more countries. Of the 42 countries that qualify for the initiative-as determined by their debt sustainability-26 have received debt relief.4 The enhanced HIPC initiative emphasizes that recipient countries should have sustained implementation of integrated programs for poverty reduction and economic reform (see http: www.worldbank.org/hipc/about/hipcbr/ hipcbr.htm).

In spring 2000 the boards of the Bank and the IMF asked the institutions staff to address concerns about how resources freed under the initiative are used. (Such funds are intended to be used for poverty reduction, augment-ing-not substituting for-a countrys spending in this area.) In response a joint initial desk assessment was conducted in fall 2000 on 25 HIPCs that had reached the decision point or were expected to do so soon. Joint Bank-IMF teams developed a questionnaire to assess the countries ability to track poverty-reducing public spending, including funds freed by debt relief. The questions were designed to identify weaknesses in public expenditure management to guide the development of performance indicators. HIPC tracking is innovative because, rather than assessing every aspect of public expenditure management, it takes a systems approach-identifying important indicators that reflect a systems overall capability and performance.

If a country scored poorly, its system for public expenditure management may be unable to plan, execute, or accurately report poverty-reducing public spending. By defining minimal standards for public expenditure management, the assessment helped prioritize needs in upgrading capacity. The findings were summarized through 15 benchmarks covering budget formulation, execution, and reporting. The focus was not on the use of targeted debt relief (HIPC initiative) funds but on the quality of public expenditure systems for all budget resources. The March 2002 Bank-IMF board paper concluded that 15 of the 24 HIPCs assessed required substantial upgrading in their public expenditure management systems, 9 required some upgrading, and none would be able to carry out satisfactory tracking with a small amount of upgrading (World Bank and IMF 2002).

The initial desk assessments were finalized in fall 2001. The boards asked Bank and IMF staff to continue close coordination, to help country authorities develop action plans for the short and medium terms, to identify gaps in donor assistance supporting those plans, to ensure that all gaps were filled by the Bank, IMF, or other donors, and to provide periodic progress reports to the boards.

The March 2003 board paper (World Bank and IMF 2003 b) reiterated that the HIPC process would be conducted based on four main principles:

Ultimate responsibility for tracking poverty-reducing spending lies with the countries.

All poverty-reducing spending should be tracked.

Poverty Reduction Strategy Papers provide the basis for identifying all relevant poverty-reducing programs.

Where systems are weak, countries should establish short-term bridging mechanisms to facilitate medium-term tracking.

HIPC AAPs are becoming accepted practice and provide a useful complement to the Banks other economic and sector work (PERs, Public Expenditure and Institutional Reviews, CFAAs, CPARs). All the HIPCs have endorsed AAPs, and Bank and IMF staff are encouraging country authorities to incorporate tracking of poverty spending into their Poverty Reduction Support Credits and thereby mainstream the approach.

The formal requirements for HIPC AAPs involve process requirements, which are evolving (see below), and instrument requirements, which are made up of the guidelines, the questionnaire, and a set of action plans.

While the revised guidelines are still being finalized by the Bank and IMF, the 2001 and 2002 board papers reviewed progress and led to general agreement on the approach. The boards requested that new tracking assessments be carried out for all new or planned HIPCs and that an updated table be included in all adjustment loan documents going to the boards of the Bank and IMF showing the status of the action plans. HIPC AAPs are not designed to be self-assessments; as with Fiscal ROSCs, the questionnaire and short-form report could be sent in advance of the related mission. HIPC assessments are not audits but rather strive to help countries manage their resources well and overcome a key constraint: lack of capacity that undermines effective public expenditure management, including the ability to track poverty-related expenditures.

Bank and IMF staff agreed that the organization and conduct of the agreed assessments be evenly divided and led by joint Bank-IMF missions following the guidelines issued in April 2001.

The Bank-led HIPC AAP missions were carried out by the Banks Regions and combined with other missions. For the IMF-led missions, draft procedures were prepared for combined ROSC-HIPC missions, and missions were either by IMFs Fiscal Affairs Department or area departments. Given the tight schedule imposed to finish the final assessments in 2001 and report to the boards by March 2002, systematic and disciplined

planning and implementation were undertaken, with progress reviewed every two weeks. This time pressure meant that while Bank-IMF cooperation was very close, it was usually not possible to involve bilateral agencies in these assessments.

Follow-up is an integral part of the exercise, and the Bank, IMF, and country authorities should seek agreement on:

A draft schedule over the next three years for upgrading tracking capacity in light of planned technical assistance and the countrys absorptive capacity.

An agreed action plan for improving public expenditure management, including identification of existing or additional technical assistance.

Another comprehensive round of assessments is planned before the end of 2004 and will be used to prepare a joint Bank-IMF board paper. New draft guidelines have been prepared and circulated for comment. Updates will be required on an ongoing basis, while assessments of new countries should be completed by mid-2004. Updates and new assessments will need to be agreed with the governments concerned and between the Bank and IMF. In most cases the updates and assessments can be conducted as part of missions already planned.

EC AUDITS

Structural adjustment support provided by the European Commission has traditionally been subject to ex post control through an audit procedure. With the recent shift to providing aid through direct budget support, greater emphasis has been given to ex ante assessment of public expenditure management systems in beneficiary countries and to monitoring and evaluating improvements over time.

EC audits of the use of its program aid must be viewed in the context of the evolution of its structural adjustment support. During the 1990s the European Commission provided structural adjustment support in two forms: in 1991-96 through general or sector import programs under the 7th European Development Fund, and in 1996-2000 through structural adjustment support introduced under the 8th European Development Fund. Although general and sector import programs remained an important source of EC program aid, structural adjustment support quickly became a key source of EC assistance.