Poor results of EU aid to the poorest country in Europe
Wednesday, 07 September 2016
EU financial support to Moldova, aimed at strengthening the country’s public administration, has had only a limited effect, according to a new report from the European Court of Auditors (ECA).
“The EU faces significant challenges in implementing assistance for Moldova”, said Hans Gustaf Wessberg, the ECA Member responsible for the report. “The combination of political and macroeconomic instability, weak governance and public administration significantly reduces the European Commission’s leverage to encourage reform”.
Referring among others to international indicators, ECA writes that public institutions in Moldova suffer from excessive bureaucracy, a lack of focus on core functions, a high turnover of staff, and, consequently, low efficiency. Corruption also remains an issue, with Moldova ranking 103rd out of 168 in the 2015 Transparency International corruption perceptions index.
With a per capita GDP of 1 687 euros, Moldova is the poorest country in Europe. Since 2007, it has been allocated EU aid amounting to €782 million which represents nearly €37 per inhabitant per year, the highest amount among the EU’s eastern neighbours.
The main aid delivery method used in Moldova is so-called sector budget support (SBS) which accounted for 74 % of the total EU aid paid out in 2007 – 2015. Budget support involves the transfer of funds to the national budget of the partner country and is contingent upon its compliance with agreed conditions for payment.
In the past external aid was given to specific projects but this delivery form has largely been replaced by budget support. While budget support is intended to increase the partner country’s ownership of the aid and reduce transaction costs, it risks being wasted if given to a country that lacks an adequate public financial management system and if the conditions for payment are not met.
For this reason country systems should be certified by the Commission but this was not the case in Moldova according to the audit report. Asked by The Brussels Times, the audit team added that accreditation of country systems is commonly not done in neighborhood countries.
ECA examined whether the EU assistance had contributed effectively towards strengthening the public administration in Moldova. Its sample covered four budget support programmes in the sectors of justice, public finance, public health and water. It also included 20 projects in various public authorities. All in all, 40 % of the bilateral EU aid contracted since 2007 was examined.
The auditors found only limited evidence of progress in the budget support programmes. External factors such as lack of political will from the national authorities explained some of the shortcomings. Others were due to weaknesses in the design and implementation of the sector programmes.
Another factor that could explain the poor performance was that there were substantial delays between the start of the programmes and the specific technical assistance to the Moldovan administration to help it managing them.
That said, the Commission did reduce payments due to partial achievement of performance criteria. Following a banking scandal involving three Moldovan banks, the Commission decided in July 2015 to suspend budget support payments, pending an agreement between the International Monetary Fund and Moldova.
As regards assistance channeled through projects, the auditors found that project designs were generally relevant and that the projects were partially effective in strengthening the public administration. However, the scope and timing of projects was not always well coordinated with the budget support programmes.
The audit shows that the majority of 22 conditions for budget support were not met or only partially met. Despite its criticism, the audit team did not question whether the basic conditions as a whole were met or which aid delivery modality should have been preferred by the Commission.
The audit team confirmed that some issues were outside the scope of the audit. The choice of whether or not to use budget support is essentially a Commission’s decision, according to the audit team. The team did not formulate any opinion on the ministries in charge of the sector programmes or on the functioning of aid coordination in Moldova.
However, ECA highlighted the risks associated with using budget support already in audit reports on aid to other countries in 2005 and 2010.
As usual, the replies of the Commission have been added to the audit report but not been commented upon or taken into account in the report itself. While expressing reservations about the report and defending its sector approach in Moldova, the Commission briefly accepts all audit recommendation on how to improve the implementation of sector budget support.
Indirectly, however, the Commission acknowledged the weaknesses in sector budget support and the limitations of controls and audits once the funds are transferred to the partner country:
“Sector Budget Support other than targeted Budget Support is designed to reward results rather than to finance activities. Therefore it is clear that controls and audits in general cannot go beyond the stage where funds are transferred following the achievement of agreed conditions. Budget support operates in a development context where core government systems such as public financial management can have major weaknesses.”
During the audited period, Directorate General for International Cooperation and Development (DG DEVCO) was responsible for managing the financial aid to Moldova. Since 2015, Directorate General for European Neighbourhood Policy and Enlargement Negotiations (DG NEAR) has taken over the management of aid to the neighbourhood countries.
According to its annual activity report, the use of “management mode” differs significantly between the neighbourhood countries (in North Africa, Middle East and Eastern Europe) and the enlargement countries (Western Balkans and Turkey). While budget support accounted for 22 % of all payments to the neighborhood countries in 2015, it was less than 1 % in the enlargement countries.
However, the reader will hardly find any reference to the Directorates-General (DG) involved and their responsibility for the decisions taken. Arguably, the accountability for any shortcomings reported by ECA could be diluted since the audits do not relate the findings and recommendations to specific DGs or departments but to the Commission as a whole.
ECA explains that the DGs cannot be in any doubt as to whom its reports are addressing. The reports are always discussed with the relevant DGs during the audit and the final contradictory stage. They are also invited to public hearings at the European Parliament to answer questions from MEPs.