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 base | Article 300 (2) and 310 EC, and the ACP-EC Partnership Agreement; unanimity
|
| Document originated | 19 June 2007
|
| Deposited in Parliament | 26 June 2007
|
| Department | International Development
|
| Basis of consideration | EM of 10 July 2007
|
| Previous Committee Report | None; but see (25393) 6370/04: HC 42-xxi (2003-04), para 10 (26 May 2004)
|
| To be discussed in Council | To be determined
|
| Committee's assessment | Politically important
|
| Committee's decision | Not 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
| 
