More than half of the European Commission’s development aid to the world’s poorest countries goes directly to their treasuries rather than to specific projects. Donor agencies have until recently seen this ‘budget support’ as a way of encouraging beneficiary governments to take ownership of development strategies, instead of remaining passive recipients. But some of the problems associated with budget support have made donors – including the Commission – review their approach, particularly as austerity budgets have heightened concern for the effectiveness of the aid.
The Arab uprisings highlighted the risks of providing budget support to regimes of questionable democratic credentials. EU direct aid worth billions of euros was supporting autocratic governments, with few safeguards about its use. Budget support – especially general budget support, which is not tied to particular policy areas – closely associates donors with the policies of recipient governments.
The €110 million in sectoral support to Egypt’s health sector in 2009 may have served an important purpose – but the aid nevertheless benefited an undemocratic government.
When donors are providing general budget support, calls for reform in the beneficiary countries may be less likely to be taken on board than if the aid is tied to specific projects, the other main way of providing aid (see box).
Last month’s overhaul of the EU’s European neighbourhood policy aims to tighten the conditions under which aid is given. Aid is usually provided with conditions attached, and the EU has on occasion suspended budget support; earlier this year, it suspended sectoral budget support to Ukraine because of concerns about changes to the country’s public procurement law.
But last year, the European Court of Auditors criticised the Commission for failing to ensure that disbursement of EU money to national treasuries was in fact used to support development goals.
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However, as international donors seek to meet their self-imposed target of providing at least 0.7% of their gross national income as aid, the desire to process higher volumes of aid makes budget support, with lower administration costs, a more attractive option.
EU officials disbursing aid have long worried about the possibility that money will be diverted once it enters a country’s domestic budget and becomes difficult to track. The concerns extend beyond embezzlement to the use of funds for purposes that run counter to development goals, such as buying weapons.
What is budget support?
Development aid comes in two basic flavours, budget support and project financing.
Budget support goes directly to a recipient country’s national treasury. In order to qualify, recipient countries are required to have fully articulated general development strategies (in the case of general budget support) or strategies in particular sectors such as health or education (for sectoral budget support). They also have to demonstrate that they have sound public financial management systems. Procurement and accounting is run by recipient governments according to their own rules.
General budget support is provided through a recipient country’s finance ministry, while the primary interlocutors for sectoral budget support are the relevant ministries.
Around 25% of the European Commission’s aid committed in 2003-09 was given in the form of budget support; in Africa, the Caribbean and the Pacific, the share was 56%. The EU is the international donor with the highest share of budget support.
International donors still provide most aid through project financing. Donors set the parameters of such projects and apply their own procurement rules. Projects are typically implemented by private – often international – aid agencies.
On the surface, the risk of losing touch of donor money appears higher for budget support than for project financing. Where donors finance projects directly, they use their own management systems, and there is a direct link between financial support and the development outcomes achieved with it.
Using budget support, donor money becomes part of national budgets and hence ‘disappears’: it is often difficult to trace what exactly such funds have been used for. This sometimes has the effect of prompting governments to provide budget support in sectors where policy outcomes can be more easily monitored, rather than those where it is most needed.
These dilemmas have fuelled debate on two issues in particular: the conditions that donors use to determine whether a government is ready to receive budget support, and the mechanisms that they put in place to deal with abuses or non-performance. These are raised in a discussion paper on budget support drafted by the Commission’s development department last year. Andris Piebalgs, the European commissioner for development, told the German parliament’s development committee earlier this year that the EU ought to use budget support “more selectively and with far greater determination” and that this would help deliver “identifiable, measurable and tangible results”.
The paper, and the results of a subsequent consultation, are supposed to assist Piebalgs in preparing a paper on budget support that is scheduled for publication in the autumn. The communication is part of preparations for the EU’s next multi-annual framework for spending, which is to start in 2014, and a co-ordinated approach to budget support that member states’ development ministers are scheduled to adopt in November. More co-ordination is supposed to relieve recipient governments of the need to demonstrate compliance with different sets of demands from different donors.
The European Parliament is to vote next month on its contribution to the debate, prepared by Charles Goerens, a Liberal MEP from Luxembourg. The Goerens report draws attention to the difficulty of simply interrupting budget support in cases where recipients fail to uphold their part of the bargain – the danger that suspension will hit hardest the people who need it most.
Piebalgs is now suggesting ways out of the dilemmas. At present, general budget support is provided on the basis of reform plans by recipient governments that are often not followed through. The EU, Piebalgs suggests, should start providing aid in instalments that depend on the achievement of measurable targets related to sound government.
Whether or not this approach works will depend on how it is executed. The EU will almost certainly have to get tougher with recipients to restore credibility to the concept of budget support.