GREEN PAPER FROM THE COMMISSION TO THE COUNCIL, THE EUROPEAN PARLIAMENT, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS The future of EU budget support to third countries
Date: 2010-10-19
Institutions: European Commission
Subjects: development aid, economic cooperation, economic growth, economic reform, financing, management audit, structural policy

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EUROPEAN COMMISSION 

Brussels, 19.10.2010 
COM(2010) 586 final 

GREEN PAPER FROM THE COMMISSION TO THE COUNCIL, THE EUROPEAN 
PARLIAMENT, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND 
THE COMMITTEE OF THE REGIONS 

The future of EU budget support to third countries 

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1. 

INTRODUCTION 

The Millennium Development Goals (MDGs) set in 2000 galvanised international support for 
development  and  triggered  other  initiatives  to  increase  the  volume  and  effectiveness  of  aid, 
based  on  a  sound  partnership  between  donors  and  partner  countries.  The  Monterrey 
Consensus (2002), the European Consensus on Development (2005), the Paris Declaration on 
Aid Effectiveness (2005) and the Accra Agenda for Action (2008) were key milestones in this 
process,  establishing  the  five  key  principles  of  ownership,  harmonisation,  alignment, 
managing for results and mutual accountability.  

In  2000,  the  Commission  presented  a  Communication  on  budget  support:  ‘Community 
support for economic reform programmes and structural adjustment: review and prospects’1. 
This helped to shape the design of budget support for the following decade. With five years to 
go  before  the  2015  MDG  deadline,  budget  support  has  become  an  increasingly  prominent 
element  of  the  aid  effectiveness  agenda.  Over  the  period  2003-2009,  the  European 
 13b n  (about  25 %  of  all 
Commission  made  budget  support  commitments  totalling  over  €
commitments  in  this  period).  About  56 %  of  commitments  were  made  in  Africa,  Caribbean 
and  Pacific  (ACP)  countries,  24 %  in  neighbourhood  countries,  8 %  in  Asia,  6 %  in  Latin 
America and 5 % in South Africa.  

However,  questions  about  the  quality,  value  for  money  and  impact  of  budget  support  are 
increasingly  being  raised  by  a  range  of  stakeholders,  including  the  European  Court  of 
Auditors, European and national Parliaments and civil society. These need to be answered as 
the  Commission  works  to  improve  its  approach  to  budget  support.  Key  issues  include  i) 
political governance and the role of political dialogue; ii) the role of policy dialogue, role of 
conditionality, and links to performance and results; iii) domestic and mutual accountability; 
iv) programming of budget support and its coherence with other instruments; v) strengthening 
risk  assessment  and  dealing  with  fraud  and  corruption;  vi)  budget  support  in  situations  of 
fragility;  and  vii)  growth,  fiscal  policy  and  mobilisation  of  domestic  revenues.  Improved 
coordination across the EU is also essential, as the Lisbon Treaty and the establishment of the 
European External Action Service are changing the EU institutional context in which budget 
support is provided.  

The  purpose  of  this  Green  Paper  is  to  gather  views  from  stakeholders  regarding  the 
objectives and use of EU budget support, building on the joint experience of the last 10 years, 
while  recognising  differences  in  the  context  and  nature  of  EU  cooperation  with  different 
regions and countries. The specific objectives of the Green Paper are to identify opportunities 
and  challenges,  to  raise  specific  questions  on  how  these  opportunities  can  be  exploited  and 
challenges  addressed,  and  to  collect  views  and  evidence  that  will  improve  our  approach  to 
budget support. 

The bulk of EU budget support is provided to developing countries and particular emphasis is 
therefore  given  to  development  cooperation.  But  the  scope  of  this  paper  covers  EU  budget 
support to all regions, taking account of differences between developing countries, and also 
differences with EU candidate countries and potential candidates, and neighbouring countries 
in which European cooperation and partnership are intended to support reform and transition 
to  enable  closer  political  association  and  gradual  economic  integration.  The  issues  raised  in 

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COM(2000)58 of 04/02/2000. 

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this  paper  will  therefore  have  different  relevance  and  may  generate  different  answers  for 
different regions.  

Section 2 defines budget support. Section 3 reviews experience and identifies a number of key 
principles for the design and implementation of budget support. Section 4 sets out a number 
of  more  contentious  issues  that  form  the  bulk  of  this  consultation  document.  Section 5 
concludes. Supporting background documents can be found at [insert website address]. 

be 

on 

Paper  will 

This  Green 
the  Commission's  website 
published 
(http://ec.europa.eu/yourvoice/). The consultation will run from 19 October to end December 
2010  and  is  open  to  any  interested  stakeholder.  Individuals,  organisations  and  countries  are 
invited  to  send  their  contributions,  in  the  form  of  answers  to  the  questions  presented  in  the 
document  and/or  as  general  comments  on  the  issues  raised.  Contributions  received  will  be 
published,  possibly  in  a  summarised  form,  unless  the  author  objects  to  publication  of  their 
personal data on the grounds that such publication would harm his/her legitimate interests. In 
this case, the contribution may be published in anonymous form. Otherwise, the contribution 
will  not  be  published  nor,  in  principle,  will  its  content  be  taken  into  account.  Furthermore, 
since the launch in June 2008 of the Register for Interest Representatives (lobbyists) as part of 
the European Transparency Initiative, organisations are invited to use this Register to provide 
the  European  Commission  and  the  public  at  large  with  information  about  their  objectives, 
funding and structures. It is Commission policy that submissions  from organisations will be 
considered as individual contributions unless the organisations have registered 

Contributions should be sent to DEV-BSGP@ec.europa.eu. Enquiries about this consultation 
can be sent to the same mailbox, or to the European Commission, DG Development, Unit C/3, 
Office SC-15 05/100, 1049 Brussels, Belgium. 

2. 

WHAT IS BUDGET SUPPORT? 

Budget  support  is  part  of  an  overall  country  cooperation  package.  It  involves  policy 
dialogue,  financial  transfers,  performance  assessment  and  capacity-building,  based  on 
partnership and mutual accountability. 

Box 1: Definition of budget support: 

Budget support is the transfer of financial resources of an external financing agency to the National 
Treasury  of  a  partner  country,  following  the  respect  by  the  latter  of  agreed  conditions  for payment. 
The  financial  resources  thus  received  are  part  of  the  global  resources  of  the  partner  country,  and 
consequently used in accordance with the public financial management system of the partner country.  

The  EU  only  provides  budget  support  to  countries  that  meet  the  following  three  eligibility  criteria, 
derived  from  the  legal  frameworks  governing  EU  support  to  each  region:  when  there  is  in  place  or 
under implementation a) a well defined national (or sectoral in the case of SBS) policy and strategy; b) 
a  stability-oriented  macroeconomic  framework;  c)  a  credible  and  relevant  programme  to  improve 
public financial management. All disbursements are conditional on continued adherence to these three 
standard  eligibility  criteria  (reflected  in  the  "general  conditions"),  and  may  also  be  subject  to 
"specific  conditions"  reflecting  performance  criteria  and  indicators  (often  focused  on  results)  in 
priority areas. 

Through budget support, donors help partner governments finance key government functions, 
such  as  building  schools  and  hospitals,  paying  for  teachers  and  health  care  staff,  building 

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infrastructure,  improving  security  and  the  rule  of  law,  implementing  complex  reform 
processes and achieving macroeconomic stability.  

Budget  support  is  meant  to  overcome  weaknesses  of  the  traditional  project  approach  (high 
transaction  costs,  fragmented  parallel  systems)  that,  particularly  in  heavily  aid-dependent 
countries,  inhibited  the  development  of  coherent  policies  by  partner  governments,  further 
weakened  the  limited  capacity  of  national  institutions,  and  undermined  the  sustainability  of 
aid. In contrast, budget support is seen as a means of fostering partner countries' ownership of 
development policies and reform processes, strengthening national accountability institutions 
and systems, and facilitating growth, poverty reduction and the achievement of development 
objectives.  

EU  budget  support  is  not  a  blank  cheque,  nor  is  it  provided  to  every  country.  ‘Underlying 
principles’  matter  (see  section 4.1),  and  policy  dialogue  is  a  central  part  of  the  package. 
Moreover,  eligibility  criteria  (see  Box 1)  have  to  be  met  and  conditions  fulfilled  in  order  to 
help  safeguard  the  use  of  resources,  mitigate  risks,  and  create  incentives  for  improved 
performance. Budget support has evolved significantly over time, with different orientations 
in different regions. 

The European Court of Auditors has been instrumental in helping the Commission to improve 
its  approach  to  budget  support  (see  Box  2).  In  its  most  recent  discussions  with  the 
Commission,  the  Court  acknowledges  progress,  but  identifies  weaknesses  that  may  still 
prevent  general  budget  support  from  achieving  its  full  potential.  It  recommends  a  clearer 
definition  of  country-specific  objectives  to  facilitate  the  assessment  of  impact;  the  use  of  a 
complete  risk  management  framework  to  mitigate  financial  management  and  development 
risks;  more  transparency  and  a  rationale  for  allocations  to  budget  support  and  to  fixed  and 
variable tranches; strengthened management of performance-related conditionality and policy 
dialogue;  and  more  regular  reporting  on  performance,  covering  benefits  as  well  as  risks. 
These  points,  together  with  internal  audit  and  the  European  Parliament's  recommendations, 
are critical in helping to inform the EU’s approach to budget support in future. 

Box 2: Budget support and the European Court of Auditors  

The Court of Auditors regularly scrutinises EU budget support in its annual reports. It has issued 
two  relevant  special  reports  related  to  general  budget  support  and  intends  to  publish  a  third  by  end 
2010. Court recommendations have informed revisions and improvements the Commission has made 
to its approach and guidelines. Specifically, the Court has contributed to the transition from targeted to 
untargeted budget support (SR 5/2001), and encouraged the development and use of a common public 
financial management performance measurement framework as well as stronger coordination and joint 
assessments  with  donors’  local  representatives  (SR  2/2005).  The  Court  has  repeatedly  assessed  the 
dynamic interpretation of eligibility applied by the Commission and has insisted that the Commission 
should  demonstrate  eligibility  and  performance  in  public  financial  management  in  a  more  explicit, 
formalised and structured manner (SR 2/2005, AR 2009). The Court has also produced a special report 
on EU assistance to the health sector. This concluded that general budget support had not yet made an 
effective contribution to improving health services and should focus more on doing so, while the use 
of  focused  sector  budget  support  should  increase  (SR  10/2008). The  Court  also  intends  to  publish  a 
special report on the education sector. 

In this paper, 'EU budget support' refers to budget support managed by the European 
Commission, originating from the External Action Instruments financed by the EU Budget as 
well as support financed by the European Development Fund. It may take the form of general 

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budget  support  (GBS)  to  support  a  country’s  national  development  strategy,  or  sector 
budget  support  (SBS)  to  support  a  particular  sector  strategy.  The  EU  and  other  budget 
support donors increasingly use general and sector budget support alongside each other and 
there is growing interest in using budget support for new and specific issues (such as climate 
change).  While  SBS  is  provided  by  the  EU  and  some  other  donors  in  its  untargeted  form, 
others apply some form of earmarking of funds.  

GBS  and  SBS  have  different  objectives  which  will  be  reflected  in  the  conditions  and 
dialogue.  GBS  aims  to  support  a  national  development  policy  and  strategy  and  has  the 
potential  to  address  the  full  range  of  policies  and  reforms;  SBS  aims  at  supporting  a  sector 
policy  and  reform  agenda  and  has  the  attraction  of  being  more  focused  on  key  sectors  of 
interest. SBS has particular added value where budget support represents a small share of the 
national  budget,  and  where  more  focused  policy  dialogue  and  reforms  within  a  sector  is 
sought.  In  many  cases  the  EU  uses  both  modalities  in  tandem,  particularly  in  African, 
Caribbean  and  Pacific  countries,  with  SBS  complementing  GBS  by  making  national 
development policy more responsive to the specific needs of a particular sector or reform. 

Coordination  is  key.  The  EU  is  a  major  provider  of  budget  support.  Work  is  underway  to 
further  improve  coordination  regarding  policy  dialogue  and  political  dialogue,  programme 
design  and  implementation,  promoting  domestic  and  mutual  accountability,  and  conducting 
and communicating the results of evaluations. This work has also informed this Green Paper 
and will contribute to improving the effectiveness of budget support, as well as the coherence 
and  credibility  of  EU  donors,  while  improving  coordination  among  all  providers  of  budget 
support. 

Box 3: Evolution of EU Budget Support 

Early experience with budget support in the 1990s showed the limits of conditionality as an effective 
means  of  promoting  reforms;  the  importance  of  partner  countries  owning  policies;  and  the  limited 
effect of targeting funds to specific budget lines. Building on this experience, the Commission adopted 
a  Communication  (2000)  on  ‘Community  support  for  economic  reform  programmes  and  structural 
adjustment: review and prospects’ which introduced poverty reduction budget support (PRBS) and an 
innovative approach to conditionality. This Communication set objectives for budget support that later 
became part of the aid effectiveness principles.  

EU budget support programmes were increasingly provided over three-year periods with annual fixed 
tranches  subject  to  compliance  with  eligibility  criteria,  and  variable  tranches  linked  also  to 
performance against agreed targets on selected outcome indicators, mainly in social sectors.  

Regarding eligibility criteria for budget support, the Commission (along with most other providers) 
applies  a  dynamic  approach  by  requiring  relevant,  credible  commitment  to  reform  and  evidence  of 
progress rather than compliance with minimum standards. This approach has allowed the Commission 
to  operate  in  very  diverse  contexts,  including  in  countries  in  situation  of  fragility,  where  budget 
support can underpin stabilisation and avoid deterioration of the economic and political situation. 

In  2008,  the  Commission  also  launched  ‘MDG Contracts’  for  countries  with  a  track  record  of 
successfully  managing  budget  support,  and  demonstrating  commitment  to  making  progress  towards 
the  Millennium  Development  Goals  (MDGs).  MDG Contracts  provide  six-year  commitments  that 
enable  governments  to  plan  longer-term  strategies  and  budgets  with  greater  certainty  about  future 
resource inflows.  

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3. 

BUDGET SUPPORT GOING FORWARD — SOME KEY PRINCIPLES 

Budget support has evolved over the past decade and a number of lessons regarding its design 
and impact have been learned (see Boxes 3 and 4).  

Box 4: Budget Support — Lessons Learned 

A  major  2006  evaluation  of  general  budget  support  (GBS)  in  seven  developing  countries  (Burkina 
Faso,  Malawi,  Mozambique,  Nicaragua,  Rwanda,  Uganda,  and  Vietnam)  commissioned  by  the 
Organisation  for  Economic  Cooperation  and  Development’s  Development  Assistance  Committee 
(OECD-DAC) concluded that budget support had been a relevant response to acknowledged problems 
in  aid  effectiveness,  and  can  be  an  efficient,  effective  and  sustainable  way  of  supporting  national 
poverty reduction strategies. It found that GBS had positive effects on harmonisation and alignment, 
and  on  strengthening  government  ownership  and  accountability.  It  also  had  positive  effects  on  the 
efficiency  of  public  expenditure,  and  on  government  capacity,  particularly  in  public  finance 
management.  Budget  support  had  also  led  to  improvements  in  access  to  services  in  most  countries. 
There was no evidence of significant crowding out of private investment or of undermining domestic 
revenue effort, nor any clear evidence that budget support funds were more affected by corruption than 
other forms of aid. However, the evaluation expressed reservations about impacts on poverty reduction 
and the quality of basic services. A revised evaluation methodology is currently being piloted in Mali, 
Tunisia  and  Zambia.  Recent  independent  evaluations  of  European  Commission  country 
programmes  in  20  countries  where  budget  support  has  been  a  significant  feature  have  generally 
confirmed  its  relevance,  and  recommended  its  continuation.  But  in  general,  it  has  been  difficult  to 
assess  the  impact  of  budget  support  on  poverty  reduction  and  other  MDG  indicators.  Questions  of 
attribution,  and  also  of  assessing  what  might  have  been  achieved  with  alternative  instruments  (the 
counterfactual), have proved particularly difficult. 

These highlight that budget support should not be seen as an end in itself, but as a means of 
improving the effectiveness of aid and achieving results. And while the weight of each will 
differ between regions, a number of key principles can be identified to guide the design and 
implementation  of  budget  support  around  which  there  is  a  high  degree  of  consensus  across 
EU budget support providers:  

Budget support as part of a package: Budget support must be more than a financial transfer – 
it is part of a package including policy dialogue, performance assessment, capacity-building 
and other supporting interventions. 

Ownership:  Budget  support  should  support  a  country  in  achieving  its  own  development 
strategies.  

Results: Budget support should focus on achieving measurable outcomes. 

Predictability:  Budget  support  should  be  provided  in  a  way  that  ensures  a  high  degree  of 
predictability in both the short and long term. 

Accountability: Budget support should be provided in a way that enhances the accountability 
of governments to their citizens, national parliaments and supreme audit institutions regarding 
the way resources are used and the results achieved (domestic accountability). Budget support 
should also be provided in a way that ensures that partner countries honour their commitments 
to donors and donors honour their commitments to partner countries (mutual accountability).  

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A  more  coordinated  EU  approach:  EU  budget  support  should  be  provided  in  a  way  that 
improves  coordination  both  within  and  beyond  the  EU,  and  enhances  the  coherence  and 
credibility of the EU. 

Public  support:  To  ensure  public  support  from  stakeholders  within  the  EU,  budget  support 
needs to provide strong evidence of results achieved and progress made by partner countries. 
Citizens  in  partner  countries  should  also  be  able  to  understand  and  identify  the  difference 
budget support makes in their countries. 

4. 

BUDGET SUPPORT: KEY ISSUES 

It is also evident that a number of challenges remain to improve the quality, value for money 
and impact of budget support. Key issues where there is less clarity or consensus on the best 
way forward are related to: 

•  Political governance and the role of political dialogue; 

•  Role of policy dialogue, role of conditionality, links to performance and results; 

•  Domestic and mutual accountability; 

•  Programming of budget support and its coherence with other instruments; 

•  Strengthening risk assessment and dealing with fraud and corruption; 

•  Budget support in situations of fragility; 

•  Growth, fiscal policy and mobilisation of domestic revenues. 

These  issues  are  presented  in  detail  below,  together  with  a  number  of  questions  to  which 
stakeholders  are  invited  to  respond.  Evidence  and  examples  in  support  of  responses  are 
welcome.  

4.1. 

Political governance and the role of political dialogue 

Political  governance  has  recently  emerged  as  one  of  the  most  critical  issues  in  budget 
support.  At  issue  is  whether  budget  support  should  be  explicitly  conditional  on  a  country’s 
respect of the underlying principles of human rights, democratic principles and the rule of law 
(see  Box 5);  or  whether  these  should  remain  principles  that  underpin  all  cooperation  and 
therefore apply to the entire partnership and all aid modalities.  

OECD-DAC guidance suggests that ‘political conditionality should not be specifically linked 
to budget support or any individual aid instrument, but rather should be handled in the context 
of the overarching political dialogue between a partner country and its donors’2.  

Ultimately,  budget  support  can  always  be  suspended  (as  can  a  project)  if  there  is  a  serious 
breach  of  underlying  principles.  This  is  in  line  with  the  various  EU  instruments  and 

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DAC Guidelines on Harmonising Donors’ Practices for Effective Aid, Budget support (vol 2, 2005). 

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agreements  governing  development  and  wider  cooperation  in  all  regions3,  and  necessary  in 
order  to  maintain  the  legitimacy  of  budget  support  and  of  aid  in  general.  Experience  has 
shown that political sensitivities are likely to be more intense in the case of budget support, 
mainly in the context of general budget support (GBS), since it is widely seen as providing an 
endorsement of the partner country’s overall policy stance. Sector budget support (SBS) is at 
times perceived as less vulnerable to political risk because it supports the implementation of a 
specific sector policy instead of the overall development policy of the partner country. Many 
donors  have  found  that  compared  to  GBS,  SBS  is  easier  to  justify  to  taxpayers  and 
parliaments at home in a context of political difficulties or growing corruption in the partner 
country. 

Box 5: Underlying Principles 

In  this  Green  Paper,  ‘underlying  principles’  refer  solely  to  political  elements  reflected  in  the  EU 
Lisbon Treaty’s general provisions on the Union’s external action.  

This states that: ‘The Union’s action on the international scene shall be guided by the principles which 
have  inspired  its  own  creation,  development  and  enlargement,  and  which  it  seeks  to  advance  in  the 
wider  world:  democracy,  the  rule  of  law,  the  universality  and  indivisibility  of  human  rights  and 
fundamental freedoms, respect for human dignity, the principles of equality and solidarity, and respect 
for the principles of the United Nations Charter and international law.’ (Article 21.1). 

Recent  political  governance  concerns  in  several  developing  countries  receiving  budget 
support have encouraged some donors to shift their attention to the underlying principles of 
human  rights,  democratic  principles  and  rule  of  law,  with  budget  support  being  used  more 
explicitly  to  achieve  broader  political  objectives.  The  intrinsically  political  nature  of  the 
national  budget,  and  the  closeness  between  dialogue  on  the  overall  policy  priorities  of  the 
partner country and political dialogue, has raised two main issues. 

The  first  issue  concerns  the  provision  of  budget  support  when  underlying  principles 
deteriorate.  Some  donors  suspend  disbursements,  while  others  continue.  Such  inconsistent 
responses can send the wrong message to the partner governments concerned. This highlights 
the  need  to  find  an  approach  that  improves  coherence  and  consistency,  ensuring  that 
underlying  principles  are  shared  and  respected,  while  protecting  the  development  benefits 
including predictability of budget support. 

The  second  issue  concerns  the  most  appropriate  forum  for  dialogue  on  political 
governance.  Some  have  advocated  using  all  possible  avenues,  including  budget  support 
dialogue  processes,  as  a  means  of  maximising  leverage  and  influence  on  political  issues 
regarding underlying principles. Others have favoured a more political forum, separate from 
but  informing  and  informed  by  budget  support  dialogue  processes,  in  recognition  that  these 
principles underpin all development cooperation. 

Q1:  Should  budget  support  operations  (especially  general  budget  support)  be  designed  to 
better reflect partner countries’ commitment to the underlying principles and if so, how? In 
particular,  should  budget  support  programmes  make  more  use  of  political  governance 
conditionality? Is there a case for adopting a different approach to political conditionality for 

3 

Notably  the  Cotonou  Agreement,  the  Development  and  Cooperation  Instrument  (DCI),  the  European 
Neighbourhood  and  Partnership  Instrument  (ENPI),  and  the  Instrument  for  Pre-Accession  Assistance 
(IPA).  

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general as opposed to sector budget support?  

Q2:  How  can  the  budget  support  process  be  consistent  with  the  political  dialogue  on 
underlying principles while maintaining the focus of policy dialogue on agreed development 
objectives? What could be the relevant fora and the appropriate level involving donors and 
partner country to raise and discuss concerns regarding underlying principles?  

Q3:  How  can  donors  meaningfully  respond  to  any  deterioration in  the  underlying  principles
while protecting the development benefits and predictability of budget support? 

4.2. 

Role  of  policy  dialogue,  role  of  conditionality  and  links  to  performance  and 
results 

Policy dialogue rooted in a partner country’s own budgetary and policy processes is essential 
to ensure that the policy measures needed to achieve agreed targets are identified, discussed 
and fully resourced. Such dialogue helps to ensure a clearer link between the use of resources 
(including budget support) and achieving results, and much needs to be done to make it more 
effective.  For  instance,  it  is  particularly  important  to  ensure  that  supreme  audit  institutions, 
national parliaments, the private sector and civil society organisations become more involved.  

Areas relevant for policy dialogue would include growth strategy; macroeconomic stability; 
fiscal  policy  (including  domestic  revenue  generation  and  budget  composition  at  central  and 
decentralised  levels);  sector  policies  (especially  social  sectors);  social  protection  (including 
use of conditional cash transfer schemes4); public financial management; broader governance 
issues  such  as  the  fight  against  corruption  and  fraud,  public  sector  reform,  including 
decentralisation.  Policy  dialogue  is  distinct  from  broader  political  dialogue  on  underlying 
principles, though they should of course complement and reinforce each other. The key issue 
is  how  to  make  this  policy  dialogue  more  effective.  This  raises  issues  about  the  scope  of 
dialogue  and  the  skills  required;  the  role  of  conditionality;  and  the  appropriate  balance 
between  policy  reforms  and  result  indicators  in  performance  assessment  frameworks  and  as 
disbursement triggers (see also Box 6).  

Box 6: Budget support policy dialogue in different contexts 

The objectives of budget support drive the scope and nature of policy dialogue in each country. These 
objectives  and  structure  of  dialogue  will  vary  depending  on  country  circumstances  and  level  of 
development, the nature of its relationship with the EU and wider donor involvement. For instance, in 
an Asian or Latin American country, where aid and budget support typically represent a very small 
share of the national budget, dialogue may be very different to that in most African countries. In small 
island states and Overseas Countries and Territories (OCTs) some particular challenges may need 
to  be  addressed,  such  as  small  national  administrations,  absence  of  robust  national  policies  and 
strategies,  absence  of  independent  macro-economic  frameworks,  and  limited  involvement  of  and 
coordination with other donors. In EU neighbourhood and enlargement countries, where EU policy 
is  more  focused  on  promoting  EU-oriented  reforms  aimed  at  political  association  and  economic 
integration, there is a stronger emphasis on holding partner countries accountable for specific policy 
measures to be implemented in the short term, such as adopting legislation harmonised with the EU 
acquis in the context of Stabilisation and Association Agreements in the case of potential candidates 

4 

Those schemes provide financial transfers to poor families on condition that their children attend school 
and have basic health care (e.g. Brazil, Mexico, Bangladesh). 

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and candidate countries, and in the context of Association Agreements currently being negotiated in 
the case of neighbourhood countries.  

Effective  policy  dialogue  requires  skilled  donor  staff  with  the  opportunity  and  ability  to 
support  both  the  analysis  of  problems  that  hamper  progress  towards  agreed  development 
objectives, and the identification and implementation of solutions. But many donors lack the 
right human resources to make the most of these opportunities. This may be partly addressed 
by more sharing of expertise and designing a more efficient division of labour between budget 
support providers, but it also requires renewed investment in appropriate skills. 

Conditionality.  Selecting  countries  for  budget  support  on  the  basis  of  defined  eligibility 
criteria is a legitimate application of conditionality. The Commission presently abstains from 
setting  minimum  requirements  considering  that  commitments  from  a  partner  country  to  the 
reform  process  are  more  important.  Disbursements  may  be  conditional  on  a  combination  of 
policy  measures  and  results  achieved.  The  balance  of  evidence  suggests  that  policy 
conditionality has rarely been effective in securing reforms unless there is a strong domestic 
constituency in favour. Many actors, including the European Commission, have placed more 
emphasis on results, although most programmes combine both policy and result indicators.  

Performance and results. The European Commission has pioneered the use of outcome and 
result  indicators  in  its  budget  support  programmes  as  a  basis  for  assessing  progress  and 
deciding  the  amount  of  variable  tranche  disbursements,  and  as  a  focus  for  policy  dialogue5. 
This approach was intended to provide space to partner governments to set their own policies 
(in  line  with  the  principle  of  ownership),  and  to  stimulate  debate  on  how  and  why  policies 
succeed  in  delivering  results  (or  not).  However,  questions  and  challenges  have  emerged, 
regarding  the  capacity  of  statistical  services  to  regularly  produce,  analyse  and  disseminate 
relevant,  objective  and  good  quality  statistics  to  measure  performance;  the  choice  of 
indicators  and  targets;  whether  performance  is  best  assessed  by  a  narrow  focus  on  those 
indicators  or  by  a  more  holistic  performance  assessment;  and  more  broadly,  the  extent  to 
which countries find results-based conditionality an effective incentive to perform better.  

A focus on results is central. But the financial attribution of budget support to specific results 
is more difficult than for projects, because budget support funds are absorbed into a country's 
overall  budget  and  cannot  be  traced.  And  yet  donors  must  account  for  the  use  of  budget 
support,  so  it  is  important  for  the  EU  –  and  the  European  taxpayer  –  to  have  more  clear 
evidence that partner countries spend resources as intended, obtain good value for money, and 
achieve the objectives agreed. This requires donors to focus analysis and policy dialogue on 
all major areas of the public financial management (PFM) system and the fiscal policy of a 
government, covering the whole budget cycle. Where weaknesses are identified, governments 
need to show they have a relevant and credible PFM reform programme, and to demonstrate 
progress  over  time.  Better  budget  analysis  is  important  to  improve  the  performance  of  the 
financial management system and the benefits of budget support. Defining specific objectives, 
performance indicators and a monitoring framework to show how budget support contributes 
to development and poverty reduction remains a key challenge. In this context demand driven 
and  result-oriented  capacity  development,  in  particular  of  line  Ministries  and  control  bodies 
such as the Supreme Audit Institutions and National Parliaments, is of paramount importance.  

Q4: How can policy dialogue with partner countries be made more effective and inclusive in 

5 

The development by the Centre for Global Development of ‘cash on delivery’ approaches to paying for 
results and rewarding performance represents a further and more radical innovation in this direction. 

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contributing to achieving reforms, results and objectives?  

Q5: How should donors use budget support conditionality to help improve performance, and 
how should they respond to failure to meet agreed conditions? 

Q6: How can performance monitoring frameworks be improved and result indicators be best 
used in budget support operations in order to address the challenges identified above? 

Q7: How can the performance of the public financial management system, including fraud 
prevention  measures,  and  the  value  for  money  of  budget  support  funds  be  best  enhanced? 
Should the EU set minimum requirements for budget support? 

4.3. 

Accountability 

Domestic accountability refers to a partner government being accountable to its citizens and 
institutions  (parliament,  supreme  audit  institutions)  on  policy  choices,  revenue  collections, 
budget allocations and outcomes. It is a two-way relationship. Citizens and institutions must 
also  be  able  to  hold  their  government  accountable  for  its  actions,  to  check  abuses  and  to 
impose sanctions. The accountability of a partner government to its citizens is a key driver in 
achieving development outcomes. It is an important component of a country's ownership of 
its development agenda. Budget support is in principle subject to domestic parliamentary and 
audit scrutiny in a way that project support is often not. 

However,  there  have  to  date  been  only  modest  improvements  in  domestic  accountability, 
partly  because  changes  take  time  to  implement  and  to  bring  about  results.  The  capacity  of 
civil  society  and  parliaments  to  advocate  and  monitor  policy  choices  during  a  transparent 
budget process is still weak in many countries. Supporting national accountability institutions 
and  systems  is  a  major  challenge  for  donors  involved  in  budget  support.  Donors'  demands 
may  overshadow  domestic  accountability  by  imposing  an  externally-driven  agenda, 
particularly when the amount of budget support is significant relative to the national budget. 

Mutual accountability. From the donors' perspective, mutual accountability is important so 
that donor governments can demonstrate to their parliamentarians and tax payers that they are 
using  public  funds  allocated  for  development  assistance  effectively.  From  the  partner 
countries' perspective, they need credible donor commitments to provide timely, predictable, 
transparent and comprehensive information on aid flows (especially budget support), aligned 
with the budget cycle, to prepare and implement comprehensive budgets that deliver agreed 
policy objectives and priorities. Partner countries also need to inform the general public about 
their relationship with the donor community and the benefits of budget support. However civil 
society can only scrutinise government action where it has key information on amounts spent 
for specific measures and where channels to inform appropriate authorities, including donors, 
about fraud and corruption exist. 

Q8:  How  can  budget  support  (including  capacity  building)  be  designed  to  further  enhance 
domestic  accountability  and  ownership  in  partner  countries,  including  the  participation  of 
civil society? 

Q9: How can mutual accountability better contribute to enhancing effectiveness of budget 
support operations in both donor and partner countries?  

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Q10: What kind of visibility/communication activities should be carried out both in donor and 
partner countries to enhance mutual accountability?  

4.4. 

Programming of budget support and its coherence with other instruments 

The decision on whether and how much budget support to provide needs to be seen in the 
wider context of aid programming as a whole, in which country allocations are determined by 
a  combination  of  needs  and  performance.  It  relates  to  a  broader  political  economy  analysis, 
each  country's  financing  needs  (considering  its  medium-term  fiscal  framework  and  the 
contribution  that  donors  and  creditors  can  propose),  absorptive  capacity,  and  risks  and 
expected benefits of budget support. Once the country context has been adequately analysed, 
including  government  efforts  to  address  identified  weaknesses  and  available  domestic 
resources,  the  objectives  of  the  cooperation  and  the  most  appropriate  aid  modality  -  which 
should  also  take  questions  of  unit  costs  and  value  for  money  into  account  -  can  be  decided 
accordingly.  

Several other modalities coexist with budget support, including vertical funds, multi-donor 
trust  funds  (MDTFs),  pooled  funds,  and  project  aid.  A  wide  range  of  implementation 
modalities is considered an advantage to respond to different needs and objectives in different 
contexts. In some areas, such as support for Non State Actors or for electoral processes, it is 
evident that this cannot and should not be provided as budget support. For others, such as high 
high-level  expertise  or  major  infrastructure  investments,  it  would  have  to  be  decided  within 
the country context what modality is the most appropriate. 

Regarding General budget support (GBS) and Sector budget support (SBS), a key question is 
whether budget support to a particular country should focus on a wider range of areas (GBS) 
to get a broad picture of the national policy but at the cost of being potentially less effective 
on  sector  policy  dialogue;  or  focus  on  specific  sectors  (SBS)  for  more  effective  policy 
dialogue, but at the cost of potentially neglecting wider, cross-sector reform issues necessary 
for progress to be made at sector level. In many cases the EU uses both modalities in tandem 
(see section 2).  

Q11:  What  criteria  should  the  Commission  use  to  inform  decisions  on  how  much  if  any 
budget support to provide to eligible countries?  

Q12: What are the advantages and disadvantages of providing both general and sector budget
support  within  the  same  country,  or  having  one  single  budget  support  instrument?  In  which
context would SBS be considered a more effective type of budget support? 

Q13:  What  are  the  advantages  and  disadvantages,  as  well  as  the  practical  arrangements  to
ensure  consistency  and  efficient  coordination,  of  using  a  broad  palette  of  aid  instruments
alongside GBS/SBS? 

4.5. 

Strengthening risk assessment and dealing with fraud and corruption 

The  efficiency  and  impact  of  all  forms  of  aid  (from  project  aid  to  budget  support)  may  be 
undermined by a number of risks that must be mitigated. Budget support and project aid have 

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different risk profiles; this implies that risk management must be adapted to the aid delivery 
method selected. The risk management framework for budget support is an important tool in 
the assessment of eligibility, in programming, design and implementation of programmes and 
to inform policy dialogue. It is an instrument to protect the financial interests of the EU. It is 
also  a  crucial  dimension  of  the  dynamic  approach  to  eligibility  (see  Box  1)  that  requires 
credible  commitment  to  relevant  reforms  and  evidence  of  progress.  In  this  context  it  is 
important to review and strengthen risk management approaches for budget support.  

A serious deterioration of political governance in a partner country receiving budget support, 
could  significantly  reduce  the  role  of  the  national  budget  as  expression  of  the  common 
interest,  and  undermine  accountability  mechanisms.  This  could  in  turn  undermine  budget 
support  efforts  to  improve  the  transparency  and  the  management  of  the  budget  itself  and 
ultimately erode budget support effectiveness. Assessing political risks requires an intensified 
political dialogue that covers aspects relevant for budget support. 

Managing  macro-economic  and  development  risks  requires  strong  monitoring  processes, 
relevant diagnostics and indicators, and the capacity to identify and adopt corrective measures 
when  appropriate.  The  limited  quality  and  availability  of  relevant  indicators  complicates 
managing  these  risks.  Improving  the  scope  and  quality  of  dialogue  on  progress  in 
implementing national and sector policies is vital for effective risk management. 

Improving  tools  for  managing  financial  risk  is  essential.  In  all  budget  support  operations 
donor funds are managed according to the partner country's public financial management and 
control systems and procedures (see Box 1). Financial risk is assessed and mitigated through 
progress  in  the  efficiency  and  effectiveness  of  public  financial  management.  Regular 
diagnostics can identify key areas of progress and weakness and inform the preparation and 
implementation of reform programmes whose relevance and credibility is monitored through 
budget support processes. 

Corruption  is  a  serious  threat  to  development  efforts.  It  undermines  democracy  and  good 
governance  by  subverting  formal  and  institutional  processes.  Corruption  undermines 
economic  development  by  diverting  resources  from  priority  expenditures,  generating 
inefficiency and lack of compliance with procurement procedures in public service delivery. 
Corruption  is  one  of  the  key  factors  that  affect  the  balance  of  arguments  for  and  against 
budget support. Failure to tackle corruption undermines confidence in both the budget and the 
wider political economy, and has implications for both financial and development risks. In 
addition as donor funds are merged with the national budget, fraud or corruption allegations 
are  not  brought  to  the  attention  or  investigated  by  the  Commission.  And  in  cases  of 
misappropriation of partner countries' budget resources recovery of funds may prove difficult. 
It is therefore essential that close dialogue with the partner governments on corruption issues 
is maintained by the Commission and the donor community at large. 

External risk factors, such as adverse international financial and economic factors, volatility 
in commodity  prices,  or climate conditions,  can  also affect the budget situation of a partner 
country.  The  recent  global  financial  and  economic  crisis  has  shown  how  interconnected  the 
world is. Monitoring and mitigating external risks requires measures to increase the resilience 
of the budget, including the tax structure, to external shocks.  

Q14:  How  can  the  above  risks  be  best  assessed  within  a  comprehensive  framework  and
managed to improve the effectiveness of budget support?  

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Q15:  What  kind  of  measures  should  the  EU  apply  if  the  risk  level  is  considered  high  with
regard to fraud and corruption? 

Q16: How can donors meaningfully respond, including with financial corrective measures, to
cases  of  large  scale  corruption  or  fraud  in  the  implementation  of  policies  benefiting  from
budget support? 

4.6. 

Budget support in situations of fragility  

Budget  support  may  be  critical  in  helping  to  provide  a  degree  of  economic  and  political 
stability to countries in situations of fragility.  

Box 7: Situations of fragility.  

This is a situation where the social contract is broken due to the State’s incapacity or inability 
to  deal  with  its  basic  functions,  and  meet  its  obligations  regarding:  service  delivery, 
management  of  resources,  rule  of  law,  equitable  access  to  power,  security  and  safety  of  the 
populace and protection and promotion of citizens’ rights and freedoms. Broadly speaking, a 
country's  emergence  from  crisis  comprises  three  successive  phases,  which  often  overlap,  in 
which  the  political  partners and donors intervene: The emergency phase that  is followed  by 
the peace-building stage, which encompasses social and economic rehabilitation and the start 
of institutional rebuilding. The third stage is macroeconomic stabilisation (generally marked 
by  the  resumption  of  aid  from  the  IFIs  once  arrears  have  been  cleared),  which  leads  to 
development. Each phase as the country emerges from crisis offers a window of opportunity 
for deciding whether to grant budget support.  

While  the  risks  are  by  definition  high,  the  costs  of  non-intervention,  and  the  benefits  (e.g. 
maintaining basic state functions like service delivery and security) of effective support, may 
be higher still. Eligibility criteria need to be interpreted to reflect the partner country’s actual 
capacity, commitment, and progress potential. But stronger coordination among those donors 
ready  to  support  the  re-establishment  of  the  state  is  essential  to  ensuring  a  proper  and 
continuous  assessment  and  management  of  risks,  rigorous  monitoring  of  progress,  and 
responsiveness  in  design.  The  Commission  is  working  on  a  ‘common  approach  paper’  with 
the IMF, World Bank, and African Development Bank. Nevertheless, relatively few bilateral 
donors currently provide budget support to countries in situation of fragility.  

Q17: Should budget support be used to promote stability in fragile states, and if so, how? 

4.7. 

Growth, fiscal policy and mobilisation of domestic revenues  

Both  partner  country  development  strategies  and  EU  attention  are  increasingly  focusing  on 
the importance of sustainable economic growth, in addition to the delivery of social services. 
It is consequently necessary to ensure that development aid in general, and budget support in 
particular,  is  also  able  to  stimulate  and  contribute  to  inclusive  growth  and  sustainable 
development as well as poverty reduction. More attention will need to be given in particular 
to the identification of steps needed to remove binding constraints to sustained growth, such 
as inadequate economic infrastructure, red tape or limited human capital. Budget support can 

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contribute  through  promoting  macroeconomic  stability,  key  reforms  for  an  economic 
environment more conducive to business, and more efficient budget allocation. Fiscal policy 
is a particularly important subject for budget support policy dialogue. 

Securing domestic revenue is crucial to ensure macroeconomic stability, to achieve and 
sustain  development  objectives,  to  reduce  poverty,  to  meet  MDG  targets,  and  to 
strengthen domestic accountability. It relates both to economic growth in partner countries 
and to tax systems. Improving developing countries' capacity to raise revenues in line with the 
principles  of  good  governance  (transparency,  exchange  of  information  and  fair  tax 
competition)  will  in  the  long  term  help  developing  countries  to  reduce  their  dependency  on 
aid and to consider an eventual exit strategy from budget support, with the place of budget 
support likely to change as countries become less aid dependent. Partner countries should be 
committed to strengthening their domestic tax systems and collection rates.  

A  broad  tax  base  combined  with  effective  revenue  and  expenditure  management 
increases the legitimacy of the state and reinforces the relationship between government 
and  citizen.  Part  of  the  objective  of  budget  support  programmes  should  be  to  assist  the 
recipient  country's  capacity  to  address  domestic  and  international  challenges  of  revenue 
collection,  in  order  to  improve  accountability  and  self-reliance  and  to  reduce  long-term 
dependency.  Although  some  budget  support  programmes  do  address  revenue  questions,  the 
main  focus  of  dialogue  and  conditionality  in  budget  support  programmes  has  been  on 
improving  the  management  of  public  expenditure.  There  is  therefore  scope  to  focus  more 
directly  on  domestic  revenue  issues  and  good  governance  in  the  tax  area  in  budget  support 
dialogue, conditionality, performance assessment and capacity development (noting also the 
particular  revenue  challenges  in  natural  resource-rich  countries).  This  would  progressively 
allow improving references and compliance with the principles of good governance in the tax 
area  (i.e.  transparency,  exchange  of  information  and  fair  tax  competition).  The  issue  of 
whether budget support should be conditional on reforms and good governance in the area of 
tax is particularly relevant.  

Supporting regional integration is also a key feature in EU cooperation. Regional integration 
brings significant economic benefits, but also new challenges, in particular the need to shift 
the  revenue  base  from  external  tariffs  towards  internal  taxation  as  trade  liberalisation  may 
result in a continued decrease in customs revenue. 

Q18:  How  can  budget  support  programmes  be  designed  and  implemented  to  best  promote
inclusive and sustained growth? 

Q19:  How  can  budget  support  policy  dialogue  and  conditionality  promote  more  domestic
revenue generation and terminate dependency on aid? What form of an exit strategy should
donors include in their budget support operations, and how to arrange it? 

Q20: How can budget support be used to assist partner countries and regional organisations to
further the process of regional integration? 

5. 

CONCLUSIONS AND NEXT STEPS 

Budget support has been seen as a solution to the question of how to make more effective use 
of  aid,  but  it  is  not  without  challenges  of  its  own.  This  paper  has  aimed  to  raise  questions 
about which countries should receive budget support, how much they should receive, and how 
best  to  design  and  manage  budget  support  programmes.  These  are  issues  that  need  to  be 

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analysed, together with work on an agreed set of objectives and principles, in order for budget 
support  to  better  contribute  to  the  realisation  of  the  Millennium  Development  Goals  and 
sustained growth and poverty reduction in developing partner countries, and the promotion of 
closer economic integration and political association elsewhere. Building on the results of this 
and  other  work,  the  Commission  will  work  to  improve  the  approach  to  the  design  and 
implementation  of  budget  support,  with  a  view  to  more  coordinated  approaches  within  the 
EU. 

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