§ The Lord President of the Council (Baroness Amos)
My right honourable friend the Secretary of State for International Development has made the following statement.
I am today announcing a £7 million initial UK contribution to the World Bank's Public Financial Management Reform Trust Fund to support the Palestinian Authority.
The Palestinian Authority has been in fiscal crisis since late 2000. Lack of revenues due to economic collapse prevents it delivering services effectively to the Palestinian people. In 2004 its total budget is 1.45 billion dollars. Revenues are expected to be 800 million dollars, leaving a financing gap of about 650 million dollars. Donor budget support in 2003 was 270 million dollars, a sharp fall from 2001 and 2002. The PA has large and growing debts to the private sector and commercial banks. This is an unsustainable situation, and a continued fiscal crisis could lead to the termination of social and administrative services to the population, and poverty (already at over 60 per cent) increasing further.
At a meeting of the Ad Hoc Liaison Committee in December 2003, attended by the Palestinian Authority (PA), Israel, major donors to the PA and other Arab countries, the PA asked the World Bank to create a new mechanism through which donors could provide pooled contributions to support the PA's budget. The Public Financial Management Reform Trust Fund was approved by the World Bank's board on 22 April and launched on 27 April. The objectives of the Reform Fund are to mobilise additional donor resources in support of the PA budget, to harmonise donor assistance in exchange for a commonly agreed reform programme, and to simplify procedures for the PA. Use of direct budget support also reflects World Bank analysis that this is the most efficient of all the emergency assistance instruments currently employed by donors, with substantial macroeconomic and welfare benefits.
An important precondition for creation of the Reform Fund was a satisfactory assessment of the current financial management procedures of the PA. The World Bank has carried out a detailed Country Financial Accountability Assessment (CFAA), which found that major and highly creditable improvements in budgeting and fiscal transparency have been introduced during the tenure of the present Palestinian Finance Minister. Weaknesses in financial accountability remain, related in particular to the lack of adequate public financial statements, inadequate auditing and the undeveloped oversight role of the Palestinian Legislative Council. But the CFAA confirms that the current systems are adequate to 18WS justify World Bank budget support. It also identifies key actions needed to further improve the systems, and these have now been agreed with the PA as performance benchmarks for the Reform Fund. Disbursement of funding will be conditional on achievement of reform benchmarks. This is an approach successfully used by the EC in its recent bilateral provision of budget support to the PA.
The use of donor funds provided to the PA through the Reform Fund will be carefully monitored. Prior conditions for the first disbursement, such as passage of a 2004 Budget Law, and the payment of all security personnel salaries by direct bank transfer, have already been met. Funding will be disbursed in six-month tranches depending on progress with further reforms, such as revised external audit arrangements, containment of the wage bill, maintaining a minimum level of social sector expenditure, and full control of the Ministry of Finance over all PA procurement. World Bank staff will monitor the implementation of the benchmarked actions on a regular basis. Every quarter, the PA will prepare a progress report. Using these reports, the bank will lead quarterly technical and fiduciary supervision missions to review compliance with agreed prior actions and benchmarks, budget implementation and general economic and social developments. DfID will participate in these missions.
In the event of the PA not meeting all benchmarks, the World Bank would assess the specific situation and consult contributing donors on whether a waiver were appropriate. Should no waiver be granted, the release of the next tranche of funding would be held hack pending fulfilment of the benchmarks. The World Bank could also, in consultation with contributing donors, suspend disbursements if the PA reversed already implemented policy actions, until remedial action were taken. Donors have the option of bilaterally withdrawing their money from the Reform Fund at any time.
In addition to the PA's own external auditing arrangements, an external auditor contracted by the World Bank will perform annual audits of the Reform Fund's deposit account at the PA Ministry of Finance. These audits will verify the extent to which the World Bank's requirements under the grant agreement are being met, and whether the PA's procedures are adequate to achieve this result.
We expect several donors to contribute to the Reform Fund. Norway and Canada have already decided to do so. Other countries are considering contributions. The World Bank plans to contribute 20 million dollars of its own alongside the fund. The EC has been providing budget support to the PA since 2000, and is likely to continue doing so. The IMF is involved in a technical capacity. The USA has been actively involved in the design of the fund, and will participate in its management. The G8 has urged the international community to increase and accelerate their assistance provided to the PA. We and other contributors will be urging other donors to give money to the Reform Fund. Arab states continue to be the 19WS biggest supporters of the PA's budget, although some may prefer to contribute outside the Reform Fund.
DfID has thoroughly appraised a UK contribution to the Reform Fund, in line with our published policy on the provision of direct budget support. This policy reflects our commitments under government acounting that aid should be properly accounted for, used for the intended purposes and represent value for money. When appraising budget support, we ensure the following: first, that a thorough evaluation of public financial management and accountability systems, and associated risks, has been carried out; secondly, that the recipient government have a credible programme to improve standards of these systems; thirdly, that the potential developmental benefits justify the risk, taking account of any safeguards that can be put in place to buttress and develop these systems; and fourthly, that these assessments are explicitly recorded as part of the decisionmaking process to provide assistance. In the case of the Palestinian Authority, we share the World Bank's assessment that there is a significant fiduciary risk, but that a satisfactory programme of reforms is in place to reduce this risk. This level of risk is not unusual in countries where DfID provides budget support. I have judged that the developmental benefits of providing budget support, and the risks of not providing it, justify this fiduciary risk.
In making this judgment I have also looked at the impact on poverty of PA spending. The PA does not have an internationally recognised poverty reduction strategy. But it has started to develop short-term planning frameworks to guide its own prioritisation. I share the judgment made by the International Development Committee in its report in February that, although unusual, given the current state of the Palestinian economy, "wage payment maintained by budget support is an effective method of emergency poverty alleviation". The PA Ministry of Planning is beginning to develop a more comprehensive approach to poverty reduction. DfID will work with other donors to help them do this, alongside the provision of budget support.
I have of course considered the many allegations made against the PA about diversion of funds. In particular, there have been accusations that budget support previously provided by the European Commission was used to finance terrorist activities. An EU independent anti-fraud investigation into these allegations has been going on for over a year and has not yet concluded. An inquiry by a European Parliament Working Group on Budgetary Assistance to the Palestinian Authority reported in March 2004, after a one-year investigation. The majority report concluded that, "there is no conclusive evidence, to date, that the EU non-targeted Direct Budgetary support was used to finance illegal activities, including the financing of terrorism", and that, "there is no evidence that EU budget support has not been fully transferred into the PA budget or that it was used outside the budget". It further concluded that budget 20WS support had, "contributed to bring about concrete changes in the PA financial system and impacted on the PA reform process towards more transparency, accountability and good governance". Recommendations from the report have largely been addressed in the design of the World Bank Reform Fund, notably that, "future budget support should be accompanied by clear, specific conditionalities subject to strict monitoring" and that "such conditionalities should be established in full co-operation and in close co-ordination with the other international donors".
It has been suggested that aid to the PA should be conditional on progress with security sector reform, and other measures to reduce terrorism against Israeli citizens, such as action against incitement. We agree with the World Bank and other donors that at this stage it will be more effective to link disbursement of budget support to conditions related to financial management, budget allocation and accountability. The Government have made action on Palestinian security their highest diplomatic priority in our relations with the PA. We are also providing practical assistance to help them to take this action. Particularly under current circumstances, we do not think an underfunded PA which risks not being able to pay salaries is in the interests of Israeli security. We have informed the Government of Israel of our decision to contribute. The Israeli Government have told us that they welcome international humanitarian and economic assistance to the Palestinians and support the World Bank Reform Fund, provided the money is properly spent and monitored.
Contributing to the PA's budget is in line with the Government's strategy for supporting Palestinians. Our new Palestinian Country Assistance Plan says we will work with partners to help to end conflict and create a viable Palestinian state that will reduce poverty. The strategy has three aims: prospects for peace enhanced; more effective, accountable and inclusive Palestinian institutions and governance systems; and humanitarian and development assistance delivered more effectively. Contributing to the Reform Fund will address all three outcomes. It will also address the Government's wider political objectives on the Middle East peace process, by helping the PA to meet its roadmap commitments. Our initial contribution to the Reform Fund is for 2004. We will consider later this year, in light of monitoring of the PA's use of donor funds and its likely financing gap and spending plans for 2005, whether we should continue contributing.
I am placing in the Library of the House the World Bank's board paper describing the rationale for, and operational arrangements of, the Reform Fund, which includes as an annex the Palestinian Authority's Statement of Development Policy and a matrix of further reform actions the PA is undertaking. I am also placing in the Library of the House copies of the finalised Palestinian Country Assistance Plan.