7.10.2005   

EN

Official Journal of the European Union

C 249/1

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

31-37

31-33

34

35-36

37

38

39-40

41-74

41-46

42-44

45-46

47-68

47

48-51

52-55

56-62

63-68

69-71

72-74

75-89

75-83

84-89

ACP

—

African, Caribbean and Pacific States signatory to the Cotonou Agreement

ADB

—

African Development Bank

AFD

—

French Development Agency

BWIs

—

Bretton Woods Institutions (WB and IMF)

CFAA

—

Country Financial Accountability Assessment

CPAR

—

Country Procurement Analytical Review

DFID

—

UK Department for International Development

EDF

—

European Development Fund

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

—

International Monetary Fund

ISA

—

International Standards on Auditing

MoU

—

Memorandum of Understanding

NIP

—

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

—

Public expenditure review

PETS

—

Public expenditure tracking survey

PF

—

Public finances

PFMA

—

Public finance management assessment

PPARP

—

Multiannual support programme for poverty reduction

PRGF

—

Poverty reduction and growth facility

PRSP

—

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

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 disbursed 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 beneficiary 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, provided 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 public finance management and proposed reforms, but also of evaluating management changes and the progress of those reforms.

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).

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. Furthermore, there is insufficient coordination with other donors at local level as regards the use of these instruments 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:

1.

In 2000, the Court examined the Commission's follow-up of the use of counterpart funds from structural adjustment support earmarked for budget aid in the ACP countries (1). The Commission 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 vigilant 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.

3.

Budget aid is paid into the budgets of beneficiary States to compensate for shortages in their domestic resources. It provides 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.

4.

The aid is ‘direct’ in that it enters budgets directly without the need for a counterpart allocation of currency for countries' essential imports. In general, this mechanism is no longer necessary 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 indistinguishably 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 limited (4) to cases of countries experiencing serious liquidity problems.

6.

The main objectives of budget aid are to facilitate growth 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.

8.

Public finance management reforms are one element of 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.

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 countries' budgets (6) and managed in accordance with the various donors' own procedures (7) (see diagram 1).

12.

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

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.

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.

15.

The Commission implements its direct non-targeted budget 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 calculated on the basis of performance indicators.

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 macroeconomic 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.

17.

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

18.

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

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 verified the quality of public finance management and the effectiveness 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:

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 poverty reduction. Lastly, the objective did not include auditing public 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).

21.

Checks were carried out at Commission headquarters, and information was gathered from the World Bank and the International Monetary Fund (IMF). In the course of its audit visits in the five ACP countries visited (see table 1), the Court examined ongoing direct non-targeted budget aid programmes (9). These countries were selected because they offer a variety of public finance management traditions and are representative (both geographically and in terms of value) of the budget support financed by the Commission.

Table 1

Programmes examined in the five countries visited

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 management: budget programming and implementation, rendering of the accounts, internal and external audit (12).

23.

In March 2002 the EuropeAid Cooperation Office (EuropeAid), 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 (13). The Guide remains, in 2005, the main reference document in this 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 domestic revenue, including revenue from public undertakings, which must be given the same consideration (14) 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 taxpayers 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 assessment. 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).

27.

Since March 2002, when the Guide was published, around 10 instruction notes have been addressed to the Delegations by a variety of Commission departments. As a result, there is no complete set of instructions for the implementation of budget 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 (15).

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 management systems, but also of the direction being taken by the country (16). 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 taxpayers' money is exposed, because it is the beneficiary countries' national budgetary procedures that are being used. Such an interpretation requires much more rigorous monitoring of the situation and subsequent development of public finance management in the countries in question.

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 proposals and agreements must guarantee and make explicit the cohesion and logical relationship between the following:

31.

On the whole, the initial assessments of public finance management are reasonably comprehensive (17). 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 (18) (see Box 1).

Box 1 — Reference to beneficiaries' national reform plans

32.

While, generally speaking, the bulk of information is given in the financing proposals and agreements, it is still too dispersed. 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 presentation should be more standardised and structured in order to enable the EDF Committee (22) 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 systematically include all the reforms, whether already launched, planned or awaiting consideration, that are necessary for the establishment of a sufficiently transparent, accountable and effective system of public finance management. In the dialogue with the national authorities the Commission should ensure that a comprehensive reform programme is drawn up, that it sets out priorities 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.

34.

Another issue is that the Commission programmes do not adequately take account of problems related to corruption (23), 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 partnership with the sovereign States and with the help of the organisations specialising in this field (24), 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.

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 (25) that identifies the finance provided by the various donors (see box 2).

Box 2 — Institutional support provided for in financing agreements

36.

An overall support programme makes it possible to calculate 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, including those for which finance has yet to be found.

37.

The Heads of Delegation have not made recommendations as provided for in the Guide (28). There are also plans to ask the Heads of Delegation to include, in their twice-yearly monitoring 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.

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 (29) of which the donors were apparently unaware.

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, noting 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 Commission 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, however, an IMF programme was concurrent.

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

41.

The main tools used to monitor the development of public finance management are the Delegations' monitoring reports and performance indicators.

42.

The Guide specifies that the Delegations are to monitor public finances and report to the Commission central services (31). The Delegations have been instructed that the half-yearly monitoring reports must contain a description of the situation (for which a pattern is given) and a framework for monitoring public finance reforms (32). While the instructions are a valid management tool, the first indications arising from their implementation (see paragraphs 47 to 68) are that they could be improved and expanded by:

43.

These reports rely on donor and government audits and 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 performance 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 (35). 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 improvements have been proposed (see paragraph 7 of Annex 2).

45.

During the implementation of its budget aid programmes, 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 therefore important to give reasons for the choices made and to indicate 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).

47.

All too often, the first monitoring reports (36) by the Delegations in the five countries visited are limited to a static analysis 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 table on the monitoring of public finance reform is lacking (see Box 4). Better use should be made of them by the central services, 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

48.

The performance indicators are negotiated with the government (a cosignatory to the financing agreement), and are usually 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 enormously from one country to the next.

49.

The indicators for budgetary allocation or implementation 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 effectiveness. The indicators used in Ethiopia, Mozambique and Zambia are rather weak in this respect. On the other hand, the indicators in Niger and Chad (38) offer more incentive (see Box 5).

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

50.

On another matter, the financing agreements do not 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.

51.

Subsequent to its exercise on ‘conditionalities’ in 2005, it 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 paragraphs 4 and 5 in Annex 3).

52.

The Guide rightly stresses the need to work, as far as possible, 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 communication between these two levels within each donor organisation. 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) (43), in which the Commission plays a leading role.

54.

Locally, coordination is generally satisfactory but not always sufficiently structured (see box 6). It is constantly evolving because it takes time to build up a voluntary-membership network 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 visited, 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 visited

55.

The Commission does not have access to full information 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.

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).

57.

The government is the Commission's partner and cosignatory 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.

58.

The parliament plays an important part in advancing those reforms, especially where they relate to budget programming and follow-up of the SAI's audit reports. It is of fundamental 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 Commission, 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 (44) in the set of information 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 (45). 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.

Box 7 — Examples of insufficient dialogue with Supreme Audit Institutions

61.

The Commission, in coordination with other donors, must continue to develop a methodology to provide the SAIs with appropriate institutional support (47), 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 parliament and the SAI, is not necessarily best placed to discuss measures 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.

63.

The audit visits showed that the human resources assigned to monitoring public finance reforms were sometimes insufficient.

64.

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

65.

The resources available to the central services are deemed 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 situation could be improved by rationalising the use of the available resources (48).

66.

In addition, certain tasks, such as the analysis of financing proposals and the Delegations' monitoring reports, should be systematised through the introduction of checklists (49). These would make it possible to ensure that the work carried out is both comprehensive and homogeneous and would facilitate activity reviews.

67.

The Commission should continue its endeavours to provide more extensive public finance training for its employees (50).

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.

69.

The audits in the five countries did not reveal any significant differences between the information provided by the Commission and the situation on the ground (with the exception of the problem referred to in paragraph 38).

70.

The public finance management systems are affected by numerous weaknesses (51) that are often accentuated in peripheral authorities such as municipalities, and budget aid remains exposed to a significant risk of misuse. However, many important 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 programming (more consistent with the poverty reduction strategy), the implementation of revenue (52) and expenditure (in particular the simplification and frequent computerisation of circuits, rationalised 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

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 Commission in particular reveals reasonably positive partial interim results.

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 suspend a programme, amend it by agreement with the country concerned, 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 Commission suspended payment to Chad of the first (fixed) tranche of 20 million euro following the interruption of the IMF programme (53).

73.

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

74.

As public finance management reform is a medium to long-term process, each programme renewal should be taken as an opportunity to adjust the ‘conditionalities’ of budget aid (preconditions, 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.

75.

The Court's audits provided the following answers to the questions raised in paragraph 19.

76.

The Commission has defined a methodological framework to enable it to assess the initial situation and subsequent development of the beneficiary countries' public finance management (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 recommendations 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 implement, 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.

79.

Similarly, the Commission has no control over coordination among donors, although it plays a leading role at headquarters level, mainly with the World Bank, in the context of PEFA (see paragraph 43). In ACP countries coordination nevertheless continues to be more problematic and there is a risk of this affecting implementation of the PEFA Measurement Framework in these countries.

80.

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

81.

The Commission's financing decisions, and its reactions 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 Commission to monitor the situation rigorously.

82.

Meanwhile, the Commission's decisions are insufficiently argued (see paragraph 39). The financing proposals and agreements do not make sufficiently clear the relations between the weaknesses detected in public finance management, governments' reform programmes, the institutional support required for implementation of those reforms and the follow-up tools, including 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 provide 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 paragraph 2), largely continue to apply. The recommendations that follow should make it possible to improve the management of those risks.

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 mitigate them, institutional support and follow-up tools (see paragraph 30). In addition, more attention must be given to matters relating to domestic revenue, including revenue from public undertakings (see paragraph 24), and to corruption (see paragraph 34). The Guide should also include improvements in connection with the Delegations' monitoring reports (see paragraph 42).

85.

The Commission should demonstrate in a more formalised and structured manner, setting out the reasons leading to its conclusion that the direction being taken by a beneficiary country 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 assessment (see paragraphs 39 and 40).

86.

The Commission should make use of performance indicators 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 partnership) adopt and implement the Framework in the near future.

88.

Coordination between donors' local representatives should be strengthened as regards the production of assessments, evaluations and audits, the implementation of institutional support 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).

89.

Relations with the authorities in the beneficiary States should be systematically structured and taken beyond the government 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 matter 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 paragraphs 56 to 62).