Select Committee on European Union Fortieth Report


Letter from the Chairman to Rt Hon Hilary Benn MP, Secretary of State for International Development, Department for International Development

  Thank you for your Explanatory Memorandum dated 11 July 2006 which Sub-Committee C considered at its meeting on 20 July and which Sub-Committee A considered at its meeting on 25 July. We have agreed to clear the document from scrutiny.

  We welcome the Report which raises a number of issues concerning the implementation of external assistance on which we would appreciate your views.

  The Report comments on the Commission's proposals for the new financial instruments and thematic programmes. Whilst acknowledging concerns expressed by the Council and European Parliament, the Report does not address developments late in 2005 such as proposals for splitting the DCECI, for creation of a new Democracy and Human Rights instrument, or for incorporating the thematic programmes within the other instruments. Whilst this is a Report on 2005 activities only, having been published in June it would have been preferable to see a more up-to-date analysis.

  €6.2 billion was spent on aid by the EC in 2005—up from €5.7 billion the previous year. The full Report states that this demonstrates that the Commission "can deliver effectively and rapidly on its commitments so that the money reaches those who need it." This improvement is welcome given a recent report published by Save the Children which argued that the Commission had the worst global disbursement record with only 40% of its committed budget support disbursed between 2002 and 2004.

  In 2000 4.94 years were needed on average to implement commitments entered into. In 2005 this had decreased to 3.33 years. The reforms launched in 2000 (the subject of a former European Union Committee Report EU Development Aid in Transition—12th Report of Session 2003-2004 HL Paper 75) thus appear to be working, though it is difficult to say whether the improvements are adequate.

  The 2005 European Consensus on Development confirmed the Commission's new approach to increased use of budget support. In 2005 the total amount of budget support commitments, around €1.55 billion, represented nearly 20% of total commitments. The Report states that this "demonstrates a slow but positive trend in the use of the new aid modalities... Nevertheless, overall targets fixed for budget support commitments were not reached in 2005, largely due to political and specific in-country issues."

  The process of simplifying EC procedures was one of the Commission's priorities for 2005. A number of reviews have taken place, with most proposed changes still under consideration and likely to come into effect in 2007. Changes include, for example, an improved presentation of procedures, a simplification of the language used, and harmonisation of the terminology to ensure coherent application of the rules. The 2006 Annual Report should contain a full analysis of the agreed changes.

  On aid management and, in particular, on assuring good financial management of external assistance projects, Sub-Committee A noted the references made in sections 5.1.1, 5.1.2 and 5.1.3 of the Commission's report and paragraph 6 of your Explanatory Memorandum. However, given the current concern within the Commission and the Member States to improve the quality of financial management we would appreciate a fuller analysis of the actions taken. We would also like your view of whether these are sufficient to ensure that appropriate analysis is made of the risks of financial mismanagement or fraud occurring in these schemes; and of whether this analysis is properly incorporated into the design of the programmes.

  We look forward to receiving your comments on all these matters.

25 July 2006

Letter from Rt Hon Hilary Benn MP to the Chairman

  Thank you for your letter of 25 July responding to my Explanatory Memorandum dated 11 July and informing me that the committee met on 20 July and cleared the document from scrutiny. You asked for my views on four issues: the need for the Report to present more up-to-date analysis of new financial instruments and thematic programmes; progress with reforms aimed at increasing the speed and effectiveness of Commission assistance; progress made with simplifying EC procedures; and the adequacy (or otherwise) of improvements to the quality of financial management for the purposes of managing risk and reducing fraud.

  I shall deal with the first and third of your requests together. The UK has consistently asked for Annual Reports to be forward looking. In Working Group meetings, we have urged the Commission to draw lessons from past experience, and comment on changes which will be made as a result. While the Reports have on the whole improved over the years, the Commission still limits its reporting to completed actions, and does not comment on events (or plans for activities) which occur after the end of the calendar year. Thus, the Report makes no comment on developments with regard to new financial instruments or on the simplification of Commission procedures, as neither of these issues was resolved in 2005. The UK will urge the Commission to provide an analysis of the new instruments and the new simplified procedures in the 2006 Annual Report.

  I agree that despite progress in recent years, Commission aid must become faster and more effective. While the Save the Children report argues that the Commission had the worst disbursement record on budget support compared to four well-performing bilateral development agencies, it also notes that "the EC is more likely to disburse on time than other multilaterals" including the World Bank and International Monetary Fund.

  You asked for a fuller analysis of the steps taken to improve financial management and whether they lead to a proper assessment by the Commission during the project design phase of the risk of financial mismanagement or fraud. Two of the most important measures are the development by EuropeAid of mechanisms and indicators to promote sound financial management; and the deconcentration (decentralisation) of project management to Commission delegations.

  All projects and programmes are now assessed by a team of Commission officials against a dozen indicators during the preparation and implementation phases. These indicators include institutional capacity issues, monitoring and evaluation systems and risk management. Changes can be made to projects and programmes accordingly. As regards deconcentration, the 2005 Court of Auditors' Report on deconcentration concluded that robust financial management procedures are generally ensured under devolved management. The Commission's Annual Report describes further measures taken in 2005 to help Delegations carry out quality checks at the design phase of projects and programmes.

  Much development assistance, regardless of the donor, is delivered in inherently difficult and risky environments. But the right balance needs to be struck between ensuring both timely provision of aid and proper use of funds. Overall, I believe that the EC has struck a reasonable balance and has the structures and procedures in place to analyse the risks of financial mismanagement and alter the design of their programmes accordingly.

1 September 2006

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