Select Committee on European Communities Seventeenth Report


Letter from Lord Tordoff, Chairman of the Committee, to the Rt Hon Clare Short MP, Secretary of State for International Development, Department for International Development

  At its meeting on 2 March, Sub-Committee A (Economic and Financial Affairs, Trade and External Relations) considered this Special Report from the European Court of Auditors, together with your Explanatory Memorandum of 17 February.

  The Sub-Committee noted that the Report was currently being discussed at the ACP Financial Affairs Working Group, but you did not indicate the extent of those discussions. We are concerned about the apparent confusion of responsibility for risk capital operations as between borrowers and the ACP governments on the one hand, and the Commission and the EIB on the other. We should, therefore, be grateful for more information than was contained in your Explanatory Memorandum on what you consider to be the major issues, and how you would hope to see them resolved. In the meanwhile we are holding this document under scrutiny.

8 March 1999

Letter from the Rt Hon Clare Short MP, Secretary of State for International Development, Department for International Development, to Lord Tordoff, Chairman of the Committee

  Thank you for your letter of 8 March in which you expressed concern about the issues raised in the Court of Auditors Special report No 24/98 (EDF Risk Capital operations), particularly the apparent confusion in responsibility for risk capital operations between the borrower and African Caribbean & Pacific governments on the one hand and the EIB and the Commission on the other. You invited my comments on what HMG considers to be the major issues.

  The arrangements governing the administration of EIB support are set out in the Lome Convention. The Convention describes the criteria for distinguishing between Risk Capital and Own Resource funds. It also explains that funding decisions must be made jointly with the ACP state taking into account factors such as the recipient country's level of development, its economic situation, the nature of the project and loan servicing issues.

  As you noted, this report has been discussed in the ACP/FIN Working Group. In these discussions, the UK supported many of the Court of Auditors' (ECA) findings. Although the Lome« Convention provides a framework for EIB funding criteria, we agree with the Court that its definition can be interpreted too broadly. We believe a sensible solution to this is for the EIB to explicitly justify the use of risk capital in each EIB financing proposal and to develop more transparent guidelines. In addition, the inclusion of accounting and reporting milestones agreed as part of a financing contract should be better monitored to ensure that the beneficiaries submit all the reporting information requested. With regard to interest rates, we believe that they should be set at market rates and that the Bank should further tighten up the guidelines concerning the reference rates for global loans applied by financial institutions.

  As part of the negotiations to agree a successor to the Lome« IV Convention, the Commission has proposed the establishment of an Investment Finance Facility (IFF) to promote commercially viable businesses. The IFF would replace risk capital and Lome« interest subsidy facilities be managed by the EIB. My Department is taking a keen interest in the Commission's proposals with a view to ensuring the new arrangements are as efficient and effective as possible. We shall ensure that the views of the ECA are taken into account when considering the new facility.

28 March 1999

Letter from Lord Tordoff, Chairman of the Committee, to the Rt Hon Clare Short MP, Secretary of State for International Development, Department for International Development

  Thank you for your letter of 28 March, commenting on what the Government considers to be the major issues arising from this Court of Auditors Special Report. Sub-Committee A re-considered the document at its meeting on 20 April and has now cleared it from scrutiny.

  We should however be interested to know more about the proposed Investment Finance Facility, and how it would differ from the present arrangements. In particular, would it ensure clearer lines of responsibility and greater transparency?

21 April 1999

Letter from the Rt Hon Clare Short MP, Secretary of State for International Development, Department for International Development, to Lord Tordoff, Chairman of the Committee

  Thank you for your letter of 21 April informing me that the European Court of Auditors Special Report No 24/98 has cleared scrutiny and requesting additional information on the Investment Financing Facility.

  As you are aware, the Commission has proposed new arrangements for the European Investment Bank's (EIB) participation in the successor agreement to the Lome« IV Convention. In drawing up their proposals, the Commission has sought to address some of the drawbacks to the current arrangements, including the fact that the EIB does not work to an explicit overall strategy in administering the facilities in its charge.

  The ad hoc Lome« working group in Brussels is currently examining the proposed new arrangements which envisage the creation of an Investment Finance Facility (IFF) to replace the current risk capital and interest subsidy facilities. The key objective of the IFF would be to develop enterprise in the ACP countries, to make these countries more internationally competitive and attractive to private investment. The IFF would act as a catalyst to stimulate domestic savings by helping to build local financial institutions and capital markets and by leveraging foreign investment. Other elements of the Commission's proposal include that:

    —  the IFF should be managed by the EIB in accordance with detailed strategic and operational guidelines;

    —  the working level committee which currently reviews meets in Luxembourg each month to review project proposals should be replaced by a new Investment Financing (IF) Committee that would focus on policy and strategy matters rather than individual project approval;

    —  the EIB should produce annual business plans covering a three year period and setting out the IFF's activities, expected financial results and budget. The EIB should report to the new IF Committee on the past year's activities;

    —  initial injections of funds should be financed from the European Development Fund (EDF) after which the IFF would operate as a market-based revolving fund and should be expected to earn a positive real rate of return in the long-term;

    —  resources should be used for direct financing of enterprises, indirect financing of enterprises through local intermediaries, support to privatisation and private infrastructure financing, and building the capacities of local financial and capital market institutions.

  The Government broadly supports most of the Commission's proposals. I am particularly encouraged by the proposals to establish policy guidelines and business plans (although I would like to see a stronger role for Member States than currently envisaged), as, like you, I am eager to ensure that the new arrangements create clearer lines of responsibility and enhance transparency. I attach a paper (a version of which has been submitted to the Commission and other Member States) setting out the Government's position in more detail which you may find of interest.

9 May 1999


  1.  We welcome the work the Commission has done and broadly support most of their proposals. The purpose of this paper is to set out the UK's views. The main text focuses on the key issue of governance and the core principles of the Facility. It also proposes that the technical details of the new Facility should be remitted to Member States' IF Committee representatives for consideration in consultation with the Commission and the EIB.

  2.  The annex contains more detailed views on the eight principles proposed by the Commission in document No 38/99 (attached for ease of reference). We would be interested in hearing the EIB's views on these draft principles.


  3.  The Commission has proposed that the Facility should operate within a framework of policy guidelines drawn up by the Commission in consultation with the EIB and subsequently endorsed by the Investment Facility (IF) Committee. However, the UK thinks there needs to be a stronger role for Member States. The IF Committee should not just rubber stamp policy agreed by the Commission and EIB. It should have the opportunity to feed into the policy process both:

    —  upstream (ie when the policy orientations are first being considered before any formal documentation is drawn up); and

    —  towards the end of deliberations (ie by approving the final draft of the policy guidelines).

  4.  We support the idea of making the IF Committee more strategic, focusing on policy and performance rather than projects. We welcome the proposal that the EIB should produce a three year rolling business plan setting out the broad operational plans and intentions of the Facility. This will provide a clear focus for the Facility's operations and a basis for judging progress (subject to the development of good performance indicators and effective monitoring systems—see below). Again, the content of the business plans should be discussed with the IF Committee upstream as well as being submitted for the IF Committee's approval. We agree that the IF Committee should be made up of Member States' representatives. These participants will have the opportunity to add significant value to the EIB's strategic deliberations.

  5.  The Bank does not have a set of clear objectives setting out exactly how its proposed activities will specifically contribute to and further the EU's policy objectives. In the absence of such objectives and clear performance indicators and assessments, there is little basis for Member States to judge the effectiveness of the Bank's operations and, more particularly, whether financing the Bank's activities is a good use of limited EDF resources. We would like the Bank's ACP Lending Unit, in consultation with the Commission and the IF Committee, to produce a clear set of objectives and performance indicators against which assessments can be made.

  6.  The recommendations made in the Court of Auditors' recent report on the EIB's risk capital operations in the ACP States (No. 24/98) should be considered during the deliberations on the new arrangements.

Core Principles

  7.  The UK thinks that the core principles of the new Facility should encompass the following sentiments:

    —  The Facility's primary aim should be to promote a healthy and competitive private sector in ACP countries, and to support countries following private sector-friendly strategies. In supporting commercially viable public corporations, it should normally look for prospects of increased private sector participation or privatisation.

    —  The Facility's operations should be market based, and it should seek commercial returns to investment. A target rate of return should be set to secure the Fund's viability and eventual revolving nature. The Facility should not make concessional loans. It should however have access to a small grant facility available for use in direct association with its investments, for example for up-stream work, environmental enhancement.

    —  The Facility should operate within the framework of the Community's country strategies, and co-operate closely with other development and development finance institutions.


  8.  In order for the IF Committee to feed its views and expertise into the guidelines (which the Commission envisages being drawn up prior to the entry into force of the new Convention), the new Committee needs to be constituted as soon as possible. If the governance arrangements can be agreed and the IF Committee established soon, it could work on the technical details of the new Facility and report back on its findings and suggestions to the ad-hoc group.

April 1999

Letter from Lord Tordoff, Chairman of the Committee, to the Rt Hon Clare Short MP, Secretary of State for International Development, Department for International Development

  At its meeting on 25 May, Sub-Committee A considered your letter of 9 May giving details of how the new facility would operate. It found this information extremely useful, and has asked me to thank you for providing it.

25 May 1999

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