European Development Fund Procedures - A Guide By Dr C. Manyeruke TRADE AND DEVELOPMENT STUDIES CENTRE Harare, Zimbabwe July 2007 1
Contents Introduction 3 The 9 th European Development Fund 5 Terms and Conditions of Financing 7 Implementation and Management Procedures 14 References 18 2
European Development Fund Procedures-A Guide Introduction The European Development Fund (EDF) is the main instrument for European Community aid for development cooperation in the Africa, Caribbean and Pacific (ACP) countries and the Overseas Countries and Territories (OCT). EDF was created by article 131 and 136 of the 1957 Treaty of Rome. It was created with a view of granting technical and financial assistance to African countries that were still colonized at the time. EDFs are financed directly by member states outside the usual European Commission budgetary mechanism. EDFs is covered by its own financial rules and managed by a specific committee. The first cycle of EDF started in 1959. It was dubbed the first Yaounde Convention (1958-1963) and it was renewed by the second Yaounde Convention (1964-1969). The Yaounde II Agreement was replaced by the EU-ACP Lome Agreement which was a regional integration agreement (RIA) which involved preferential trade among partner countries only since 1975. The Lome Conventions came about as a result of the need by ACP states to create a New International Economic Order (NIEO) which could result in clear procedures, mechanisms and adjustments that would promote fair economic relations between the developed and developing countries. During the Cold War, the Lome Conventions which infact developed from Lome I to IV, became strategic partnerships against the Union of Soviet Socialist Republic (USSR). The Lome Conventions consisted primarily of the system of non-reciprocal trade, which included the concept of aid and trade. It was hoped that the Lome Conventions would encourage the ACP countries to diversify their exports and increase their market share. The principle of mutual obligations was also included and entailed issues on human rights, democracy, corruption and good governance. Lome IV contained clauses on liberalisation policies under the IMF and World Bank. These Conventions had limited duration, initially 5 years, then 10 and now 20 years. Although the ACP countries are at the top of the list in enjoying preferential market in the EU market, the ACP states are at the bottom of the list when it comes to exports to European markets. Modernisation theorists would view such developments as key in bringing about development to developing countries as resources and technologies are transferred. On the other hand, dependency theorists would view such contractual arrangements as promoting dependency and neo-colonialism. The experience of ACP countries in the Lome I to IV era was that these agreements created dependency of ACP states on EU aid and trade. ACP states remained suppliers of raw materials to the EU markets under its terms and conditions, and the EU exported the refined products to the ACP market. 3
Under Lome I to IV, trade between EU and ACP states was based on non-reciprocal trade preferences. This meant that ACP states had direct access to the EU s market. This decision was based on the present development needs of ACP states as described in the Lome I Convention. This arrangement is inconsistent with the Most-Favoured - Nation (MFN) rule which is the fundamental principle of WTO. Article XXIV of the GATT allows Free Trade Areas (FTAs) and customs unions if (a) trade barriers after integration do not rise, on average (ArticleXXIV.5); (b) all tariffs and other regulations of commerce are removed on substantially all intraregional exchange of goods within reasonable length of time (Article XXIV.8); and (c) the arrangements are notified to the WTO Council. WTO rules can therefore be regarded as rules of the thumb intended to minimize the negative impacts of regional integration on the multilateral trading system. It is within this framework that ACP- EU 20 year Partnership Agreement was formulated and signed in Cotonou on June 2000 by 77 ACP countries and 15 EU countries. It is a comprehensive economic and trade cooperation. The agreement has five pillars of the partnership. These are: a) A comprehensive political dimension with key emphasis on human rights, democratic principles and political dialogue in addressing issues of mutual concern.; b) Participatory approaches by promoting non-state actors involvement in the implementation of projects; c) A strengthened focus on poverty reduction; d; A new framework of trading arrangements that will pursue trade liberalisation between the parties and formulate provisions in related issues; e) A reform of financial co-operation (McQueen, 1998). The focus of this paper is to outline the EDF procedures. THE 9 TH EUROPEAN DEVELOPMENT FUND The 9 th EDF commenced on 1 March 2000, for a period of five years. Its overall assistance to ACP states was EUR 15 200 million. The Community s financial assistance comprised an amount up to EUR 13 500 million from the 9 th EDF. The 9 th EDF was allocated between instruments of cooperation as follows: a) EUR 10 000 million in the form of grants was reserved for an envelop for support of long term development. This envelop was meant to be used to finance national indicative programmes. From this envelop: i) EUR 90 million was reserved for financing the budget of the Centre for the Development of Enterprises (CDE); ii) EUR 70 million was reserved for financing of the budget of the Centre for the Development of Agriculture (CTA); and iii) An amount not exceeding EUR 4 million was reserved for the Joint Parliamentary Assembly. 4
b) EUR 1 300 million in the form of grants was reserved for the financing of support for regional cooperation and integration of the ACP states. c) EUR 2 200 million was allocated to finance the Investment Facility. d) An amount of up to EUR 1 700 million was to be provided from the European Investment Bank in the form of loans made from its own resources. Any balances remaining from the previous EDFs on the date of entry of the 9 th EDF, as well as amounts decommitted at a later date from ongoing projects under these Funds, were to be transferred to the 9 th EDF. Any resources transferred to the indicative programme of an ACP State or region was to remain allocated to that State or Region. The overall amount of the 9 th EDF, supplemented by the transferred balances from previous EDFs covers the period of 2000-2007. Before the expiry of the 9 th EDF, the Parties should assess the commitments with the objective for re-evaluating the overall amount or resources. If funds provided in the agreement are exhausted, the joint ACP-EC Council of Ministers shall take appropriate measures. According to the European Research Office (February, 2007), Nominal EDF aid allocations increased from the 4th to the 9th EDF, rising from 3.4 billion euros to 15.2 billion euros; a nominal increase of 348%. Despite the increase in nominal EDF aid allocations from the 4th to the 9 th EDF, real EDF allocations increased over the same period by only 16%. However, from the 7th EDF (the approximate end of the Cold War) to the 9th EDF the real value of allocations declined from a peak of 3.5 billion euros to 3.1 billion euros in 1975 prices; a real decline of 11.4%. Research show that there has been a major shift in sector deployment of EDF aid in ACP countries. Under the earlier Lome Conventions the sector of agriculture and rural development was the major focal sector, with the agriculture and rural development accounting for the largest proportion of aid deployed. The second most important sector for EDF aid deployment was that of transportation infrastructure. Since Lome III however the sector focus of EDF aid deployment has changed. Transportation infrastructure remains a major sector for EDF aid deployment. Agriculture and rural development have decreased in terms of EDF aid allocations, with first commodity assistance support and subsequently budgetary support coming to play a leading role. This is despite the continued centrality of agriculture and rural development to poverty eradication in ACP countries. New priority areas such as health and education have received increased funding under the EDF in recent years but this is still below the average for OECD donors. Relatively low levels of NIP aid are deployed in support of economic projects such as trade promotion, private and business sector 5
development. The EC tends to favour using regional funding to support such trade and business development programmes. 1. TERMS AND CONDITIONS OF FINANCING Investment Financing The terms and conditions of financing in relation to the operations of the Investment Facility, the loans from own resources of the European Investment Bank and special operations are be as laid down below. These resources may be channelled to eligible enterprises, either directly or indirectly, through eligible investment funds and or financial intermediaries. Resources of Investment facility I. The resources of the Facility may be used, inter alia to: a) provide risk capital in the form of: i) equity participation in the ACP enterprises, including financial institutions; ii) quasi-capital assistance to ACP enterprises, including financial institutions; and iii) guarantees and other credit enhancements which may be used to cover political and other investment-related risks, both for foreign and local investors or lenders. b) provide ordinary loans. 2. Equity participation are normally for non-controlling minority holdings and are remunerated on the basis of the performance of the project concerned. 3.Quasi-capital assistance may consist of shareholders advances, convertible bonds, conditional, subordinated and participating loans or any other similar form of assistance. Such assistance may consist in particular of: a) conditional loans, the servicing and or the duration of which is linked to the fulfilment of certain conditions with regard to the performance of the project; in the specific case of conditional loans for pre-investment studies or other project-related technical assistance, servicing may be waived if the investment is not carried out; c) participating loans, the servicing and/ or the duration of which is linked to the financial return of the project. d) Subordinated loans, which are repaid only after other claims have been settled. 1 European Research Office, 2007 6
4. The remuneration of each operation is specified when the loan is made. However: a) in the case of conditional or participating loans, the remuneration normally comprise a fixed interest rate of not more than 3% and a variable component related to the performance of the project; and b) in the case of subordinated loans, the interest rate is market related. 5. Guarantees are priced so as to reflect the risks insured and the particular characteristics of the operation. 6. The interest rate of ordinary loans comprise a reference rate applied by the Bank for comparable loans with the same terms and conditions as to grace and repayment periods and a mark up determined by the Bank. 7. Ordinary loans may be extended on concessional terms and conditions in the following cases: a) for infrastructure projects in the Least Developed Countries or in post-conflict countries that are prerequisites for private sector development. In such cases, the interest rate of the loan will be reduced by 3%. And b) for projects which involve restructuring operations in the framework of privatisation or for projects with substantial and clearly demonstrable social or environmental benefits. In such cases, loans may be extended with an interest subsidy the amount and form of which will be decided with respect to the particular characteristics of the project. However the interest rate subsidy is not higher than 3%. The final interest rate, in any case, is never less than 50% of the reference rate. 8. The funds to be provided for these concessional purposes are available from the Investment Facility and do not exceed 5% of the overall amount allocated by the Investment Facility and by the Bank from its own resources. 9. Interest subsidies may be capitalised or may be used in the form of grants to support project related technical assistance, particularly for financial institutions in the ACP countries. 7
Operations of the investment facility 1) The investment Facility operates in all economic sectors and support investments of private and commercially run public sector entities, including revenue generating economic and technological infrastructure critical for the private sector. The facility is: a) managed as a revolving fund and aim at being financially sustainable. Its operations are based on market-related terms and conditions and avoid creating distortions on local markets and displacing private sources of finances; and b) endeavour to have a catalytic effect by encouraging the mobilisation of long-term local resources and attracting foreign private investors and lenders to projects in the ACP States. c) On the expiry of the Financial Protocol, and in the absence of a specific decision by the Council of Ministers, the cumulative net reflows to the Investment Facility is carried over to the next Protocol. Bank own Resources loans 1. The Bank : a) contributes, through the resources it manages, to the economic and industrial development of the ACP States on a national and regional basis; and to this end, finance as a priority productive projects and programmes or other investments aimed at promoting the private sector in all economic sectors; b) establishes close cooperation links with national and development banks and with banking and financial institutions of the ACP States and of the EU; and c) in consultation with the ACP States concerned, adapt the arrangements and procedures for implementing development finance cooperation, if necessary, to take into account the nature and programmes and to act in accordance with the objectives of this Agreement, within the framework of the procedures laid down by its statute. 2. Loans from the Bank s own resources are granted under the following terms and conditions: a) the reference rate of interest rate is the rate applied by the Bank for a loan with the same conditions as to currency, and repayment period on the day of signature of contract or on the date of disbursement; b) however: i) in principle, public sector projects are eligible for an interest subsidy of 3%.; 8
ii) private sector projects which involve privatisation and social and environmental benefits have an interest rate subsidy which is not be higher than 3% and the final interest rate is not higher than 50%. c) the amount of interest rate subsidy calculated in terms of its value at the times of disbursement of the loan is charged against the interest subsidy allocation of the Investment Facility and paid directly to the Bank; and d) The repayment period of loans made by the Bank from its own resources is determined on the basis of the economic and financial characteristics of the project, but may not exceed 25 years. These loans normally comprise of a grace period fixed by reference to the construction period of the project. 3. For investments financed by the Bank from its own resources in public sector companies, specific project-related guarantees or undertaking may be required from the ACP concerned. Conditions for foreign exchange rate risk In order to minimise the effects of exchange rate fluctuations, the problems of exchange rate risk is dealt in the following way: a) in the case of equity participation designed to strengthen an enterprise s own funds, the exchange rate risk, as a general rule, is borne by the Investment Facility; b) in the case of risk capital financing for small and medium sized enterprises (SMEs), the exchange rate risk, as a general rule,is shared by the Community, on the one part, and by the other parties involved, on the other. On average, the foreign exchange rate risk is shared equally; and c) where feasible and appropriate, particularly in countries characterised by macroeconomic and financial stability, the Facility endeavours to extend loans in local ACP currencies, thus defacto taking the foreign exchange risk. Conditions for foreign exchange transfer The ACP States concerned, in respect of operations under the Agreement, and in respect of which they have given their written approval within the framework of this Agreement: a) grant exemption from all national or local duties, fiscal charges on interest, commission and amortisation of loans due in accordance with the laws of the ACP States or States concerned. 9
b) Place at the disposal of the beneficiaries the currency necessary for the repayment of interest, commission and the amortisation of loans due in terms of financing contracts granted for the implementation of projects and programmes on their territories; and c) Make available to the Bank the Foreign currency necessary for the transfer of all sums received by it in national currency at the exchange rate applicable between Euro or other currencies of transfer and the national currency at the date of transfer. These include all forms of remuneration, such as, inter alia, interest, dividends, commissions and fees, as well as the amortisation of loans and the proceeds from the sale of shares due in terms of financing contracts granted for the implementation of projects and programmes on their territories. IMPLEMENTATION AND MANAGEMENT PROCEDURES Programming (National) Operations financed by grants within the framework of the Cotonou Agreement is programmed at the beginning of the period covered by the Financial Protocol. The preparation of a Country Support Strategy (CSS) is done based on the country s own medium-term development objectives and strategies. The Community also gives a clear indication of the indicative programmable financial allocation from which the country may benefit during the five year period. An indicative programme for implementing the CSS is prepared and adopted. A review process of the CSS is carried out in relation to the resources allocated to it. The CSS is prepared by the ACP State concerned and the EU following consultations with a wide range of actors in the development process. The CSS is an instrument to prioritise activities and to build local ownership of cooperation programmes. The CSS includes the following standard elements: an analysis of the political, economic and social country context, constraints, capacities and prospects including an assessment of basic needs such as income per capita, population size and social indicators and vulnerability; a detailed outline of the country s medium-term development strategy; an outline of relevant plans and actions of other donors present in the country; response strategies, detailing the specific contributions the EU can provide; a definition of the nature and scope of the most appropriate support mechanisms to be applied. Programming (Regional) Regional cooperation means that two or all ACP states and or a regional body of which at least two ACP states are members. Programming for a region entails preparation and development of a regional Support Strategy (RSS) based on the region s own medium-term 10
development objectives and strategies; a clear indication from the Community of the indicative resource allocation from which the region may benefit during the five-year period as well as any other relevant information; preparation and adoption of a Regional Indicative Programme (RIP); and a review process covering the RSS, the RIP and the volume of resources allocated to each region. The RSS is prepared by the Commission and the duly mandated regional organisation(s) in collaboration with the ACP States in the region concerned. The RSS includes: a) an analysis of the political, economic and social context of the region; b) an assessment of the process and prospects of regional economic integration and integration into the world economy; c) an outline of the regional strategies and priorities pursued and expected financing requirements; d) an outline of relevant activities of other external partners; e) an outline of the specific EU contribution towards achievement of the goals for regional cooperation and integration. PROJECT IMPLEMENTATION, MONITORING AND EVALUATION Projects and programmes that have been presented by the ACP States are subject to joint appraisal. The ACP-EC Development Finance Cooperation Committee develops the general guidelines and criteria for appraisal of projects and programmes. Regular assessments of development operations are carried out with the view to improving the development effectiveness of on-going and future operations. MANAGEMENT AND EXECUTING AGENTS The Commission appoints the Chief Authorising Officer of the Fund, who is responsible for managing the resources of the Fund. The Chief Authorising Officer is responsible for commitment, clearance, authorisation and accounting of expenditure under the Fund. The Government of each ACP States appoints a National Authorising Officer to represent it in all operations financed from the resources of the Fund managed by the Commission and the Bank. The National Authorising Officer can delegate some of these functions but he should inform the Chief Authorising Officer of any such delegation. The National Authorising Officer in close cooperation with the Head of Delegation is responsible for the preparation, submission and appraisal of projects and programmes. This Officer is also responsible for invitations of local tender, receive, preside and establish the results, sign contracts and approve expenditure. 11
The Commission is represented in each ACP State or in each regional grouping, which expressly so requests, by a delegation under the authority of a Head of Delegation, with the approval of the ACP State or State concerned. In close cooperation with the National Authorising Officer, the Head of Delegation, at the request of the ACP State concerned, participates and give assistance in preparation of projects and programmes and in negotiating technical assistance contracts. He or she also prepares financing proposals. He or she approves within 30 days, the National Authorising Officer s proposal for the placing of local pen tenders, direct agreement contracts, emergency assistance contracts, service contracts and works contracts with a value less than EUR 5 million and supply contracts with a value less than EUR 1 million. 12
REFERENCES ACP_EU Partnership Agreement, 2000, ACP: Cotonou. What is Europe Aid?, EU http://www.imf.org/external/pubs/ft/weo/2005/01/index.htm Investing in our common future, The budget of the European Union, EU, 2006. www.europa.eu.int/euroaid Background note: The 10 th www.fesportal.fes.de European Development Fund: Where do we stand?, The 10 th European Development Fund, www.acp-eu-trade.org 13