Special report No 2/2005 concerning EDF budget aid to ACP countries: the Commission's management of the public finance reform aspect, together with the Commission's replies
Date: 2005-06-30
Institutions: European Court of Auditors
Subjects: ACP countries, EU control, EU relations, European Development Fund, financial aid, national budget, national planning, public finance, use of aid

7.10.2005

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Official Journal of the European Union

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I

(Information)

COURT OF AUDITORS

SPECIAL REPORT No 2/2005

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

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

(2005/C 249/01)

CONTENTS

Paragraph

Page

ABBREVIATIONS AND TERMINOLOGY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

Description of the mechanism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The Court’s audit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Audit results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

AUDIT FIELD: DIRECT NON-TARGETED BUDGET AID . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Definition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

Advantages: ownership and greater simplicity for beneficiary countries . . . . . . . . . . . . .

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

Implementation: aid is conditional

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

Regulatory provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

Audit objective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Audit approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

AUDIT FINDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Assessment of the initial public finance management situation . . . . . . . . . . . . . . . . . . . .

Definition of methodological framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Methodological framework improved, but should be expanded . . . . . . . . . . .

Dynamic interpretation of eligibility conditions . . . . . . . . . . . . . . . . . . . . . . . .

Cohesion between programmes should be made more explicit . . . . . . . . . . . .

I-V

I-II

III

IV-V

1-2

3-18

3-5

6-8

9-11

12-14

15

16-18

19-22

19-20

21-22

23-74

23-40

23-30

23-27

28-29

30

3

4

4

4

4

5

5

5

5

5

6

6

7

7

7

7

8

8

8

8

9

9

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Paragraph

Page

Implementation of the methodological framework . . . . . . . . . . . . . . . . . . . . . . . . .

31-37

Initial assessments generally comprehensive and linked to the national reform
programme . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Fighting corruption: an issue that needs to be developed . . . . . . . . . . . . . . . . .

Institutional support coordinated but not always part of an overall framework

No recommendations from the Heads of Delegation . . . . . . . . . . . . . . . . . . . .

Information reflects the true picture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Commission’s decisions insufficiently argued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Monitoring the progress of reforms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Methodological framework under development . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Delegations’ monitoring reports could be improved . . . . . . . . . . . . . . . . . . . . .

Performance indicators are being improved . . . . . . . . . . . . . . . . . . . . . . . . . . .

Implementation of the methodological framework . . . . . . . . . . . . . . . . . . . . . . . . .

Delegations’ monitoring reports incomplete . . . . . . . . . . . . . . . . . . . . . . . . . . .

31-33

34

35-36

37

38

39-40

41-74

41-46

42-44

45-46

47-68

47

Performance indicators sometimes offer too little incentive . . . . . . . . . . . . . . .

48-51

Unequal progress in different countries as regards coordination with other
donors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Relations with parliaments and Supreme Audit Institutions to be strengthened

Human resources shortfall at the Commission . . . . . . . . . . . . . . . . . . . . . . . . .

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

Commission’s reactions appropriate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Recommendations

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

52-55

56-62

63-68

69-71

72-74

75-89

75-83

84-89

ANNEX 1 — Six tables illustrating the importance of budget aid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

ANNEX 3 — The performance indicators used by the Commission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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

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

9

9

10

10

11

11

11

12

12

12

13

13

13

14

14

15

16

16

17

18

18

18

20

24

28

30

31

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ABBREVIATIONS AND TERMINOLOGY

— African, Caribbean and Pacific States signatory to the Cotonou Agreement

— African Development Bank

— French Development Agency

— Bretton Woods Institutions (WB and IMF)

— Country Financial Accountability Assessment

— Country Procurement Analytical Review

— UK Department for International Development

— European Development Fund

ACP

ADB

AFD

BWIs

CFAA

CPAR

DFID

EDF

EMCP

— Expenditure Management and Control Programme

FRA

— Fiduciary Risk Assessment

GBOFT

— Government budgetary operations and financing table

HIPC

— Highly indebted poor country

HOAP

— Harmonisation of overseas audit practice

IFAC

— International Federation of Accountants

IMF

ISA

MoU

NIP

— International Monetary Fund

— International Standards on Auditing

— Memorandum of Understanding

— National Indicative Programme

OECD

— Organisation for Economic Cooperation and Development

PAF

— Performance Assessment Framework

PARPA

— Plano de Acção para a Redução da Pobreza Absoluta (action plan to reduce absolute poverty)

PEFA

— Public expenditure financial accountability

PEMFA

— Public expenditure management and financial accountability

PER

PETS

PF

— Public expenditure review

— Public expenditure tracking survey

— Public finances

PFMA

— Public finance management assessment

PPARP

— Multiannual support programme for poverty reduction

PRGF

PRSP

— Poverty reduction and growth facility

— Poverty reduction strategy paper

PSCAP

— Public service capacity building programme

ROSC

— Report on the observance of standards and codes

SAI

— Supreme audit institution

SISTAFE — Sistema de Administração Financeira do Estado (government financial administration system)

WB

— World Bank

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Description of the mechanism

SUMMARY

I.
The volume of direct non-targeted budget aid has increased substantially in recent years and now
accounts for around one fifth of EDF aid. It has several major advantages, chief of which are ownership and
greater simplicity (see paragraphs 9 to 11), but it also brings an element of risk. This risk differs from that
affecting other types of aid (see paragraphs 12 and 13): the objectives are more ambitious and the funds dis-
bursed are merged with the revenue of the beneficiary countries, which then spend them in accordance with
their own management systems, which are usually weak. The philosophy behind budget aid is to help benefi-
ciary countries to reduce this risk while at the same time allowing them to manage their own development
through growth and poverty reduction. Most donors are showing an increased interest in this form of aid,
which is fundamentally different from the traditional method of project support (see paragraph 11).

II.
The Commission is prepared to transfer budget aid to countries with weak management systems, pro-
vided that reforms are put in place to improve them (see paragraphs 28 and 29). This is a long-term process.
It has therefore developed tools with the aim not only of making an initial diagnosis of the quality of the pub-
lic finance management and proposed reforms, but also of evaluating management changes and the progress
of those reforms.

The Court’s audit

III.
The objective of this audit was to examine, for 2003 and 2004, how the Commission had managed
the risk linked to public finance within the framework of budget aid (see paragraph 12), i.e. how it had verified
the quality of public finance management and the effectiveness of the reforms introduced by the beneficiary
State (see paragraphs 19 and 20). The audit focused in particular on the programmes of direct non-targeted
budget aid granted from the EDF within the framework of the Cotonou Agreement. It was based on checks
performed at Commission headquarters and in five countries (see paragraphs 21 and 22).

Audit results

IV.
The analytical and follow-up tools, which the Commission applies in coordination with the other
donors, and the World Bank and IMF in particular, provide relatively comprehensive information that enables
it to take appropriate action. However, the design (see paragraphs 23 to 27 and 42 to 46) and implementation
(see paragraphs 31 to 37 and 47 to 68) of these tools need to be improved. There are some design weaknesses
at the diagnostic level and in the monitoring reports, which are not sufficiently complete and informative. Fur-
thermore, there is insufficient coordination with other donors at local level as regards the use of these instru-
ments and their implementation does not rely sufficiently on the parliaments and supreme audit institutions
of the beneficiary countries concerned.

V.

The Court recommends that the Commission:

(a) update and complete its Methodological Guide, including the parts relating to monitoring reports

(see paragraph 84);

(b) give clearer evidence for the eligibility of beneficiary countries (see paragraph 85);

(c)

employ enhanced-incentive public finance performance indicators (see paragraph 86);

(d)

finalise the new public finance management performance measurement tool and do its utmost to have it
adopted by the various donors (see paragraph 87);

(e)

strengthen local cooperation between donors (see paragraph 88);

(f)

strengthen its relations with the parliaments and supreme audit institutions of beneficiary countries
(see paragraph 89).

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INTRODUCTION

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

1.
In 2000, the Court examined the Commission’s follow-up
of the use of counterpart funds from structural adjustment sup-
port earmarked for budget aid in the ACP countries (1). The Com-
mission has since replaced this form of assistance by budget aid,
which now represents more than one quarter of total aid under
the ninth EDF (see table A in Annex 1).

2.
The Parliament (2) and the Council (3) have recognised the
advantages of budget aid. They are concerned about the control
arrangements for it and have urged the Commission to be vigi-
lant in its observance of Article 61(2) of the Cotonou Agreement
(see paragraph 18) and, in coordination with the other donors,
to carry out more thorough appraisal of the direction taken by
public finance management in the beneficiary countries as well as
monitoring the progress of
the reforms that are intended
to improve it.

AUDIT FIELD: DIRECT NON-TARGETED BUDGET AID

Definition

Budget aid is paid into the budgets of beneficiary States
3.
to compensate for shortages in their domestic resources. It pro-
vides de facto support for their balance of payments and public
finances. At present, most of the budget aid disbursed by the
Commission is ‘direct’ and ‘non-targeted’. The importance of this
aid relative to total EDF assistance is shown in table B in Annex 1.
The amount of budget aid by country is shown in table C in
Annex 1.

The aid is ‘direct’ in that it enters budgets directly without
4.
the need for a counterpart allocation of currency for countries’
essential imports. In general, this mechanism is no longer neces-
sary because the currency of the beneficiary countries is nearly
always convertible and freely transferable.

5.
The aid is ‘non-targeted’ in that it is merged indistinguish-
ably with other budgetary revenue and cannot be associated with
specific expenditure, in contrast to targeted budget aid, where the
EDF funds are paid into special accounts whose use requires the
signature of the Heads of Delegation. Targeted budget aid is lim-
ited (4)
to cases of countries experiencing serious liquidity
problems.

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

14.9.2001).

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

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

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

The main objectives of budget aid are to facilitate growth
6.
and reduce poverty, both of which are among the United Nations’
Millennium Development Goals (5).

7.
For most of the ACP States concerned, this translates into
a poverty reduction strategy paper (PRSP), which is drawn up by
the country and approved by the main donors. This document
sets out the principal medium-term guidelines adopted by the
country to reduce poverty among its population.

Public finance management reforms are one element of
8.
the EDF’s overall poverty reduction strategy and direct non-
targeted budget support. Given the Commission’s dynamic
approach (see paragraph 28), such reforms become an important
budget aid objective in themselves.

Advantages: ownership and greater simplicity for beneficiary
countries

9.
Direct non-targeted budget aid enables the Commission to
enter fully into the issue of how national budgets are managed,
by initiating permanent dialogue with countries on reforms
to improve that management. European taxpayer’s money has a
leverage effect which helps to improve the overall quality and
effectiveness of national budgetary revenue and expenditure.
These improvements are beneficial to development as a whole
and enhance the aid that is provided to donor-funded projects in
all their forms.

10.
Budget aid should provide countries with a better sense
of ownership than aid supplied to a variety of projects. Moreover,
the aid becomes an integral part of the budget and is thus subject
to national parliamentary control.

11.
Budget aid can greatly simplify the expenditure process
by reducing the number of steps. Because it is merged with
national budgets, it is spent according to national budgetary
implementation procedures, whereas projects, which offer other
advantages, are usually implemented outside beneficiary coun-
tries’ budgets (6) and managed in accordance with the various
donors’ own procedures (7) (see diagram 1).

(5) See Resolution No 55/2 adopted by the United Nations General

Assembly on 8 September 2000.

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

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

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Diagram 1

The EDF aid circuit to budget support and projects

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

14.
A further consideration is that these budgets’ dependence
on external aid in general, including EDF aid (see table D in
Annex 1), affects budget predictability and revenue reliability in
the beneficiary countries. In some cases the problem is aggravated
by the system of conditional variable tranches.

12.
Once direct non-targeted budget aid has been paid to the
beneficiary countries, its use is subject to their national budget-
ary procedures. This exposes European taxpayers’ money to the
usually high risks affecting those procedures. Donors are con-
scious of these risks and accept them as long as reforms
to improve the national budgetary procedures have been put in
place.

Implementation: aid is conditional

13.
Public finance reform is a lengthy process. By agreeing
to channel aid over a period of years into developing systems that
do not immediately provide sufficient guarantees in terms of
transparency, reliability or effectiveness, donors are investing in
the future.

15.
The Commission implements its direct non-targeted bud-
get aid under three-year programmes. Funds are disbursed in half-
yearly or annual tranches once the Commission has assessed the
compliance with general preconditions (affecting the programme
as a whole) and specific preconditions (relevant to a single
tranche). Some tranches are variable, meaning that they are cal-
culated on the basis of performance indicators.

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Regulatory provisions

(b)

this methodological framework was implemented correctly at
both the initial and follow-up stages;

16.
Article 67(1), (3) and (4) of the ACP/EC Partnership
Agreement signed in Cotonou on 23 June 2000 (the Cotonou
Agreement), which governs the ninth EDF, provides that ACP
States wishing to benefit from budget aid must undertake mac-
roeconomic or sectoral reforms that are economically viable and
socially and politically bearable. In practice, where these reforms
are supported by a Bretton Woods Institutions (BWI) programme,
this condition is automatically satisfied.

(c)

the information on which the financing decisions were based,
and, subsequently, the information in the follow-up docu-
ments, gave a true view of the situation; and

17.
According to Article 61(1)(c) of the Cotonou Agreement,
aid is paid directly to ACP States with convertible and freely trans-
ferable currencies.

(d)

the financing decisions were properly argued and transparent
and the Commission had taken appropriate action as a
consequence.

18.
‘Direct
According to Article 61(2) of the Agreement,
budgetary assistance in support of macroeconomic or sectoral
reforms shall be granted where:

(a) public expenditure management is sufficiently transparent,

accountable and effective;

(b) well-defined macroeconomic or sectoral policies established
by the country itself and agreed to by its main donors are in
place; and

20.
However, the audit did not set out to determine the
advisability of using budget aid in preference to funding for
projects, nor did it seek to assess the impact of budget aid on pov-
erty reduction. Lastly, the objective did not include auditing pub-
lic finance management and reform in the beneficiary countries
even though, following analysis of documents, cross-checked
with interviews and on-the-spot visits, the Court produced some
findings concerning the public finance situation and the progress
of reforms in those countries (see paragraphs 69 to 71).

(c) public procurement is open and transparent’.

Audit approach

THE COURT’S AUDIT

Audit objective

19.
The objective of this audit was to examine for 2003
and 2004 how the Commission had managed the risk linked to
public finance and inherent to this type of aid, i.e. how it had veri-
fied the quality of public finance management and the effective-
ness of the reforms introduced by the beneficiary State. This
meant evaluating whether, both when the programme financing
decision was taken and since the start of implementation:

(a)

the Commission had defined a suitable methodological frame-
work to allow it to assess the initial situation and subsequent
development of the beneficiary countries’ public finance
management;

Checks were carried out at Commission headquarters,
21.
and information was gathered from the World Bank and the
International Monetary Fund (IMF). In the course of its audit vis-
its in the five ACP countries visited (see table 1), the Court exam-
ined ongoing direct non-targeted budget aid programmes (1).
These countries were selected because they offer a variety of pub-
lic finance management traditions and are representative (both
geographically and in terms of value) of the budget support
financed by the Commission.

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

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Table 1

Programmes examined in the five countries visited

Country visited

Financing agreement examined and duration

Ethiopia

No 9171/ET, 2003/2004 — 2005/2006 (1)

Mozambique

No 6567/MOZ, 2002 — 2005

Niger

Chad

No 9012/NIR, 2003 — 2005

No 9067/CD, 2004 — 2006

Zambia

No 9114/ZA, 2004 — 2006

Value
(million euro)

As percentage of total aid
planned under the 9th EDF

95

168 (2)

90

50

117

17,5 %

51,7 %

26,0 %

18,3 %

33,3 %

(1) Ethiopia’s budget year begins in July.
(2) A protocol assigned a further 16,4 million euro to Mozambique, as funding for the elections held in 2004.
Source:

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

22.
In each country visited, the first step was to review the
agreements and reports that the Delegation had prepared. These
were cross-checked against the reports by the other donors and
the government and compared with the situation in the main
departments active at the various levels of public finance man-
agement: budget programming and implementation, rendering of
the accounts, internal and external audit (1).

AUDIT FINDINGS

Assessment of the initial public finance management situation

Definition of methodological framework

Methodological framework improved, but should be expanded

In March 2002 the EuropeAid Cooperation Office (Euro-
23.
peAid), the Directorate-General for Development (DEV) and the
External Relations Directorate-General
(RELEX) established a
‘Methodological Guide to the programming and implementation
of budget support for third countries’ (the Guide). This was in part
a response to the Court’s previous recommendations (2). The
Guide remains, in 2005, the main reference document in this

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

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

area. It is a significant improvement over the previous situation.
However, examination showed it to be inadequate for the initial
assessment of public finances.

24.
The Guide does not place sufficient emphasis on domes-
tic revenue, including revenue from public undertakings, which
must be given the same consideration (3) as expenditure. This is,
in fact, because improvements to domestic revenue collection and
recovery, which may prove less costly and swifter to take effect
than the reduction of irregular expenditure, reduce the external
aid requirements to an equivalent extent and should provide tax-
payers with more incentive to require the national authorities to
account for their use.

25.
The framework financing proposal over-summarises the
list of information to be included in the public finance assess-
ment. The Guide should provide a detailed template for this
assessment, on the basis perhaps of that used for the Delegations’
monitoring reports (see paragraph 42).

26.
The section of the framework financing proposal that
addresses the beneficiary country’s eligibility omits all reference to
Article 61(2) of the Cotonou Agreement (see paragraph 18).

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

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Since March 2002, when the Guide was published,
27.
around 10 instruction notes have been addressed to the Delega-
tions by a variety of Commission departments. As a result, there
is no complete set of instructions for the implementation of bud-
get aid measures. The guide is currently being updated. It would
be beneficial if it could be completed as soon as possible, with
provision for subsequent updates to be consolidated at regular
intervals (1).

Dynamic interpretation of eligibility conditions

28.
The Commission interprets the conditions set by
Article 61(2) of the Cotonou Agreement in a dynamic manner. In
its view, the weaknesses affecting public finance management at
the time of the financing decision do not preclude the launch of a
budget aid programme, provided that the will for reform exists
and the reforms are deemed to be satisfactory. In this way it takes
account not only of the initial situation of public finance man-
agement systems, but also of the direction being taken by the
country (2). Many other donors, including the Bretton Woods
institutions, similarly take account of the prospect of improving
public finance management systems, rather than merely referring
to a threshold value or an absolute qualitative level.

29.
This interpretation extends the scope of this particular
provision and thus increases the risk to which European taxpay-
ers’ money is exposed, because it is the beneficiary countries’
national budgetary procedures that are being used. Such an inter-
pretation requires much more rigorous monitoring of the situa-
tion and subsequent development of public finance management
in the countries in question.

(c)

the institutional resources required to implement those
reforms;

(d)

the general and specific conditions (which govern pro-
gramme implementation), performance indicators (which are
used in the calculation of variable tranches) and other
follow-up tools (which are considered in the dialogue with
the national authorities, especially when the EDF pro-
grammes are due to be renewed).

Implementation of the methodological framework

Initial assessments generally comprehensive and linked to the national
reform programme

31.
On the whole, the initial assessments of public finance
management are reasonably comprehensive (3). The assessments
make use of analyses and evaluations produced with the other
donors, principally the Bretton Woods Institutions (BWIs), and
the national authorities (see Annex 2 and paragraphs 43 and 44)
in order to report on the essential weaknesses affecting public
finance. They usually summarise the prospects for improvement
by reference to the national programme of reforms (4) (see Box 1).

Cohesion between programmes should be made more explicit

Box 1 — Reference to beneficiaries’ national reform plans

30.
Direct budget aid programmes do not focus sufficiently
on the direction being taken by a country and the provision for
follow-up. The Guide does not stipulate that all financing propos-
als and agreements must guarantee and make explicit the cohe-
sion and logical relationship between the following:

(a)

the weaknesses detected in the management of public
finances;

1. The assessment for Ethiopia analyses the prospects for improve-
ment and refers to the measures planned in the Expenditure Man-
agement and Control Programme (EMCP) (1).

2. The Mozambique public finance assessment reports on the vari-
ous reforms initiated by the government, the main one being the gov-
ernment
financial management system SISTAFE (Sistema de
Administração Financeira do Estado) (2), which was adopted at the
end of 2002.

(b)

the government’s programme of reforms;

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

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

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

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

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In Niger, as a response to the audit of the structural adjustment
3.
programme by the Commission in 2001 and the suspension of bud-
get aid that followed it, the government and the Commission intro-
duced a matrix for measuring improvement in public finance man-
agement. This was duly taken into account in the initial assessment.

4. The Chad financing proposal does not contain any analysis of
the overall plan for public finance reforms, as it was not under devel-
opment at the time.

5. The assessment for Zambia refers to the national reform pro-
gramme,
the ‘Public Expenditure Management and Financial
Accountability (PEMFA) Action Plan’ (3), which was only available
in draft form at the time when the initial assessment was drawn up.

(1) Footnote does not concern English version.
(2) Government financial management system.
(3) Footnote does not concern English version.

32.
While, generally speaking, the bulk of information is
given in the financing proposals and agreements, it is still too dis-
persed. The financing proposals and agreements do not set out
systematically enough the arguments leading to the conclusion
that, despite the weaknesses disclosed by the initial assessment of
public finance management, the clause on the quality of public
finances has been complied with (see paragraph 39). The presen-
tation should be more standardised and structured in order to
enable the EDF Committee (1) and the Commission to obtain
assurance, during the process leading up to financing decisions,
that
any significant weaknesses have been taken into
consideration.

33.
The governments’ reform programmes do not systemati-
cally include all the reforms, whether already launched, planned
or awaiting consideration, that are necessary for the establish-
ment of a sufficiently transparent, accountable and effective sys-
tem of public finance management. In the dialogue with the
national authorities the Commission should ensure that a com-
prehensive reform programme is drawn up, that it sets out pri-
orities and is accompanied by a realistic timetable that is regularly
revised. This medium and long-term perspective is especially
important in a context where the management turnover rate at
the Commission (both at headquarters and in the Delegations)
and in the beneficiary countries outpaces the duration of the
reforms.

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

Fighting corruption: an issue that needs to be developed

34.
Another issue is that the Commission programmes do
not adequately take account of problems related to corruption (2),
which have been identified, by the World Bank in particular, as a
major obstacle to poverty reduction. It is true that improving
public finance management helps per se to reduce corruption.
None the less, corruption merits specific attention. Although this
topic is sensitive and not easy to broach, it is important, in part-
nership with the sovereign States and with the help of the organi-
sations specialising in this field (3), to measure the extent of the
phenomenon, which often appears under various headings, and
to understand how it works so that the appropriate measures can
be introduced and included by governments in their reform
programmes.

Institutional support coordinated but not always part of an overall
framework

35.
The institutional support measures provided for in the
financing agreements examined are well coordinated with the
other donors, either explicitly in the agreements or, subsequently,
during implementation. However, they are not always part of an
overall institutional support programme (4) that identifies the
finance provided by the various donors (see box 2).

Box 2 — Institutional support provided for in financing agree-
ments

1. The financing agreement for Ethiopia provides that the 3,5 mil-
lion euro earmarked for institutional support is to be paid into pooled
donor funds. One of these is the public service capacity building pro-
gramme PSCAP (1), a multi-donor overall support programme
totalling USD 400 million over five years, piloted by the Ministry
of Capacity Building (MCB).

2.
In Mozambique the 5,5 million euro allocated for institutional
support has been allocated to measures that are to be carried out
jointly with the main donors. On the other hand, it has not been
included in an overall support programme because there was none
available when the financing proposal was drawn up.

(2) Article 9(3) of the Cotonou Agreement makes it clear that combating
corruption is a key part of European Community development assis-
tance.

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

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

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3. The programme in Niger earmarked 1,35 million euro for tech-
nical assistance measures for the Ministry of Economics and Finance.
The planned measures are not part of an overall support programme.

In Chad 3,7 million euro has been set aside for capacity build-
4.
ing. There are no precise details of the latter because the needs in that
area had not been identified at the time when the financing proposal
was drafted. Drafting of an overall support programme is expected
towards the end of 2004, once the conclusions of the country finan-
cial accountability assessment (CFAA) (2) have been finalised.

5.
In Zambia 6,75 million euro has been reserved for capacity
building. It forms part of an overall support programme which had
not been finalised at the time when the financing agreement was
signed. The programme was signed by eleven donors in Decem-
ber 2004.

(1) Footnote does not concern English version.
(2) Footnote does not concern English version.

36.
An overall support programme makes it possible to cal-
culate the needs which can usefully be supported by the EDF. The
Commission should ensure that a programme is drawn up, with
an approximate timetable, to cover all necessary measures, includ-
ing those for which finance has yet to be found.

No recommendations from the Heads of Delegation

37.
The Heads of Delegation have not made recommenda-
tions as provided for in the Guide (1). There are also plans to ask
the Heads of Delegation to include, in their twice-yearly monitor-
ing reports, an overall summary of their views, which is in part a
consequence of the same approach. In both cases, it is of value to
obtain formally the explicit views of persons who have ongoing
close experience of the situation on the ground. The Commission
should therefore retain this provision in the Guide and ensure
that it is enforced.

Information reflects the true picture

38.
The Commission had identified all the public finance
management weaknesses that the Court detected during its
in-country audit visits. The exception was Chad, where there was
found to be an arrears problem (2) of which the donors were
apparently unaware.

Commission’s decisions insufficiently argued

39.
Having received a favourable opinion from the EDF
Committee, the Commission decided to sign the five programmes
examined, in spite of the public finance management weaknesses
observed in the countries concerned, which indicates that it
deemed the direction taken by the country to be satisfactory.
More detailed reasons should be given for these conclusions, not-
ing in particular how the reform programmes are expected to
overcome those weaknesses (see paragraph 30).

40.
Generally speaking, the initial situation regarding public
finance management in the ACP countries is characterised by
many weaknesses. In some of the countries visited, the Commis-
sion was one of the first donors to agree to accept this risk
(see box 3 and tables E and F in Annex 1). On each occasion, how-
ever, an IMF programme was concurrent.

Box 3 — Situation of other donors as regards non-targeted bud-
get aid in the five countries visited

In Ethiopia the Commission was the first donor to grant non-
1.
targeted budget aid, in 2002. It was joined by the United Kingdom
Department for International Development (DFID) (1), in 2003,
and then by the World Bank and Ireland in 2004.

In Mozambique the number of donors granting budget aid has

2.
increased steadily since 2000, reaching around 15 in 2004.

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

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

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In Niger, in March 2004, the Commission, with the IMF, was
3.
the only donor which granted non-targeted budget aid. The World
Bank and the ADB became involved at the end of 2004.

In Chad several donors in addition to the Commission have
4.
been providing budget support for a number of years. They include
the African Development Bank (ADB), French Development Agency
(Agence française de développement — AFD), World Bank
and International Monetary Fund. However, the latter suspended
renewal of its poverty reduction and growth facility (PRGF) and the
Commission suspended its own programme.

In Zambia, in May 2004, the Commission, with the IMF and
5.
the World Bank, was the only donor providing budget aid. Some of
the donors that the auditors met in the country welcomed the Com-
mission’s initiative and were prepared to participate in the overall
capacity building programme, but were not disposed to provide bud-
get support themselves in the immediate future.

(1) Footnote does not concern English version.

Monitoring the progress of reforms

management tool, the first indications arising from their imple-
mentation (see paragraphs 47 to 68) are that they could be
improved and expanded by:

(a) bringing the template for describing the public finance situ-
ation into line with the measurement framework that is cur-
rently being developed by the Public Expenditure Financial
Accountability (PEFA) partners (3) (see Annex 2);

(b)

requiring systematic follow-up of the implementation of the
institutional support programme so as to identify measures
where difficulties or delays are being experienced;

(c)

requiring an explicit assurance of consistency between the
various analyses (the two referred to above and the frame-
work for monitoring reforms);

Methodological framework under development

(d)

requiring the Delegation to give an overall opinion, accom-
panied by a recommendation for further action;

41.
The main tools used to monitor the development of pub-
lic finance management are the Delegations’ monitoring reports
and performance indicators.

(e)

requiring all the objective elements of these monitoring
reports, as far as possible, to be drawn up jointly, or at least
shared, with the other donors (each local representative office
reporting to its respective headquarters, with, possibly, the
ultimate aim of producing a joint document);

Delegations’ monitoring reports could be improved

42.
The Guide specifies that the Delegations are to monitor
public finances and report to the Commission central services (1).
The Delegations have been instructed that the half-yearly moni-
toring reports must contain a description of the situation (for
which a pattern is given) and a framework for monitoring public
finance
a valid
the

reforms (2). While

instructions

are

(f)

requiring the national authorities to be involved as much as
possible in the work of evaluation, with a view in particular
to developing their audit capabilities. However, the quality of
public finance management must be a matter of independent
professional judgment;

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

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

(g) having the reports produced less frequently, on an annual
basis, as the early warning procedure provided for in the
Guide (4) makes action possible the same year.

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

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

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These reports rely on donor and government audits and
43.
evaluations, which are evolving in significant ways. In particular,
the Commission is working with other donors, notably the World
Bank, to develop a new public financial management perfor-
mance measurement framework within the framework of PEFA
(see Annex 2). This would take the place of the existing tools.

44.
The Measurement Framework is currently being tested in
around 30 countries (including 18 ACP States), in 14 of which
the Commission has put itself forward as lead manager (1). As of
2005, therefore, the donors should have enough experience for
them to be able to make the necessary improvements for the
Framework to be adopted and made operational. Following
examination of the Measurement Framework, some improve-
ments have been proposed (see paragraph 7 of Annex 2).

Performance indicators are being improved

During the implementation of

its budget aid pro-
45.
grammes, the Commission uses performance indicators (see
Annex 3) to measure progress in the quality of public finances and
sectoral results, mainly with the aim of encouraging beneficiary
countries to improve their public finance management. This it
does by factoring the indicators into the calculation of variable
tranches. The Guide provides much detail on the selection and
use of performance indicators. In early 2005, the Commission
launched an exercise on ways of improving them.

46.
The performance indicators that are employed do not
cover all aspects of the reforms being implemented because this
would make them too numerous and unmanageable. It is there-
fore important to give reasons for the choices made and to indi-
cate clearly which fields are not covered by the indicators, stating
whether they are deemed to be low-priority, whether it was not
possible to identify suitable indicators or whether the basic data
required for the calculation of indicators are unreliable (in which
case they could be made more secure in future).

Implementation of the methodological framework

table on the monitoring of public finance reform is lacking
(see Box 4). Better use should be made of them by the central ser-
vices, which have not always responded by giving the Delegations
clear instructions concerning the measures to be taken.

Box 4 — Monitoring reports in the five countries visited

1.
In Ethiopia the two monitoring reports issued in March and
July 2004 (2004-I and 2004-II) follow the template provided by
headquarters and provide quality information, but the table on the
monitoring of public finance reform has not been completed.

In Mozambique the first half-yearly monitoring report was
2.
delivered late, because of the limited human resources available in the
Delegation. The report provides quality information and scrupu-
lously follows the template, but lacks information on human
resources management (section I.B.3 of the report), the retention of
exceptional procedures for execution of expenditure (section II.B.4),
and the recording of the most pressing needs in terms of capacity
building (section III. C). The framework for monitoring public
finance reforms is also missing.

3. The Delegation in Niger received instructions on the presenta-
tion of reports late and expected to compile its first monitoring report
in the second half of 2004, after the PEMFAR (public expenditure
management and financial accountability (1)) review had been fina-
lised.

4. The delegation in Chad has sent two half-yearly monitoring
reports, in April 2003 and in February 2004 (for the second half
of 2003). The second one was late, due to human resources short-
ages in the Delegation. Headquarters commented briefly on the first
report, with a list of the missing information. The second report scru-
pulously follows the template, but is incomplete, lacking informa-
tion on the role of the parliament and institutional support provided
by donors, as well as the framework for monitoring public finance
reforms. Overall the information is precise and highlights persistent
weaknesses clearly, although it does give rise to some questions about
follow-up. For example:

(a)

section I.B.3 of the monitoring report says that human resources
are at the heart of the weaknesses in public finance manage-
ment;

Delegations’ monitoring reports incomplete

(b)

section I.B.5 points out that there was also insufficient coordi-
nation between donors.

All too often, the first monitoring reports (2) by the Del-
47.
egations in the five countries visited are limited to a static analy-
sis of public finance management. The analysis is usually of good
quality and modelled on the template provided by headquarters.
These reports are incomplete in that, among other things, the

(1) See note No 17450 of 9 June 2004 from the Directorate-General for
Development and EuropeAid to the 14 Delegations concerned.
(2) The reports examined in the five countries were usually the first such

to be published since the current programmes got underway.

There is no indication of the action taken or to be taken in order to
remedy these situations.

In the case of Zambia the financing agreement was signed in

5.
June 2004, so there had not yet been a monitoring report.

(1) Footnote does not concern English version.

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Performance indicators sometimes offer too little incentive

48.
The performance indicators are negotiated with the gov-
ernment (a cosignatory to the financing agreement), and are usu-
ally coordinated with the other donors. The nature and number
of public finance management indicators, and consequently their
suitability for encouraging the progress of reforms, vary enor-
mously from one country to the next.

The indicators for budgetary allocation or implementa-
49.
tion levels, which, when restricted to a single sector, more closely
resemble sectoral input indicators, are relatively easy to measure
but not the most effective way of encouraging ACP countries
to improve management accountability, transparency and effec-
tiveness. The indicators used in Ethiopia, Mozambique and Zam-
bia are rather weak in this respect. On the other hand, the indi-
cators in Niger and Chad (1) offer more incentive (see Box 5).

Box 5 — Public finance management performance indicators
included in the financing agreements for the five countries vis-
ited

1.
Ethiopia has three public finance indicators focusing on the
financial timetable, progress of the Government Information System
Strategy (GISS) (1), and the level of the budget allocation to the
health and education sectors. They are, in fact, derived from the Pov-
erty Reduction Strategy Paper (PRSP) (2) and are shared with the
other donors.

2. Mozambique has eight public finance indicators, two of them
focusing on budgetary discipline (their purpose is to verify that cur-
rent expenditure does not exceed the amounts specified in the bud-
get) and six on the level of implementation of current expenditure in
the priority sectors. The indicators are not derived from the Plano de
Acção para a Redução da Pobreza Absoluta (PARPA) (3) nor from
the donors’ common matrix, the PAF (performance assessment
framework) (4).

3. Niger has seven public finance indicators focusing on: the recov-
ery rate for the ‘patente synthétique’ (a source of revenue based on the
informal sector. The recovery rate is considered to be abnormally
low); rejection rate for commitment requests; time taken for payment
instructions; level of arrears; clearance rate for delegated appropria-
tions; implementation rate for transfer to Caisse Autonome du Fonds
d’Entretien Routier (CAFER); allocation to CAFER funds. Some of
these derive from the Programme Pluriannuel d’Appui à la Réduc-
tion de la Pauvreté (PPARP) and the others were agreed with the
government as a result of shortcomings recorded during the audit of
the structural adjustment programme in 2001. The other donors do
not use indicators, but the appropriations are subject to special con-
ditions.

rates

implementation

(commitment/allocation

4. Chad has 20 public finance indicators: six of them are prior
conditions that function as indicators and focus on documents which
the government must have presented or approved; seven relate to
budget
or
payments/commitments); one to arrears; two to procurement (con-
tracting methods and time); two to progress in preparing calls for
tenders and contracts; two to rates for delivery of major items of
equipment to beneficiary structures. They are not derived from the
PRSP (Poverty Reduction Strategy Paper), as only one of the 80
indicators which it proposes is relevant to public finance manage-
ment.

5. Zambia has 12 public finance indicators. They focus on the
drawing up of the budget (budget allocations consistent with estab-
lished programmes and policies, with particular regard to the social
sectors of education and health, Auditor General and poverty reduc-
tion programmes) and the actual implementation of the budget
(funds are supplied in accordance with the budget allocation and
linked to bank expenditure reconciliations).

(1) Footnote does not concern English version.
(2) Footnote does not concern English version.
(3) Poverty reduction action plan.
(4) Footnote does not concern English version.

On another matter, the financing agreements do not
50.
always give information of an adequate quality about indicators.
Details explaining the grounds, definition, calculation method
and sources of information for each indicator should be included
systematically, as is the case of the financing agreement with
Niger.

Subsequent to its exercise on ‘conditionalities’ in 2005, it
51.
would also be helpful if the Commission included pointers in the
Guide as to the relative importance to be assigned to variable
tranches and public finance performance indicators (see para-
graphs 4 and 5 in Annex 3).

Unequal progress in different countries as regards coordination with other
donors

The Guide rightly stresses the need to work, as far as pos-

52.
sible, in coordination with other donors.

53.
Donor coordination exists, firstly, at headquarters level
and, secondly, between the donors’ local representatives in each
ACP country. There must in parallel be smooth lines of commu-
nication between these two levels within each donor organisa-
tion. At headquarters level, coordination on aspects relating to the
monitoring of public finance performance is reasonably well
organised in the form of the PEFA partnership (see paragraphs 42
and 43) (2), in which the Commission plays a leading role.

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

(2) The PEFA Steering Committee, on which the Commission is repre-
sented, meets twice a year. The results of PEFA’s work are brought to
the attention of the other main donors in bodies of the OECD.

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Locally, coordination is generally satisfactory but not
54.
always sufficiently structured (see box 6). It is constantly evolving
because it takes time to build up a voluntary-membership net-
work of donors, more and more of which are granting budget aid.
The Commission collaborates closely with the Bretton Woods
institutions, which exercise considerable influence and have more
substantial resources at their disposal. In the five countries vis-
ited, coordination is most advanced in Mozambique, which has
the longest experience in this field (see Annex 4).

Box 6 — Coordination between donors in the five countries vis-
ited

1.
In Ethiopia coordination between donors functions well. The
Delegation chairs the informal direct budget support group and is a
member of the public finance management committee which holds
monthly meetings between donors and the government. All the
evaluation work is carried out jointly and Ethiopia, as one of the 18
ACP PEFA pilot countries, is going to test the new performance
measurement framework (see paragraph 44).

The Commission does not have access to full informa-
55.
tion on the budget aid that other donors allocate and disburse in
the beneficiary countries. This information is hard to come by
because there is no standard definition of budget aid and some
donors do not supply information.

Relations with parliaments and Supreme Audit Institutions to be
strengthened

56.
If public finance management reforms are to succeed, it
is crucial that countries assume ownership at all levels, from the
official who is expected to follow new procedures to the highest
government echelons. Otherwise procedures will be poorly
applied or even bypassed. This ownership depends, among other
things, on the quality of donors’ relations with the national
authorities, and above all with the government, the parliament
and the Supreme Audit Institution (SAI).

2. The situation in Mozambique provides several examples of good
practice and is described in Annex 4.

57.
The government is the Commission’s partner and cosig-
natory of the budget aid programmes, as well as playing the lead
role in designing and implementing the reforms that are intended
to improve public finance management.

3.
In Niger there is no formal structure for coordination between
donors, but satisfactory ongoing dialogue has been established
between them. The various areas of public finance are divided
between the Commission (programming, implementation and bud-
getary control), the World Bank (procurement and structural reform)
and the IMF (macroeconomic framework and monetary matters).

4.
In Chad representatives of the Commission, IMF, World Bank
(WB), African Development Bank (ADB) and the French Develop-
ment Agency (AFD) meet informally and participate in joint assess-
ments. These donors have differing perceptions of external audit in
the country. Whereas the Commission, IMF and AFD want to
develop the Chambre des comptes, WB relies on another audit body,
Collège de Contrôle et de Surveillance des Revenus Pétroliers (Oil
Revenues Control and Monitoring Board — CCSRP), which seeks
to maintain safeguards on the use of oil revenue.

In Zambia coordination functions well. WB, Delegation and
5.
other donors encouraged the government to compile the PEMFA
(public expenditure management financial accountability) review and
the action plan that will follow it. In December 2004 an overall
support programme for implementation of the plan was signed by
11 partners. The Delegation and Norway chair the PEMFA donor
group. In addition the Delegation is a member of an informal group
examining the quality of government expenditure. Lastly, a Memo-
randum of Understanding was signed in 2004 by eight donors and
the government (Framework for harmonisation in practice — HIP),
the main aims being donor coordination and harmonisation, donor
alignment on government procedures and the government’s commit-
ment to undertaking the necessary reforms. The Commission has not
yet signed the memorandum.

58.
The parliament plays an important part in advancing
those reforms, especially where they relate to budget program-
ming and follow-up of the SAI’s audit reports. It is of fundamen-
tal importance to ensure as far as possible that in carrying out
such functions parliament is acting in the country’s interest and is
not driven exclusively by donor pressure. According to the Com-
mission, the most significant progress is achieved in the countries
where the parliaments are most active.

59.
The SAI is the external auditor responsible for assessing
budget implementation and the reliability of the annual accounts.
Even though in most ACP countries it will be years before the SAI
is in a position to shoulder its responsibilities fully, the results of
SAIs’ work must be systematically included (1) in the set of infor-
mation that is made available to donors, but without creating too
close a link between those results and the level of aid received.

60.
The dialogue with governments is usually formalised and
satisfactory (2). Parliamentary involvement and the dialogue with
the SAIs (see box 7), on the other hand, are often insufficient,
because of the institutional weakness of these bodies and the
weakness of their position vis-à-vis both government and donors.

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

(2) The financing proposals and agreements make formal provision for

dialogue with the government.

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Box 7 — Examples of insufficient dialogue with Supreme Audit
Institutions

1.
In Ethiopia the donors did not make use of the Auditor Gen-
eral’s reports (and reports by internal auditors), which were in
Amharic. As a result of the Court’s audit visit English translations
were to be arranged, so that the reports can be used, and the Audi-
tor General was to join the public finance management committee
comprising representatives of donors and the government.

2.
In Mozambique, dialogue with the Tribunal administratif
(Administrative Court) is difficult. The Tribunal did not consider
itself bound by the action in the performance assessment framework
(PAF) (1) matrix which aims to abolish its ex ante control function.
Donors negotiated the matrix with the government and the Tribu-
nal maintains that it may, and must, apply only national legisla-
tion.

(1) Footnote does not concern English version.

61.
The Commission, in coordination with other donors,
must continue to develop a methodology to provide the SAIs
with appropriate institutional support (1), and to put in place
similar support for parliamentary committees on finance and
budgetary control.

62.
The government, which is subject to audit by the parlia-
ment and the SAI, is not necessarily best placed to discuss mea-
sures to strengthen the powers of those two bodies. It is therefore
vital, in the context of negotiations with the government of a
country, to consider how the Commission can establish better
contacts with these two institutions.

Human resources shortfall at the Commission

The resources available to the central services are deemed
65.
inadequate by the Heads of Unit concerned. The Court considers
that changes would be justified in this area in view of the amounts
involved and the importance of the activity, and that the situa-
tion could be improved by rationalising the use of the available
resources (2).

66.
In addition, certain tasks, such as the analysis of financ-
ing proposals and the Delegations’ monitoring reports, should be
systematised through the introduction of checklists (3). These
would make it possible to ensure that the work carried out is both
comprehensive and homogeneous and would facilitate activity
reviews.

The Commission should continue its endeavours to pro-
67.
vide more extensive public finance training for its employees (4).

68.
Finally, the pooling of experience and the identification
and dissemination of best practice, which has been organised
among the West African Delegations, must be extended to other
regions.

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

The audit visits showed that

63.
the human resources
assigned to monitoring public finance reforms were sometimes
insufficient.

69.
The audits in the five countries did not reveal any signifi-
cant differences between the information provided by the Com-
mission and the situation on the ground (with the exception of
the problem referred to in paragraph 38).

64.
The staff in question are almost always economists (this
is also true of other donors’ local representatives). While this spe-
cialisation is relevant, some diversification would be useful where
several members of a Delegation are assigned to budget aid.

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

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

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

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

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The public finance management systems are affected by
70.
numerous weaknesses (1) that are often accentuated in peripheral
authorities such as municipalities, and budget aid remains
exposed to a significant risk of misuse. However, many impor-
tant reforms aimed at limiting this risk are being implemented,
and the beneficiary States are making an obvious effort in this
direction. Progress was noted in the fields of budget program-
ming (more consistent with the poverty reduction strategy), the
implementation of revenue (2) and expenditure (in particular the
simplification and frequent computerisation of circuits, rationa-
lised cash management and stricter rules on public procurement),
the rendering of the accounts (faster) and internal and external
audit (see Box 8).

Box 8 — Main public finance management reforms in progress
in 2004 in the five countries visited

4. Reforms have been undertaken in Chad, mainly covering the
introduction of a medium-term expenditure framework, financial
legislation, the introduction of programme budget processes, com-
puterisation and rationalisation of expenditure flows, procurement,
fiscal and customs revenue, and the development of management
tools.

5.
In Zambia a number of reforms are under way as regards the
restructuring of services, the civil service pay system, decentralisation
and public expenditure management and financial accountability
(PEMFA). The latter is split into twelve domains, covering the entire
budget cycle. Financial management has already been computerised
and in 2004 the government introduced an activity-based budget
with a link to medium-term programming and monthly limits for
transfers of funds.

In Ethiopia the expenditure management and control pro-
1.
gramme (EMCP) comprises eight current projects covering the finan-
cial legal framework, public expenditure programme, budget reform
(programming and monitoring), reform of accounting, financial
information systems, and internal and external
flows, financial
audit.

71.
Given their scope and complexity, these reforms will take
time, especially since there are frequently delays owing to the
often very limited powers of the departments responsible for
implementing them. It is still too early to discern any significant
lasting results, although the follow-up implemented by the Com-
mission in particular reveals reasonably positive partial interim
results.

2.
In Mozambique the principal reform concerns the government
financial management system (SISTAFE). SISTAFE came into ser-
vice recently, after some delay, and covers simplification of revenue
and expenditure circuits, rationalisation of the Treasury accounts,
computerisation of expenditure, budget classification, close and audit
of the accounts, general inspection of finance, budget procedures and
medium-term programming. In addition to this there has been a
reform of procurement procedures and a reform of fiscal and customs
revenue. The latter is now in its final stages and domestic revenue has
increased from 9 % to around 14 % of gross domestic product from
1996 to 2004.

3. A new budget classification and new chart of accounts have
been adopted in Niger and are at the implementation stage. The
legal and administrative texts governing the budget cycle are being
updated and reforms concerning the collection of revenue, procure-
ment and a supreme audit institution are in preparation.

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

(2) In practice, government reforms often take account of domestic rev-
enue, but it is not adequately emphasised in the Commission’s Guide
(see paragraph 24).

Commission’s reactions appropriate

72.
Every financing agreement is a contract which binds the
Commission and the beneficiary country. The Commission may
react to changes in the quality of a beneficiary country’s public
finance management in any of four ways. It may unilaterally sus-
pend a programme, amend it by agreement with the country con-
cerned, take action during the implementation of the programme
and influence the design of the subsequent programme. The
Commission’s reactions are appropriate and consistent with its
dynamic approach (see paragraph 28). For example, the Commis-
sion suspended payment to Chad of the first (fixed) tranche of
20 million euro following the interruption of
the IMF
programme (3).

73.
Where the payment of a variable tranche is below the
specified maximum, the balance remains assigned to the benefi-
ciary country. This reduces the incentive effect of variable
tranches. It would be more effective to rule that any balance is lost
to the country.

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

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As public finance management reform is a medium to
74.
long-term process, each programme renewal should be taken as
an opportunity to adjust the ‘conditionalities’ of budget aid (pre-
conditions,
indicators and weighting of variable tranches) to
reflect the progress achieved and new priorities. It is too early to
note what reactions there will be at this stage in the five countries
visited.

The Commission’s financing decisions, and its reactions
81.
in mid-programme, are appropriate in the light of its dynamic
interpretation of Article 61(2) of
the Cotonou Agreement
(see paragraph 28). However, since this increases the level of risk,
at least in the short term, it is doubly important for the Commis-
sion to monitor the situation rigorously.

CONCLUSIONS AND RECOMMENDATIONS

Conclusions

The Court’s audits provided the following answers to the

75.
questions raised in paragraph 19.

76.
The Commission has defined a methodological frame-
work to enable it to assess the initial situation and subsequent
development of the beneficiary countries’ public finance manage-
ment (see paragraphs 23 and 41). This framework is a significant
advance in terms of the situation that existed before, but it is
incomplete (see paragraphs 24 and 26) and lacks precision
(see paragraph 25). It does not help to explain the cohesion and
logical relationship between aid programmes (see paragraph 30).
The Guide is not updated (see paragraph 27). The instructions
concerning monitoring reports are also incomplete, although the
Commission has already introduced significant improvements
(see paragraph 42).

77.
During the initial stage, this methodological framework
was implemented in a reasonably satisfactory manner, despite
the inadequate attention given to corruption, the lack of recom-
mendations by the Heads of Delegation and, on occasion, the lack
of an overall institutional support framework (see paragraphs 31
to 37). Matters are less satisfactory at the follow-up stage, where
the Delegations’ reports are overly static and incomplete and the
performance indicators sometimes offer too little incentive
(see paragraphs 47 to 51).

78.
These processes are complex and awkward to imple-
ment, because they apply to sovereign States whose ownership of
the reforms is a criterion for success for which the Commission
can press but over which it has no control.

Similarly, the Commission has no control over coordi-
79.
nation among donors, although it plays a leading role at head-
quarters level, mainly with the World Bank, in the context of
PEFA (see paragraph 43). In ACP countries coordination never-
theless continues to be more problematic and there is a risk of
this affecting implementation of the PEFA Measurement Frame-
work in these countries.

Meanwhile, the Commission’s decisions are insuffi-
82.
ciently argued (see paragraph 39). The financing proposals and
agreements do not make sufficiently clear the relations between
the weaknesses detected in public finance management, govern-
ments’ reform programmes, the institutional support required for
implementation of those reforms and the follow-up tools, includ-
ing preconditions and performance indicators (see paragraph 30).
This failure to evidence cohesion and perspective, combined with
a presentation that is too diverse and unstructured, do not pro-
vide the EDF Committee with assurance that all the weaknesses
are being taken into consideration (see paragraphs 32 and 33).

83.
The reforms accompanying direct non-targeted budget
aid require a good deal of time. It is still too early to discern any
significant lasting results, although the follow-up implemented by
the Commission in particular reveals reasonably positive partial
interim results (see paragraphs 69 to 71). For example, the risks
to which budget aid is exposed (see paragraph 12), and which are
a matter of concern to the Parliament and the Council (see para-
graph 2), largely continue to apply. The recommendations that
follow should make it possible to improve the management of
those risks.

Recommendations

84.
The Commission should update its Methodological
Guide to the programming and implementation of budgetary
support for third countries by incorporating into it the relevant
instructions issued since March 2002 (see paragraph 27), in order
to ensure that within each aid programme there is cohesion
between the weaknesses recorded, the reforms that are to miti-
gate them, institutional support and follow-up tools (see para-
graph 30). In addition, more attention must be given to matters
including revenue from public
relating to domestic revenue,
undertakings (see paragraph 24), and to corruption (see para-
graph 34). The Guide should also include improvements in con-
nection
reports
(see paragraph 42).

Delegations’ monitoring

with

the

The information on which the financing decisions were
80.
based and, subsequently, the information in the follow-up docu-
ments, give a true view of the situation. For this reason, the
Commission is usually well informed about the weaknesses affect-
ing public finance management systems (see paragraphs 38
and 69 to 71).

85.
The Commission should demonstrate in a more forma-
lised and structured manner, setting out the reasons leading to its
conclusion that the direction being taken by a beneficiary coun-
try is satisfactory, that there is compliance with Article 61(2) of
the Cotonou Agreement, account being taken of the public
finance management weaknesses revealed by the initial assess-
ment (see paragraphs 39 and 40).

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The Commission should make use of performance indi-
86.
cators that genuinely encourage beneficiary countries to press
ahead with their reforms and that focus more closely on results
that reflect improvements in management (see paragraph 49).

87.
The Commission must do everything within its power to
see to fruition the public financial management performance
measurement framework being developed within the framework
of PEFA (see paragraph 43). This major coordination project
between donors must be improved by taking account of the
results that will be available at the end of the testing stage. The
Court’s suggestions should also be considered (see paragraph 7 in
Annex 2), especially the proposal concerning tests of controls. It
is crucial that donors (particularly those belonging to the partner-
ship) adopt and implement the Framework in the near future.

Coordination between donors’

representatives
88.
should be strengthened as regards the production of assessments,
evaluations and audits, the implementation of institutional sup-
port and the use of conditions and performance indicators, it
being understood that each donor retains full discretion over its
own aid disbursement (see paragraph 54).

local

89.
Relations with the authorities in the beneficiary States
should be systematically structured and taken beyond the govern-
ment level to include parliaments and Supreme Audit Institutions,
whose powers must be strengthened to enable them to undertake
the reforms that concern them and to audit those that are a mat-
ter for the executive branch. It is therefore vital, in the context of
negotiations with the government of a country, to consider how
the Commission might approach parliaments and SAIs (see para-
graphs 56 to 62).

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

For the Court of Auditors
Hubert WEBER
President

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ANNEX 1

SIX TABLES ILLUSTRATING THE IMPORTANCE OF BUDGET AID

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

Table A

Total budget aid (2)

Total EDF aid

A

276,93

1 350,20

386,50

595,60

972,80

469,40

206,48

587,62

672,90

570,21

615,20

724,42

B

2 693,00

3 757,41

1 554,16

1 768,39

3 395,83

2 375,15

1 275,00

1 548,16

2 067,86

1 852,72

2 179,47

2 197,84

(million euro)

Budget aid as a
proportion of EDF aid

C = (A / B)

10,28 %

35,93 %

24,87 %

33,68 %

28,65 %

19,76 %

16,19 %

37,96 %

32,54 %

30,78 %

28,23 %

32,96 %

Year

1999

2000

2001

2002

2003

2004

1999

2000

2001

2002

2003

2004

Commitments

Payments

In the form of structural adjustment before the Cotonou Agreement entered into force.
Includes highly indebted poor countries initiative (HIPC).

(1)
(2)
Source: Commission figures.

Table B

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

2003

2004

Commitments

Payments (1)

Commitments

Payments (1)

(million euro)

A. Direct non-targeted budget aid

B. Direct targeted budget aid

C. Indirect budget aid

D. Total budget aid excluding HIPC Initiative

(A + B + C)

E. HIPC Initiative (2)

F. Total EDF budget aid (D + E)

666,80

106,00

0,00

772,80

200,00

972,80

358,11

40,10

8,02

406,23

208,97

615,20

425,80

0,00

43,60

469,40

0,00

469,40

461,90

136,00

26,52

624,42

100,00

724,42

G. Total EDF aid

3 395,83

2 179,47

2 375,15

2 197,84

Direct non-targeted budget aid as a proportion of
total EDF budget aid (A / F)

Direct non-targeted budget aid as a proportion of
total EDF aid (A / G)

68,54 %

58,21 %

90,71 %

63,76 %

19,64 %

16,43 %

17,93 %

21,02 %

(1) Payments are booked to the commitments for the year or the commitments outstanding from previous financial years.
(2) The HIPC (Heavily Indebted Poor Countries) Initiative seeks to ease the external debt of the countries concerned. It has a similar impact to
budget aid but is not subject to the same audit arrangements. The commitments and payments are entered in the EDF accounts by the
EDF when they are effected to the European Investment Bank (EIB) and the World Bank (WB).

Source: Commission data.

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

Table C

Country

2003

2004

Commitments

Payments (1)

Commitments

Payments (1)

(million euro)

Benin

Burkina Faso

Burundi

Cameroon

Cape Verde

Djibouti

Ethiopia

Ghana

Guyana

Jamaica

Kenya

Lesotho

Madagascar

Mali

Mauritania

Mozambique (2)

Niger (2)

Uganda

Central African Republic

Democratic Republic of the
Congo

Rwanda

São Tomé and Príncipe

Senegal

Sierra Leone

Tanzania

Chad

Vanuatu

Zambia (2)

Total

55,00

0,00

0,00

0,00

0,00

0,00

0,00

0,00

0,00

30,00

0,00

0,00

0,00

132,90

0,00

16,40

90,00

0,00

0,00

106,00

50,00

0,00

0,00

0,00

114,00

50,00

0,00

128,50

772,80

4,29

37,80

8,02

8,86

9,00

4,50

10,70

25,57

0,00

0,00

0,00

3,00

34,50

32,92

5,70

41,00

24,25

24,50

0,00

4,60

25,04

1,00

3,80

0,00

68,50

0,00

0,00

28,68

406,23

0,00

0,00

43,60

0,00

5,80

0,00

95,00

62,00

23,30

25,00

125,00

0,00

35,00

0,00

0,00

0,00

0,00

0,00

0,00

0,00

0,00

0,00

53,00

0,00

0,00

0,00

1,70

0,00

469,40

18,20

37,57

26,52

0,00

5,50

0,00

45,00

27,85

6,00

36,10

0,00

5,50

20,67

29,60

6,00

51,10

27,25

24,50

11,90

105,70

12,50

0,00

25,30

18,37

31,50

0,00

0,80

50,99

624,42

(1) Payments are booked to the commitments for the year or the commitments outstanding from previous financial years.
(2) Payments in 2004 include the variable tranches for Mozambique (9,1 million euro), Niger (8,25 million euro) and Zambia

(29,5 million euro).
Source: Commission data.

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Table D

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

National budget (1)

Budget aid paid by
the Commission

Budget aid paid by
the other donors

Total budget aid
paid

Budget aid paid as a
proportion of total

(million euro)

A

2 924,00

1 202,10

621,83

603,28

1 475,66

B

45,00

51,10

27,25

0,00

50,99

C

236,38

139,15

44,07

22,00

215,00

D = B + C

281,38

190,25

71,32

22,00

265,99

D / A

9,62 %

15,83 %

11,47 %

3,65 %

18,03 %

Country

Ethiopia

Mozambique

Niger

Chad

Zambia

(1) The budget figure for Chad relates to 2003.
Source: Commission data.

Table E

Proportion of budget aid relative to total aid paid by principal donors in 15 African countries (1) in 2003

Donor

Budget aid as a proportion of total aid

World Bank (2)

United Kingdom

European Commission

Netherlands

Sweden

Switzerland

African Development Bank

Italy

Ireland

Norway

Canada

Denmark

Germany

Finland

France

Japan

Weighted average

48,1 %

34,2 %

30,7 %

27,8 %

21,5 %

19,2 %

16,5 %

16,0 %

15,2 %

14,5 %

12,0 %

10,1 %

6,4 %

3,9 %

2,3 %

1,0 %

25,7 %

(1) The 15 countries are: Benin, Burkina Faso, Ethiopia, Ghana, Kenya, Madagascar, Malawi, Mali, Mozambique, Niger, Uganda, Rwanda,

Senegal, Sierra Leone and Tanzania.

(2) The World Bank aid essentially consists of loans.
Source: SPA — Strategic Partnership with Africa — Survey of the alignment of budgetsupport and balance of payments support with

national poverty reduction strategy processes — final draft dated 7 February 2005.

The figures in the above document are rough estimates.

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

Table F

Donor

Ethiopia

Mozambique

Niger

Chad

Zambia

Amount

%

Amount

%

Amount

%

Amount

%

Amount

%

(million euro)

European Commission

45,00

16,0 %

World Bank (1)

100,00

35,5 %

International Monetary
Fund (1)

0,00

0,0 %

African Development Bank

66,67

23,7 %

51,10

49,80

0,00

0,00

3,50

3,00

0,00

0,00

4,00

3,00

6,00

3,20

0,00

7,18

18,00

1,53

22,44

11,00

6,50

26,9 %

27,25

38,2 %

0,00

0,0 %

26,2 %

22,26

31,2 %

20,00

90,9 %

50,99

16,00

19,2 %

6,0 %

0,0 %

10,18

14,3 %

0,00

0,0 %

199,00

74,8 %

0,0 %

1,8 %

1,6 %

0,0 %

0,0 %

2,1 %

1,6 %

3,2 %

1,7 %

0,0 %

3,8 %

9,5 %

0,8 %

11,8 %

5,8 %

3,4 %

4,63

0,00

0,00

0,00

0,00

0,00

7,00

0,00

0,00

0,00

0,00

0,00

0,00

0,00

0,00

0,00

6,5 %

0,0 %

0,0 %

0,0 %

0,0 %

0,0 %

9,8 %

0,0 %

0,0 %

0,0 %

0,0 %

0,0 %

0,0 %

0,0 %

0,0 %

0,0 %

0,00

0,00

0,00

0,00

0,00

0,00

2,00

0,00

0,00

0,00

0,00

0,00

0,00

0,00

0,00

0,00

0,0 %

0,0 %

0,0 %

0,0 %

0,0 %

0,0 %

9,1 %

0,0 %

0,0 %

0,0 %

0,0 %

0,0 %

0,0 %

0,0 %

0,0 %

0,0 %

0,00

0,00

0,00

0,00

0,00

0,00

0,00

0,00

0,00

0,00

0,00

0,00

0,00

0,00

0,00

0,00

0,0 %

0,0 %

0,0 %

0,0 %

0,0 %

0,0 %

0,0 %

0,0 %

0,0 %

0,0 %

0,0 %

0,0 %

0,0 %

0,0 %

0,0 %

0,0 %

6,00

0,00

0,00

0,00

0,00

0,00

6,80

0,00

0,00

0,00

0,00

0,00

2,1 %

0,0 %

0,0 %

0,0 %

0,0 %

0,0 %

2,4 %

0,0 %

0,0 %

0,0 %

0,0 %

0,0 %

45,00

11,91

0,00

16,0 %

4,2 %

0,0 %

Total

281,38

100,0 %

190,25

100,0 %

71,32

100,0 %

22,00

100,0 %

265,99

100,0 %

Germany

Belgium

Canada

Denmark

Finland

France

Ireland

Italy

Japan

Norway

Netherlands

Portugal

United Kingdom

Sweden

Switzerland

(1) Loans as aid.
Source: Commission data.

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ANNEX 2

THE DRAFT NEW PUBLIC FINANCE MANAGEMENT PERFORMANCE MEASUREMENT FRAMEWORK

1.
The Delegations’ monitoring reports rely on existing diagnoses and evaluations. The main tools tradi-
tionally used to measure the quality of public finance, which in many cases were developed by the Interna-
tional Monetary Fund and the World Bank, are the country financial accountability assessment (1) (CFAA), pub-
lic expenditure review (1) (PER), report on the observance of standards and codes (1) (ROSC), country
procurement assessment report (1) (CPAR), highly indebted poor country assessment and action plan (1) (HIPC
AAP), fiduciary risk assessment (1) (FRA), and public expenditure tracking survey (1) (PETS). In some countries,
such as Ethiopia, donors have developed substitute tools locally.

2.
In the face of this plethora of assessments, which were unwieldy to implement and at times difficult to
exploit, rationalisation, in the form of a single report, became necessary. This new tool is intended as a replace-
ment for the existing ones, not a supplement, and is meant to be used by all donors and applicable to all coun-
tries (not just ACP countries). It should provide a sufficiently comprehensive view of a country’s public finance
management, covering amongst other things all the major risks associated with programming and budget
execution, the presentation of accounts and internal and external audit.

3.
It was for this reason that, in 2004, PEFA (Public Expenditure Financial Accountability) (2) started work
on a new public finance management performance measurement framework (the measurement framework).
The core of this tool is a set of 28 indicators that aim to assess the adequacy and performance of public finance
management procedures, systems and institutions (see table G).

Table G

Set of public finance management performance indicators developed by the PEFA
(Public Expenditure Financial Accountability) partners

A.

PUBLIC FINANCE MANAGEMENT OUT-TURNS

1.

2.

3.

4.

B.

5.

6.

7.

Aggregate fiscal deficit compared to original approved budget.

Composition of budget expenditure out-turn compared to original approved budget.

Aggregate revenue out-turn compared to original approved budget.

Stock of expenditure arrears; accumulation of new arrears over past year.

KEY CROSS-CUTTING FEATURES: COMPREHENSIVENESS AND TRANSPARENCY

Comprehensiveness of aggregate fiscal risk oversight.

Extent to which budget reports include all significant expenditures on central government activities, including
those funded by donors.

Adequacy of information on fiscal projections, budget and out-turn provided in budget documentation.

(1) Footnote does not concern English version.
(2) PEFA was set up in 2001 as a partnership between the World Bank, the European Commission, DFID (the United King-
dom Department for International Development), the Swiss State Secretariat for Economic Affairs, the French Ministry
of Foreign Affairs, the Norwegian Ministry of Foreign Affairs and the International Monetary Fund. The Commission is
a founder member and one of the leading players.

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8.

9.

10.

C.

Administrative, economic, functional and programmatic classification of the budget.

Identification of poverty related expenditure in the budget.

Publication and public accessibility of key fiscal information, procurement information and audit reports.

BUDGET CYCLE

C (i) Medium term planning and budget formulation

11.

12.

13.

14.

Extent of multi-year perspective in fiscal planning, expenditure policy-making and budgeting.

Orderliness and participation in the budget formulation process.

Coordination of the budgeting of recurrent and investment expenditures.

Legislative scrutiny of the annual budget law.

C (ii)

Budget execution

15.

16.

17.

18.

19.

20.

21.

22.

Effectiveness of cash flow planning, management and monitoring.

Procedures in operation for the management and recording of debt and guarantees.

Extent to which spending ministries and agencies are able to plan and commit expenditures in accordance with
original/revised budgets.

Evidence available that budgeted resources reach spending units in a timely and transparent manner.

Effectiveness of internal controls.

Effectiveness of internal audit.

Effectiveness of payroll controls.

The existence of a transparent procurement system as an integral part of the overall PFM system which is
supported by a clear regulatory framework that provides for competition, value for money and effective
controls.

C (iii) Accounting and reporting

23.

24.

25.

Timeliness and regularity of data reconciliation.

Timeliness, quality and dissemination of in-year budget execution reports.

Timeliness and quality of the audited financial statements submitted to the legislature.

C (iv)

External accountability, audit and scrutiny

26.

27.

28.

The scope and nature of external audit.

Follow up of audit reports by the executive or audited entity.

Legislative scrutiny of external audit reports.

Source: PEFA. Revised Consultative Draft Public Finance Management Performance Measurement Framework, 12 February 2004, Public

Expenditure Working Group.

4.
There are two limits to this approach, both of them known to and accepted by donors. Firstly, it does
not lead to recommendations, which would probably require a more thorough investigation into the causes of
the problems identified. Secondly, it does not address the issue of the effectiveness and efficiency of public
finance.

5.
The indicators, measured against a scale from A (best possible) to D, are qualitative and usually cover a
fairly large area that can be broken down into several parts. For example, the assessment against indicator 22,
concerning the existence of transparent procurement systems for services, works and goods, calls in particular
for review of the regulatory framework, the correct application of the rules (e.g. publication of calls for ten-
der), the effectiveness of control systems and a comparison between prices paid by the public sector and mar-
ket prices in the private sector.

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The standard report proposed by the measurement framework suggests that these indicators should be
6.
accompanied by more general information about the country and its management systems, and in particular
by a description of the government programme of public finance management reforms, indicating to what
extent the reforms cover the weaknesses identified by means of the indicators.

7.

The following proposals for improvements resulted from the measurement framework: review:

(a)

some indicators include assessment of management or control systems. The evaluation of systems deemed
to be weak may be restricted to interviews and limited inspections. However, to conclude that a system is
effective it is crucial to rely on more thorough checks, including tests of controls (1);

(b) a systematic description of the causes of weaknesses that can be identified without significant further
investigation would be useful in order to improve the targeting of governments’ reform programmes,
which aim to remedy such weaknesses;

(c)

twelve indicators would rely on, among other things, indices (representing variances, times, amounts
or percentages) (see table H). The results of these indices should systematically appear in the assessment
reports, and some of them could be used as performance indicators in the Commission’s programmes;

(d)

indicator 3, on public revenue, should include a comparative analysis of domestic revenue actually received
and the amount that could reasonably be expected given the activity of the country (for example, by com-
paring import levels and customs revenue);

(e)

indicator 25, on audited financial statements, provides for examination of the audit opinion on them
issued by the Supreme Audit Institution (SAI). It would also be helpful to examine the SAI’s work and
opinions on the legality and regularity of the underlying transactions and on sound financial manage-
ment, although these elements should be treated with caution;

(f)

indicator 26, on external audit, should include an analysis of the adequacy of the SAI’s resources to its
audit tasks;

(g) an additional indicator should be added with a view to evaluating the existence and quality of the services
entered in the accounts, including, where purchasing is centralised, the problem of their delivery as far as
the final beneficiaries (2);

(h) an additional indicator should be added with a view to evaluating anti-corruption measures by examining

what is being done to identify, analyse and combat corruption (3).

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

(2) The delivery rate to final beneficiaries of centrally purchased goods could be used as an index for this indicator.
(3) Perception indicators such as those of Transparency International could be used as indices for this indicator.

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

Table H

Indicators in question

Cardinal data (indices)

1

2

3

4

10

14

18

19

22

24

25

26

— Deviation from budgeted aggregate fiscal deficit as percent of budgeted expenditure.
— Deviation from budgeted primary fiscal balance (before interest) as percent of budgeted expen-

diture.

— Average deviation between actual and budgeted expenditure by functional classification
— Average deviation between actual and budgeted expenditure by economic classification
— Average deviation between actual and budgeted expenditure on administrative basis
— Budget volatility (median of year-to-year policy changes in each functional or administrative
classification over the preceding 4 years: policy change is reflected by change in percentage
share in the budget)

— Actual revenue minus budgeted revenue as a percent of budget

— Level of expenditure arrears as a percentage of total expenditure

— Number of days after quarter end that quarterly budget report made public

— Number of days the legislature has to review the budget

— Percentage of intended resources that reach front-line service delivery units

— Error rates in routine financial transactions

— Prices paid by public sector for goods, works and services is comparable to prices paid by the

private sector for similar items

— Number of days following end of quarter that quarterly budget report is disseminated within

the government.

— Number of months after year end that financial statements presented to legislature

— Number of months following external audit report before specialized legislative committee

completes examination of the report

Source: PEFA. Revised Consultative Draft Public Finance Management Performance Measurement Framework, 12 February 2004.

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ANNEX 3

THE PERFORMANCE INDICATORS USED BY THE COMMISSION

Section 3.7 of the Guide provides a good deal of detail concerning the selection and use of performance
1.
indicators. It provides in particular that ‘as far as possible, the indicators should be identified in the PRSP (Pov-
erty Reduction Strategy Paper) or the government’s policy documents and should be shared by the other
donors’ and specifies that the indicators must be SMART (Specific — Measurable — Accepted by all involved
— Realistic — Timed).

2.
The performance indicators included in the Commission’s programmes can be classified in various
areas, chief of which are social sectors such as health and education and public finance management (PF indi-
cators). This audit focuses only on the last category. Annex 13a to the Guide provides, as an example, around
40 performance indicators, seven of which are specific to public finance (see table I).

List of seven public finance performance indicators proposed as an example in Annex 13a
to the Commission Guide

Table I

Gap between budget allocations and objectives set at sectoral level

Budget execution rate (total and by priority sector)

Share of the budget going to more peripheral structures (by survey)

Unit costs of consumer items under public contracts/unit cost of local purchases from private sector (or donors) (by
survey)

Time taken to pay suppliers

Percentage of bad execution (procedures not adhered to)

Delay in closure of accounts and approval of the national accounts

3.
The tendency is to establish jointly with the government and donors a list of indicators from which each
selects the ones that they particularly want to use. The objectives are to determine indicators that are accepted
wholeheartedly by the country and to avoid having a large number of different indicators for each donor.

The performance indicators adopted (type and number) were decided on a case-by-case basis. The num-

4.
ber is usually an expression of the volume of variable tranches linked to public finance (see table J).

Relative importance of performance indicators in the variable tranches for the five programmes examined

Table J

Variable tranches

Performance indicators

Total amount

Amount linked
to public
finance
indicators

Amount linked
to sectoral
indicators

Public finance
as proportion
of total amount

Total number

Number of
public finance
indicators

Number of
sectoral
indicators

Ethiopia

Mozambique

Niger

Chad

Zambia

A

30

42

35

26

100

Source:

Financing agreements.

B

6

21

16

22

65

C

24

21

19

4

35

D = B / A

20 %

50 %

46 %

85 %

65 %

E

15

22

18

28

23

F

3

8

7

20

12

G

12

14

11

8

11

(million euro)

Public finance
indicators as
proportion of
total number

H = F/E

20 %

36 %

39 %

71 %

52 %

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According to the Commission, the proportion of variable tranches (see table K) is increased if the

5.
national authorities’ willingness to improve their public finance management deserves encouragement.

Relative importance of variable tranches in the five programmes examined

Table K

Budget support

Related expenditure

(million euro)

Total amount for
programme

Total tranches

Fixed tranches

Variable tranches

A = B + F + G

B = C + D

Ethiopia

Mozambique

Niger

Chad

Zambia

95

168

90

50

117

Source:

Financing agreements.

90

162

88

46

110

C

60

120

53

20

10

D

30

42

35

26

100

E = D/B

33 %

26 %

40 %

57 %

91 %

Institutional
support

F

3,5

5,5

1,35

3,7

6,75

Audits

G

1,5

0,5

0,65

0,3

0,25

Of the five countries visited three have already received variable tranches. On each occasion the amount
6.
disbursed was less than the projected maximum, on account of the PFM performance indicators (see table L).

Table L

Impact of performance indicators on the amount of the variable tranches disbursed in the countries visited

(million euro)

Category of performance
indicators

According to financing agreement

According to assessment

Number of
indicators
provided

Maximum
amount provided

Number of
indicators
achieved

Amount
disbursed

Amount not
disbursed

2003 variable tranche of Mozambique programme

Public finance

Social sectors

8

14

22

TOTAL

2004 variable tranche of Mozambique programme

Public finance

Social sectors

8

14

22

TOTAL

2004 variable tranche of Niger programme

Public finance

Social sectors

5

7

12

TOTAL

2004 (2nd) variable tranche of Zambia programme

Public finance

11

2004 (3rd) variable tranche of Zambia programme

Public finance

Social sectors

TOTAL

GRAND TOTAL

8

8

16

83

(*) Of these five indicators, four were only partially achieved.
Source: Assessment documents for the tranches disbursed.

100

5

5

10

7

7

14

8

8

16

30

10

20

30

5

9

14

4

10

14

3

4

7

5 (*)

5

7

12

52

3,50

3,20

6,70

4,20

4,90

9,10

4,50

3,75

8,25

8,25

5,00

16,25

21,25

53,55

1,50

1,80

3,30

2,80

2,10

4,90

3,50

4,25

7,75

21,75

5,00

3,75

8,75

46,45

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ANNEX 4

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

1.
Coordination between donors and with the government is governed by a memorandum of understand-
ing (MoU) which was signed in April 2004 and had 16 adherents at the end of 2004. The agreement includes
a matrix (PAF — performance assessment framework) for monitoring the progress of the reforms, combined
with activities/indicators covering a three-year period (2004 to 2006) and subject to annual review.

In principle the donors agree not to use any performance indicators that are not included in the matrix
2.
(but there are exceptions, notably in the case of the Commission, which had already included its own indica-
tors in its programme before the MoU was signed).

3.
There is also another matrix setting out donors’ undertakings vis-à-vis the government. It comprises
some twenty activities, which are grouped into six areas: predictability of budget aid; alignment and harmoni-
sation of indicators; reducing the administrative burden caused by missions; transparency; coordination of
capacity building; adjustment of the amounts paid in the form of budget aid.

The donors in the group take it in turns to chair the group (Switzerland had the chair at the time of the

4.
mission) with a ‘troika’ of the last, present and next chairs.

5.
The dialogue with the government takes the form of a steering committee made up of representatives
of the government and the ‘troika +’, i.e. the troika (of chairs) plus, as permanent members, the World Bank
and the Commission. It meets every two months and more frequently during the periods of the joint reviews,
in April and September.

In order to lessen the administrative burden the donors have undertaken not to carry out audits or

6.
assessments apart from the two joint reviews.

Meetings between donors are organised at three levels: heads of mission (policy matters), heads of coop-

7.
eration (identifying priorities), and economists (technical monitoring).

8.
The economists work in subject groups, with responsibility shared between the donors. The ‘public
finance’ area comprises the following groups: the government integrated financial management system
(SISTAFE), revenue (taxes and customs duties), procurement and audit. The Delegation is responsible for the
audit group and participates actively in all the others, with the exception of the revenue group, where it holds
a watching brief.

9.
Alongside the public finance area there are other groups on: budget analysis (the Delegation is a con-
tributor), monitoring the poverty reduction programme, public sector reform (including the corruption aspect),
etc. The Delegation is considering joining the public sector reform group as an observer (because it does not
contribute to the funding of the activities).

The public finance management assessment (PFMA) established in September 2004 was carried out

10.
using the PEFA framework (see Annex 2) and, furthermore, it was carried out jointly with the government.

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THE COMMISSION’S REPLIES

SUMMARY

I.
The purpose of budget aid is to encourage growth and relieve poverty. The donors who use it believe
that, given certain conditions of eligibility, it is more effective than other kinds of aid in strengthening gov-
ernments’ ability to plan and implement macroeconomic, sectoral and public finance reforms. From this point
of view, budget aid also provides a response to the risks that might affect external funding based on project
aid. It is thus multi-dimensional. Budget aid provided by the Commission to the ACP countries is as much con-
cerned with questions of health or education as with the equally vital question of public finance. The Court’s
report deals with this latter aspect and must be viewed within this broader context.

Generally speaking, the Commission is willing to provide aid to countries with weak administrative
II.
structures, in the field of public finance as in many other areas, given that the precise purpose of development
is to alleviate such weaknesses. As the Court points out, the Commission, over the years, has substantially
improved its ability to monitor the public finance situation, often taking the initiative in relation to the other
donors.

III.
The Commission defines risk as ‘anything that may stand in the way of achieving the objectives’
(SEC(2004) 318 of 12 March 2004). Risks should accordingly be assessed in the light of the stated ambitions
and aims. It is therefore difficult to identify risks without taking account of the ultimate objective (combating
poverty) and the multiple dimensions of this type of support.

The Commission agrees with the Court on the progress made by the Commission in developing ana-
IV.
lytical and monitoring tools which have enabled it to provide accurate information and to take appropriate
action. Of course, improvements can still be made, taking into account the cost-benefit ratio of such improve-
ments, the balance between controls and action by the Commission, and the importance to be attached to the
other dimensions of a programme (the Commission places very great importance on the social sectors when
providing budget aid).

The Commission generally accepts the Court’s recommendations, which correspond to actions already

V.
being taken.

(a)

The Methodological Guide is currently being updated and should be finalised in 2005.

(b)

It will clarify the question of country eligibility.

(c)

The search for enhanced-incentive performance indicators is an ongoing process.

(d) and (e) The work of PEFA is currently being finalised and the Commission has played and will continue to
play a major role in the coordination of the various donors, including at local level, in matters of
public finance management.

(f)

The Commission is planning to increase the role of parliaments and SAIs, with due regard for the
independence of the powers of the various institutions and in the light of the Cotonou Agreement.

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INTRODUCTION

1.
In line with the recommendations of Special Report
No 5/2001, the Commission has moved towards non-targeted
budget aid, among other things.

2.
As noted by the Court in Special Report No 5/2001 (para-
graph 62, recommendation 1(e)), the Commission cannot be held
responsible for the management errors of the national depart-
ments that execute national budgets. On the other hand, it has a
duty to monitor the management of public finance very closely,
and that is precisely what it is doing.

AUDIT FIELD: DIRECT NON-TARGETED BUDGET AID

3 to 6.
Budget aid is intended to provide countries with the
resources they need to reduce the poverty of their people. To this
end, it provides support for the introduction of essential reforms.
The Commission must verify that all the conditions imposed on
the recipient have been met before effecting payment of this aid
to the beneficiary State. In line with the practice of the other
donors (especially the Bretton Woods Institutions), such aid is
normally no longer targeted.

The Commission feels that, when the conditions are met,
12.
budget aid offers considerable advantages for the European tax-
payer which justifies the risks associated with the weakness of
national public finance systems. Moreover, it takes very seriously
the risk that the budget aid will not have any impact on reducing
poverty. It manages this risk by imposing prior conditions on
such aid. It can also terminate or reduce ongoing aid in the light
of the country’s performance. In short, the Commission, from the
adoption of a programme to its implementation, endeavours to
set up appropriate means of control at a cost which is reasonable
in relation to the risks and to the human resources at its disposal
(see reply to paragraphs 63 and 65 below).

13.
Improving the management of public finance is an essen-
tial element of development; it lies at the heart of budget aid
and is specifically designed to improve transparency, reliability
and efficiency. Improving public finance management helps to
reduce poverty.

14.
The question of aid dependency is a general problem
which extends beyond budget aid. The variable tranche system is
regarded by the OECD as best practice for limiting the volatility
of such aid.

7.
Community aid is generally provided in support of the
PRSP. Since 2000 aid has taken a new, results-based form. The
amount of the support varies (variable tranche) depending on the
extent to which objectives in terms of improved services (vacci-
nation, births attended by skilled health personnel, school atten-
dance, etc.) or improved public finances have been achieved. It is
this last category which is considered in this report.

15.
The risk associated with budget aid is managed by impos-
ing conditions on the planning and implementation of such aid.
These include the eligibility conditions set out in the financing
proposal, start-up conditions, and the implementing conditions
contained in the financing agreement, which enable the Commis-
sion to decide whether or not to provide this type of aid, to sus-
pend it during implementation or to increase or reduce the
amount involved.

Budget aid provides the donors which use it with the nec-
9.
essary legitimacy to hold a serious dialogue with the countries
concerned on the way in which State resources as a whole are
managed. It is very much more ambitious than project aid, the
impact of which is generally limited to the proper implementa-
tion of an investment project.

THE COURT’S AUDIT

While projects introduce parallel procedures which are
10.
difficult for the beneficiary States to manage, budget aid rein-
forces national procedures.

11.
Although complicated for donors to implement, this
type of aid is certainly simpler for the beneficiary countries. It
thus limits the inefficiencies associated with the proliferation of
procedures or the dispersal of projects.

19(a), (b), (c) and (d).
The Court’s investigation concentrates
on the management of public finances. Although this is a very
important dimension for the Commission, it is not the only one.
When aid is being planned and, then implemented, we are look-
ing, as well, at other very important elements, such as the mac-
roeconomic situation, health and education policies, the country’s
ability to monitor the performance indicators, and the quality of
the PRSP. The risks involved in external aid are described in the
Commission’s document SEC(2004) 318 as ‘anything that may
stand in the way of achieving the objectives’. These risks must
therefore be viewed ‘always in relation to the ultimate objectives
to be achieved’.

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Although the Court’s audit does not seek to assess the
20.
impact of budget aid on poverty reduction, the Commission
would point out that the Court’s recommendations and analyses
must also be examined in the light of the necessary balance which
has to be preserved between the various areas covered by budget
aid, including its final objective. In some countries it may be jus-
tified to pay as much attention to the vaccination of children or
attendance at health centres as to public finance. This explains the
differences in the importance placed on the health, education and
public finance indicators, depending on the country.

This dynamic interpretation of Article 61(2) could
29.
increase the risk in the short term. However, the selective
approach to which it leads, based on the rigour (acknowledged by
the Court) of the diagnostic assessments and the desire for reform
on the part of the beneficiary countries and, coupled with an
improvement in their financial situation, makes it possible to con-
tain and to manage this risk. The Commission also feels that, by
acquiring a thorough knowledge of the initial situation and the
credible prospects for improvement, there is a greater probability
that budget aid will have an impact both by improving public
finances and by reducing poverty.

AUDIT FINDINGS

23.
The guide, which, as the Court points out, was a signifi-
cant improvement on the previous situation, was intended to
evolve and is currently being revised. The revision of the ques-
tion of public finance management was awaiting the Court’s
findings.

30.
The cohesion called for by the Court will be made more
explicit by maintaining not only a reasonable balance between the
Commission’s tasks of control and description and the action it
takes, but also a balance between the different parts of a financ-
ing proposal (in particular those relating to the social sectors).
Finally, the Commission will continue to give preference to an
approach targeted on those aspects of the reform programme
which it feels should be prioritised in the short and medium term,
giving reasons for its priorities.

The question of revenue is important. It forms part of all
24.
the programmes supported by the Commission and will be
included in the PEFA indicators. It is monitored by the IMF in
allocating roles between donors. The Commission does not want
to duplicate the work done by this institution and is concentrat-
ing on those areas where it can provide real added value.

32.
The Court comments that, generally speaking, the bulk of
information is given in the financing proposals. An effort will be
made to ensure that such information is less dispersed and more
standardised and structured, and that the links are clearer, while
remaining within the realms of what is reasonable.

25.
The structure of the part of the financing proposals deal-
ing with public finances can be improved, but the process must
remain within the limits set by the optimum balance between dif-
ferent parts of the programme and should not be at the expense
of information concerning the social sectors.

The need to observe the eligibility criteria can be made

26.
more explicit than it is at present.

33.
As the Court points out, the financing proposals include
the essential reforms. It is difficult to be completely exhaustive in
describing these reforms, especially as the same exercise would
have to be carried out for the other sectors covered by the financ-
ing proposal: macroeconomic situation, health, education, statis-
tics, follow-up, evaluation of the PRSP, to mention only the sec-
tors which are systematically included. It is not certain either that
systematically comprehensive descriptions provide real value
added.

27.
The contents of the guide have been regularly updated in
the form of instruction notes to the Delegations. The most impor-
tant notes are also on the Commission’s intranet site. It is planned
to consolidate them in the next version of the guide and to
develop the site.

28.
Like the other donors providing budget aid, the Commis-
sion bases its decisions on proposals and eligibility for budget
support on an analysis of the initial situation and the credible
prospects for improvement. This analysis leads the Commission
to be selective in providing aid.

34.
Corruption is a scourge to which the Commission gives
its full attention. The fight against corruption is also covered by
Article 9 of the Cotonou Partnership Agreement. The question of
corruption therefore occupies a central role in cooperation rather
than forming part of a separate instrument. Moreover, a standard
clause on combating fraud and corruption is included in all stan-
dard financing agreements, including the one used for budget aid.
As the Court points out, the enormous advantage of budget aid is
that it tackles one of the principal potential sources of corruption
in many ACP countries: public finance management. The Com-
mission will provide in the financing proposals the information
at its disposal on other areas of corruption (the legal system, the
police, the Supreme Audit Institution (ISC), etc.), provided that
such information is considered to be serious and credible.

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The existence of formalised plans describing insti-
35 and 36.
tutional requirements and support is desirable in all sectors. These
plans are the responsibility of the States. The Commission helps
in their preparation and will continue to do so. However, such
plans do not always exist, are not always comprehensive and are
difficult to keep permanently up to date. When providing help in
drafting these plans, the Commission tries to ensure that the pri-
orities are clearly identified, including those for which EDF financ-
ing is provided.

37.
The favourable opinion of the Heads of Delegation,
required by the Guide, is given implicitly at the point when the
financing proposals are forwarded; these contain the entire frame-
work of indicators and conditions which are subsequently set out
in full in the financing agreements. The Commission stipulates
that the half-yearly reports should include, in their conclusion, an
overall opinion on the public finance situation and the prospects
for improvement.

38.
The Court acknowledged that, with one exception, the
Commission had identified all the weaknesses that the Court had
found during its audit. The exception concerned ‘commitment
arrears’ in Chad in connection with a programme that had been
suspended by the Commission and was consequently no longer
monitored in the same way.

The Government has agreed to adopt a number of corrective
measures. The Commission will monitor the effect of these
reforms.

The Court notes that the Commission’s decisions were
39.
taken on the basis of precise knowledge of the situations (para-
graph 31) and the essential developments expected (para-
graph 38). The Commission will make sure that it provides more
detailed arguments in support of its decisions.

(e)

require that the objective elements of these reports continue
to be shared with the other donors;

(f) provide that the national authorities be involved as much as

possible in the evaluation work;

(g)

reduce the frequency of the reports to once a year as sug-
gested by the Court, except in special circumstances requir-
ing closer monitoring.

These reports are already based on the most recent

43.
evaluations.

The Measurement Framework has been tested, mainly by
44.
the Commission, and is in the process of finalisation. There is
provision for changes to be made at the end of a one-year trial
period. Some of the Court’s suggestions have already been dis-
cussed with the other donors.

45.
The definition of relevant performance indicators is a
matter of ongoing concern for the Commission. This is one of the
reasons why it carried out its retrospective assessment of its expe-
rience with variable tranches.

46.
One of the lessons to be learned from this study is that,
in order to be effective, indicators must be limited in number
and cannot cover all aspects. They must focus on essentials. How-
ever, the Commission’s monitoring is not confined only to these
indicators, as can be seen from the structure of the monitoring
report which the delegations are asked to produce.

40.
In all the countries visited the Commission took action
after the IMF and is operating in collaboration with the World
Bank and, in most cases, with other donors too. Generally speak-
ing, the donors (with the exception of the United States) are mov-
ing towards budget support. The question of visibility, the ben-
efits of the aid, are among the factors taken into consideration.

47.
The monitoring reports are still evolving. In their first
reports the delegations described the current situation, and this
could have created the impression that they were too ‘static’. Sub-
sequent reports focus more on dynamics. They have been used by
the central departments, which are going to improve formal feed-
back to the delegations.

42.
The Commission has introduced an instrument for the
systematic monitoring of public finance management; in the light
of the lessons learned from the first wave of these reports, the
Commission has proposed ways of improving it. These improve-
ments will:

(a)

take account of
indicators;

the situation described by the ‘PEFA’

(b)

include a systematic follow-up of the implementation of the
institutional support programmes;

(c)

include an analysis of the links between the weaknesses of
the situation and the reforms and aid planned;

(d)

include an overall conclusion by the delegation;

48.
The incentive for a government to reform does not
depend only on the suitability of the performance indicators. It is
also linked to other factors such as the amount of aid, the overall
conditionality of donors, the effectiveness of donor coordination,
etc. The Commission negotiates the indicators with governments
and tries to coordinate systematically with the other donors. In its
view, it is normal that the type and number of public finance
management indicators should vary according to circumstances
in the different countries.

49.
The Commission feels that it is essential to monitor bud-
getary allocation and implementation levels, especially in the
health and education sectors, when it is providing budget aid. The
fact that they are easy to measure is more an advantage than a
drawback. Admittedly, they should be supplemented by a small
number of indicators chosen to reflect the particular situation of
individual countries.

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Where necessary, details of the definition, calculation
50.
method and sources of information for each indicator must be
provided.

Box 7 gives an example of the, sometimes difficult, dia-
60.
logue which the Commission has developed in Mozambique with
a SAI. In this case, the Administrative Court reminded the donors
that it was an autonomous institution.

51.
The importance to be assigned to variable tranches and
public finance performance indicators depends on a large num-
ber of factors: dependence on specific aid, whether or not the eco-
nomic situation is fragile, situation of the health and education
sectors, lessons drawn from earlier programmes, etc. In the case
of the five countries observed by the Court, it is clear that the
importance of the public finance indicators varied in proportion
to the weakness of the systems (ranging from 59 % of the pro-
gramme in Zambia to 7 % in Ethiopia).

52.
Coordination with other donors, both at head office level
and at local level, has always been one of the Commission’s cen-
tral concerns.

53.
This coordination was developed within the context of
the PEFA programme, initiated by the Commission and the World
Bank, but also under the Strategic Partnership with Africa (SPA)
and the OECD-DAC.

54.
At local level, as the Court points out, coordination is
quite good. While formal structures are certainly needed when a
large number of partners are providing aid (Mozambique), they
are not necessarily required when fewer partners are involved.
The Commission has taken the lead in a number of areas (for
example, by requiring that performance indicators be followed
up) and has often initiated action in the form of donor groups. In
other areas, it respects the distribution of roles between different
donors (follow-up of the macroeconomic situation and revenue
by the IMF, for example).

61.
The Commission has on several occasions supported the
SAIs and provided them with institutional support. A draft strat-
egy paper has been sent to the delegations.

62.
The possibility of allowing the Commission to approach
parliaments and the SAIs should be examined on a case-by-case
basis, with caution and in the light of the Cotonou Agreement.
This is a very sensitive area which touches on national sover-
eignty and must be approached with due regard for the national
rules on the distribution and balance of powers between
institutions.

63.
A balance must be found between the human resources
responsible for monitoring and control and those who play an
active part in policy dialogue and between those who monitor
public finance and those who follow up social indicators or the
macroeconomic context.

The Commission is aware that the targets it has set itself
65.
are ambitious given the human resources at its disposal. It would
point out that increasing its tasks, as recommended in the report,
would be likely to accentuate this discrepancy.

The Commission is in the process of developing check-

66.
lists of the type suggested by the Court.

The Commission will continue its efforts in the field of

67.
training.

55.
Admittedly, it is sometimes difficult, including for ben-
eficiary countries and the IMF, to have a precise picture of the
financing of aid by other donors.

Exchanges between delegations will be encouraged on

68.
the basis of best practice.

If the reforms are to succeed, all those concerned must

56.
assume ownership of them.

69.

See the Commission’s reply to paragraph 38.

The Commission is well aware of the importance of the
58.
role played by national parliaments and the need to promote and
strengthen this role. However, its ability to intervene in this area
should not be overestimated since the distribution and balance of
powers between parliament and the government is a matter
which is directly related to the sovereignty of the beneficiary State.
It should therefore be approached only with the greatest caution
and with due regard for the independence of the various institu-
tions of the beneficiary State and for the Cotonou Agreement.

59.
The situation regarding SAIs also varies a great deal from
country to country. Whenever possible, though, the Commission
generally tries to include useful information obtained from the
SAIs.

70.
The Commission agrees with the Court that, in line with
objectives, substantial progress in public finance management has
been noted in the countries that have received budget aid. This
provides confirmation for the Commission of its choices. Improv-
ing budget management has an impact on all government
resources and not on Community funding. These improvements
must be consolidated and continued, which argues in favour of
continuing this work.

It should be noted that it is mainly under the impetus of
71.
the budget aid programmes that a comprehensive reform of pub-
lic finance is properly on the agenda. In such a context, the fact
that the Court of Auditors has noted ‘reasonably positive partial
interim results’, is an achievement for which budget aid can take
some of the credit.

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Every financing agreement sets out in detail the condi-
72.
tions and results expected (measured by indicators) and consti-
tutes a binding legal contract between the beneficiary State and
the Commission. The Commission’s reactions correspond to a
risk management which it feels to be appropriate. Thus, in one of
the five cases observed by the Court, the Commission suspended
its aid. In the others it adjusted the amount of its support in
accordance with movements in performance indicators which do
not relate only to public finance but also to social services pro-
vided to the poorest populations, women and children.

73.
At the end or, if appropriate, in the course of each pro-
gramme, funding which has not been disbursed because the con-
ditions have not been met or because the results have not been
achieved is decommitted and repaid to the National Indicative
Programme (NIP). However, this non-use of funding is, as a rule,
authorised during the mid-term review or the final review, which,
if necessary, allows the NIP amount to be reduced. The incentive
effect of variable tranches is therefore unaffected.

The conditionalities and the weighting of the respective
74.
tranches and indicators are reviewed for each new programme, as
can be seen from the review of aid carried out recently by the
Commission.

CONCLUSIONS AND RECOMMENDATIONS

76.
The Court observed that the Commission had defined a
methodological framework which was a significant improvement on
the previous situation (paragraph 23). It felt that this framework
could be made clearer and more comprehensive on some points
(paragraphs 25 and 26). In particular the cohesion and logical
relationship of the programmes could be highlighted (para-
graph 30). The updates to the methodological framework will be
consolidated in a new version of the guide on which the depart-
ments are currently working and which will include an update of
the monitoring reports (paragraph 42).

The Court noted that the methodological framework had
77.
been implemented in a reasonably satisfactory manner and that the
performance indicators were being improved. Some aspects could
still be made clearer or more comprehensive. The Commission
points out that a balance must be sought between the various
components of budget aid: attention to the question of the social
sectors in particular must remain a priority. Budget aid will con-
tinue to tackle one of the main potential sources of corruption,
viz. weaknesses in public finance management.

The Court’s audit accepts that the information on which
80.
the financing decisions were based, and subsequently the infor-
mation in the follow-up documents, gives a true view of the situation.

81.
The Commission notes that the Court does not question
its interpretation of Article 61(2) of the Cotonou Agreement. The
selective nature of Commission support, which is the result of this
interpretation based on rigorous diagnosis and the beneficiary
State’s desire for reform, makes it possible to contain and to man-
age the risk mentioned by the Court.

82.
The Commission will continue to improve the way in
which the programmes are presented, highlighting internal cohe-
sion while maintaining a reasonable balance between the differ-
ent components of a programme (which is not limited to the
question of public finance) and taking care to respect the balance
between monitoring and control, on the one hand, and more
active interventions with governments and other donors on the
other, and taking into account the cost and expected benefit of
more detailed information.

83.
There are a number of indications that the management
of public finance is improving in a great many countries benefit-
ing from budget aid. On the question of risk, defined in the Com-
mission’s working paper ‘Outline of risks linked to external assis-
tance’ as ‘anything that may stand in the way of achieving the
objectives’, the Commission considers that risk should always be
viewed ‘in relation with the ultimate objectives to be achieved’.

84.
The updating of the Methodological Guide is under way.
The Commission was waiting for the Court’s recommendations
so that it could include those it considered apposite. The instruc-
tions will stress the need to make clear the cohesion of measures.
The Commission notes that the Court has not questioned its
choices and the cohesion of its actions. The fight against corrup-
tion, especially where it affects the use of public funds, is and will
continue to be central to the programmes. A number of propos-
als for improving the monitoring report will be taken into account
by the Commission. The Commission expresses reservations
regarding revenue, not as regards the intrinsic importance of this
problem but in terms of the value added the Commission can
bring to the analysis of this area, which is very well covered by
the IMF.

The delegations’ reports should become more dynamic.

85.
It is expected that the next guide will help to provide a
more formalised demonstration, on a case-by-case basis, of com-
pliance with Article 61(2) of the Cotonou Agreement.

79.
Coordination is a priority for the Commission, whether
between head offices or at local level, particularly as regards the
implementation of the PEFA Measurement Framework. In the
field of budget aid, the Commission is active in all coordination
forums.

86.
The Commission will endeavour to use results-based per-
formance indicators that offer the best possible incentive, even
though it is always difficult to measure the real incentive effect.

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The Commission is already doing all it can, and indeed
87.
has made it a priority, to complete the Measurement Framework
for public financial management performance which is being
developed within the PEFA and which it instigated. However, this
also depends on the position of the other donors. There comes a
time when a joint approach can be developed only if those con-
cerned agree to compromise.

88.
For many years, the Commission has been trying to pro-
mote coordination at local level and it has initiated a large num-
ber of joint frameworks of donors providing budget aid. The

model advocated by the Commission would leave each donor free
to make its own decisions.

Parliaments and the SAIs have an essential role to play.
89.
However, the Commission’s ability to approach these institutions
must be examined with caution and with due regard for national
sovereignty and the national rules governing the distribution and
the balance of powers between the institutions. It should also be
studied from the point of view of the Cotonou Agreement.