Select Committee on European Scrutiny Thirty-First Report


3 Financing short-term fluctuations in export earnings of ACP countries

(28731)

10967/07

COM(07) 337

Draft Council Decision on the position to be adopted by the Community within the ACP-EC Council of Ministers regarding the revision of the terms and conditions of financing for short-term fluctuations in export earnings

Legal baseArticle 300 (2) and 310 EC, and the ACP-EC Partnership Agreement; unanimity
Document originated19 June 2007
Deposited in Parliament26 June 2007
DepartmentInternational Development
Basis of considerationEM of 10 July 2007
Previous Committee ReportNone; but see (25393) 6370/04: HC 42-xxi (2003-04), para 10 (26 May 2004)
To be discussed in CouncilTo be determined
Committee's assessmentPolitically important
Committee's decisionNot cleared; further information requested

Background

3.1 The ACP-EC Partnership Agreement, known as the Cotonou Agreement, provides for a system of financial support — FLEX — to mitigate the negative effects on the African Caribbean and Pacific (ACP) countries which are party to that Agreement of short-term fluctuations in export earnings, particularly in the agricultural and mining sectors. It is not designed to compensate directly for losses of export earnings but to mitigate their adverse impact on economic potential and to protect expenditure in social sectors.[14] The support is financed from the B-allocation of the financial envelope for support to long-term development, which covers unforeseen needs.[15]

3.2 In May 2004, EU and ACP states agreed to amend FLEX's original eligibility criteria to improve its operation and effectiveness.[16] These changes were subsequently incorporated into the amended Cotonou Agreement agreed in 2005. In January 2005, the ACP states submitted a proposal to amend the FLEX mechanism further but, in order not to delay agreement on the revision of Cotonou, it was agreed that these would be examined at a later date.

The proposed Council Decision

3.3 In his 10 July 2007 Explanatory Memorandum, the Parliamentary Under-Secretary of State at the Department for International Development (Mr Gareth Thomas) says that the Commission has reviewed the ACP proposals and "believes that further substantial revision is required in order to improve problems identified during the initial years of implementation". He explains that the revisions apply to:

—  the eligibility criteria;

—  the method of calculating and mobilising funds; and

—  the source of financing.

and aim to address the problems of slow disbursement and of "funds not being available to all countries which should be receiving support".

PROPOSED CHANGES TO ELIGIBILITY CRITERIA:

—  countries facing post-conflict or post-natural disaster situations benefit from the more favourable treatment currently offered to least-developed, landlocked and island states;

—  the reference period will now be for the four years preceding the application, excluding the year with the most extreme figures, in order to identify more accurately whether there is a short-term fluctuation in export earnings;

—   fluctuations in export earnings will be calculated in the local currency rather than euros;

—  the second eligibility criterion which measures the impact on programmed public deficit will be removed;

—  a new eligibility criterion aimed at restricting the proliferation of small awards will be added; and

—  the number of successive years for which countries can access FLEX will be reduced from four to three.

PROPOSED CHANGES TO THE METHOD OF CALCULATING AND MOBILISING FLEX:

—  FLEX assistance to be further concentrated on countries less able to withstand fluctuations in export earnings, by the limiting of support to countries that have suffered a reduction of at least 0.7% of GDP;

—  countries eligible for budget support will be automatically eligible to receive up to 100% of the payment in advance;

—  countries ineligible for budget support will be offered assistance to help develop market based insurance schemes; and

—  eligibility to receive FLEX assistance is considered as part of the EU's political evaluation of countries where the EU has imposed appropriate measures or has not agreed a Country Strategy Paper (CSP).

PROPOSED CHANGES TO THE ALLOCATION OF FUNDING:

—  a maximum annual FLEX allocation of between €80-€100 million be established for all ACP states; and

—  if the potential amount of FLEX support exceeded the annual allocation, countries would receive FLEX financial support in proportion to their potential eligibility.

3.4 Finally, the Minister explains that in accordance with Article 100 of the Cotonou Agreement, Annex II may be revised by a Decision of the ACP-EC Council of Ministers; that the proposal recommends that the Council and the Member States authorise the Commission to negotiate the revision of the FLEX cooperation instrument with the ACP Group on the basis of the changes outlined; that the ACP-EC Council of Ministers has mandated the ACP-EC Committee of Ambassadors to take the final Decision on this matter; and that the Portuguese Presidency is hoping to secure Council agreement to a Community position by the end of September.

The Government's view

3.5 The Minister says that compensatory financing facilities such as FLEX can potentially play a positive developmental role, "provided lessons learnt from the past are applied". He welcomes the Commission's objective of improving the working of the FLEX mechanism, and says that, in principle, the proposed changes appear helpful. He also says, however, that he will be seeking clarification from the Commission on the following specific points:

  • "The previous amendments to the FLEX mechanism were based on a 2004 review of the scheme for the application years of 2000 and 2002 (i.e. loss of export earnings that occurred in 2000-2002). In March 2005, the EC circulated an evaluation of the 2003 application year (i.e. loss of export earnings that occurred in 2003), which were processed in 2004, following the introduction of the changes. The evaluation concluded that the revised criteria had successfully increased accessibility to FLEX assistance. We will be seeking a similar assessment of the mechanism for subsequent year(s) to assess how necessary the further reforms are and whether the issues identified in the previous review are still applicable;
  • "The EC has proposed a new reference period which more accurately reflects short-term fluctuations in the general trend. This is in contrast to the ACP proposal of a six-year reference period which is more a reflection of long-term structural trends. The EC has proposed that the reference period should now be the four years preceding the application, excluding the year with the most extreme figures. However, before changing the reference period, more information is needed on why the current reference period (i.e. the first three years of the four years preceding the application) is not working efficiently;
  • "Currency used. More evidence is needed that the conversion to local currency would enable more countries which need FLEX assistance to qualify for it. This is not adequately illustrated in the Commission's paper;
  • "Addition of a condition to the first eligibility criterion. The first eligibility criterion currently requires countries to prove a loss in export earnings. The Commission's new proposal to restrict FLEX assistance to situations where the loss in export earnings is more than 0.7% of GDP appears reasonable. This threshold favours countries whose exports account for a bigger share of GDP and/or whose export earnings are the most volatile without penalising the poorest countries. This figure (0.7%) is based on a calculation where the average exports' share of GDP in ACP countries is 35%. We want the Commission to clarify whether this figure would be subject to adjustment if the average exports' share of GDP in ACP countries were to change; and
  • "Number of successive years. We will seek a clearer justification for why limiting access to three successive years rather than four is more appropriate to address short-term fluctuations."

3.6 Finally, the Minister notes that there are no direct financial implications for the UK as FLEX assistance will come from the country B envelope within the overall funding ceiling for the EDF.

Conclusion

3.7 We have no quarrel with the purposes of the FLEX scheme or the wish to improve it: on the contrary. However, while it is clear how the proposals could tackle one of the two problems identified — "funds not being available to all countries which should be receiving support" — it is not apparent how they will speed up disbursement. We should be grateful if the Minister would explain how the proposed changes would achieve this. There are also the other issues where the Minister wishes to seek clarification.

3.8 We shall therefore retain the proposal under scrutiny, pending the clarifications that both he and we are seeking. However, we note that the Presidency is hoping to secure Council agreement to a Community position by the end of September, i.e., during the summer recess. Neither we nor the Minister wishes to contemplate a scrutiny over-ride. Therefore, if during this period the Minister is able to clarify the matters that he himself has identified to his satisfaction, and is also able to demonstrate that the proposal does indeed tackle the problem of slow disbursement as well as eligibility, we would not object to his joining a consensus in September. In such circumstances, we should of course expect him to write to us to explain the position he would have adopted.


14   Article 68.2 of the Agreement says that the purpose of this support is "to safeguard macroeconomic and sectoral reforms and policies that are at risk as a result of a drop in revenue and remedy the adverse effects of instability of export earnings". Back

15   Article 3.2(b) of Annex IV of the Cotonou Agreement. Back

16   (25393) 6370/04: see HC 42-xxi (2003-04), para 10 (26 May 2004) for the Committee's consideration of this Council Decision. Back


 
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