Documents considered by the Committee on 22 March 2017 Contents

8EU financial assistance for Overseas Countries and Territories

Committee’s assessment

Politically important

Committee’s decision

Cleared from scrutiny; further information requested; drawn to the attention of the International Development Committee

Document details

Report from the Commission on the implementation of the financial assistance provided to the Overseas Countries and Territories under the 11th European Development Fund

Legal base

Article 91 of Council Decision 2013/755/EU

Department

Foreign and Commonwealth Office

Document Number

(38541), 6590/17 + ADD 1, COM(17) 84

Summary and Committee’s conclusions

8.1The UK has a number of dependent island territories which are not part of the EU, but which benefit from preferential access to the European market. Under the EU Treaties, they are classified as “Overseas Countries and Territories” (OCTs), which can export their goods tariff- and quota-free to the EU. They also have privileged, but not full, access to the EU’s market for services such as insurance, gaming and shipping. British Overseas Territories (BOTs) which enjoy OCT status include the Falklands, Bermuda and Montserrat. France, Denmark and the Netherlands also have oversees dependencies which are treated in the same way (see “Background” for more details).

8.2OCTs are also eligible for financial assistance from the European Development Fund (EDF).26 Between 2014 and 2020, planned bilateral EDF investment to the six eligible UK territories will amount to €77 million (£65.7million).27 While these are relatively small sums compared to bilateral financial assistance provided by the UK Government,28 the EDF allocations are still substantial given the economic size of these island communities.

8.3On 22 February 2017, the European Commission published a report on the allocation of financial assistance to the overseas territories from the EDF in 2016.29 Overall, the Commission concludes that “notable progress” was made in 2016, with the adoption of four funding programmes and the formulation of an additional six.

8.4In his Explanatory Memorandum on the report, the Minister for Europe (Sir Alan Duncan) notes that EDF support for the British Overseas Territories is welcome because, “as dependent territories, their access to concessionary finance is constrained”. With regards to the UK’s exit from the EU, the Minister simply states that “until exit negotiations are concluded, all rights and obligations of EU membership remain in force”.30

8.5The Commission report on financial assistance for the EU’s Overseas Countries and Territories is a straightforward description of progress made in deciding on the funding programmes for OCTs under the European Development Fund, and we are content to clear it from scrutiny.

8.6However, we are concerned about the lack of clarity about the economic implications of the UK’s exit from the EU for the British Overseas Territories more generally. Brexit will necessitate amendments to the EU Treaties to expunge references to the UK as a Member State. With respect to the OCTs, this will presumably mean that the BOTs will lose their preferential access to EU markets, as well as access to financial support under the European Development Fund.

8.7It is unclear what the practical consequences of Brexit will be for the volumes of trade between the BOTs and the rest of the EU, especially if—as the Secretary of State for Exiting the European Union (Mr David Davis) has said—there is a possibility of no successor UK-EU trade agreement being in place by the end of the two-year Article 50 period.31 While the territories affected could seek to become beneficiaries of existing EU trade initiatives for developing countries, such as the Generalised System of Preferences or the Economic Partnership Agreements with ACP countries, there is as yet no clarity about the practical or legal implications of those options, or whether they could be accomplished in time to prevent a cliff-edge.

8.8With respect to development assistance from the European Development Fund, it seems likely that this source of financial support for the BOTs will eventually dry up after Brexit as these territories will no longer be “associated” with the EU.

8.9In light of the above, we ask the Minister to answer the following questions:

8.10We also draw this chapter to the attention of the International Development Committee.

Full details of the documents

Report from the Commission on the implementation of the financial assistance provided to the Overseas Countries and Territories under the 11th European Development Fund: (38541), 6590/17 + ADD 1, COM(17) 84.

Background

8.11Four EU Member States (the UK, France, the Netherlands and Denmark) maintain special constitutional relations with a number of dependent territories outside Europe, such as the Falkland Islands or Greenland. While not part of the EU or bound by EU law, under Article 198 of Treaty on the Functioning of the European Union (TFEU), these “Overseas Countries and Territories” (OCTs) are nonetheless ‘associated’ with the EU. This means that the EU has a duty to “promote the economic and social development of the countries and territories and to establish close economic relations between them and the Union as a whole”.32

8.12The territories which are classified as associated OCTs are listed in Annex II to the EU Treaties. At present there are 25 such territories, all islands, of which 12 are British Overseas Territories (BOTs).33 Gibraltar—despite being a BOT—is not included, as it has a special status under Article 355 TFEU, which makes it part of the EU. The full list of OCTs is reproduced in the Annex to this Report.

8.13The legal framework for managing the EU-OCT association is the Overseas Association Decision (OAD), which was adopted unanimously by the Council in November 2013.34 In practice, the status of Overseas Country or Territory confers distinct economic benefits in the form of unilateral trade preferences when exporting goods into the EU, as OCTs are exempt from EU tariffs and quotas. With respect to trade in services, the EU must accord companies or individuals based in one of the overseas territories with “treatment no less favourable than the most favourable treatment applicable to like natural and legal persons of any third country with whom the Union has concluded an economic integration agreement”.35

8.14In addition to having preferential market access, OCTs are also eligible for financial assistance from the European Development Fund (EDF).36 Between 2014 and 2020, total bilateral EDF investment to the six eligible UK territories37 amounts to €77 million (£65.7million), with the largest recipients being Saint Helena (€21.5 million; £18.7 million), Montserrat (€18.4 million; £15.7 million) and the Turks & Caicos Islands (€14.6 million; £12.5 million).38 EU development assistance for these territories is dwarfed by bilateral investment and assistance provided by the UK Government.39 However, the fact remains that the EDF allocations are not insubstantial relative to the economic size of these island communities.

8.15On 22 February 2017, the European Commission published a report on the allocation of financial assistance to the overseas territories from the EDF in 2016.40 The report sets out the consultations that have taken place between the EU and the OCTs on their individual and regional financial assistance programmes. It also identifies the proposed sectors for which support is to be given, such as disaster risk reduction, environmental protection and sustainable tourism.

8.16Overall, the Commission concludes that “notable progress” was made in 2016, with the adoption of four funding decisions (including for the Turks and Caicos Islands in December 2016). With respect to the other UK territories, the report notes that the funding programme for Anguilla is awaiting adoption, and those for the Falklands and Pitcairn are being formulated. The financial assistance for St. Helena and Montserrat are still under discussion.

8.17The Minister for Europe (Sir Alan Duncan) submitted an Explanatory Memorandum on the Commission report on 6 March.41 After summarising the document, the Minister notes that EDF support for the British Overseas Territories is welcome because, “as dependent territories, their access to concessionary finance is constrained”. With regards to the UK’s exit from the EU, the Minister simply states that “until exit negotiations are concluded … all the rights and obligations of EU membership remain in force”.

Our assessment

8.18The Commission report on financial assistance for the EU’s Overseas Countries and Territories is a straightforward description of progress made in deciding on the funding programmes for OCTs under the European Development Fund. However, we are concerned about the lack of clarity about the economic implications of the UK’s exit from the EU for the British Overseas Territories (BOTs) more generally in the Minister’s Explanatory Memorandum. We recently expressed a similar concern as regards the consequences of Brexit for the developing nations of the Commonwealth.42

8.19With respect to the Overseas Territories and Brexit, the Minister’s Explanatory Memorandum only notes that “until exit negotiations are concluded”, all of the UK’s rights and obligations that flow from its EU membership remain in force. By extension, this also applies to the rights and obligations of the British Overseas Territories insofar as they benefit from association with the EU under Article 198 TFEU.

8.20Although this is not referred to explicitly by the Minister, the UK’s exit from the EU will necessitate amendments to the EU Treaties to expunge references to the UK as a Member State. With respect to the OCTs, this will presumably mean that the 12 British Overseas Territories will be removed from Annex II to the Treaties. As a result, Article 198 TFEU and the Overseas Association Decision will cease to apply to them. Similarly, Gibraltar would lose its special status as an Overseas Territory which is part of the EU.

8.21The Minister has not provided us with any information about the volume of trade between the Overseas Territories and EU Member States other than the UK.43 However, in its evidence to the Foreign Affairs Committee prior to the referendum, the Falkland Islands government said:

“Total sales of Falkland Islands produced fish, meat and other agricultural products into the European Union are valued at around £180m per annum and the EU is the largest single market for our products globally. Whilst tiny compared to total UK-EU trade, we estimate that over 70% of our total GDP is dependent upon access to the European market. Restricted access in any form would be potentially catastrophic to our current economy and also continued economic development.”44

8.22For other territories, in particular Bermuda, the Cayman Islands, the British Virgin Islands and Gibraltar, the economic benefits of access to the EU’s market for financial and other services are also significant. For example, Gibraltar’s government has said that access to the EU market has been important for its shipping, financial and gaming industries.45

8.23In its White Paper on Brexit, the Government said that it will seek a “wide reaching, bold and ambitious free trade agreement with the EU”.46 With respect to the Overseas Territories, the Government stated simply that the “unique relationships that (…) the Overseas Territories have with the EU will also change”. It may well be that the Government intends the Overseas Territories, following Brexit, to have access to EU markets on the same footing as the rest of the UK under the terms of this future trade agreement.

8.24However, it is conceivable that the UK might leave the EU without a new trade agreement in place. It is reported that the Secretary of State for Exiting the European Union (Mr David Davis) told the Cabinet in February 2017 to prepare for the “unlikely scenario” of no agreement being reached by the end of the two-year Article 50 period.47 The Prime Minister herself told European ambassadors on 17 January 2017 that “no deal for Britain is better than a bad deal”.48

8.25It therefore follows there is a possibility, whatever its likelihood, that the British Overseas Territories could lose their preferential access to the EU market without a transitional or successor arrangement in place. In such an event, it unclear how the BOTs would maintain current volumes of trade with the EU as they would face new trade barriers. There may be a possibility for the Overseas Territories to join the new EU-ACP economic partnership after the current agreement expires in 2020. Alternatively, they could seek to become beneficiaries of the EU’s Generalised System of Preferences (GSP), which grants tariff- and quota-free exports from developing countries for numerous types of goods.49

8.26As regards development assistance from the European Development Fund, it seems likely that this source of financial support for the BOTs will eventually dry up after Brexit as these territories will no longer be “associated” with the EU. The sums of EDF support are relatively small compared to bilateral support provided by the UK. However, given the small size of the economies in question, they are nonetheless significant in relative terms.

8.27The UK has committed to budgetary contributions to the EDF until 2020 by separate treaty, and we have raised the issue of legacy commitments and payments from the EDF even after Brexit elsewhere.50 However, it is unclear whether the Government intends to make up any shortfall in financial assistance for the overseas territories resulting from Brexit.

Previous Committee Reports

None.

List of Overseas Countries and Territories under Article 198 TFEU

Member State

OCT

Denmark

Greenland

France

French Polynesia

France

French Southern and Antarctic Territories

France

New Caledonia and Dependencies

France

Saint Pierre and Miquelon

France

Saint-Barthélemy

France

Wallis and Futuna Islands

Netherlands

Aruba

Netherlands

Bonaire

Netherlands

Curaçao

Netherlands

Saba

Netherlands

Sint Eustatius

Netherlands

Sint Maarten

United Kingdom

Anguilla

United Kingdom

Bermuda

United Kingdom

British Antarctic Territory

United Kingdom

British Indian Ocean Territory

United Kingdom

British Virgin Islands

United Kingdom

Cayman Islands

United Kingdom

Falkland Islands

United Kingdom

Montserrat

United Kingdom

Pitcairn

United Kingdom

Saint Helena and Dependencies

United Kingdom

South Georgia and the South Sandwich Islands

United Kingdom

Turks and Caicos Islands


26 See for more information on the European Development Fund our Report of 18 January 2017.

27 €1 = £0.85305 as at 3 March 2017.

28 For example, in 2015 alone, Montserrat received some £40 million in funding from the Department for International Development. Full statistics are available from the Government website.

29 COM(17) 84 (21 February 2017).

30 Explanatory Memorandum submitted by the Foreign and Commonwealth Office (6 March 2017).

31 BBC News, 28 February 2017.

32 The OCTs are different from the “Outermost Regions” of the EU (France’s Overseas Departments, Spain’s Canary Islands, and the Portuguese autonomous regions of the Azores and Madeira) which are considered integral parts of their respective Member States and as such part of the territory of the European Union, where EU law applies.

33 The Isle of Man and the Channel Islands are Crown Dependencies, not Overseas Territories. Three British territories listed under Article 198 TFEU (the British Antarctic Territory, the British Indian Ocean Territory, and the South Georgia and Sandwich Islands) do not have a permanent population and as such are not usually considered OCTs, as there is no economic development to promote.

34 Council Decision 2013/755/EU on the Association of the Overseas Countries and Territories with the European Union.

35 OCTs can also participate, under the same conditions as and as part of the EU countries to which they are linked, in EU programmes in areas such as education, research and competitiveness and innovation.

36 See for more information on the EDF our Report of 18 January 2017.

37 The six British territories which qualify for EDF funding are Anguilla, the Falkland Islands, Montserrat, Pitcairn, St. Helena and the Turks & Caicos Islands. The other three (Bermuda, the British Virgin Islands and the Cayman Islands).do not qualify on account of their advanced economic status.

38 See for more information the European Commission website.

39 For example, since 2011, the Government is spending over £285 million on the construction of a new airport on St. Helena. In 2015 alone, Montserrat received some £40 million in funding from the Department for International Development.

40 COM(17) 84 (21 February 2017).

41 Explanatory Memorandum submitted by the Foreign and Commonwealth Office (6 March 2017).

42 See for more information on the possible impact of Brexit for developing Commonwealth nations our Report of 25 January 2017.

43 See for more information on BOT-EU trade relations: “Brexit and the Overseas Territories: Repercussions for the Periphery“ by Peter Clegg in the Commonwealth Journal of International Affairs (20 September 2016).

47 BBC News, 28 February 2017.

49 Regulation (EU) No 978/2012 applying a scheme of generalised tariff preferences.

50 See for more information on the EDF our Report of 18 January 2017.




24 March 2017