House of Commons - International Development

Select Committee on International Development First Report

THE FUTURE OF THE EC DEVELOPMENT BUDGET

Underspends

35. One of the key concerns put to the Committee during this inquiry has been the allocation of resources to programmes which are politically important at the expense of those which are developmentally important. This is all the more shocking given that programmes which focus on better off developing countries consistently underspend. A general trend showing consistent underspends across Category 4 expenditure is demonstrated in Table 6 below.

Table 6: Disbursement rate of EC Category 4 Budget, 1993-97

(Million Ecu)

1993
1994
1995
1996
1997

Financial Perspective
4,120
4,311
4,895
5,264
5,622

Budget (Commitments)
3,407
3,289
4,094
4,520
4,860

Commitments
3,191
3,191
3,769
4,247
4,486

Annual Budget for Payments
2,139
2,375
3,204
3,723
3,921

Actual Payments
1,954
2,159
2,377
2,753
2,950

UNDERSPEND
(Annual budget for payments minus actual payments)

185
216
827
970
971

Sources: General Budgets of the EC 1994-98, Draft General Budget 1999

Note: Within each annual budget, emergency aid reserves appear under Category 6, separate from the external action category. Out-turn figures for Category 4, which are published in subsequent annual budgets include expenditure of both the budget for humanitarian aid and any expenditure of emergency aid reserves, but these two sources of funds are not separated out. We have therefore excluded emergency aid from our calculations of budgets for commitments and payments.

36. Table 6 shows that annual budgets fall consistently and increasingly below the ceilings set out in financial perspectives.[77] This is not necessarily something we would criticise, given that financial perspectives are ceilings rather than targets, and in light of DFID's explanation that "these trends reflect stricter budget management than in previous years."[78] It does, however, lend credence to DFID's argument that Category 4 ceilings should be stabilised over the seven years covered by the new Financial Perspective,[79] reflecting a more realistic expectation of the amount of external action resources which can be managed by the Commission. This point is further demonstrated by the failure of the Commission actually to make financial commitments in line with the figure for commitments in the annual budget. In 1997, for example, the Commission made commitments amounting to 92 per cent of the budget for commitment appropriations.[80] Table 6 shows that in the period 1993-1997, the Commission made commitments which, on average, amounted to 93 per cent of its budget for commitments.

37. The new Financial Perspective proposes a cut in the rate of growth in the Category 4 budget from an average of 9 per cent per year from 1993-99 to around 2 per cent per year from 2000-2006. It is clear that the rapid increase in the Category 4 budget from 1993-99 has been a significant factor in producing the situation which now exists: budgetary allocations are being made which simply cannot be implemented. Richard Manning told us that "anybody in the development business would say that the hardest thing is to manage a sharply rising programme."[81] This point is demonstrated in Figure 2, which shows that the ability of the Commission to disburse funds has not increased in line with the rapid increase in its budgetary allocations over recent years.

38. In the light of these problems, DFID is proposing a further cut in the rate of increase in Category 4 budget ceilings, beyond that which has been proposed by the Commission: "Given the rapid growth of the EC's external assistance programmes over recent years, and concerns over the quality of these programmes, the Government considers that lower Category 4 ceilings for 2000-2006 than those proposed by the Commission would be appropriate."[82] Richard Manning did not think that "additional resources can easily be spent effectively given the other constraints which exist."[83] In fact Clare Short wanted "to constrain [Category 4] to the amount it is now and then put a bit of energy into increased effectiveness as the practical way of making progress."[84]

39. Once resources have been committed to a particular project, payments are usually made over a prolonged period. This is one of the reasons for the practice of setting separate annual budget allocations for commitments and payments, with the budget for payments usually being set lower than the budget for commitments. The OECD DAC peer review of the EC suggests, however, that in the EC, the gap between commitments and disbursements is unacceptably large, concluding that, "A significant gap between amounts committed for ODA and actual disbursements has become a persistent concern in the Commission's programmes in the 1990s. Between 1992 and 1996, ODA commitments exceed disbursements by about $1600m each year, with the gap having reached more than $2200m in 1994."[85] This assessment is reinforced by an examination of the extent to which the Commission succeeds in disbursing the amounts which it predicts in its annual budgets.

40. Table 6 clearly shows that over a period of five years, the Commission has failed to disburse payments in line with its budget for payments, which is already significantly less than its budget for commitments. Figure 2 demonstrates this trend in graphic terms.

Figure 2: Difference between annual budget for payments and actual payments for Category 4 expenditure 1993-97 (Excluding Humanitarian and Food Aid) (Million Ecu)

Sources: General Budgets of the EC 1994-98, Draft General Budget 1999

The OECD DAC suggest this inability to disburse the allocated budget, "can be attributed to a range of factors, some within the Union's sphere of influence - such as low staffing levels and complex administrative procedures slowing down implementation - and others beyond it - such as the absorption rate and administrative capacities within recipient countries."[86] Philip Lowe posed the following question in evidence: "Why can the World Bank safely disburse probably more than the Commission does in most of these countries? The answer is that the World Bank has a system which is geared to doing this, the Commission does not. The problem is that the amount of money does not match the delivery mechanism."[87] It is not enough, however, simply to blame underspends on the inefficient management of the Commission. The fundamental mistake has been to allocate excessive funds in the first place for predominantly political reasons.

41. A closer examination of patterns of budgetary discipline within particular Category 4 programmes reveals the political nature of these demands. The Phare, Tacis and MEDA programmes, all of which are close to the top of the political agenda of the Union, have particularly poor records of budgetary implementation. The difference between budgeted and actual payments for these programmes are shown in Figures 3, 4 and 5 below.

Figure 3: Difference between annual budget for payments and actual payments for the MEDA programme, 1993-97 (Million Ecu)

Sources: General Budgets of the EC 1994-1998, Draft General Budget 1999

Figure 4: Difference between annual budget for payments and actual payments for EC Cooperation with CEECs (Phare), 1993-97 (Million Ecu)

Sources: General Budgets of the EC 1994-98, Draft General Budget 1999

Figure 5: Difference between annual budget for payments and actual payments for EC Cooperation with the New Independent States and Mongolia (Tacis), 1993-97 (Million Ecu)

Sources: General Budgets of the EC 1994-98, Draft General Budget 1999.

42. The DAC estimates that backlogs of payments (defined as budgetary commitments for which contracts had not yet been signed) at the end of 1996 amounted to 2.3 billion ecu for CEECs, covered by the Phare programme.[88] Despite a clear trend in underspends in the Phare programme over recent years, which is shown in Figure 4, the 1999 Preliminary Draft Budget presented by the Commission included a proposed increase in the budgetary allocation for aid to CEECs of 29 per cent. We met Catherine Day, the Director of the Phare programme in Brussels, who informed us of measures which had been taken to improve the record of the Phare programme in implementing its allocated budget. These reforms had included the introduction of a 2-year time limit within which a contract must be signed following a commitment, and a further 12 months within which disbursement of funds must take place. The Commission was now more sophisticated in its selection of projects, and did not sign contracts until its projects were ready for implementation, thus reducing the potential for project failure after contracts had been signed. As a result, in 1997 the backlog of committed but undisbursed funds had stabilised for the first time. Tangible results of the reforms of the Phare programme are, however, yet to be seen because as yet, of commitments made during 1996, only 20 per cent have been translated into payments. Similarly, of funds committed made during 1997, only 23 per cent have been disbursed.[89]

43. For new independent states, which are covered by the Tacis programme, the DAC estimated the payments backlog at the end of 1996 to be 0.7 billion ecu.[90] The pattern of underspend in the Tacis programme is shown in Figure 5. DFID attributes the failure of the Tacis programme to disburse the available resources to the following factors: "the late agreement of the current regulation; staff shortages in DGIA; lengthy administrative and financial procedures; and a lack of absorptive capacity (the ability to identify appropriate projects) in partner countries. These constraints have led to a backlog of commitments, or projects agreed with partner countries, for which the Commission has yet to enter into contracts with project operators."[91]

44. A clear indicator of a lack of ability to manage the available budget is the fact that the Tacis programme has developed an atrocious record in making payments to NGOs and contractors. The British Consultants Bureau (BCB) has been particularly trenchant on this issue:

We were told by the Director of the Tacis programme, Mr John Kjaer, during our visit to Brussels, that steps were being taken to rectify these problems. The establishment of the Common Service Directorate (SCR), which we discuss later in this Report, would go some way to improving the efficiency with which payments were processed. The number of staff working on payments had been increased, a set of uniform contracting rules had been implemented, and the number of payments to be made under each contract had been reduced. It was expected that these measures would begin to address the problem of late payments.[93]

45. It must be remembered that Phare and Tacis are not development programmes, although the Tacis programme does disburse some ODA, and we can only hypothesise on the extent to which funds allocated to Phare and Tacis which remain undisbursed would have been allocated to other more poverty-focussed programmes within Category 4. What is clear, however, is that funds appear to have been repeatedly allocated to the Phare and Tacis programmes which, for whatever reason, have been unable to disburse those resources. This demonstrates an unacceptable over-emphasis on political priorities during budget allocation discussions, with a lack of attention to whether the money could be spent effectively, or indeed whether it could be disbursed at all.

46. As has already been noted, our primary concern in this inquiry is the allocation of official development assistance, rather than the official aid of the Phare and Tacis programmes. We are therefore particularly concerned to note the poor record of underspends by the MEDA programme, which became significantly greater during the period 1995-97, when the budget was increased at a rapid rate, as is demonstrated in Figure 2. A Commission Report on the Implementation of the MEDA programme during the period 1995-97 reported that "for the period 1995-97, cumulative payments have reached ECU 417 million, or 26.7 per cent of commitments made over the same period."[94] The Court of Auditors report on the Financial Year 1997 shows that during 1997, the MEDA programme committed 98 per cent of its budget for commitments, but disbursed only 64 per cent of its budget for payments. The Report went on to suggest that an increase in the level of funding for the MEDA programme would only serve to exacerbate existing problems.[95] Despite this fact, the 1999 Preliminary Draft Budget proposed by the Commission included only a minute cut in the budget — 6.7 million ECU out of 1,149.7 million ecu, less than one per cent of the budget.

Figure 6: Difference between annual budget for payments and actual payments for EC Cooperation with Asia and Latin America (ALA), 1993-97 (Million Ecu)

Sources: General Budgets of the EC 1994-98, Draft General Budget 1999.

47. When we met Mr Enrico Cioffi, Director-General DGIB, which manages both the MEDA and ALA programmes, he told us that the ALA programme would not be able to absorb any further funds, and that it was therefore not possible to increase the proportion of ODA being spent in that region.[96] We have evidence which directly refutes this. The result is that money remains unspent which could have been directed to Asia, which contains 950 million of the 1.3 billion people in the world who live on less than $1 a day. Figure 6 shows that, in fact, the ALA programme has a record of budgetary implementation which far exceeds that of the MEDA programme. In 1997, for example, the ALA programme committed 99 per cent of the available appropriations for commitments, and disbursed 93 per cent of its budget for payments, which was unique among all the external action programmes in that it set appropriations for payments at a level higher than the budget for commitments. Clare Short told us in evidence, "I think it is absolutely untrue to say Asia lacks the capacity to absorb [an increase in its budget]. Asia is a very big place. It is a very sophisticated continent in which we have very big programmes."[97] We agree with Clare Short's analysis. Despite this, the 1999 Preliminary Draft Budget, proposed by the Commission, suggested a cut in the budget for the ALA programme.[98] We therefore support DFID's call for a decrease in the allocation of resources to the MEDA programme, with a corresponding increase in the budget for the ALA programme.[99]

48. Philip Lowe, Director-General of DGVIII, pointed out to us that the budgetary discipline, or lack of it, evident in the EC was far below the standard expected of its peers. He suggested that the EC must adopt such procedures: "that is we forecast a budget which we plan to meet 100 per cent and we tell the member states at the beginning of the year how much the contributions shall be and we stick to it and we do not take any more or any less than what we say at the beginning of the year ... that is the normal budgetary mechanism of every national administration, and by the way it is the normal budgetary mechanism which other parts of the Commission respect."[100]

49. The excessive underspends in so many of the Community's external programmes reveal a Commission unable to manage and disburse its resources but unwilling for political reasons to take the necessary budgetary action. In the light of such underspends, we agree with the Government that there should be no increase in Category 4 funds in the new Financial Perspective. The Commission should concentrate on managing its current level of funding and on distributing those funds more generously to the poor.

50. Over recent months, serious allegations of fraud and financial mismanagement within the Commission have been raised. These have referred in particular to the MEDA and ECHO budget lines. This is a matter of great concern to the Committee, and we await with interest the results of current European Parliamentary investigations. We are not surprised, however, to see such concerns emerging from a Community where there are huge discrepancies between political priorities and administrative capacity, over-commitment of funds to programmes which cannot disburse them effectively, and serious delays in the payment of some accounts.

77 Evidence, p.3 Back

78 Evidence, p.3 Back

79 Q222 Back

80 Official Journal of the European Communities 'Court of Auditors: Annual Report concerning the Financial Year 1997' C349 vol. 41 1998 (English Edition) p.91 Back

81 Q44 Back

82 Evidence p.3 Back

83 Q25 Back

84 Q222 Back

85 OECD DAC Development Cooperation Review Series No. 30, 'European Community', 1998, para 0.42 Back

86 OECD DAC Development Cooperation Review Series No. 30, 'European Community', 1998, para 333 Back

87 Q43 Back

88 OECD DAC Development Assistance Review Series No. 30, 'European Community', 1998, para 302 Back