order to approve the disbursement of the funds rather
than ongoing monitoring of the economic and political condi-
tions of the country (see paragraphs 52 to 55).

Recommendation 1

68. The Commission should always establish the reasons why a
separate EU action, with all its administrative consequences, is
necessary. The expected added value should not only be indicated
compared to existing programmes of the BWI. In the case of
MFA, complementarity should also be ensured with the tradi-
tional EU project and programme assistance.

Consistent approach to similar instruments

69. MFA and SAF are similar instruments. In both cases the funds
are fungible and are disbursed in instalments once the Commis-
sion is satisfied that the conditions, mainly aimed at supporting
structural reforms in the economy of the beneficiary State, set out
in an agreement between the Commission and the government,
have been met. However, MFA for the EU accession countries, the
western Balkans and the new independent States is considered as
an exceptional instrument, given mainly as loans, whereas SAF
for the Mediterranean non-member States is seen as a normal
instrument, always given as grants (see paragraphs 1 to 5).

Recommendation 2

70. The Commission should find a more harmonised approach
for assistance on a macroeconomic level. The way the manage-
ment of these instruments is divided between the different Com-
mission’s services, including the role of Delegations, should be
re-examined. Lessons learned from experience in ACP States
should also be taken into consideration.

Design, conditions and monitoring of agreements

71. The process, which results in the agreements with the ben-
eficiary countries is not clearly documented. In the case of MFA
this concerns the relevance of the conditions to broader political
objectives, e.g. EU accession (see paragraph 44). In the case of
SAF this relates to the justification of the global amount of the
assistance and its division into instalments (see paragraph 20).

72. Where conditions in agreements are common, the Commis-
sion’s monitoring makes use of work carried out by the IMF and

73. Although the specific conditions of the individual pro-
grammes have to be fulfilled before payments can be made, it is
understandable that, in practice, the Commission needs a certain
margin of manoeuvre in judging the real efforts of the beneficiary
State towards the achievement of macroeconomic policy and
reform objectives. In addition, it may sometimes have to take into
account unforeseeable events. However, the non-fulfilment of
some conditions and the problems encountered were not always
established in a transparent enough manner and corrective action
was not always asked for with sufficient persistence (see para-
graphs 22 to 27 and 42 to 45).

Recommendation 3

74. The Commission should make its decision-making clearer by
establishing written guidance for the various phases of the man-
agement of macroeconomic assistance. It should also more clearly
document its considerations when deciding the content of the
financing agreements with the beneficiary countries, as well as
when deciding the disbursements on the basis of the assessment
of the conditions stipulated in the agreement. The Commission
should document its justification for waivers in situations where
conditions are not fulfilled.

Assessment of partner government’s budgetary and
accounting processes

75. The quality of the budgetary processes in the beneficiary
States plays a crucial role during the whole reform process and
should be a key condition when attributing untied budgetary sup-
port. A high degree of transparency, accountability and external
control of the management of public resources is vital for ensur-
ing good governance and in helping to combat fraud and corrup-
tion (see paragraph 50).

Recommendation 4

76. The Commission’s monitoring of the quality of financial
management in beneficiary countries should be considerably
improved and all relevant DGs should be involved. The Commis-
sion should take fully account of any work carried out by the BWI
in this respect whenever the Commission is going to rely on their
work.

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Evaluations

Recommendation 5

77. The absence of evaluations (MFA) or their limited scope (SAF)
means that the Commission has not yet fully implemented its
general policy for the evaluation of Community expenditure pro-
grammes. The Commission therefore does not benefit systemati-
cally from the possibilities of a structured learning process (see
paragraphs 61 to 65).

78. The Commission should regularly carry out comprehensive
evaluations in order to identify what lessons can be learned for
policy-making, particularly as regards the suitability of reform
programmes, the relevance of its conditions to the reform process
and the alleviation of the social costs of the reform programmes.

This report was adopted by the Court of Auditors in Luxembourg at its meeting of 7 March 2002.

For the Court of Auditors

Juan Manuel FABRA VALLÉS

President

ANNEX I

FINANCIAL EVOLUTION SAF 1992 TO 2000

Country

Year started

Amount com-
mitted SAF
1992 to 2000

Total per
country

SAF from
Protocols

SAF from
MEDA funds

Total SAF from
MEDA funds
per country

Total Funds
under
MEDA 1 (1)
(1996 to 2000)

SAF as % of
MEDA funds

Payments made
under MEDA
1996 to 2000

Amount still
open under
MEDA

Amount still
open under
Protocols

(Mio EUR)

1

2

3

4

5

6

7

8

9

10

11

12

13

14

Algeria

Algeria

Jordan

Jordan

Jordan SAF I

Jordan SAF II

Morocco

Morocco

Tunisia

Tunisia

Tunisia (SAF I)

Tunisia (SAF II)

Tunisia Sante

Lebanon

TOTAL

1992

1996

1995

1995

1996

1999

1993

1996

1992

1996

1996

1998

1999

1999

70

125

30

20

100

80

80

120

40

20

100

80

40

50

955

(1) All dotations, including SAF and non-SAF development programmes.

Source: Court of Auditors based on Commission data.

195

230

200

280

50

955

70

95

30

20

80

40

20

355

30

30

250

12 %

100

80

180

254

71 %

100

80

120

120

656

18 %

120

100

80

40

50

600

220

50

600

428

182

1 770

51 %

27 %

34 %

100

40

30

470

30

0

0

0

0

0

0

0

0

40

40

20

130

35

35

C
1
2
1
/
1
6

E
N

O

f
f
i
c
i
a
l

J
o
u
r
n
a
l

o
f

t
h
e

E
u
r
o
p
e
a
n
C
o
m
m
u
n
i
t
i
e
s

.

.

2
3
5
2
0
0
2

23.5.2002

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Official Journal of the European Communities

C 121/17

ANNEX II

MACROFINANCIAL ASSISTANCE TO THIRD COUNTRIES
Details on disbursements 1998 to 2000

Decisions

Disbursements

1997 to 2000

1998

1999

2000

Total

(Mio EUR)

A. EU ACCESSION COUNTRIES

Bulgaria III

Bulgaria III

Bulgaria IV

Romania IV

B. WESTERN BALKANS

Bosnia I

Bosnia I

FYROM I

FYROM II

FYROM II

Kosovo

Kosovo

Montenegro

Montenegro

125

125

(February)

(December)

15

(February)

250

100

200

60

40

80

35

20

40

60

(September)

100

(June)

15

(December: grant)

10

(December: loan)

10

10

10

20

20

15

(December:
grant) (1)

(December:
loan) (1)

(December:
loan) (1)

(December:
grant) (1)

(March: grant)

(August: grant)

7

(August: grant)

13

(December:
grant) (1)

C. NEW INDEPENDENT STATES

Armenia

Armenia

Georgia

Georgia

Ukraine III

265 (2)

28

(December: loan)

8

(December: grant)

4

(December)

110

(July: loan)

10

(August: grant)

9

(September)

TOTAL LOANS

TOTAL GRANTS

150

980

220

403

18

58

(July)

121

15

180

85

(1) Payment request in 2000, disbursement in January 2001.
(2) Common decision for Armenia and Georgia.

Source: Court of Auditors on basis of Commission data.

125

125

100

100

25

20

15

10

20

20

15

7

13

28

12

110

19

58

704

118

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23.5.2002

ANNEX III

FULFILMENT OF CONDITIONS

Kosovo

1.

In Kosovo the strict respect of all conditions was not considered necessary for the decision of the Commission to propose
the disbursement of the second instalment of the grant to the Region’s budget (15 million euro). UNMIK had not been
able to make the progress expected in consolidating the budget. Major problems on the revenue side included the failure
to introduce a wage withholding tax of 15 % (1) and the delay in introducing a profit tax. The public utilities were a major
problem on the expenditure side (e.g. inadequate billing system for electricity) (2). In the absence of an increase in budget-
ary revenue there was a continuing need for a high level of budgetary support. In June 2000 there was a real danger of
a cash shortage in the Kosovo budget and international donors were asked to provide cash. The second instalment was
released because of these urgent financing needs. However, this speedy disbursement compromised the principle of
macroeconomic conditionality, in spite of the Commission coming to the overall conclusion that the specific condi-
tions attached to the EU budgetary support were met ‘to a large extent’.

Bulgaria

2. The Court’s audit in Bulgaria in April 2001 revealed that in the area of bank privatisation the State bank Biochim was
still not yet sold, as it should have been according to the conditions. Representatives of the Ministry of Finance, the IMF
and the World Bank expressed their view that the condition regarding the sale of the State bank Biochim was unrealistic.
The World Bank’s representatives also commented that they did not consider it a good idea to specify that individually
named enterprises should be privatised at a specific date, as this could have an adverse effect on the sales price.

3.

In the environment area Bulgaria was required to adopt legislation in full conformity with the EU directive on environ-
mental impact assessment. In April 2000 the delegation considered that the condition was not met. In July 2000 DG EC-
FIN judged that the condition has not been fulfilled in formal terms but ‘there has nevertheless been substantial progress
towards achieving this’. It was the assessment of DG ECFIN that progress was sufficient to allow the release of a second
instalment. However by April 2001 although a new law on environmental impact assessment had been drafted, it had
still not been adopted by the Bulgarian parliament.

4. The Commission considered the environmental condition to be fulfilled in the context of the loan (bringing legislation
into full conformity with the EU directive on the EIA). However in the regular report on Bulgaria’s progress towards
accession prepared by DG Enlargement (November 2000) the Commission stated that further legal changes will be
needed to fully conform to EU requirements on the EIA.

5. Concerning the previous loan to Bulgaria, decided in 1997 (250 million euro), the Commission considered splitting the
second instalment in two, as the conditions for preparation for the European Union were only partly met. However, the
information resulting from the monitoring process was finally not taken into account and the whole amount was dis-
bursed.

(1) There are important concerns of equity, as locals employed by the UN are exempted from taxation under the UN convention. UNMIK
has tried (letter of 25 May 2000 by Mr Kouchner to the Secretary-General of the UN), so far without success, to propose that in the
specific case of Kosovo these exemptions would not be applied.
See report concerning the financial accounts of the European Agency for Reconstruction and the implementation of aid for Kosovo for
the year 2000 (OJ C 355, 13.12.2001).

(2)

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Montenegro

6.

In November 2000 a first report was produced by a consultant which pointed out major problems with regard to budget
transparency and completeness (e.g. ‘cash figures do not give a true picture of budget execution’). In the final report the
consultant concluded that ‘Montenegro has made substantial progress — greater in some areas than in others — in
meeting the conditions’. Concerning the condition ‘Enhancement of fiscal and budgetary transparency’ the report noted
on the one hand that ‘Montenegro has fully met the conditions relating to budget classification’ and on the other hand
that ‘nevertheless, Montenegro still has some way to go in meeting international standards for fiscal transparency’
(Montenegro only complied with three out of 20 of the IMF’s code of good practices principles on fiscal transparency).
The consultant did not make a clear recommendation for or against a disbursement decision. The Commission’s pro-
posal to the Economic and Financial Committee concerning the disbursement of the second instalment (under certain
conditions), was, however, made even before this final report was available. The Commission carried out its own mis-
sion to Montenegro at the beginning of December 2000 and also found that ‘substantial progress had been made in a
number of areas while more action is needed in others’ (e.g. unsatisfactory progress in strengthening of the role of the
Ministry of Finance; little progress with regard to the reform of income taxation and clearance of arrears; expenditure
control not satisfactory). The Montenegrin authorities were asked to take rapid action. To a certain extent the condi-
tions were renegotiated and softened so that Montenegro could comply with them already in December 2000. As
planned the Commission disbursed 12,95 million euro in January 2001.

Jordan

7. The analysis prepared by the Commission concerning the release of the first instalment of Jordan’s SAF II explained that
the introduction of VAT had been delayed but nevertheless concluded that the related condition is complied with.

Tunisia

8. For Tunisia’s SAF 1, instalment two, an analysis by the Commission of how far conditions had been met concluded that
a condition relating to the offer for sale of five public companies had been fulfilled although only two such operations
had been carried out. The Commission released instalment two of Tunisia’s SAF 1 in December 1997 after the financial
controller’s signature was obtained, even though it was recognised that five conditions had been only partially fulfilled.
This money was transferred in euro to the Tunisian Central Bank. According to the Financing Agreement the corre-
sponding value in dinars was then to be transferred to the budget following the double signature of the national coor-
dinator and the Head of Delegation (1). The Head of Delegation did not sign until July 1998 as only then did the Com-
mission consider that all the conditions had been met (2). Given this, the only explanation for having transferred the
money in December 1997 could be that the Commission sought to improve its apparent rate of budgetary execution.
No interest was ever paid on this amount, which remained in the Tunisian Central Bank’s account for over six months.

(1) The requirement for a double signature serves no useful purpose in the case of direct budgetary support managed from Brussels. The
decision as to whether the conditions have been satisfied should be made once on behalf of the Communities. It should not be a two-
stage process.

(2) The condition relating to the offer for sale of five public companies was considered to be fulfilled and consequently was not followed up

further.

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THE COMMISSION’S REPLIES

SUMMARY

I and II. Although similar in a number of aspects, MFA (macrofinancial assistance) and SAFs (structural adjust-
ment facilities) are designed differently and are meant to address different needs.

MFA is an exceptional instrument (based on ad hoc Council decisions) and is designed to help the beneficiary
countries in dealing with serious but generally short-term macroeconomic imbalances (serious balance of pay-
ments and fiscal difficulties).

MEDA SAFs are regular instruments of financial cooperation with the beneficiary countries. They address more
long-term budgetary needs associated with the development process of these countries and are decided in the
context of the normal programming exercise applying to all operations implemented under the MEDA Regula-
tion.

III. The amount allocated to an SAF takes into account the costs of the reforms supported by the operation
and since 2001 is documented more fully. The Commission conducts close discussions with the country and
the international financial institutions (IFI), in particular the International Monetary Fund (IMF) and the World
Bank (WB) to coordinate action and to assess the country’s real needs. In the case of SAFs, synergies with the
World Bank are considered important, either as parallel operations with identical conditionality (to increase
joint leverage and avoid ‘donor splitting’ by the beneficiary) or in the form of self-standing EU operations
which further the goals of the association agreements to which the World Bank attaches great importance.

As SAFs accompany the reform programmes of the Mediterranean partners, a fixed timetable of disburse-
ments is not required (instalments are released only upon compliance with conditionality). This is because
(a) the rhythm of reforms of the partner country should be respected and (b) SAFs are not exceptional instru-
ments to be used in the urgent financing of internal and external deficits.

IV. Although the Ecofin conclusions referred to by the Court are informal and not legally binding, the bulk
of MFA follows the principles. Some exceptions may occur, which is not unexpected given the nature of the
programme, though these are known about and subject to appropriate review.

Coordination, by its nature, can always be improved, but it is felt that there is generally a good balance achieved
between coordination and action activities.

V. All the countries concerned by such aid are regularly subjected to IMF Article IV review, when budget
implementation and the quality of the data concerning public finances are examined and evaluated. These
provide a major input to assessing the quality of budgetary and accounting processes.

VI. Highly qualified and experienced staff, who have contacts with specialists and independent experts, are
dedicated to the programmes. It is appropriate that the Commission works closely with the IFIs and uses the
same information, as in many cases the objectives are the same. Disbursement can be based on an overall
evaluation of the achievement of set objectives though all relevant available information should be weighed
up to arrive at an appropriate conclusion. Some actions which may not have been foreseen in an original
agreement may be important in achieving the overall objective.

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VII. The Commission produces a report, which exceeds the minimum requirements. However, it is looking
for continual improvement and as a result of a focus on evaluations the report should be further improved in
the future with details of these results.

VIII. A systematic effort is made to ensure adequate complementarity with IMF/WB programmes. Generally
the mobilisation of MFA and SAFs is associated with additional reform efforts required from the recipient
partner countries. More evaluations are foreseen as part of the reform process which also includes output
criteria. They should allow a better assessment of the value added of the EU interventions.

Although these two instruments are designed differently and pursue somewhat different objectives, an effort
is under way to ensure consistency in their implementation procedures. The observation of the Court will be
taken into account in this context.

The Commission will ensure, in all cases, that reasons for granting waivers are adequately documented.

This is foreseen as part of the general reform.

INTRODUCTION

possible to expand, year by year, the scope of the reforms required
for the modernisation of the country, in a framework which guar-
antees the coherence of EU support.

4. Macrofinancial assistance (MFA) is an exceptional instrument
(based on ad hoc Council decisions) designed to help beneficiary
countries in dealing with mainly short-term macroeconomic
imbalances.

23. See the reply to paragraph 53.

In contrast, Structural adjustment facilities (SAFs) are a standard
instrument of economic cooperation, aimed at supporting the
beneficiary countries in their reform efforts over a long period.

DESIGN OF PROGRAMMES

19. As part of the reform of the management of external aid, the
Commission is planning to draft a manual of procedures and to
provide specific training on this manual.

The Commission believes that the necessary expertise exists within
the departments managing these instruments to guarantee effec-
tive evaluation of the performance criteria associated with imple-
mentation.

24. The withdrawal of the World Bank was in part due to Leba-
non’s economic situation. There were extremely close consulta-
tions with the IMF and WB on the maintenance of the SAF. Both
the IMF and the WB strongly urged the Commission to continue
its operation so that there would be one way of bringing pressure
to bear on the reform policy in Lebanon.

Although the Article IV consultations were delayed, the IMF,
which was keeping a constant watch on the situation in Lebanon,
was able to inform the Commission about all the necessary devel-
opments.

Meeting the conditions for the first tranche meant that prepara-
tions for VAT, the key item in fiscal reform in Lebanon, could be
completed and the deadlock was broken in the negotiations on
the association agreement. This justified disbursement, even
though we made a point of expressing our deep concern about
the macroeconomic situation in a letter from the Commissioner
to the Finance Minister dated 28 July 2000.

20. The amount allocated to an SAF takes into account the costs
of the reforms supported by the operation and since 2001 is
documented more fully.

The Commission opted for a non-binding formulation to dem-
onstrate that it was reserving its freedom of judgement in rela-
tion to the IMF.

21. Through the Country Strategy Papers 2000 to 2006 exercise
and the three-year indicative programmes 2000 to 2002, Com-
mission departments have managed to provide, for the medium
term, a structure for setting up SAF operations. In this way it is

25.
In the case of SAFs, synergies with the World Bank are con-
sidered important, either (a) in the form of parallel operations
with identical conditionality so as to increase joint leverage and
to avoid ‘donor splitting’ by the beneficiary or (b) in the form of

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23.5.2002

self-standing EU operations, not incompatible with World Bank
ones, but furthering the goals of the association agreements to
which the World Bank attaches great importance.

— the necessity of being current on its external financial obliga-
tions towards the Community before being allowed to benefit
from a new assistance package,

26.
In each of the cases to which the Court refers, the Commis-
sion made a point of consulting the experts from the World Bank,
who shared all their knowledge of the social sector. More gener-
ally this dialogue allowed the Commission departments to estab-
lish a balance in the nature of the actions covered by the pro-
grammes.

— a grant element justified by the exceptionally difficult eco-
nomic and social situation in these countries and their limited
debt-servicing capacity, as in Albania, Kosovo or Bosnia and
Herzegovina,

— grant disbursements subject to the fulfilment by the benefi-
ciary countries of macroeconomic and structural reform con-
ditions.

27. Only in exceptional cases have second tranche conditions
been left open. However since January 2001, the Commission has
not left any open conditions relating to second tranches in any
SAF agreements.

The requested reduction in the net debt position of Armenia,
Georgia and Tajikistan was designed to ease the debt-servicing
obligations of these low income countries

28. The Genval informal Ecofin conclusions referred to by the
Court provide general guidance for the design and implementa-
tion of MFA. However because of its ad hoc character, each mac-
rofinancial or exceptional financial assistance decision sets de novo
the principles and the conditions of implementation of the cor-
responding assistance package.

30. The motivation of the Commission’s proposal, including its
assessment of the factors that justify financial intervention by the
Community, is generally laid down in the explanatory memoran-
dum accompanying the Commission’s proposal. The existence of
a residual external financing gap in the recipient country’s bal-
ance of payments (after financing from the international financial
institutions has been taken into account) is an important, but not
a sufficient condition for this type of assistance to be initiated.

The expected added value of the Community’s intervention derives
from the very nature of macrofinancial assistance. The assistance
is generally made available to partner third countries, which are
geographically close to the EU and maintain important political
and economic links with it. This type of assistance complements
financing provided by the relevant IFIs and its objectives are there-
fore consistent with those agreed by these institutions and the
recipient country. However, the economic policy conditions (nota-
bly on structural reform) attached to the implementation of the
assistance are also inspired by the economic cooperation agenda
between the EU and the recipient country, as set out in associa-
tion or cooperation agreements.

31. The Commission has put forward proposals for macrofinan-
cial assistance when there were residual external financing needs,
over and above those that could be covered by the IFIs.

The characteristics of the exceptional financial assistance to Arme-
nia, Georgia and Tajikistan were similar to those applying to other
macrofinancial assistance programmes with in particular:

It is necessary to put the implementation of macrofinancial

33.
assistance within a broader perspective.

In the early 1990s during the first years of the transition from
central planning to market economies of most of the countries in
central and eastern Europe, many of these countries benefited
from one-off assistance packages (Hungary, Czech and Slovak
Republics, Baltic countries). The fact that macrofinancial assis-
tance has been provided repeatedly to a limited number of coun-
tries (notably, Romania, Bulgaria and Ukraine) of eastern and
south-eastern Europe simply demonstrates that the transition
process to the market economy has in some cases been complex
and discontinuous. Because of difficult political circumstances,
the necessary structural reforms have been delayed or imperfectly
implemented in some countries and exceptional circumstances
have reappeared.

35. With regard to the geographical proximity Armenia and
Georgia can in many respects be regarded as European NIS. With
the possible accession of Turkey, they will even become the EU’s
immediate neighbours, like Belarus, Ukraine and Moldova. They
are of strategic interest to the Community, since their macroeco-
nomic and political stability is essential to adequate energy sup-
plies to Europe through the oil and gas corridors linking it to cen-
tral Asia. These countries are linked to the European Union by a
special relationship through their Partnership and Cooperation
Agreements and important programmes like Traceca and Inogate.
The case of Tajikistan is somewhat different, but the country’s sta-
bility is also essential to central Asia’s stability and to the proper
functioning of the oil and gas corridors.

Although it is recognised that further progress in the area of
human rights is required in some of the countries concerned, the
Commission considers that the political preconditions have so far
been respected and no country with a dubious track record in the
respect of democratic principles and human rights is presently
benefiting from an active MFA programme.

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38. The Community assistance is generally decided at a particu-
lar point in time and committed on the basis of the estimated
average residual financing needs of the recipient country’s balance-
of-payments, in the context of an IMF-supported programme.
The disbursements take place, when the conditions of this assis-
tance are fulfilled, in principle during the programme period, but
irrespective of the balance-of-payments effective needs (which are
constantly varying during the period) at the time of the disburse-
ments (unless unexpected circumstances arise, the programme is
discontinued or a reassessment of the external financial situation
has been explicitly foreseen from the outset). This is the only
practical way to implement financial assistance of this type and is
the approach adopted by all major official donors.

39. As reflected in Annex II(1) to the Commission report to the
European Parliament and to the Council on the implementation
of macrofinancial assistance in 2000 (COM (2001) 288 final),
Community assistance to Bulgaria in 1999/2000 represents about
50 % of the total bilateral support made available to this country
(see also reply to paragraph 38).

40.
In the view of the Commission, UNMIK had made particu-
larly good progress in establishing a macroeconomic framework
under very difficult circumstances. This included e.g. setting up a
central fiscal authority ensuring fiscal control and the develop-
ment of a revenue base. This justified in the Commission’s view
the release of the second payment.

This positive appraisal was corroborated by the positive apprecia-
tion of Kosovo’s economic transformation from the IFIs and other
international bodies. As appropriate when taking its decision, the
Commission also took into account the external financing needs
and the urgency. The Pristina office of the European Agency for
Reconstruction was not responsible for determining whether the
conditions necessary for releasing the second payment had been
met. It was deemed appropriate to proceed with the implementa-
tion of macrofinancial assistance when conditions specifically
attached to it were fulfilled, rather than introducing cross-
conditionalities thereby running the risk of stalling progress in
the area of the economic framework and the provision of basic
services to Kosovo.

41. When the Kosovo crisis erupted, the Commission decided to
provide Albania with emergency budgetary support (a grant) of
up to EUR 67 million to help the country to cope with the pres-
ence of a larger number of refugees. Although only EUR 33 mil-
lion was ultimately disbursed, because the refugees returned more
quickly than anticipated, Albania then decided not to take advan-
tage of the loan support already approved. This assistance is no
longer programmed and the Commission agrees, could be can-
celled.

In the case of the two examples, the Commission would observe:

— with regard to Kosovo, at the second Donors’ Conference of
17 November 1999, UNMIK, the European Commission and
the World Bank presented detailed programmes and docu-
mentation. These documents described priority areas for
which regulatory frameworks had to be established (e.g. energy,
water and waste, transport, telecommunications, etc.). Results
can be assessed on the basis of preparatory documents (e.g.
the White Paper for private sector development), draft regula-
tions (circulated in the JIAS or sent to the legal office) or
adopted regulations,

— the condition mentioned in the case of FYROM was inspired
by the World Bank’s public expenditure and institutional
review action plan. This action plan sets out certain steps to
be undertaken, but was not very specific on the timetable to
be followed (as most of the timetable was relative to the cre-
ation of the Civil Servants Agency). Therefore, it was deemed
appropriate to formulate the condition broadly and to use the
World Bank action plan for assessing whether the authorities
had ‘made significant progress’.

44. All the conditions associated with the 1999 macrofinancial
loan to Romania were key issues identified in the Commission’s
opinions and regular reports of 1997, 1998 and 1999.

45. At the time of the action, Montenegro both faced a very
complex and difficult external environment and was embarking
on a transition period that involved institution-building and mod-
ernising the administration. The assistance needed to be imple-
mented urgently for political, economic and financial reasons.
Against this background, it was decided to reduce the usual mini-
mum interval between disbursements from three to two months.
The structural reform conditionality attached to the disbursement
focused on the budgetary sphere, notably on the enhancement of
fiscal and budgetary transparency, where it was considered fea-
sible for the authorities to make satisfactory progress within two
months.

However, as the Council decision made clear, the two-month
period was a minimum and the assistance could not in any case
be disbursed until conditions had been fulfilled. The actual dis-
bursement of the second tranche took place four months after the
first tranche precisely because of unsatisfactory compliance with
the conditions.

ASSESSMENT OF PARTNER GOVERNMENT’S BUDGETARY
AND ACCOUNTING PROCESSES

43. MFA drawn up on policy-based conditionality may some-
times need to be formulated in general terms, so as to take into
account complex circumstances and leave a margin of judgement.

47. The MEDA countries are subject each year to an IMF
Article IV review, when budget implementation and the quality of

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23.5.2002

the data concerning public finances are examined and evaluated.
The reason why the Commission did not conduct a specific evalu-
ation of these matters was because it works in close coordination
with the World Bank, which carries out reviews of public spend-
ing in the region, and with the IMF, including its fiscal depart-
ment, on all the fiscal aspects. These provide a major input to
assessing the quality of budgetary and accounting processes.

48. The guide to budgetary aid procedures currently in prepara-
tion states that the assessment of public finances is one of the
main steps in the preparation of a budgetary aid operation.

49. When macrofinancial assistance is used for its usual purpose
of strengthening the country’s external reserves, a close monitor-
ing of the beneficiary country’s national budget is not the main
focus. The government is not expected to use the money paid to
the central bank, since an increase in external reserves is not auto-
matically translated into an increase in the Central Bank’s credit
to the government. The IMF quantitative targets monitoring is a
sufficient guarantee in this respect.

When macrofinancial assistance is paid directly to the national
budget (e.g. Kosovo, Montenegro), it is appropriate to monitor
this budget. In this respect, the Commission services benefited
from the overall budgetary monitoring implemented by the IFIs,
by the EU pillar of the UN administration in Kosovo and by a con-
sultant in Montenegro.

In implementing its programme of deconcentration of staff to the
delegations, the Commission is enhancing their capacity to moni-
tor the political and economic conditions in beneficiary coun-
tries.

55. While retaining its freedom of judgement, the Commission
now systematically coordinates its action with the World Bank.

56. The rationale of SAFs (accompanying the reform programmes
of the Mediterranean partners) does not require the establishment
of a fixed timetable for disbursements. Payment of instalments is
made only when conditionality is met. The rhythm of reforms of
the partner country should be respected. It should be recalled that
SAFs are not exceptional instruments used in response to short-
term urgent external financing needs.

58. As foreseen in the Memorandum of Understanding defining
disbursement conditions the Government of Jordan approved a
draft competition law taking into account the comments of DG
Competition. This draft was submitted by the Government to the
parliament in 1997. Since then parliamentary committees have
discussed the draft and sent it back several times to the Govern-
ment with request for amendments. Unfortunately, in April 2001
the parliament refused the law. In conclusion, the interlocutor of
the Commission, the Government of Jordan, has fully complied
with the conditions as set out in the Memorandum of Under-
standing.

50. The Commission agrees that lessons learned should be duly
taken into account. It also agrees with the importance of assess-
ing the quality of public finance management in countries ben-
efiting from budgetary aid, a major point emphasised by the IAS
report. The Commission consults with donors including the World
Bank and the IMF on the assessment of public finance manage-
ment.

59.
It is correct that there is generally consensus between the
Commission and the IMF/World Bank about progress in the
adjustment and reform process of the recipient countries. How-
ever, the Commission decisions concerning disbursements of
macrofinancial assistance and of SAFs are taken independently.

MONITORING OF MFA AND SAF

51. With regard to MFA, there are internal rules and procedures,
although not always strictly formalised. The informal character of
such rules and procedures results from the exceptional nature of
the instrument.

60. The Council decisions authorising macrofinancial assistance
operations stipulate that the Commission is responsible, in con-
sultation with the EFC and in coordination with the IMF, for
agreeing with the authorities of the recipient countries the condi-
tions of the macrofinancial assistance operations and for verify-
ing that these conditions have been fulfilled. The Commission
endeavours in all cases to document fully the reasons for waiving
conditions. The same approach is applied to SAFs (see also para-
graph 74).

The responsibility for the implementation of macrofinancial assis-
tance lies with the geographical Units, but the adviser in charge
of coordination of financial assistance supervises all operations
and ensures overall consistency.

REPORTING AND EVALUATION

53. Commission departments, including the delegations, regu-
larly monitor the economic and political developments of the
beneficiary countries.

61 and 62. All the SAFs approved since 2000 include a financial
provision to carry out a final independent evaluation of the pro-
grammes. The Court’s comment about the report to be submit-
ted by the recipient country will be taken into account for cur-
rent and future programmes.

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62. An evaluation of macroeconomic policy support is planned
for 2004/05. It is not planned to cover MFA. Once the evaluation
report is finalised, it will be made available on the Commission’s
website.

69. MFA and SAFs have different objectives as they aim to fulfil
different needs although certain operational elements are similar,
as noted by the Court.

63. Substantial progress has recently been made: the Commis-
sion adopted the report on the implementation of macrofinancial
assistance in 2000 (COM(2001) 288) on 1 June 2001.

70. The Commission wishes throughout its operations to har-
monise its approach where possible while ensuring sufficient
flexibility to cope with different requirements.

64 and 65. The structural reform analysis contained in the
annual report broadly corresponds to the policy-based conditions
agreed with the beneficiary countries. However, given the sensi-
tivity and the confidential character of the reforms agreed in the
Memoranda of Understanding with the beneficiary countries’
governments, the link between our analysis and the precise condi-
tions attached to operations is generally not made explicit.

The Commission is planning to initiate independent evaluations
of MFA programmes from 2003 onwards.

CONCLUSIONS AND RECOMMENDATIONS

73. With respect to SAFs, the guide on budgetary aid, which is
currently being prepared by AIDCO, takes into consideration sev-
eral of the Court’s recommendations. See also replies to para-
graphs 60 and 74.

74. The Commission is working towards the establishment of a
more systematic set of rules and procedures that should apply to
financial
instruments with macroeconomic implications. For
instruments like MFA and SAFs, implementation is generally sub-
ject to the satisfactory fulfilment of policy-based conditionality.
This type of conditionality may sometimes need to be formulated
in broad terms, so as to take into account complex circumstances.
It is often not only necessary but also productive to leave a mar-
gin of judgement.

66. The Commission shares the views of the Court and is pres-
ently exploring the best way to structure and implement these
policy-based instruments so as to enhance consistency and effi-
ciency.

For this reason, the verification of the satisfactory implementa-
tion of the conditions attached to MFA and SAFs require an expert
and comprehensive assessment of the country’s macroeconomic
adjustment and structural reform programme.

67. As mentioned under paragraph 30, the MFA is generally
made available to geographically close partner countries with
important economic and political links with the EU. It comple-
ments financing provided by the relevant IFIs and its objectives
are therefore consistent with those agreed by these institutions
and the recipient country. However, the economic policy condi-
tions (notably on structural reform) attached to the implementa-
tion of the assistance are also inspired by the economic coopera-
tion agenda between the EU and the recipient country, as set out
in association or cooperation agreements.

68.
In the case of SAFs, synergies with the World Bank are sys-
tematically sought, either (a) in the form of parallel operations
with identical conditionality so as to increase joint leverage and
to avoid ‘donor splitting’ by the beneficiary or (b) in the form of
self-standing EU operations, not incompatible with World Bank
ones, but furthering the goals of the association agreements to
which the World Bank attaches great importance.

In the case of MFA, the justification of a separate EU action is
made explicit in the explanatory memoranda of the relevant
Council decisions. Consistency is always sought with other EU
instruments. (see reply to paragraph 30).

75. The Commission fully agrees with the emphasis placed by
the Court on the quality of budgetary processes and the impor-
tance of transparency.

76. The Commission intends to further enhance monitoring of
financial management in the beneficiary countries.

The Commission maintains close working relations with the IMF
and the World Bank, but the Community is not a member of
these institutions. There may therefore be institutional constraints
for the Commission to be involved in their work.

78. The Commission is considering ways to enhance evaluation
procedures for MFA, notably by financing evaluation exercises
from 2003 onwards. Annual reporting by the Commission to
Parliament and to the Council concerning the implementation of
MFA, as well as any future exercise of evaluation of this type of
assistance, have to duly take into account the sensitivity and the
confidential character of the policy measures agreed between the
Commission and the beneficiary countries, as conditions for the
disbursement of the assistance.

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As regards the SAF, the Commission, when preparing operations,
begins the analysis of the feasibility and impact of the reform pro-
cess supported by an SAF. In addition, since 2001 provision is
systematically made for the evaluation of the SAF.

ANNEX III

FULFILMENT OF CONDITIONS

Kosovo

1.

In the case of Kosovo, the identification of conditions was par-
ticularly delicate given the exceptional circumstances and dif-
ficult situation on the ground. Nevertheless, following its
review mission in June 2000, the Commission was convinced
that the UNMIK progress in implementing the conditionality
was sufficient to allow a disbursement.

With regard to Kosovo’s budget, the conditionality did not
require budget consolidation, but enhanced revenue collec-
tion and better expenditure control. UNMIK had progressed in
these areas and was commended on this by the International
Community (Working Level Steering Group of 20 June 2000).

As the Court acknowledges (footnote 1, page 18), there are
important social and economic reasons (‘important concerns
of equity’) behind the decision of UNMIK not to introduce the
wage withholding tax. The Commission concurred with this
view and therefore accepted this decision.

The Commission considers that naming individual enterprises
in policy-based conditionality may, in some cases, be neces-
sary to ensure minimum progress in the privatisation process,
notably of large banks and other State-owned enterprises. The
argument that this may affect the sales price is only true if the
conditionality is made public, which is not the case with the
conditions attached to macrofinancial assistance. It should be
noted that the sale of Biochim was also explicitly part of the
IMF/World Bank conditionality.

3. At the time of the release of the second tranche, the Commis-
sion was able to verify that a new bill on EIA was prepared by
the Ministry of Environment to ensure compliance with the
EU EIA directive. Assurances received by the Bulgarian authori-
ties concerning the adoption of this new legislation were con-
sidered sufficient.

4. The Commission considered that the condition was suffi-
ciently met with respect to the objectives of the macrofinan-
cial assistance operation. Full compliance with the acquis com-
munautaire, which is required for EU membership and is
reviewed in the regular reports, is a far more demanding
requirement and was not asked for in the agreed Memoran-
dum of Understanding.

5. The agreement with the Bulgarian authorities specified that
the assistance would be disbursed in two tranches. The condi-
tions for the release of the second tranche were met to a very
large extent in the second half of 1998. In June 1998, the pos-
sibility of splitting the second tranche was indeed considered.
The process was delayed, however, for reasons related to dif-
ficulties with several EU Member States arising from debt
issues. The full payment was only made in December 1998,
after the Commission was satisfied that the respect of condi-
tionality was adequate.

Montenegro

With regard to self-financing,
in the Commission’s view,
UNMIK had made significant progress towards increasing the
domestically financed part of the budget: in the four budgeted
months of 1999 (September to December), roughly one third
of recurrent expenses had been covered by own resources,
albeit in a distinct budgetary framework. In 2000, the budget
plan foresaw external financing of about 50 % or DEM 220
million, while in fact the budget closed with a cash surplus of
DEM 46 million, of which DEM 38 million was from domes-
tic revenues. The 2001 budget plan foresees a further reduc-
tion in external financing (in absolute and relative terms).

6. The main task of the consultant was supporting the Montene-
grin Government in the area of budget/fiscal reform and help-
ing the authorities to implement the economic policy condi-
tions of this assistance. In pursuing his tasks the expert
obviously provided useful information to the Commission
that helped it to monitor the assistance. The Commission pur-
sued its own monitoring and evaluation of the assistance
through regular contacts and an assessment mission in Decem-
ber 2000.

Bulgaria

2. As mentioned above, the Commission always leaves a margin
of judgement in the formulation of policy-based conditions.

The consultant accomplished his tasks satisfactorily, especially
given the short period of his assignment and the difficult envi-
ronment at that time. In particular, the consultant helped the
Montenegrin Ministry of Finance to make substantial progress
in enhancing budgetary transparency and improving budget-
ary procedures. The Commission did not expect a clear

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recommendation for or against a disbursement decision, since
it considered this to be its own responsibility.

The Commission went on mission to carry out its assessment
of conditionality early in December 2000. At that time the
Consultant was also present in Podgorica and the Commis-
sion had the opportunity to discuss his draft final report,
which was available at the beginning of the mission. The con-
sultation of the Economic and Financial Committee was based
on the Commission’s own assessment and the conclusions in
the draft final report.

During its mission in December 2000, the Commission
observed that the progress made in some areas had not been
satisfactory. It therefore warned the Montenegrin authorities
that without further substantial progress in these areas a dis-
bursement of the second tranche would not be possible. The
Commission also specified action that had to be taken, but in
no way softened the conditions laid down in the Memoran-
dum of Understanding. It was also necessary to explain the
conditions in greater detail, since information about some
aspects of the situation on the ground and of the policy envi-
ronment had been incomplete at the time when the condi-
tions were formulated.

Tunisia

(a) Sale of five companies: the joint World Bank/ADB/Commission

evaluation mission considered this condition to have been ful-
filled, as the stock market situation was so unfavourable that
it would not have been reasonable to demand that the three
remaining companies be put up for sale. In return the Tuni-
sians provided a timetable for sale going beyond what had
been demanded. It is true that, with hindsight, the technical
waiver procedure could have been more transparent in this
instance, but the head of mission (World Bank) did not con-
sider it necessary and this procedure does not exist at the
Commission.

(b) Five of the 35 conditions for the second tranche were fulfilled
in part. This was reflected in the file submitted for the approval
of the Director-General and subsequently of Financial Con-
trol. Mathematically, therefore, performance exceeded 85 %.

Given that there is never 100 % compliance, that performance of
certain conditionalities went far beyond what was demanded, that
the Tunisians offered guarantees for total achievement of the
remaining conditions, the decision-makers gave the go-ahead for
disbursement provided that the funds were not finally acquired
(double signature) until ‘full compliance’ had been established.
This will not happen again as the double signature procedure has
been discontinued. At the time nobody could have known that it
would take six months. It is quite clear that the Commission can-
not alter the regulations of the Tunisian Central Bank.

This programme was considered exemplary, in particular in terms
of coordination between donors and the delivery of the privatisa-
tion programme.