10 Effectiveness of development assistance
to India; underspent European Development Funds
| (a)
(24744)
11525/03
—
(b)
(24893)
12658/03
COM(03) 491
|
Special Report No. 10/2003 concerning effectiveness of the Commission's management of development assistance to India in targeting the poor and ensuring sustainable benefits.
Commission Communication on financial information on the 6th, 7th and 8th European Development Funds 2002.
|
| Legal base | — |
| Department | International Development
|
| Basis of consideration | Minister's letter of 6 November 2003
|
| Previous Committee Report | HC 63-xxxiv (2002-03), paragraphs 5 and 7 (22 October 2003)
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| To be discussed in Council | No date set
|
| Committee's assessment | Politically important
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| Committee's decision | (Both) cleared
|
The European Court of Auditors report
10.1 The European Court of Auditors (ECA) report assessed the
effectiveness of eight EC-financed development projects and programmes
in India.
10.2 The report noted the potential advantages of
sector-wide approaches (SWAPs) over project-based ones but commented
that "one consequence, however, is that donors cannot trace
how their funds have been used". The Court recognised the
value of nationwide sector programmes but stressed that donors
needed to have sufficient confidence in the capacity of the beneficiary
country's administration to manage sector-wide programmes and
to account for their implementation, results and costs. It recommended
that, when considering contributions to sector programmes through
budget support, the Commission, together with other donors, should
ensure beforehand that the country concerned has satisfactory
reporting, accounting and auditing systems for managing its public
finances.
10.3 When we considered this document on 17 September,
we were concerned that donors other than the EU had not engaged
in SWAPs in India because, according to the report, they wanted
"to ensure direct control of the use of their funds".
We therefore asked the Minister whether he was confident that
the EU funds would be accounted for in accordance with acceptable
standards. The Minister replied that other donors did not have
concerns about the Indian Government's financial management systems
and that it was because SWAPs are a relatively new concept in
India that no other donors are supporting that approach. We found
this reply less than reassuring and on 22 October, asked the Minister
again whether the UK Government itself is confident that the funds
will be accounted for in accordance with acceptable standards.
[17]
The Commission Communication
10.4 The European Development Fund (EDF) is the main
instrument for development cooperation between the European Community,
the ACP countries[18]
and the Overseas Countries and Territories (OCT). In April 2003,
the 9th EDF became operative and all unspent funds
from previous EDFs were absorbed.
10.5 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.
10.6 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."
10.7 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."
10.8 When we considered this document on 22 October[19],
we emphasised that the increased resort to quick disbursing instruments,
such as direct budget support, should be accompanied by a rigorous
check on the financial and audit systems of the beneficiary country,
so that the EU funds concerned can be accounted for in accordance
with acceptable standards.
10.9 The ECA has emphasised for some time in its
Special Reports, including that on development assistance to India,
the need for the Commission to ensure, before contributing to
budget support, that the country concerned has satisfactory systems
in place. We therefore asked the Minister whether he was confident
that support in the form of direct budget contributions to poor
countries in crisis was being adequately and effectively monitored,
or whether improved arrangements needed to be put in place.
The Minister's letter
10.10 The Minister has replied to the questions
on both documents as follows:
"In order to reach an acceptable standard of
public financial management, most developing countries will have
to make substantial and sustained investments in upgrading systems
and developing the skills to operate and maintain them. Progress
on this is constrained by the lack of suitably qualified staff.
"My Department together with the EC, World Bank,
IMF and other bilateral donors are partners in the Public Expenditure
and Financial Accountability (PEFA) programme which is seeking
to strengthen recipient and donor ability to diagnose the condition
of public expenditure and financial accountability systems and
develop a practical sequence of reform and capacity building actions.
This joint approach will seek to improve donor harmonisation
in this area and explicitly address fiduciary concerns and lead
to improved impacts of developmental reforms. PEFA participants
are seeking to develop a standardised assessment which can be
used by the donor community and the recipient government to both
assess the quality of public financial management systems, benchmark
performance for future monitoring and develop tools to improve
the impact and effectiveness of reform programmes. Working collectively
on this agenda will be a far more effective proposal than working
individually as donors.
"Discussions have also taken place with the
European Court of Auditors in the context of meetings between
the Utstein partners of Supreme Audit Institutions. They are
supportive of the approach that DFID has been developing and the
wider donor engagement in developing systems of fiduciary appraisal."
10.11 In relation to the specific comments on document
(b), the Minister says:
" 'The ECA has emphasised 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.' DFID does not set
a minimum standard for its own budget support and would not expect
the EC to impose such a standard; it would however seek assurance
that the following criteria have been specifically and explicitly
addressed:
— a thorough evaluation of public financial
management and accountability systems, and associated risks, has
been carried out;
— the government has a credible programme
to improve standards of these systems;
— the potential development benefits justify
the risks, taking account of any safeguards that can be put in
place to buttress and develop these systems; and
— these assessments are explicitly recorded
as part of the decision-making process to provide assistance."
Conclusion
10.12 The Minister does not give us an assurance
that beneficiary countries such as India will have satisfactory
systems for public expenditure and financial accountability before
budget aid is given, as recommended by the European Court of Auditors.
He says that his Department does not set a minimum standard and
would not expect the EC to set one, though it would seek an assurance
that certain criteria had been specifically and explicitly addressed.
Instead, the Minister acknowledges that most developing countries
need to make progress in order to reach an acceptable standard
of public financial management, and that this is constrained by
the lack of suitably qualified staff. Assessments are made of
the risks and are taken into account in decision-making.
10.13 The Minister emphasises the work carried
out collectively with other international donors on the Public
Expenditure and Financial Accountability Programme, which is seeking
to improve the assessment of public financial management systems
and promote reform and capacity-building in this area. He tells
us that the European Court of Auditors is supportive of this approach.
10.14 We thank the Minister for this information.
Since his reply falls short of an assurance about the current
reliability of developing countries, we ask the Government to
keep a close eye on how programmes which provide direct budgetary
support to these countries are managed and monitored by the Commission.
10.15 We now clear this document.
17 For reference, see headnote. Back
18
African, Caribbean and Pacific countries which are parties to
the Cotonou Agreement. Back
19
See headnote. Back
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