GREEN PAPER
on relations between the European Union and the ACP countries
on the eve of the 21st century
Challenges and options for a new partnership
CHAPTER VI.
OPTIONS FOR A NEW PRACTICE IN THE FIELD OF FINANCIAL AND TECHNICAL COOPERATION
This report should be cited as: European Commission. 1996. Green Paper on relations
between the European Union and the ACP countries on the eve of the 21st century -
Challenges and options for a new partnership. Brussels: European Commission
DG VIII page
There are three considerations which militate in favour of a fundamental revision of
the practical methods of providing financial and technical assistance: (i) the move
towards a partnership based on reciprocal rights and obligations and a more explicit
allocation of the partners' responsibilities, (ii) the need to alter Community assistance
to take more account of the fact that some ACP countries have reached a substantially more
advanced stage of development than others and (iii) the need to reconcile the
predictability of accumulated aid practice with the requirement for better-tailored and
more efficient aid.
These aims mean that a new thinking will have to be developed in connection with aid
instruments, that the nature of support activities will have to be changed, and that a new
way of managing resources will have to be promoted. In addition, the Commission is
recommending, as it has done in the past and as the European Parliament has long been
urging, that the European Development Fund (EDF) be incorporated into the budget to help
rationalize the Community's activities outside its borders and to improve their cohesion
and transparency.
A. A single source of funds or multiple smaller sources?
One of the most common criticisms levelled at assistance under the Lomé Convention has
been the large number of instruments which have been set up over the years and adapted as
one negotiating exercise succeeded the next. Cooperation with the ACP countries is now
overburdened with instruments which are tailored to predetermined uses and are
increasingly difficult to run in a coherent way.
Drawing up strategy papers for each country doubtless reduces the risks of lack of
cohesion, but the use of a multiplicity of instruments which all have different purposes,
procedures and methods of operation inevitably makes the EU's policy for each individual
country less transparent. Despite the substantial effort the Community has put into
information, the complexity of the system often impedes access to the various financing
and technical assistance facilities, particularly for those active in civil society.
EDF instruments and the range of specially-targeted budget headings also tend to make
the implementation of policy guidelines rather rigid. As the situation currently stands.
it is impossible to reorient or adapt aid policy within a reasonable space of time, but
this is just what is increasingly called for. This is because economic and political
circumstances can change fast, and we have to be able to react to new concerns connected
with policy initiatives, respond to public opinion in the ACP countries or in Europe, or
give effect to the findings of evaluations in the interests of increasing the efficiency
and impact of cooperation.
Under these circumstances, is there any justification for keeping a range of special
instruments, or should there be a radical change of direction focusing on the setting of
overall allocations of funds allowing aid to be administered in a more flexible way which
can cope with needs which are more and more changing and divergent?
There are three possible options:
- (1) Maintaining the current division of allocations
Though this is an option,
it carries all the disadvantages described above and will not encourage relations between
donor and recipients to move in a direction of independence and responsibility.
- (2) Gathering all aid operations under the umbrella of a single source of funds
This
would provide a maximum of flexibility in the organization and subsequent development of
financial assistance.
- (3) Creating two or three separate allocations
These would group together
activities of the same nature:
- One allocation would be set aside to fund long-term assistance for the public sector.
This indicative overall allocation would be used (depending on needs and on the outcome of
an assessment of the most appropriate action) to support sectoral policies or
institutional reform, to provide budget assistance or to fund more one-off activities;
- A second allocation would be used for resources to cope with emergencies, which by their
very nature are not foreseeable, and for all very short-term measures.
- A third allocation might be needed for direct assistance to non-governmental agents, the
private sector, associations, consumer organizations, NGOs, etc. such operations need
different administrative arrangements (though EU eligibility criteria must always be
adhered to).
The clear distinction between short-term and long-term operations would help to make
Community action more visible by preventing the confusion which can be caused by
instruments like Stabex and the food-aid arrangements, which both have an
"emergency" component and a component providing assistance with more long-term
aims.
A move in this direction would make Community aid policy more flexible, cohesive and
transparent. The ability to alter and adapt aid policy for a given country or group of
countries is also, however, connected with programming arrangements. These are dealt with
in Chapter VI.B.
B. Should aid be granted according to need or according to merit?
Resources for programmable aid are currently according to the needs of each country
relative to the needs of others, human development indicators, the size of the country,
geographical considerations (such as the country being an island or being landlocked).
Resources for nonprogrammable aid (support for structural adjustment programmes,
arrangements to make up for loss of export earnings, etc.) are governed by separate
criteria.
The automatic nature of the allocation of programmable resources has already been
substantially modified (this was done during the mid-term review of the Lomé Convention).
Allocation is now in two tranches. The first is 70% of programmable resources and is
intended to allow the allocation of resources to be reviewed in the light of the degree to
which the recipient countries' undertakings (especially as regards sectoral policy) have
been adhered to, the general consistency of the government's development policy, plus any
unforeseen outside events.
The new system of allocation by tranches thus introduces a new qualitative criterion by
which the aid for each country can be adjusted according to its government's general and
sectoral policy performance. This development translates into action the EU's greater
requirements for efficiency and a new concept of partnership based on reciprocal
undertakings, foreign aid being used to back domestic reform.
The EU should continue to act along these lines. However, the fact that programming
over several years has the advantage of giving developing countries a predictable flow of
outside financing and of requiring at least a basic level of strategy framework means that
there are grounds for keeping a system of multiannual programming. A number of options,
which will have to reconcile flexibility and predictability, efficiency and
responsibility, should therefore be considered.
Two questions arise: what should determine how programmable resources are allocated
among the ACP countries? How can programming be reworked to restore flexibility to aid
policy?
The growing gap between different categories of ACP country (between the poorest and
those which have more resources to devote to development, and between those which are
still in the grip of serious political and social problems and those which have embarked
on economic and social reform and progress) makes this issue all the more important.
Combine incentives and development indicators
The substantial importance attached to the conduct of domestic policy and the
incentive-based approach which the EU is seeking to promote through its aid policy suggest
that the concept of "need" (which dictates remedial action) be supplemented by
the concept of "good management", which would take account of how the state and
local authorities assumed their responsibilities. This would mean that performance
criteria for political and economic life would come into play alongside social and
economic indicators and levels of poverty. This option would entail establishing
"governance" criteria which were accepted by the partners. As in the case of
conditionality (dealt with in section C below), it seems preferable to have an assessment
of general policy rather than very specific criteria, and historical, political and
institutional considerations should not be divorced from social and economic
considerations. Whatever the criteria, they should be able to be agreed by the parties in
advance in order to prevent arbitrariness.
This option would inevitably make aid more selective. It would enable the EU to focus
its efforts on the poorest countries and the countries where the impact of its operations
is likely to be the greatest.
Introduce ongoing programming
Introducing incentive-based criteria for granting aid would bring a change in the
contractual nature of ACPEU relations. There would be no point in adopting performance
criteria while keeping five-year fixed allocations: standards of governance can change
very rapidly (i.e. improve or deteriorate). This option would also be more compatible with
a financing arrangement which differed from the EDF (in which the Member States establish
their contributions in advance). Budget arrangements which allowed multiannual programming
of expenditure in tandem with greater flexibility would undoubtedly be more appropriate.
However, predictability of flows could be preserved by adopting ongoing programming
covering three, four or five years with regular (yearly, for instance) reviews. This
method has been adopted for the Euro-Med partnership, for example. It reconciles the goals
of predictability and flexibility against the background of a "contract" between
donor and recipient which centres on a requirement for efficiency.
C. Types of aid
The critical appraisal in Chapter II of cooperation past and present is based mainly on
the findings of recent evaluations and throws up a number of operational pointers. It
highlights the value of increasing the sectoral emphasis and support for reform, of
formulating long-term strategies to improve institutional frameworks and local capacity to
devise economic and social policies, and of restricting project aid to very specific,
reform-linked operations.
Given the intention of sharing out responsibilities more equitably, encouraging ACP
governments to implement sustainable development policies, reduce instability and define
their own development strategies, the best way forward might be to channel Community aid
in a lump sum to national budgets instead of financing sets of individual projects. This
could of course only be done if economic and social performance criteria were used to
decide how much aid should be given and only those countries with a proven ability to
manage resources would be eligible.
The evaluations also suggest that the Stabex and Sysmin systems need to be abolished or
at least amended. The idea of compensation itself is not being challenged since there are
good reasons why special aid packages should be available to keep macroeconomic management
on track and reduce the risks faced by some exporters, particularly those in the
agricultural sector. Stabex and Sysmin are also increasingly being used to support
economic and institutional reform in the affected sectors. However, the automatic
triggering of these types of instrument is making them less relevant.
Recent developments in the world economy have increased the supply of investible
resources seeking profitable placement in developing countries, and have increased the
number of developing countries offering good investment opportunities to investors.
Successful developing countries receive their external financing and external professional
and technical support essentially on market terms. It seems reasonable for the EC to wish,
post Lomé, to concentrate its grants on assisting countries which are poorest and least
favourably placed to attract foreign direct and portfolio investment. The EU could
therefore think about a new instrument to make it easier for ACP countries to gain access
to capital markets.
The whole issue of the type of aid to be provided by the EU prompts a number of
questions:
Should support for macroeconomic reform and sectoral policies be stepped up?
Should project aid be phased out in favour of direct budget aid?
Should the EU carry on with its export earnings compensation mechanisms?
What type of conditionality should the EU envisage?
Should the EU think about new ways of facilitating ACP access to private capital, be
it in the form of direct investment, project financing or government loans?
Towards direct budget aid.
The EU could think about a switch to direct budgetary aid for ACP countries. This would
work well with the structural adjustment support facility, which still plays a big part in
improving the budget planning and management in the countries concerned.
In this case, the disparate macroeconomic support instruments could be combined into a
single package of direct budget aid linked to an appropriate macroeconomic framework.
There are two arguments for this:
it would be a sign of a mature relationship between the EU and ACP countries, based on
trust in which responsibility for managing development resources lay with national
authorities;
unlike project aid, budget aid does not knock the allocation of expenditure out of
kilter.
Flawed budgetary management and opaque spending decisions constitute the main barriers
to any move towards budget assistance and mean some minimum attendant conditions would
have to be imposed. The switch would therefore be seen as a process, marking a stage in
the development of local capacities and providing an opportunity for much more effective
cooperation.
From support for structural adjustment to support for sectoral policies.
As explained earlier, the EU-backed reforms under way in the ACP countries are a
long-term process, especially the institutional reforms. In a rapidly changing world that
demands the constant reworking and reappraisal of economic policies and social systems,
adjustment itself becomes a permanent process in every country. Within the process,
however, different stages can be singled out, in particular the move from an initial phase
of structural reforms concerned with the general running of the economy and public sector
to a complementary stage centred on more specific sectoral aspects.
As reforms progress, the EU will have to be able to redirect its aid towards sectoral
and institutional support if it is to respond appropriately to the priorities of the
moment.
Community support for reforms could therefore be tailored to whatever stage of
structural adjustment a particular country is at. This means that within a given set of
conditions, direct budget aid could be explicitly targeted towards reforms in specific
sectors.
Retaining compensation for export earnings
In order to compensate for sharp drops in export earnings, the EU could consider giving
extra support for individual sectors on top of the total aid package for the country in
question. Depending on whether the export difficulties were structural or cyclical, the
extra funding could be allocated as sectoral support or macroeconomic assistance.
Reforming conditionality
Conditionality is another vital issue in any discussion on the type of aid to be given.
Explicitly or implicitly, every cooperation programme has some form of conditionality. It
implies a certain degree of aid selectivity and is designed to encourage recipient
countries to modify their policies or carry out certain reforms. The conditions imposed
may concern the kinds of results that are expected or the means to be targeted at an
objective. Given the experimental nature of many reforms, particularly those of an
institutional type, an approach based on a searching appraisal of the overall impact of a
government's policies seems far preferable to just imposing highly specific conditions.
As part of the Special Programme for Africa, the Commission has presented other donors
with new proposals for structural adjustment conditions. This new approach would aim to:
encourage recipient countries to internalize reforms;
apply realistic conditions which take due account of the political and administrative
context;
make a full assessment of what has been achieved in terms of sustainable development
rather than making do with a partial appraisal of a few specific indicators. Such an
assessment should be carried out in conjunction with all other donors.
This comprehensive coordinated approach should also prevent any "stop and go"
in aid payments.
It would also avoid the drawbacks of current practice and change the donorrecipient
relationship into more of a partnership based on reciprocal undertakings designed to
achieve long-term goals.
Access to capital for investment
At present Lomé uses a variety of instruments to help countries find the capital
necessary for investment: EDF grants, venture capital also funded by the EDF and some
lending from the own resources of the European Investment Bank.
With a view to increasing availability of sources of finance at the prime market rate
for investment, in particular infrastructure, a first option would be greater access to
EIB lending. As part of the proposed budgetization of the EDF, EIB lending to ACP
countries could then be subject to the same modalities that apply to lending in other
third countries (in particular with respect to provisioning of the Guaran4ee Fund for
external actions).
A further option to be explored could be to adapt present instruments to encourage
greater access to private sources of finance. For example, partial guarantees (possibly
via the EIB) are an instrument already used with some success by several multilateral
agencies in mobilizing long-term market finance to cover part or all of the political
and/or commercial risk.
The application of these options as part of post-Lomé cooperation requires further
study and consultation. Most of the better-off ACP countries have already established some
track-record for sovereign credit-worthiness and would probably see little advantage in
external guarantees for their sovereign borrowing. On the other hand they may find the
idea of guarantees, eg for privately-financed large infrastructure projects, very
attractive because of the many contractual risks which continue to inhibit the market
financing of such projects and because of the importance of infrastructure in sustaining
economic expansion.
Providing guarantees or market-financed lending through the EIB could be advantageous
both for both the creditworthy, or nearly creditworthy, countries and for the poorer ACP
countries. The former should receive more external financing from the markets, and their
credit ratings should, over time improve - giving them access to more and cheaper
financing in future. Less well-off countries might expect to receive a higher share of
available EDF grants as better-off countries' need for official financing reduces.
D. Co-management, EU-only management or autonomous management by recipients themselves?
The current Lomé system whereby commitment decisions on cooperation activities and
expenditure monitoring are both jointly managed has shown its limits. In practical terms,
the frequent to-ing and fro-ing between national and chief (i.e. Community) authorizing
officers is time-consuming and so makes aid less effective. The system also makes it
difficult to co-finance operations with other donors.
In operational terms, co-management does little to encourage recipients to take
responsibility for the development programmes and reforms supported by the EU even though
all Community evaluation studies have concluded that this is vital if aid is to be
effective. The gradual shift away from infrastructure-based aid towards support for
socio-economic policies and institutional reform makes it all the more necessary.
Joint aid management therefore has to be reviewed. What alternatives would provide
the reliable system needed for managing Community aid while encouraging recipients to take
more responsibility, itself a prerequisite for more effective cooperation?
A phased and individualized approach should be adopted in which the degree of
responsibility for administrative and financial management of the aid grows as good
governance improves in the recipient state.
The aim would be to give beneficiaries steadily more responsibility for managing
programmes, justifying and monitoring expenditure and assessing the economic and social
impact of assistance. The best way of doing this would be through direct budget aid.
In countries where institutional and administrative conditions would rule out this
approach in the short-term, the EU would take sole management responsibility but would
simultaneously help strengthen the local skills needed to take over responsibility. It
would be best not to set up specific units but to work within existing local structures.
Here too, the type of management appropriate in each case would be decided on the basis
of a number of criteria and would depend upon the quality of ACP-EU dialogue, the
willingness of recipient countries to match additional Community funds with a contribution
of their own and the existence of units or machinery for coordinating foreign aid.
This issue, like many other aspects of ACP-EU relations raised in this Green Paper,
will have to be addressed through a case-by-case approach tailored to individual countries
or groups of countries. The chosen system will have to be seen as evolutionary, with
management tasks gradually passing into the hands of all ACP beneficiary countries as
administration gets better.
Generally speaking, any potential changes in the way resources are managed should aim
to redirect day-to-day consultation and dialogue on cooperation towards substantive
issues, and the conditions which affect the impact of programmes and determine the
contribution they make to sustainable development in the country concerned. This is one
area in which both EU and ACP partners can demonstrate their sense of responsibility to
their respective electorates.
Contents
Chapter 1 Chapter 2 Chapter 3 Chapter 4 Chapter 5
Updated on December 19, 1996
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