Select Committee on European Scrutiny Thirty-Fourth Report


7 Underspent European Development Funds

(24893)

12658/03

COM(03) 491

Commission Communication on Financial information on the 6th, 7th and 8th European Development Funds 2002.

Legal base
Document originated7 August 2003
Deposited in Parliament24 September 2003
DepartmentInternational Development
Basis of considerationEM of 2 October 2003
Previous Committee ReportNone
To be discussed in CouncilNo date set
Committee's assessmentPolitically important
Committee's decisionNot cleared; further information requested

Background

7.1 The European Development Fund (EDF) is the main instrument for development cooperation between the European Community, the ACP countries[9] and the Overseas Countries and Territories (OCT). In April 2003, the 9th EDF became operative and all unspent funds from previous EDFs were absorbed.

The Commission Communication

7.2 This Communication reports to the Council, European Parliament and Court of Auditors on the financial performance of the previous EDFs (6, 7 and 8) for the year 2002. Net spending was €1.853 billion. Of this, the UK contributed around 12.7%, or €222 million. The total was less than the original EC estimate of €2 billion. The main cause of the underspend was the delay in making a large single payment to the European Investment Bank as part of the large Heavily Indebted Poor Countries Initiative (HIPC). Although the final figure was down on the previous year's figure (€2.1 billion), the Commission points out that it was still higher than the average for the previous 12 years.

7.3 A backlog of around €11.3 billion remains unspent from the old EDFs, made up of around €8.4 billion where funding commitments have been made but not disbursed, and of €2.9 billion which has not been committed or spent. The Commission does not regard such a backlog as unusual for major donor agencies and has identified only €1.4 billion of the backlog as "abnormal" or problematic. These are the "sleeping" commitments on which there has been no movement in the last two years and the "historic" outstanding commitments made some time ago which remain unpaid.

7.4 The Commission says that the ACP countries include some of the world's poorest, with serious governance problems. A significant number are in crisis and aid often has to be suspended. It says:

"The 'poverty reduction' and economic performance of those ACP countries receiving direct budgetary aid is variable. If the 'good governance' criteria which the international community sets and the technical conditions agreed for disbursement are not fulfilled, then payments are withheld."

7.5 The Commission says that it is exploring new ways of working in partnership with ACP countries;

"for instance, the increased use of direct part-financing of ACP countries' public budget within an agreed government 'poverty reduction' framework. These 'budgetary support decisions' represented €550 million in 2002, and do away with the long wait for individual project design, implementation and accounting, although partner governments must fulfil certain policy and economic performance 'standards' for payments to be made."

7.6 Other short-term steps taken include fast disbursing initiatives such as contributions to international agencies or donors such as the World Health Organisation and HIPC, and to global funds.

7.7 In the medium term, measures taken to speed up the expenditure of commitments and to stop the continued occurrence of unspent problematic commitments include the introduction into the new EDF Financial Regulation of a "sunset clause", which limits the time between commitment and disbursement, thus unlocking funds, and "deconcentrating" management of resources to delegations.

7.8 The largest share (almost 25%) of EC commitments (planned spending) went to structural adjustment/ direct budget support/ balance of payments support. Transport also received significant resources (around 15%).

The Government's view

7.9 The Secretary of State for International Development (Mr Hilary Benn) says:

"Concern remains over the backlog of unspent money. However, the funds are not sitting in bank accounts. EDF funds are only called down from Member State treasuries when required for disbursement; therefore Member States can spend the funds in other ways if not called down in any given year.

"However, despite this dip since last year, the trend in EDF implementation rates is still upward. Significant progress has been made in changing the system for identifying, unblocking and reallocating funds from 'old' commitments that have not begun spending. This operation is made easier in EDF 9 with the incorporation of the sunset clause in the new EDF9 Financial Regulation.

"The Communication also outlines the process of devolving some responsibility to Commission Delegations in the field. We have welcomed the 'deconcentration' process, although it has been slower to roll out in EDF countries. However, we also believe that effectiveness could be improved with even more delegation of responsibilities, including higher delegated authority, to the Delegations. We hope to see this addressed in further stages of reform.

"The Commission equates better financial performances and increasing disbursement rates with greater effectiveness. This is very important, but the UK will continue to promote a broader notion of effectiveness, which includes a stronger focus on the quality of programmes and on organisational behaviour (e.g. how well partnerships are managed). In policy terms, the EDF performs better than the main EC budget with 89% of funding going to low-income countries (compared with 31% for the budget) and more prolific use of modern development tools, such as joint direct budget support programmes. Poor countries have more say in decision making in the EDF, which we support. New flexibility mechanisms (linked to mid-term reviews) under EDF9 will come into play next year, which will make it easier to move money to countries which are performing in terms of spend".

Conclusion

7.10 The Minister says that the Government will continue to promote a broader notion of effectiveness than the Commission's current tendency to equate better financial performance and increasing disbursement rates with greater effectiveness. We support this aim, though we recognise that slow disbursement rates have attracted considerable criticism in the past, so perhaps it is not surprising that the Commission places so much emphasis on this issue.

7.11 The Commission tells us that a large proportion of the European Development Funds are programmed to the poorest countries, a significant number of which are in crisis. The European Court of Auditors (ECA) has emphasised for some time in its Special Reports, and most recently in its Special Report on the effectiveness of the Commission's management of development assistance to India,[10] the need for the Commission to ensure, before contributing to budget support, that the country concerned has satisfactory systems for reporting, accounting and auditing its public finances.

7.12 In this Communication, the Commission assures us that, if the "good governance" criteria set by the international community, and the technical conditions for disbursement, are not fulfilled, payments are withheld. We recognise that in some of these countries the systems to which the ECA refers may not be state-of-the art, but we emphasise that the increased resort to quick disbursing instruments, such as direct budget support, should be accompanied by a sufficiently rigorous check on these systems and that the EU funds concerned should be accounted for in accordance with acceptable standards. We are not reassured by the Minister's response to us on this issue in regard to the Communication on India. In the case of the present Communication, we ask the Minister whether he is confident that support in the form of direct budget contributions to poor countries in crisis is being adequately and effectively monitored, or whether improved arrangements need to be put in place.

7.13 Meanwhile, we shall not clear the document.


9   Africa, the Caribbean and the Pacific. Back

10   See paragraph 5 of this Report. Back


 
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