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UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 179-iv House of COMMONS MINUTES OF EVIDENCE TAKEN BEFORE INTERNATIONAL DEVELOPMENT COMMITTEE
AID UNDER PRESSURE: SUPPORT FOR DEVELOPMENT ASSISTANCE IN A GLOBAL ECONOMIC DOWNTURN
Wednesday 1 April 2009 MR ECKHARD DEUTSCHER MR MACIEJ POPOWSKI Evidence heard in Public Questions 180 - 237
USE OF THE TRANSCRIPT
Oral Evidence Taken before the International Development Committee on Wednesday 1 April 2009 Members present Malcolm Bruce, in the Chair John Battle Hugh Bayley Mr Virendra Sharma Mr Marsha Singh Andrew Stunell ________________
Witness: Mr Eckhard Deutscher, Chairman, OECD Development Assistance Committee, gave evidence. Q180 Chairman: Good morning, Mr Deutscher. It is nice to see you again in front of our Committee on a different topic, which is our concern about aid under pressure in the present circumstances. We had an informal meeting yesterday with Robert Zoellick, President of the World Bank, and he said the impact is likely to be severe on poor countries. Putting it the other way around, what he basically said is we started with a financial crisis that then became a crisis in the real economy but he thinks that will then hit the developing countries, the real economic crisis, and then that will start to undermine their financial institutions and it is likely to come in waves. His comment was that it requires a great deal of humility to predict anything. I say all that by way of introduction because that is what I am going to ask you to do, to give your assessment of what effect you think the current downturn and the crisis will have on developing countries. Do you have any evaluation of which countries are likely to be the most vulnerable and the hardest hit and, if so, what will be the criteria which determines that? Mr Deutscher: Thank you, Chairman. I am happy to be here again, it is a pleasure for me. I would like to refer briefly to the recent statistics we published two days ago. I very much believe, to come straight to the question in the title, aid is under pressure; indeed, I believe that development is under pressure as well. Gains made over the past years are being reversed and this is my most fundamental concern. Let me share with you some data. In 2008, the total Official Development Assistance from the member countries of the OECD's Development Assistance Committee rose to $119.8 billion and this corresponds to an increase of 10.2 per cent in real terms. Let us also be clear - I know there is a double side - this is the highest dollar figure ever recorded. Probably more significantly the bilateral co-operation excluding debt financing and humanitarian emergency relief rose by 12.5 per cent in real terms in 2008 compared to 2007. These are the ODA figures that, in many ways, really matter most for development and clearly indicate that members are substantially scaling up their core aid programmes. The net bilateral ODA from DAC donors to Africa totalled 26 billion. This corresponds to a slight increase of 1.2 per cent but, excluding debt relief grants, bilateral aid to Africa rose by 10.5 per cent in real terms. Of those 26 billion, 22.5 billion went to Sub-Saharan Africa. While the overall rise was only 0.4 per cent in real terms, it was ten per cent if you factor out the debt relief grants. I will not go deeper into these statistical details, but let me try to summarise these figures in the following way. As recently as several months ago eight targets seemed to be slipping out of reach but now it seems the situation is reversed. The aid commitments undertaken by donors, notably the Gleneagles commitments of the G8 countries, have come within realistic reach. The Gleneagles commitments usually come with the overall price tag attached but they are, however, an aggregation of individual donor country commitments and many of these donors now look well placed for meeting their commitments. Let me take a rough look at the three groups of countries. We all know there are countries which have met already and exceed the ODA ratio of 0.7 per cent of GNI - Denmark, Luxembourg, The Netherlands, Norway and Sweden - and I think they will continue to outperform. The next group are donors who are on track to meet their commitments for 2010. The United States looks set to meet its target of doubling aid to Sub-Saharan Africa from the 2004 base line. Canada is also well on track to doubling its aid in nominal terms from 2001 to 2010. Japan is also in this group. The outlook for meeting its targets appears much more challenging. Similarly, a range of EU donors who arguably set the most ambitious aid targets are also in this group and this includes the United Kingdom as well as other bigger EU countries like France, Germany and Spain, but also smaller countries like Belgium and Ireland. As of 2008, meeting their commitments for 2010 will be challenging but they are now broadly within reach. Finally, there are some countries who have not acted practically over the last years to meet their aid commitments. Abstracting from debt relief, countries like Austria, Italy or Greece would have to increase their ODA budget measured as a share of GNI by a multiple of their current level. In fact, if Italy lived up to its commitments this, in itself, would close half the aggregated gap for meeting the collective Gleneagles targets. Notwithstanding this qualification, the overall message for 2008 is positive and in times like this crisis I believe this is very encouraging. The 2008 figures for aid are not the only reason to be encouraged. It is clear that these figures do not yet factor in any impact the crisis would have on aid flows. However, the OECD has undertaken new work to compile forward information on future aid flows from both bilateral and multilateral donors. While the OECD will not give this information on individual donors due to a confidentiality clause, this essential benefit is a benefit for aid recipients to have a much better sense of the aid they can expect to reach them over the next years. The nature of this information will in itself be extremely important for effective strategic planning by developing countries. When you are talking with finance ministers they are really keen to focus on this fact and ensuring that aid for our partner countries can have then the strongest possible impact. The preliminary results of this work show that aggregated donor spending plans imply an increase of an additional 11 per cent until 2010 in country programmable aid. This corresponds to an additional $9 billion of fresh resources, in today's dollars, which developing countries will be able to factor into their development plans from now on. Nearly half of this increase is expected to go to Sub-Saharan Africa and South and Central Asian countries. This means that 2008 will not be a blip. Donors in the aggregate have actually programmed further aid increases for 2009 and 2010. Q181 Chairman: Does that take into account the fact that Italy and Ireland announced cuts in their aid budget? Does the aggregate take that into account? Mr Deutscher: This is a cross-view, but it counts in that Ireland will cut this year 95 million from their aid budget. We had a peer review last week in Paris on Ireland and this was discussed by the Committee also with the express intention, and taking into account where we are, of having a look to revise this perspective. Q182 Chairman: And Italy? Mr Deutscher: In such a situation nobody can make a concrete promise. This depends on the Parliament and on the budget, but it is planned. Q183 Chairman: The 56 per cent cut that the Italian parliament has voted, is that taken into account in your projections? Mr Deutscher: Yes. The currently programmed increases do not suffice to fully reach the aggregate commitments undertaken at Gleneagles and this should be very clear. We are estimating that to meet the 2010 targets a further $15 billion would have to be disbursed in addition to currently planned expenditures, but this is an additional effort and I think this is a very real possibility to meet those commitments. Such an effort, however, must not be short-term. Reaching the targets will mean little if they are not sustained. ODA needs to be a reliable and predictable source for resourcing long-term sustainable development results, and meeting aid targets for the sake only of having met them would be a hollow achievement. To be meaningful and to produce the expected development result, they need to be sustained and built upon; anything else would defy the very purpose they are meant to have and it would be a terrible cost for developing countries and for taxpayers in the donor countries. I want to be clear that additional efforts are warranted. There is no longer a question that developing countries are being hit severely by the global crisis, instead there is the very distinct possibility that they end up as the worst hit victims while already being the most vulnerable. The need for aid has increased dramatically. Aid increases are of vital importance because of progress the world has seen towards the Millennium Development Goals. We should not forget this common target on a global level. In my view the MDGs remain important and we should not forget them. They should not be eroded as the crisis unfolds. Already in 2008 100 million people are estimated to have fallen back into absolute poverty due to the food and fuel crisis and tens of millions more will join them this year as a result of the crisis. One billion people will suffer hunger this year. As I said, aid is under pressure because development is under pressure. The increase in aid figures should not be a cause for self-congratulatory complacency but should spur all to undertake further efforts. Fulfilling the commitments made repeatedly at Head of State level is not an optional luxury. The viability of many developing country plans and strategies depend on them, and the long-term economic prospects and political stability of many poor countries is important. In today's world, a world even more interconnected, this concerns everybody and should concern everybody. Development co-operation, as I said repeatedly, and I will say it here and say it everywhere I am talking with parliaments and governments, is not charity. Development co-operation is a strategic political investment also in our interest, in our common interest together with developing countries. Especially in the current crisis, honouring commitments for development assistance is an important test for the credibility and viability of international co-operation in addressing challenges we all share. It is perfectly clear that this crisis will not be overcome by domestic actions alone. International co-operation is absolutely and remains to be absolutely essential. It should also be clear that developing countries need to be a part of the crisis response and that aid will have to be a key instrument in this response. Is aid under pressure? I see it as being under pressure, and it is obvious that the strains the crisis is putting on public finances will put governments' budgets under high pressure and this includes aid budgets. I think the end of this year when the parliaments are deciding about the budgets for 2010-2011 will be decisive. Q184 Chairman: We have a number of specific questions. You have already made your comment about the MDGs and made clear that you think they should be maintained as a paramount and the targets should be maintained. Do you have any criteria for determining which specific types of countries are most vulnerable or the factors that might guide donors as to where the priorities should lie? Mr Deutscher: We in DAC are not making recommendations on countries. I know that the World Bank, the IMF and, so far as I am informed, DFID are undergoing such analysis. The IMF, for example, noted that countries with adequate reserves have been able to supply foreign currency liquidity to domestic agents but the capital flight is still a concern. There are countries where external debt is under pressure: Russia, Korea and Kazakhstan. Poor African countries do not seem to be experiencing the worst effects in the crisis, but Bob Zoellick said we will have waves. We will have a wave now and there will come a wave afterwards, maybe when the economy is more or less on the way to recovery. This remains a concern. We are not working along the lines of your question about developing countries. Q185 John Battle: Can I thank you for that comprehensive and helpful statement. It is a pity that your statement was not reflected in the headlines of The Financial Times which said that donor nations fall behind on aid pledges. It is true of some, but not of all, and sometimes a bit of encouragement from the headlines would be helpful. Having said that, I do not want to ask about the summit and the wider picture but DFID in particular and DFID's role and response to the financial downturn which is focused on infrastructure and social protection. I would like to ask you how helpful that policy response is and what other measures would you like to see from bilateral donors such as DFID? Mr Deutscher: Let me make a basic statement. DFID is one of the best, if not the best performer and the model for a lot of other countries. I heard when I presented these numbers two days ago that DFID is also one of the best performers in the British administration. Again, not only in terms to conceptualise development policy approaches but also in the organisational forms, DFID is and remains a model. I visited more than 15 donor countries speaking with governments, parliaments, with agencies and NGOs, and I think this is my general view. Concerning infrastructure to build up a social net, I can share the view, also what is the approach overall in the World Bank, that investment in infrastructure is contributing to economic growth. Economic growth remains a key factor for development. We should not underestimate what development can contribute and we should not over-estimate what development co-operation can do, but this remains a key factor. Secondly, now more than ever it is necessary to care about what social nets could be in developing countries. This might be an emergency step forward. My recommendation would be that with all the multiple approaches we have these are two very important elements and content of development co-operation. Q186 John Battle: If I was to ask you about the new Rapid Social Response Fund to which DFID contributes some 200 million, do you anticipate DAC members donating to that or do you think they will go to the World Bank's Vulnerability Finance Facility? Mr Deutscher: Not only DFID, but there are other DAC donors who are providing, especially to the World Bank, more funds. For example, Japan has provided 100 billion in extra money. The European Union has committed 75 billion to help the IMF. The proposed Vulnerability Finance Facility by the World Bank was a proposal from Bob Zoellick to fund 0.7 per cent of the stimulus packages. This morning I heard Bob Geldof proposed to invest three per cent and this will not be enough of what would be needed. Australia, Canada, Germany and New Zealand - Germany provided already $100 million for the infrastructure fund especially for the purpose to invest in infrastructure to promote growth - and so far DFID is in the same line like other donors. Q187 John Battle: As well as infrastructure, I see the point for economic growth but supporting balance of payments at the present time to make sure there are proper social safety nets, do you think that should be a higher priority? Mr Deutscher: We do not know yet how far the second wave will reach the developing countries. We need to have a detailed look at how the different countries are affected. At this stage to be prepared to have an investment here is absolutely in step with a fundamental reflection and responsibility. I think this should be done. Q188 Hugh Bayley: If balance of payments support is needed for these developing countries, who should provide it: the World Bank in terms of providing government revenue to allow those programmes to take place or the IMF in terms of loan finance to cover a fiscal deficit? Mr Deutscher: These are different instruments for different purposes and this needs again closer co-operation on how to harmonise both instruments with different purposes in the partner countries. These instruments are needed and money is going into these funds. I think this is okay. Q189 Hugh Bayley: Aid is only one policy instrument for relieving poverty in developing countries. What views does the OECD have on the macro-economic policies which OECD member countries should follow in our own countries in order to reduce the impact of a downturn on developing countries? While we were in Tanzania recently the finance minister welcomed a fiscal loosening in OECD countries because he felt that would shorten the recession and would create an environment which would be more benign than would otherwise be the case for exports. In particular, do you have advice to the EU about initiatives you would like them to seek in relation to the WTO round? Mr Deutscher: This is exactly trade. When you are talking about the macro-economic impacts, we have a good example that aid alone cannot carry all the burdens. We need here much more policy coherence, that is different policy sectors working together. We need a successful WTO round. Everybody is talking about protectionism, and protectionism is only lip service, a Sunday speech. Now the time has come to make it serious that we have more equal global structures in trade. Here I have a number in mind. Only through better access to the world markets by the developing countries can be mobilised more than $350 billion. This is three and a half times more than development aid. This means that while we are giving aid, at the same time we are handcuffing ourselves through false policies. We need another qualitative response to this crisis. This is one of the biggest concerns I have. While we are talking about inclusiveness of globalisation, in reality developing countries are excluded. It is not enough only to talk about numbers and figures and the investment. Money is important enough but we need new qualities to respond to all the impacts of the crisis. Q190 Mr Singh: We had an informal meeting with Robert Zoellick yesterday and he outlined a number of initiatives that the World Bank had already taken in response to the crisis: the Vulnerability Fund, Fast Track Facility the four trust funds. In your view, have multilateral institutions moved fast enough and effectively enough to meet the crisis that developing countries are facing? Mr Deutscher: I am no longer on the board of the World Bank. Principally a president must have the protection of whatever he is saying by the shareholders but I know, knowing Bob Zoellick very well, that he is looking at what is necessary to decide. I think with the Vulnerability Fund, for example, the proposal of 0.7 per cent came very early. My concern right now is that we need to have much more co-ordinated efforts in the sense we need not create too many new instruments. To create new instruments can mean that we have new administrative bodies around these new instruments and we already have 242 multilateral programmes and this is enough. But to your principle question, we need to react very fast. When we have to consider new facilities we should bear in mind that they should come also to efficient operational forms. To create new instruments might need time, but we need to react immediately. Q191 Mr Singh: Do you think the World Bank has acted very fast? What about the European Commission, the UN, the IMF, is there anything more these multilateral institutions could be doing? Mr Deutscher: In my view, how I can judge it? Being in contact with colleagues of the Commission and the UN, everybody is trying to reflect on the given instruments they have to apply these instruments. What has not happened so far is that the donors have come together to share and verify the different instruments they have and what they can provide. Here I am in very close contact with the Commission and I hope that in four weeks when the Development Committee is in Washington we can go a little bit further to identify and, in a given case, harmonise the instruments, what the bilaterals and the multilaterals, in the plural - and we should not forget also the regional development banks - can do together. Q192 Mr Singh: Given the crisis and looking more towards the medium and longer term, at the G20 we have an opportunity to look at the financial architecture of multilateral institutions. In your experience, in your view, are there reforms that should be made to that existing architecture which will lead us to be more effective in delivering to the poorest countries? Mr Deutscher: To what level and depth of reforms should the multilateral organisations go? I will quote Horst Koehler, who was the IMF Director, the President of Germany, who said the Europeans should have a look, when the reforms earn this name, that the Europeans are represented with one chair. This he said last week. I know this is very complicated but the Europeans, without losing their voice and their influence, should have a look at how we can have a more efficient governance structure in both institutions, the World Bank and the Fund. I also had seven years' experience in the World Bank and there is a lot of room for improvement. It is sometimes not acceptable how regionalised the governance structures are dealing in and with these institutions. We have here a lot of improvement and we should do it and then give space to identify what the famous voice of developing countries, the voice of the poor, is in those institutions and of the emerging countries. We know that there is not a common line of interest between the emerging countries and the developing countries. The donors, or those who dominated in the last decades those institutions as a construction in the 20th Century, must renovate the old system and make the system fit for the needs of the 21st Century. We have not done the first steps. There are thoughts, but this is one of the biggest needs I see. Q193 Mr Singh: Do you think that an extra seat on the board for Sub-Saharan Africa is enough? Mr Deutscher: No. Now there are 25 offices but we do not need more of the same. We need to restructure and give real decision power. This has to do with shares. I know this is easier said than done but it is more a symbolic step to give one more office to Sub-Saharan Africa to have it taken seriously. Q194 Hugh Bayley: How realistic is it to suggest that you should have an EU seat on the IMF in particular rather than national European seats when clearly you see in the previews of the G20 there is not a common European macro-economic policy in response to the downturn? How on earth would you get Germany and Britain both agreeing to appoint one person to speak for them both on global macro-economic policy when you have different central banks, for instance? Mr Deutscher: I am realistic enough seeing the problems we have, quoting a very experienced colleague, when he is trying to push a political structure taking into account developing and emerging countries in a global body. When we want to maintain the relevance of those multilateral institutions, we need to give more political power also to those countries which are now excluded. What might be one way is a group of countries with the most common denominator. This can be Europe but I am realistic enough to know this is not right now always a practical discussion. This is maybe for the next 15 to 20 years. Q195 Hugh Bayley: At the start of the meeting you talked at length about the figures you have just published looking at last year's aid flows. I understand that the OECD-DAC in May is going to publish a report on aid flows looking to the future for the next two or three years. Are you able to share with us any of your initial conclusions in that regard? In particular, what impact do you think the downturn will have on aid flows across the DAC as a whole over the next two or three years? Mr Deutscher: This 11 per cent is forecast on what we can identify until now. You have a chart number, it is in press release number 4 or so, of what might be the future flows. Under the paradigm what was promised, what was politically announced by member countries, you can identify the numbers. For example, Italy must disburse additionally 6.5 billion, Germany 3.7 billion or so and other countries as well. This is along the lines of the political promises that were politically announced. Again, I am coming back to the impact of the crisis and I am coming back to the credibility of what was committed. The job I am doing is to remind donors always what they have promised. The other point is the aid effectiveness agenda. To be more effective we need to fulfil what our commitments are. This is a qualitative issue and this is a quantitative issue. I will keep, if you wish, this pressure on the Member States. Q196 Chairman: Is there not a danger in you applying this pressure that Member States will find ways of bringing things into aid that are marginal? Quite a lot of the NGOs feel that debt relief should not be counted, the migration effect, refugees and students, whatever it might be. Do you think that is a danger, the more you put pressure on they will not necessarily come up with the real money but find ways of putting things into the pot they are spending anyway and counting it as aid? Mr Deutscher: Maybe you want to pressure me to open up against the discussion on the ODA criteria, what should be counted or what should not be counted. To be serious, I remember my predecessor told me that all the member governments were happy when this Pandora's box was closed three years ago and we defined the criteria of ODA, what should be counted in or not. I am hearing birds singing from the roofs in some capitals to reflect again on these ODA criteria. Principally, I am open for this discussion but there must be also on the other side the political will not to escape the development commitments by counting in, let us say, security or military engagements. This is another criterion. Maybe we can open up another criterion of policy sector, outside of a narrow sense of aid what other policy sectors are providing to global development, but this would be another level. This has another characterisation of discussion but let us be careful with what are now the responsibilities in the ODA criteria. Q197 John Battle: Our worry would be that some worthy causes are funded, climate change for example, and there is double counting going on. That money is passed across to the ODA budget but it is really for another initiative, good and worthy though it is. Similarly, assistance to refugees in Britain should not really be counted as ODA money when it is not actually going to help developing programmes. Are you detecting that happening elsewhere? That is happening in Britain. Mr Deutscher: Here and there I am sensing, not in a concerted manner, that this pressure is increasing. I have a very clear position: everything else, on climate change or migration, should be additional. That is my clear view. Q198 Mr Sharma: A lot of pressure on the currency depreciation is affecting OECD-DAC members' expenditure. What support can the OECD-DAC offer donors such as DFID that are experiencing a decline in the purchasing power as a result of currency depreciation? Mr Deutscher: The ODA figures which we publish are not distorted by changes in the exchange rate. This movement in the exchange rate has no impact on the commitments how they are expressed as ratios of national income or the donor domestic currency terms. Q199 Mr Sharma: Which countries are likely to be affected by this? Mr Deutscher: I have said already we have no statistics on single countries. This is not the job of our mandate but I know that this is the mandate of the World Bank and the IMF and also DFID is working on a single country analysis. Q200 Chairman: I take your point you are quantifying the commitments in terms of the percentage of GDP which is defined in terms of the national currency, but in reality a lot of what DFID spends is either spent in dollars or euros or local currencies. I have not yet found a currency in the world where the pound has not sunk, so on that basis, although your figures do not show it, there is a real reduction in the purchasing power. Mr Deutscher: This is what we will figure out. This we have on the monitor in the methodology how statistics are elaborated. You might remember in this press release we are always talking about 2004-based figures and values and this is the criteria we will maintain. That means we know at a certain stage what was the real increase or decrease. Q201 Andrew Stunell: The problem that this Committee sees in relation to British aid is that two things are happening: the currency is purchasing much less in dollar and euro terms, and actually the 0.7 per cent is a reducing figure as well if the GNI of the UK falls. Could I turn to the harmonisation of the different aid programmes? You produced a wonderful figure that there were 242 multilateral programmes and clearly at a time when aid is under pressure something needs to be done to not necessarily bring them together but to make sure they all work together. Can you say something about how that can be achieved and what you see the challenges as being? Mr Deutscher: I am not telling a secret, but maybe you know that DAC is undergoing a fundamental reflection on what bilateral aid in the future is or must be under the condition of a globally changed landscape. We are having with all member countries fundamental reflection, and we discussed in this group what we are calling aid fragmentation or the aid architecture. I believe the last time I was here, and I am carrying these figures in my mind, the numbers of individual agencies were 280. We have over 40 UN units and more than 25 development banks working globally or regionally. There have been efforts underway for years to talk about coherence, co-ordination and co-operation, but we need to tackle this much more seriously. In this reflection exercise we are doing maybe this will be one of the challenges we have. We want to tackle it and the first step we did was last year OECD-DAC published an analysis of the multilateral programmes. From there I have the 242 programmes in my mind, and around those programmes are administrative bodies. The problem is the quality of harmonisation and this is not work that DAC can do alone. We have to co-operate very closely with the World Bank, the IMF and other multilateral banks, not to mention what is increasingly important also, the private sector. This is one of the most serious challenges I see in this business for the next year. In my view, what we are doing is investments. When you have a company and everybody is investing in the different units without having a market strategy, in very different single markets, this is not very successful. We will decide that to tackle these problems it can only be done with serious co-operation with the other institutions. Q202 Andrew Stunell: At the G8 and G20 meetings there are opportunities for those kinds of issues to be brought forward. What advice would you give to the United Kingdom Government and to DFID about the point of view that the country should be adopting in those discussions? Mr Deutscher: I heard that there are one or two sentences regarding the developing countries. We all heard there will be a strong focus to provide the IMF with more money and there is a call to have reforms in the multilateral institutions, not so much in the systems but in both institutions. My advice would be to qualify more in an operational sense what should be done, and not only as an intention but also to underscore this with a time line. All such declarations are suffering when there is not a time line as to when you should have reached which target. Q203 Andrew Stunell: Those 242 are probably all political initiatives launched at a point to solve a particular problem. We have a new set of problems. Do you foresee a new set of political initiatives and perhaps the 242 might be increased rather than reduced? How can we get hold of that and make that a better structure altogether, harmonised as you put it? Mr Deutscher: There are two criteria: who is doing what in which area in the UN in the multilaterals, or multilateral programmes , not integrated but linked with bigger institutions like the World Bank. We need to elaborate a methodology on which programme is where right now and where is the most common denominator to put programmes together and to reduce those programmes. The second criterion is we have to simplify the processes between the decision to disburse money and this money going out. The time should be much shorter than it is in a lot of these programmes. Again, we are here at the very beginning to tackle this aid architecture and I think there is a real need to do it. Q204 Andrew Stunell: Does the current crisis make it easier? Is the pressure to do that increased or is it going to be put to one side? Mr Deutscher: I hope this crisis is deep enough and people are sensing that the time of lip service is over, now we need to act. We do not need new studies. We do not need to identify what we need to do, we know it, it is the political will. It is a problem to act and to do it. It makes me sometimes furious that for years we are talking about the same issue without acting. This is a matter of political will and I am asking for this political will. Q205 Hugh Bayley: We have been told by some British NGOs that something in the order of $150 billion of revenue is lost by developing countries through tax evasion. It is clear that G20 is going to discuss this issue but our Secretary of State, Douglas Alexander, while acknowledging this as an important issue, challenged the figure. Does OECD-DAC have any view of how much developing countries lose through tax evasion? Mr Deutscher: No. We are not elaborating on these figures in developing countries. I heard not only $120 billion but much more can be mobilised by appropriate tax systems in partner countries. Two or three years ago there was co-operation between the Taxation Committee of the OECD, which is not working on developing countries, and the Development Committee. This is exactly what I want to strengthen: having a look through the experiences of taxation systems at how this can be applied also to partner countries. I think this is not only to mobilise money, which is important enough, this has also to do with structure building for transparency and good governance in the single countries. This has also to do with justice in the country so that people who can pay taxes are doing so. So far this is a double motivation. I am in favour of strengthening this point that member countries are working much more together with partner countries to establish taxation systems in the partner countries. Q206 Hugh Bayley: What steps in particular would you like to see the UK take to increase transparency and reduce the opportunities for people from developing countries with deposits in the UK to evade tax due in developing countries? Across the OECD as a whole, which countries do you think perform better in terms of transparency on taxation matters and which are the ones you feel have most to do? Mr Deutscher: I would wish that DFID could again be the model or the example to present a concept for other member countries on how to elaborate taxation systems in developing countries. As far as I know, there is no comprehensive or basic concept that we have, this would be a new instrument. I know that the UK or DFID would be able to do it. Here DFID should be the fore-rider to present such a paper and to discuss it in the Committee. Q207 Hugh Bayley: We will encourage DFID to do so, but DFID is a single national development ministry and cannot act as a referee of behaviour for other countries. If there is an agreement at the G20 that there should be more openness and transparency about taxation matters amongst developed countries, would the OECD be a viable body to implement and report on compliance with such an agreement and would it be willing to do so? Mr Deutscher: Yes, that is what I would recommend, and I am sure the Taxation Committee of the OECD can provide assistance or advice and this should be used. I think in the Committee there is the openness to proceed. This is a lack that we have right now and we should close this lack. Q208 Chairman: Do you think that the British Dependent Territories are a possible source of tax evasion, so lack of transparency affects developing countries? Places like the Turks & Caicos Islands, the Cayman Islands, Gibraltar, the Channel Islands, the Isle of Man, do you have a concern they are not transparent enough and people who are trading and dealing in developing countries can use these countries or these territories as a means of evading taxation? Mr Deutscher: This is a very serious problem. When there are new global rules then the rules are linked to everybody and there should be no exceptions. This is nothing else than to be serious and accept what was concluded globally. Secondly, the OECD is in contact with those islands to negotiate. Chairman: Thank you very much. It has been a helpful and useful exchange. I am sure we will meet again. We will be watching your publications and reports with interest.
Witness: Mr Marciej Popowski, Director EU Development Policy: Horizontal Issues, Directorate General for Development, European Commission, gave evidence. Q209 Chairman: Good morning, Mr Popowski, and welcome again. This is the second occasion when you have both been before us for different reasons. You have heard the discussion and some of the issues will be common. Perhaps I can start by looking at the Commission's situation specifically. What steps can the Commission take to ensure that both the Commission and Member States' commitments are fulfilled? Do you share Mr Deutscher's view that the MDGs' aims remain paramount and can still be progressed at the same rate given the downturn? Mr Popowski: I am glad to be back. Let my start by saying that I share Mr Deutscher's analysis of the situation; indeed, there is some reason for optimism in the figures published by the OECD. We are going to follow and present European figures specifically for the EU as a whole next week on 8 April. Whereas the situation in 2008 seemed to have improved, there are still question marks on the future 2009-2010. As you know, the EU has taken individual and collective commitments to reach certain levels of aid, 0.56 per cent by 2010 and 0.7 per cent by 2015, and in order to get there we need to strengthen our efforts. We are not there yet even though 2008 was a good basis. Of course we all know that the effects of the financial crisis, and the additional pressure on the aid budgets which is the main subject of our meeting, will increase in 2009 and 2010. For example, if we were to meet our collective commitments in 2010 we would have had to scale up by 20 billion already. The EU is still the largest donor combined, the 27 Member States and the Commission. We also increased our spending last year arriving at 0.4 per cent of the GNI, and we also increased the volume, but that effort needs to be maintained and strengthened. We constantly remind our Member States of the commitment and obligations and those were, of course, reconfirmed at the Doha Conference and was also reconfirmed by our leaders at the European Council meeting last June. We are going to remind our Member States again as early as next week since the Commission is going to adopt a policy paper - a communication as we call it - on the measures we would like to adopt to help the developing countries in coping with the consequences of the crisis. It will be published on 8 April together with some supporting documents outlining the current situation in areas like aid effectiveness, financing for development, aid for trade and the state of play of the MDGs, so more efforts need to be done. We are going to send a very powerful message to our Member States: the commitments must be met and the current financial and economic crisis cannot be an excuse not to meet our commitments. Q210 Chairman: How do you deal with Ireland and Italy who have both made cuts? Are you protesting about those cuts or checking whether they are saying it is a one-off and they will catch up? What is the current state? I do not want to pick on them but they are two countries who specifically and explicitly cut their budgets. Mr Popowski: That is true. We are aware of the situation and are in touch with them, of course. We have analysed this situation together with our partners and, as I said, there is no valid excuse not to maintain the commitments. Of course, there is still some time. It requires a lot of effort and that is why we have been encouraging our Member States to adopt multi-annual spending plans, and roughly half of them have done so. Thirteen Member States have adopted these multi-annual plans and that increases the predictability of aid. They can also play a little bit with time. Some of the Member States, including the United Kingdom, still intend to back-load quite a lot of spending at the end of this period, let us say 2010 to 2015. We, as the European Commission, do not have any legal instruments to force our Member States to spend more. The national budgets are an exclusive national competence so we can only send reminders and engage in a dialogue, which we are currently doing. We cannot force them, of course, but we will not shy away of even, if need be, naming and shaming. Q211 Chairman: Not only that, but Italy is going to be leading the G8 and it would be very unfortunate, in addition, having to be in the impossible position of encouraging people to increase aid if they have cut theirs. Mr Popowski: That is true. We are going to use the opportunity of the G8 Summit in Italy in July to raise the issue of the level of spending but also the question of burden sharing among donors. Being the largest donor worldwide we will definitely continue to encourage the others to be ambitious as well. There are also some encouraging signs from the US that the new US Government would like to double the level of development assistance to arrive at $50 billion. We hope Japan will do so as well as the others so we can have a combined mass attack. Q212 Chairman: You announced on 13 March a €2.7 billion commitment to African, Caribbean and Pacific countries. Is this new money or is this part of the already planned allocation? Mr Popowski: It is part of the allocation under the 10th European Development Fund which, as you know, came into force last year. That is the so-called intra-ACP tranche which we can use for different purposes mainly concentrating on areas having original effect. For example, some of these funds we are going to use to finance the next addition of the African Peace Facility which is a very novel instrument created to support African-led peace-keeping efforts but also capacity building in the area of peace and security. It is only part of it and there are also other areas we are going to finance with that. Q213 John Battle: Could I ask about DFID's response as well which is focused on infrastructure and social protection? I wonder what your view is of that policy response and what else would you like to see from bilateral donors. Mr Popowski: It is going definitely in the right direction. In the policy paper I mentioned the Commission is going to propose targeted and well co-ordinated action in a number of areas and one of the areas is definitely infrastructure, and that was already mentioned by Eckhard Deutscher. If we invest in infrastructure we are automatically creating ways and means of cushioning the impact of the crisis on the real economy because we would spur job creation and promote growth so that is what we intend to do as well. We intend to boost spending at the Commission to invest more in the EU-Africa Infrastructure Trust Fund, for example, so we are going to double our inlay. Q214 John Battle: It is not so much what the EU does with the compound of the money but it is the combination of approach that DFID is putting together an emphasis on social protection as well as infrastructure. I wonder what other EU Member States are doing. Are they pushing hard on the infrastructure and down-playing the social protection or are some countries pushing social protection a bit more now? Is DFID in line or are other countries coming in behind DFID? Mr Popowski: I think DFID is in line in the sense I do not have a full picture of what all the Member States are doing. That is also the reason for us putting forward a policy paper in order to have a discussion and encourage Member States to act together in a co-ordinated fashion. The social protection element is crucial. There will be social, political, possibly also security related consequences of the crisis in the developing countries and we need to invest in the governments' abilities to cushion the social impact. That is the right approach and we are going to do the same on behalf of the Commission by creating a new vulnerability instrument which we dub the FLEX Plus. There is already a FLEX instrument, the purpose of which is to offset possible revenue losses from exports. The new instrument will be based on a different premise in the sense it will be based on the forecast of possible losses. We want to grant support to countries, to the governments, so they will be able to finance certain social expenditure. Q215 John Battle: I can understand that the Commission is taking that initiative. To its credit the Commission has been ahead of the Member States, and that is right from the beginning of the policy. On this initiative, in terms of having a blend of social protection and infrastructure, could you tell me which other Member States, as well as the UK through DFID, are actually promoting the social protection? Mr Popowski: First of all, it is our role to spearhead some efforts and to federate our Member States, so that is what we intend to do. We very much hope that the Member States will follow suit. When we proposed to them to concentrate on infrastructure, social protection, as well as on agriculture and investing in the green economy we hoped to create this mass effect. What other Member States are doing, for the time being I do not have a full picture at this stage. I know that Germany is also thinking along the same lines. They are very mindful of the social dimension, the social consequences, of the crisis, but I do not think I can give you a full picture. Q216 John Battle: It may emerge from discussing the paper. Mr Popowski: We very much hope so. We want the Member States to get together and act in a co-ordinated way. Q217 Andrew Stunell: I wanted to pick up that point about co-ordination. We were talking in the first session about harmonisation of the multilateral agencies of which there sounds like far too many. Do we really have 27 different aid strategies within the EU? Mr Popowski: I do not think we have 27 different aid strategies. We have 27 players plus the Commission, which is not the same thing, or 28. In terms of policies and strategies, we are quite well co-ordinated in the sense that Europe was very much the driving force behind the high level conferences of Accra on aid effectiveness and Doha on financing for development. We were pushing for a very ambitious outcome and that was a co-ordinated effort by all the Member States: now we have to deliver. In terms of co-ordinating and harmonising our approach, there are a number of very clearly described commitments concerning harmonisation, use of country systems, conditionality and the division of labour where we need to deliver but, as a matter of fact, we have already started. We are making progress albeit slowly. We know that we need to make progress quickly because especially now in times of crisis it is worth real money. According to our very, very rough calculations, if we were to implement everything that is covered by the Accra Agenda for Action, all the recommendations to donors, we would be able to spend between €25 billion and €35 billion more by 2015. That is, in a way, a rough estimate of the real value of a well implemented aid effectiveness agenda. Q218 Mr Singh: We heard from Mr Deutscher that we do not need new instruments. We do not need to proliferate new instruments. I was very interested when you said about the EU Vulnerability Fund, FLEX Plus and at the same time the World Bank has its Vulnerability Finance Facility. Why do you not just go in with the World Bank? Why are you creating a separate Vulnerability Fund? Mr Popowski: We are not creating something totally new but are just adapting an existing instrument. On the general remark, I fully agree that we do not need new instruments. We should stop the proliferation but we have to see how effective and how quick we can be. The instrument we are now working on will be financed from the European Development Fund so its specific target is the ACP countries. Also for formal contractual reasons we cannot offer that money to another global institution because we are managing that fund jointly with our partners in the ACP countries. As I said, it is not entirely new. We are changing the target to be more effective and to be able to act counter-cyclically, because the current flex is basically a pro-cyclical instrument as we are trying to offset the losses of export revenue which can be quite dramatic. According to our estimates, the results of the crisis in some countries vary. In export-dependent countries like Mali, where the dependence on the export of primary commodities is at a level of 95 per cent, we want to anticipate this negative effect and offer an instrument to cushion the impact. Q219 Mr Singh: You would still encourage EU States to support the World Bank Vulnerability Fund? Mr Popowski: It is a proposal which is on the table which needs to be examined in detail. We have been in touch with Robert Zoellick on that as well. We spoke both to President Barroso and Commissioner Michel. We are quite open to discussion but we want to make sure it is effective, that it is fast and we are not creating another layer of bureaucracy. If it is the best way, fine, we are ready to look into that, but we need to mobilise what we have in the EU at that stage. Q220 Mr Singh: I asked this question of Mr Deutscher: are you satisfied that multilateral institutions have moved fast enough and effective enough in terms of help or instruments to help poorer countries? Mr Popowski: I think all the multilateral institutions have worked very hard over the last few months to be ready to respond. Of course, if you need to mobilise money and if you need to spend it quickly it is a big challenge, but I think we have made progress. The Vulnerability Fund is just one of the ideas and some other ideas will be discussed at the G20 starting tonight. We hope that, for example, the question of doubling the special drawing rights of the IMF will be sorted out quickly and it will finally happen because that is really needed. Quite a lot of partner countries need that money. It was also mentioned by Eckhard Deutscher that the European Union has made a pledge to contribute €75 billion to the IMF capital to boost its spending capacity. We have made progress but we need to go further. Q221 Mr Singh: I think two years ago we were with the IMF and at that time they were closing offices and shedding staff because they were not making any money because they were not lending enough. I asked if there was a need for the IMF anymore. Obviously there is still a need and bigger than it was before. Mr Popowski: I am afraid it is. Q222 Mr Singh: Mr Deutscher was very strong on the need for reform of multilateral institutions at the World Bank. Do you share his view? Do you think they should be removed and, if so, what kind of reforms would you like to see? Mr Popowski: We have arrived collectively at a stage where all the institutions are basically at a stage of being re-examined. We are looking into the whole international set-up. That is one of the objectives of this summit starting in London tonight, to try to outline a new global governance that includes the World Bank, the IMF, the G20, the G8 and the OECD. I think we need to be more representative and more inclusive. The question that you posed to Mr Deutscher, I can repeat his answer. An additional seat to Sub-Saharan Africa on the World Bank board will not do the trick. It is a good start but we need to go further than that. We need to finally reach agreement on a different way of electing the heads of the IMF and the World Bank. It must be a merit-based process with no geographic bias. The picture of the multilateral institutions, especially the aid agencies, is quite complex. The report by the OECD presented last year was telling, but now we need to draw conclusions. Do we really need so many players around the table and so many different international and national flags? We should be serious about this. We should start a discussion on that as well. It is not for now to decide if we are going to cut by half the number of multilateral institutions but it has to be borne in mind otherwise I do not think we are quite serious about an effective international governance system. It is not likely to be a single all-encompassing institution at the end of the day but at least we should try to be simpler and more effective. Q223 Mr Singh: It is hard to do it. Mr Popowski: It is. Q224 Andrew Stunell: We have heard that there are 242, the 27 plus one, and you are now having an EU Vulnerability Fund. Is that the 243th fund? How does this fit in? You are arguing for simplicity but you are also proposing new different programmes. Mr Popowski: It is an instrument; it is not a separate structure. It is an existing instrument which we are going to refocus within the current EDF budget, but we are going to use unspent reserves under the 10th EDF to finance that. It is not a new body. It is not a new vertical fund. The Commission is going to manage it as we did before. We are not adding to the confusion hopefully. We are not adding to the complex picture of the multilateral world. Q225 Andrew Stunell: If I am a developing country's government and I want to access this money, we have the same problem in civic society in this country, you have about 35 different organisations to apply to and filling the forms in takes more time than spending the money. How will a developing nation access this money? What will be the route for accessing this separate fund? Mr Popowski: What we intend to do is to grant that money under the reformed FLEX instrument, one of the European abbreviations, to grant most of it in the form of budget support. As you know, that is the preferred instrument of the European Commission, budget support, and we want to do it exactly in that way, so offer the money directly to the government of the partner country so they can use it the way they see fit. The idea would be to offer the possibility of additional interventions in the social sphere but the procedure is fairly easy. We believe that the budget support is a predictable way of spending and a way of spending really respecting the principle of ownership by the partner country itself. Q226 Chairman: It has been suggested, and there has been an undercurrent in the aid and development debate for years, that free trade for developing countries would do more to lift people out of poverty than all the aid and remittances that we are all working on and yet we are further away than ever on getting a progressive free trade agreement. Mr Deutscher very strongly was saying far from being less urgent, now is the moment to deliver because it would do more for the developed and developing world than any other single action. To be blunt, one of the main obstacles to delivery is the European Union. Is it not time that the European Union recognised that its protectionism, particularly on agricultural, is not only bad for development but bad for the world economy and bad for the European Union? Mr Popowski: I am fully aware of the importance of the Doha Development Round. We also believe that it needs to be brought to a successful outcome as soon as possible. The Commission is going to state publicly in the communication, the policy paper, next year that it is a prerequisite of making progress and especially now in times of crisis. It is a very complex situation. As you know, the negotiations have been dragging on for a very long time. I do not think it is only the fault of the Europeans that we could not reach agreement, but I hope that the context has changed so dramatically now that all the players around the table in Geneva will be more willing to compromise. Q227 Chairman: I have no difficulty saying the same thing to President Obama; it is the United States and the European Union. You are the Director of Development for the European Union, is this not a moment for your division to strengthen your arguments? We all know the politics. We all know there are Member States who have vetoes and ultimately you cannot do anything about that, but what you can do is use your powers of persuasion and information to confront the difficult partners with the fact that actually they are no longer protecting their own interests but are damaging it. It is estimated that the agricultural production from Sub-Saharan Africa could increase dramatically if they had the opportunity to get access to our markets. Indeed, we saw when we were in Kenya cut flower production on a world-class scale which was delivering cut flowers to European markets with one-sixth of the carbon footprint of flowers produced within the EU and doing it competitively. The potential is there and that would be an expansion of trade that would benefit both the EU and developing countries. Is it not the responsibility of your particular part of the Commission to really reinforce those arguments to use this moment now to say it is time for a radical rethink and that protectionism is working against the real interests of economic recovery? Mr Popowski: It is our role to be an advocate and watchdog of policy coherence for development. I would put it in that context. That is only one of very many inter-linkages between different policy areas where we have to be careful. When we implement a certain policy, be it agriculture, trade or migration, that should not undermine the development interests or the interests of the developing countries. That, of course, is what we are doing in our part of the house, also pushing the policy coherence agenda and making both our colleagues and other parts of the Commission and the Member States aware of the potential damage we could create by conducting policies not conducive to development results. We are going to discuss with Member States all the aspects of development policy before the formal meeting of development ministers in May. We will present our policy proposals, our communication, our Monterey report on financing and aid effectiveness and all the aspects will be put before the Member States again. No doubt we will have a difficult discussion but a discussion that should lead to conclusions by the ministers. I agree that is the right time to do so. Q228 Chairman: That is fair enough, but in terms of the EPAs which are negotiated by the Commission, could you review the way you are doing these and remove the requirement for any reciprocal liberalisation? Could you not make them pro-development agreements? Mr Popowski: You know the story of the EPAs, the story behind it, and its origin to make our trade agreements with the ACP countries WTO conform. The perception of the EPAs was somehow distorted in many quarters in the sense that it was seen as something that we were imposing on the partner countries. I would like to put it in a different way. The EPAs were conceived as an instrument to promote regional integration and intra-ACP trade in different regions. Of course we ran into difficulties with our accomplice so that we are still not there yet and we are continuing our negotiations. I am not dealing with the EPA negotiations directly so I am not in a position to give you details on the state of play, but what I can say is that especially now, in the difficult time of the financial economic crisis, regional integration is also a way of promoting growth and opening up new market opportunities for the partner countries. I do not think we should abandon that approach. John Battle: The EPAs are seen as a stumbling block because it is seen as do as we say and not do as we do. There has to be an opening up and a liberalisation of developing countries' markets when we are not doing enough. I wonder if I could turn back on your words of a strong message. It is not potential damage to trade. We have set up, in the Houses of Parliament, a Trade out of Poverty group that is all-party and puts together some interesting characters where we have got together to say the facts are there is a six per cent decline in trade now. It is actual damage that could wipe out the whole of the aid budget to the 0.7 per cent within one year. All that effort to get everyone in line to pay 0.7 per cent could be wiped out this year by the decline in trade alone. I wonder whether I could dream of the Italian Presidency giving an incredibly strong leadership in June from the EU to get Doha back on track. Could I dream of much more pressure coming from within the EU leadership to say unless those trade talks are not back on track at the G8 then we are wasting our time debating aid? Q229 Chairman: Sweden is taking over the presidency of the EU and Italy is taking the G8. Mr Popowski: I can say that I share your dreams. We have already sent quite a number of messages to the G8 Presidency. The EU Presidency, both the current Czech and the future Swedish, is fully aware of the challenge. Our position is that the Doha rounds should be finalised as soon as possible because we need to create a real value for developing countries, especially the least developed countries, and to provide duty free and quota free access for them. For me it is a part of our policy coherence agenda and it is not a bureaucratic exercise. Of course we have to use different bureaucratic instruments, impact assessments and different kinds of consultations, but it is really crucial and it is very political. What is really needed, and I would refer back to the Chairman's remark on the role of the Director General for Development, is we have to be a whistleblower and a watchdog and that is what we are. We are constantly reminding other colleagues of development dimensions and of potential collateral damage of the different policies. I think we reached quite a good level of agreement within the DAC community that the policy coherence for development should be one of the main tasks of the DAC in the future. Eckhard Deutscher referred to the ongoing work of the DAC reflection group on which he is presiding and of which I am member for of the European Commission. We already know that is one of the main challenges for the future, to make sure that we are more coherent in implementing the development policy and that the development policy is, in a way, co-owned by other departments within national administrations and within the Commission. It is not only for the development people to push for a pro-development agenda but the others have to be on board as well: trade, agriculture, internal affairs and all the parts of the national and international administrations. Q230 John Battle: Could I return back to the donor aid commitments? We got the impression that half the Member States have issued timetables for their multi-annual budgets. Could you give us a clue as to which have not, or if you could let us have a list? You may not have them. Mr Popowski: I do not have a list with me. Q231 John Battle: Could you provide us with a list? It may help in some of the conversations. Mr Popowski: Yes. Q232 John Battle: The outcomes you are hoping for from the EU development ministers meeting in May, what are the top priorities? I liked your remark about sending strong messages. I think that the Commission for nearly 40 years now has led on the development agenda and pulled people to co-ordinate a line, but what do we want to come out of the EU development ministers this May, because that could be quite a crucial meeting? Mr Popowski: It is. It will take place just two or three weeks before the UN High Level Conference in New York where the Stigler Commission report will be debated. It will come two months before the G8 Summit so it will be one of the highlights in the development debate this year. We are going, as I said, to present to our Member States a communication and our report on our Monterey commitments, so the state of play but also recommendations for the future. The main message is that we need to honour our commitments. We need to act, and we need to act swiftly, in order to be able to tackle the consequences of the crisis. We are going to cover quite a vast ground in the paper. We are going to propose more co-ordinated and targeted action. We are going to push for more effective aid which I have already mentioned. Also we would like to propose some additional instruments that we could offer to the developing countries. We need to mobilise everything that is at our disposal, both the ODA money and we need to take forward the ongoing discussion, but we need to make progress on innovative sources of financing. There is only a handful of Member States that are using innovative sources of financing like airline tax, for example, to finance development-related expenditure. We can go much further than that by using revenue from the Emissions Trading Scheme revenue. That is still not the case but there is huge potential there and that is exactly where the development agenda is very much linked to the Copenhagen Summit on Climate Change. We need to be serious about financing both mitigation and the adaptation levels. There is a huge effort that is needed. According to our estimates we need to spend €175 billion on mitigation plus €50 million annually on adaptation, so I think the agenda will be quite full. We will suggest that we need to engage in a targeted way in areas that I have already described, being infrastructure, agriculture, green growth, so environment protection and climate change. We need to progress on trade and continue with disbursing the Aid for Trade money. I think I have covered the Doha round already. Q233 John Battle: Doha will be on the agenda. Will the trade questions be on the agenda? Mr Popowski: Yes. It will be quite a comprehensive discussion because all the issues relevant to the EU development policy will be on the table. We very much hope to arrive at a common position that will inform the EU position both on the UN conference in New York and other development events later this year. Q234 Mr Sharma: Currency depreciation is a fact in many areas in the EU. To what extent is the effect of currency depreciation likely to affect European Commission expenditure? Mr Popowski: We calculate our statistics in euros and the euro was not affected by depreciation so we do not think that it will produce immediate effects for the time being. There are reasons to believe that it might be the opposite because the euro is quite strong which potentially could be difficult for the European economy, but I do not think it would really impact on the aid budgets. On the other hand, if the European economies continue to shrink the real volume of aid in 2009 and 2010 is likely to diminish calculated in percentages of GNI even if we stick to our commitments to spend 0.56 per cent in 2010 and 0.7 per cent in 2015. Q235 Mr Sharma: The Secretary of State has told the Committee here that the fall of the pound against the euro has put pressure on the Department's funds as it makes a contribution to the EU. Are there any other Member States facing similar problems? Mr Popowski: I think it could be the case with the non-eurozone members of the EU, Sweden for example or most of the new Member States. Of course, their contribution to the ODA budget of the European Union is rather small. They account for eight per cent of the European GNI and only two per cent of the European ODA. Most of the new Member States are non-eurozone members and their currencies are severely affected by the crisis and they are really depreciating rapidly so that could be the case. Q236 Chairman: The UK has maintained its commitment. The consequences are that your budget is not affected because the UK will pay its euro contribution, but because the pound has depreciated it will affect our domestic aid budget which could mean that it will inhibit other possible non-core contributions that the UK might have made to European Commission programmes. I do not know that whether that is in your calculations. Mr Popowski: We are aware of it. We have been discussing that with our colleagues in DFID while preparing our report on financing for development. That was already taken into account during the preparatory work for the report that is going to be published on 8 April. Q237 Andrew Stunell: We had a discussion in the first session about taxation and its impact on developing countries. The Commission has published the draft Council Directive on taxation which I presume your department will have had some input into. You are probably aware that it has hit some stormy water in this building with our European Scrutiny Committee who perhaps are not as enthusiastic as they might be about the direction it is going. Can you just say to us what action the Commission is taking to reduce tax evasion and where you think this should proceed in the next year or two? Mr Popowski: First of all, in order to be effective the action on tax evasion must be global. If we do it on our own, even as the EU, we will not really solve the problem. We need to be comprehensive. I understand that will be quite vividly discussed by the G20 leaders tomorrow in London. There is already political agreement to address the problem of the non-co-operative jurisdictions. This discussion has already produced a knock-on effect. If countries outside the European Union are ready to sacrifice the banking secrecy rule, it shows that things are changing. Taxation, as you know much better than I do, is a very sensitive issue for our Member States. The European policy on taxation, in fact, covers a very limited ground. What we are discussing is basically the VAT and it is for the Member States to decide on the rates. When it comes to the development agenda, we are going to promote good governance in the area of taxation in the partner countries, also using incentives like the governance incentive tranche of the European Development Fund. That could be used also to promote good governance in the area of taxation if it is a priority jointly identified by us and our partner countries. We are going to be proactive to the extent that the Member States allow us to be because it is not our competence. There is also ongoing work in the Commission on the question of the corporate tax base, for which I am not responsible in the house, but that is quite a difficult complex issue which is linked to the question of de-localisation of businesses within Europe as you can imagine. It was supposed to be accomplished last year but it is still ongoing. The Commission is going to propose some ideas on how to harmonise not the rate of corporate tax but the method of calculating the corporate tax base. Chairman: Thank you very much. As you can see, the Committee is somewhat troubled by all these challenges, as I guess we should be and you should be as well. I should indicate that it is not all bad news but it is uncertain. I hope you also get the message that we have strong views about making progress on trade agreements as essential for development and we encourage you, therefore, to speak out as the Development Director on that. Thank you for coming here and exchanging your views with us; it has been extremely helpful. Our intention is to produce this report around the end of May in time to feed into the Government's White Paper so you will see the recommendations there. |