# EUR-Lex - 52012DC0366 - EN

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# 52012DC0366

**COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS Improving EU support to developing countries in mobilising Financing for Development. Recommendations based on the 2012 EU Accountability Report on Financing for Development. /* COM/2012/0366 final */**

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TABLE OF CONTENTS

1........... Introduction.................................................................................................................... 3

2........... EU Support for Stronger Public
Finances in Developing Countries................................... 4

2.1........ Increased Domestic Revenue
Mobilisation....................................................................... 4

2.2........ Maintaining Sustainable Debt
Levels................................................................................ 4

3........... Fostering International Private
Flows for Development..................................................... 5

3.1........ Trade as an Engine of Development................................................................................ 5

3.2........ The Development Impact of
Remittances......................................................................... 5

4........... Official Financing for Global
Goals.................................................................................. 6

4.1........ Scaling up Official Development
Assistance..................................................................... 6

4.2........ Accounting for all ODA.................................................................................................. 6

4.3........ Scaling up Funding for Tackling
Climate Change and Preserving Biodiversity in the wider context of Sustainable
Development.................................................................................................................. 6

5........... Leveraging Development Finance
and Seeking Synergies................................................. 6

5.1........ Innovative Financing Sources.......................................................................................... 6

5.2........ Innovative Financing Mechanisms
and Engaging Private Sector........................................ 6

5.3........ Strengthening Synergies between
various Financing Sources............................................ 6

6........... Making EU Actions more
effective: Busan Implementation at Country Level..................... 6

6.1........ Country-Level Results Frameworks................................................................................ 6

6.2........ Mutual Accountability Frameworks................................................................................. 6

6.3........ Reduced Fragmentation.................................................................................................. 6

7........... Conclusions.................................................................................................................... 6

COMMUNICATION
FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN
ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS

Improving EU support to developing
countries in mobilising Financing for Development.

Recommendations based on the 2012 EU
Accountability Report on Financing for Development.

1.           Introduction

The EU has constantly been the driving
force in mobilising international support for development: it is the largest
aid donor and the leader in aid effectiveness, the largest and most open market
for developing countries and is at the forefront promoting the three dimensions
of sustainable development.

This standing has been achieved through a
number of specific EU commitments to support developing countries in their
efforts. Many of these contribute to the overall goal of helping developing
countries to mobilise all sources of financing for development for achieving
their development goals.

The international Financing for Development
agenda, set at the Monterrey conference[1] in 2002 and taken forward
at the Doha conference in 2008, is a crucial ingredient in all major
international discussions on issues requiring global cooperation. MDGs,
international climate action, sustainable development, international trade negotiations
— they all touch on how to finance progress towards the goals set. Rightly so,
as taking into account the available means is essential for setting realistic goals.

What are these means in the development
context? By far the biggest source of financing for development available to governments
is the domestic revenue — this also explains why the primary responsibility for
development lies with the developing countries themselves. Aid from development
partners complements this, and can catalyse other flows, but is in itself not
the major element for many developing countries. It is, however, international
trade, investments and money sent back home by migrants that can stimulate the
real economy, given the right conditions. There are also outflows from
developing countries, which need to be taken into account.

Still, donors have an important role in development
and Official Development Assistance (ODA) matters. Firstly, donors can take
action that supports or creates leverage for other development finance. Secondly,
ODA is more important to the poorest countries, who have limited access to
other sources. These two considerations also underpin the EU Agenda for Change.

At the same time, we need to look at all
development finance — domestically mobilised finance, international inflows,
and also outflows — as in reality developing countries have to design and
implement their development policies taking into account the combination of the
resources available.

The EU and Member States, in contrast to
other donors, have made various commitments in all areas of financing for
development and annually monitored our progress towards these.

This Communication builds on the
previous progress as well as the new principles set out in the Agenda for
Change, and proposes improvements in EU support for mobilising development
finance. These proposals are based on data presented
in the Staff Working Document accompanying this Communication and the previous
Reports published since 2003.

2.           EU
Support for Stronger Public Finances in Developing Countries

2.1.        Increased
Domestic Revenue Mobilisation

Domestic revenues tend to be the most
important source of development finance directly available to governments.
Considering that revenue collection levels[2] in developing countries,
and more so among Low Income Countries, are clearly below the global average,
this is one area where significant additional efforts should be made. Increases
in government revenue can translate directly into increased investment on
development priorities, which also underlines the responsibility for spending
it well.

It is up to the partner government to enact
and uphold the appropriate regulatory measures and policies to ensure that the
virtuous cycle of tax collection-development spending-development
progress-increased tax collection materialises. Donors can only facilitate this
process if the partner government is ready and committed. In this spirit, the
EU should continue to increase its support to strengthen the capacity of tax
systems in line with the three principles of Good Governance in the tax area
(transparency, exchange of information and fair tax competition) and public financial
management.

Actions: The EU and its Member States should incorporate tax administration
and fair tax collection, including rationalising tax incentives and good
governance in tax matters, into policy dialogue with partner countries.

In addition, donors can support developing
countries in domestic revenue mobilisation by regulatory means. To combat illicit
capital flows from developing countries, the EU contributes to improving
transparency of international financial flows, e.g. by supporting capacity in
identifying misuse of transfer pricing. These efforts are complemented by
cooperation initiatives such as strengthening the Extractive Industries
Transparency Initiative and adopting legislation for country by country
reporting for multinational enterprises[3]. The EU and its Member
States should continue these actions.

2.2.        Maintaining
Sustainable Debt Levels

Ensuring that debt is sustainable is an
integral part of good management of public finances, including appropriate
macroeconomic policies to ensure stability. The prolonged period of economic
crisis has reduced the ability of many developing countries to respond to
possible additional shocks[4], while also reducing the
ability of developed countries to extend support.

The debt-management capacities of
developing countries and their resilience against economic shocks should be
enhanced further. The EU and its Member States have delivered on their debt-relief
commitments and increased their level of involvement. The EU also monitors developing
countries’ finances in cooperation with the IMF, and supports reforms in public-finance
management, including debt management.

In the light of the increased use of
lending mechanisms for developing countries, and the increased share of
non-Paris Club loans in developing countries’ debt portfolios, the EU and its
Member States should continue to promote responsible lending and borrowing
practices, and encourage the involvement of all lenders in debt workout
settlements. Five Member States have also taken specific action to prevent
litigation by distressed-debt funds in respect of developing countries, and
such measures should be expanded.

Actions: The
EU and its Member States should i) continue to use responsible lending
practices, including in blending and in export-credit operations, ii) push for
the participation of non-Paris Club members in debt workout settlements, and
iii) take national action to restrict litigation against developing countries
by distressed-debt funds.

3.           Fostering
International Private Flows for Development

3.1.        Trade
as an Engine of Development

International trade is the biggest source
of external finance for developing countries. However, emerging economies and
more generally Middle Income Countries have been able to take better advantage
of international trade than do Least Developed Countries (LDCs). Further
efforts are needed to better integrate LDCs and other countries most in need in
the Multilateral Trading System.

Overall, the EU is the biggest trade
partner and the most open market for developing countries, accounting for 16%
of their total trade. The EU works steadily to improve coherence and
complementarity between its trade and development policies.[5]
Furthermore, the recent Communication on "Trade, Growth and
Development"[6] sets new orientations for
the next decade on ways to improve the contribution of the EU’s trade and
investment policies to inclusive growth and sustainable development. Like the
Agenda for Change, the new EU trade and development policy will be based on
greater differentiation among developing countries, prioritising LDCs and other
countries most in need.

Alongside the significant policy support, EU
development assistance also reflects this commitment. The total Aid for Trade
funds committed by the EU and Member States amounted to EUR 10.7 billion in
2010. The EU and its Member States exceeded already in 2008 the specific target
to increase Trade-Related Assistance to EUR 2 billion per year by 2010. Africa remains
the primary target of EU Aid for Trade (38 %), but the share of LDCs decreased
to 16 % from 23 % in 2009. This is partially due to cyclical and
programming factors, but it also indicates the need to implement the orientations
of the Communication on "Trade, Growth and Development". Concerning
future financing commitments, The EU Aid for Trade Strategy makes a commitment
to increase Aid for Trade in coherence with the gradual increase of overall EU
aid.

3.2.        The
Development Impact of Remittances

Global remittance
flows to developing countries were estimated at € 267.5 billion in 2011
and are expected to grow at a rate of 7-8 per cent annually[7].
However remittances from the EU have kept momentum
since 2008[8]. While these are private flows, the figures underline their potential
for development impact; achieving the G8 target of reducing the cost of sending
remittances to 5 % would increase the funds reaching developing countries
by around € 11 billion[9].

At EU level, significant progress has been
made in making remittance services cheaper, more transparent, more competitive
and more reliable, through initiatives such as the transposition of the 2007
Payment Services Directive (PSD) into the national legislation of a majority of
EU Member States, the setting up by several EU Member States of remittance
price comparison websites and support to developing countries' capacities to
maximise the development contribution of remittances. Like trade policy, this
issue is analysed in greater detail in the EU PCD report. The EU has outlined
the necessary actions in the Communication on ‘The global approach to migration
and mobility’[10], as well as in the
accompanying Staff Working Paper[11], the EU and its Member
States need to implement the commitments confirmed in the 29 May 2012 Council
Conclusions[12] to maximise the
development impact of migration and mobility.

4.           Official
Financing for Global Goals

4.1.        Scaling
up Official Development Assistance

ODA is a key resource for development,
especially for the poorest countries. Unfortunately, in 2011 the EU’s
collective ODA decreased to € 53.1 billion from € 53.5 billion in
2010. This limited reduction, in a context of sharp budget cuts due to the
ongoing economic crisis, brings the EU ODA level to 0.42 % of GNI, down
from the 2010 outcome of 0.44 % of GNI. Nevertheless, the EU is by far the
biggest global ODA donor, accounting for over half of the total ODA to
developing countries.

The EU Foreign Affairs Council of 14 May 2012
adopted the ‘Annual Report 2012 to the European Council on EU Development Aid
Targets’[13], expressing serious concern
over the slow progress towards the ambitious EU target of 0.7 % ODA/GNI by
2015.

Reflecting the strong EU commitment to
focus on the poorest, the EU and its Member States have also made specific
commitments to increase aid to Africa and Least Developed Countries. Since
committing in 2005 to direct 50 % of EU aid increases to Africa, the
combined EU aid to Africa has risen by about EUR 6.2 billion at constant prices
so that 28 % of total EU ODA growth between 2004 and 2011 went to Africa.
While short of the target, most EU Member States are taking steps to increase
the ODA targeted at Africa and stress the importance of Africa’s share in their
overall ODA. In 2011, EU ODA to Africa stood at € 25.3 billion, accounting
for a significant 43 % of total EU ODA.

Also, in 2011 the EU fulfilled for the
first time its commitment to collectively provide at least 0.15 % of GNI
to LDCs. The LDCs’ share of EU ODA has increased over the years and reached 35 %
in 2011; this is EUR 18.8 billion or 0.15 % of GNI.

4.2.        Accounting
for all ODA

With greater use of a differentiated
approach to development and aiming to increase the impact of funding, donors
are using more loans as a development tool, especially for more advanced
developing countries. This calls for a clearer understanding of how the
concessional character of loans is determined in accounting for ODA, to avoid
artificially inflating or deflating ODA figures, and ensure comparable
information on donors.

Action: To this end, the EU and its
Member States should agree that the existing method for determining concessionality
of loans and equity in ODA reporting needs to be clearly defined in the OECD DAC,
ensuring equal treatment of all donors.

4.3.        Scaling
up Funding for Tackling Climate Change and Preserving Biodiversity in the wider
context of Sustainable Development

Sustainable development including social
development, economic growth and environmental protection is a key global
challenge. The EU is helping developing countries to devise an inclusive
approach to addressing all of its elements, including decent work, labour
standards and environmental protection through various specific actions as well
as through mainstreaming, while promoting a unified approach in the provision
of support. At the recent United Nations Conference on Sustainable Development
in Rio, the EU renewed its commitment to support all aspects of sustainable
development. On some areas, the EU has taken specific financial commitments.

As regards climate finance, the EU and its
Member States are by far the largest contributor, accounting in 2010 for more
than 70 % of both mitigation-related and adaptation-related ODA globally. The
EU remains on track to achieve the goal of providing fast-start climate finance
of EUR 7.2 billion over the period 2010-2012, having delivered another EUR 2.33
billion in 2011. The details of EU progress on the latter have already been
presented in May[14]. The EU also reiterated
the commitment for doing its fair share in the context of the longer term global
financial pledge of USD 100 billion per annum by 2020, and confirmed the
continued importance of transparent reporting on progress made.

Also, the EU has adopted the ‘EU
Biodiversity Strategy to 2020’, which reconfirms the commitment to support
developing countries in implementing international biodiversity agreements,
including by substantially increasing resource mobilisation to this end. In
2010, EU collective biodiversity-related ODA stood at EUR 3 billion.

Addressing all these challenges means
mobilising significant resources from all possible areas of financing for
development. But it also means that financing for these policy areas cannot be
seen separately from the domestic policy environment of partner countries, e.g.
the fossil fuel subsidies in emerging and developing countries which amounted
to € 309 billion in 2010[15] and which more than
offset the effects of financing provided to reduce global greenhouse gas emissions.
This also shows that EU should continue to promote policies in both donor and
partner countries that reinforce each other to leverage the best possible
development results.

5.           Leveraging
Development Finance and Seeking Synergies

5.1.        Innovative
Financing Sources

‘Innovative financing’ is considered an
important financing source for most global public goods, including addressing
global development challenges. At the same time, given their innovative nature,
it is impossible to establish a complete list of sources and mechanisms
that fall under this term. Because of this, the estimated potential of
innovative financing to mobilise new funds varies greatly.

The Commission has proposed an EU-wide
financial transaction tax, strongly supported by the European Parliament[16],
which would contribute through the EU budget also to tackling global challenges.
Although not explicitly directed to development financing, it would reduce the share
of other resources in the EU budget, in the magnitude of EUR 54 billion by 2020[17],
which could in turn make it easier for Member States to mobilise funding
required for meeting aid targets and tackling other global challenges. Another
potential source of increasing importance is the revenue from the Emissions
Trading System that some Member States already partly direct towards supporting
developing countries.

Action: The Council should adopt the
proposed EU-level Financial Transaction Tax.

5.2.        Innovative
Financing Mechanisms and Engaging Private Sector

There is an increasing range of ways to collect
and pool revenues, use traditional development finance and deliver aid. Engaging the private sector in development
financing is another innovative way of mobilising new funds.

In many developing
countries, the expansion of the private sector is a powerful engine of economic
growth and the main source of job creation. Foreign investment also plays an
important role, including through domestic firms’ linkages to international markets and through
investments. One of the main challenges for governments in developing countries
is to ensure an environment that supports private sector development. This often
requires far-reaching economic reforms aimed at improving the investment
climate and facilitating access to finance. Accordingly, and as outlined in the EU Agenda for Change[18], the EU should continue to assist partner countries’ efforts to
improve their business environment with a view to fostering inclusive growth.

The EU promotes actively the Corporate
Social Responsibility (CSR) principles
including human and labour rights, decent work parameters, as well as attention
to local environmental conditions. The recent Commission
Communication on CSR[19] outlined this in detail
and the Council took specific commitments in its Conclusions on
“Reinforcing Industrial Policy in the EU”[20].

The EU should also use its grants more
strategically and effectively for leveraging public and private sector
resources. Half of the Member States are already actively engaged in several
innovative mechanisms. The EU and Member States, together with European and
International public financing institutions are actively collaborating though
various regional blending mechanisms which are expected to be further scaled up
in future in order to leverage grant resources. This includes the potential to
make greater use of guarantee mechanisms, equity investments and other types of
innovative financing. In this context, the EU is currently exploring with
Member States and financing institutions, the establishment of an "EU
Platform for External Cooperation and Development" to maximise the impact
of resources through enhanced cooperation, coherence, monitoring and
development of new innovative financing mechanisms.

Action: The EU, Member States and public
financing institutions should step up efforts for increased use of innovative
financing mechanisms on a coherent, coordinated and strategic basis. The EU should leverage more private resources
and capacities through blending mechanisms that can crowd-in additional private
and public financing: i) create a private sector window within the regional
blending mechanisms, ii) make greater use of risk-sharing mechanisms such as
guarantees that can unlock investments and iii) promote investments through instruments that entail improved risk
management and equity participation in structured funds.

5.3.        Strengthening
Synergies between various Financing Sources

The resources covered in the previous chapters
are intrinsically linked to each other, as are also the global challenges these
need to address. Ultimately, each country needs to find its individual balance
between these priorities in domestic implementation for delivering the best
compound return on all fronts. However, the tendency for different policy areas
to ‘compete’ for resources contributes to aid fragmentation and less development
effectiveness. This can be observed in the overlap of financing sources through
which the various challenges can be met, with all parties vying for more
domestic resources and international finance, increased private sector
engagement and use of innovative mechanisms. Therefore, there is scope for
finding synergies between all these policies.

In this light, the tendency to set
boundaries between policy areas and instruments can prove counterproductive.
While in theory locking in expenditure on specific policies, the artificial
categories will restrict the policy space of countries to target resources
according to what brings best results in the national context. While there are
early signs of an emerging international consensus that a joined-up approach is
needed to tackle global challenges, this will need further analytical work and
a cross-cutting approach to avoid undermining policy goals.

Action: The EU and its Member States should
support an integrated approach to development financing, including monitoring its
various elements, possibly in the context of the discussions on a post-2015
development framework, and should establish a common EU position on this.

6.           Making
EU Actions more effective: Busan Implementation at Country Level

In responding to the outcomes of the Busan
High Level Forum on Aid Effectiveness, the EU should focus on country-level
implementation of aid and development effectiveness commitments, in particular
through supporting partner country capacity and leadership to set priorities
and achieve results. The EU has in place a broad spectrum of guidance for this
purpose: the EU Common Position for Busan, the Operational Framework on Aid
Effectiveness and the EU Code of Conduct on Complementarity and Division of
Labour. These remain valid; however, some key issues should be prioritised for
collective EU action at the country level in line with Busan outcomes and the
Council Conclusions on the Agenda for Change.

6.1.        Country-Level
Results Frameworks

Focus on results was identified in Busan as
a major priority. The Busan outcome document states that all development
partners should rely to the maximum extent possible on country-led and
country-level results frameworks as a common tool to monitor outputs and
outcomes drawn from the development goals of partner countries.

Considerable work is still required in
establishing and using country-level results frameworks. While acknowledging
partner countries’ lead, the EU should play an active role in this process in
coordination with existing initiatives. EU collective action should follow the
approach for mutual accountability frameworks as set out in the EU Operational
Framework, namely EU Delegations initiating discussions to support existing
frameworks and develop new ones together with Member States, partner countries
and other stakeholders.

6.2.        Mutual
Accountability Frameworks

Country-level mutual accountability
frameworks are key tools with which to foster the implementation of aid and
development effectiveness commitments on the ground. These are also likely to
be instrumental in any future monitoring within the Global Partnership for
Effective Development Cooperation.

The full potential of mutual accountability
frameworks is yet to be tapped, thus collective EU support to strengthen or
establish these frameworks is timely. This support should be provided under
partner country leadership and in coordination with other processes and actors,
and giving consideration to the expected supporting role of UNDP country
offices. The EU should place particular emphasis on how to address in these
frameworks the partner countries’ priorities in relation to Busan, including
the use of country systems and capacity development.

6.3.        Reduced
Fragmentation

Development partners committed themselves
in Busan to increased use of country-led coordination arrangements to reduce
fragmentation. Collective EU action on the ground is of particular value as the
Fast Track Initiative on Complementarity and Division of Labour has built EU
experience in this area and should be pursued, preparing the ground for further
joint programming.

Donor mapping is one of the activities that
can enhance in-country division of labour. In line with Busan priorities, the
EU and its Member States should expand country-level mapping to cover the
support they give to climate action based on Fast Track Initiative methodology
and building on the OECD Rio Marker system. It would complement the EU’s and
Member States’ potential measures to support national strategies for climate
action and promote the integration of climate risks into development
strategies.

Action: Collective EU action to
strengthen country-level implementation of aid and development effectiveness
commitments based on the EU Operational Framework through i) supporting country-level
results and mutual accountability frameworks, and ii) continued division of
labour activities, including mapping of EU support for climate action at the
country level, leading to conducive environments for joint programming.

7.           Conclusions

The next three years will see important
developments. The EU will need to deliver on its commitments and prepare a
common and coherent approach also on the means for reaching any new goals. Even
with the changing global context, the EU has to remain focused on the essential
objective: providing the best support it can to developing countries in
mobilising all available resources for development.

[1]               International Conference on Financing for Development.

[2]               Usually expressed as tax-to-GDP ratio.

[3]               COM(2011) 637 final,

http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2011:0637:FIN:EN:PDF

[4]               http://www.imf.org/external/pp/longres.aspx?id=4611

[5]               See: EU 2011 Report on Policy Coherence for
Development (PCD), SEC(2011) 1627 final.

[6]               COM(2012)22 final of 27 January 2012, http://ec.europa.eu/trade/wider-agenda/development/

[7]               Migration and Development Brief No 17, World Bank,
Migration and Remittances unit, December 2011.

[8]               Eurostat Statistic Focus 4/2012.

[9]               ‘Innovation With Impact: Financing 21st
Century Development’, Report by Bill Gates to G20 leaders, Cannes Summit,
November 2011.

[10]             COM(2011) 743.

[11]             SEC(2011) 1353.

[12]             9417/12

[13]             9372/12; http://register.consilium.europa.eu/pdf/en/12/st09/st09372.en12.pdf

[14]             10029/12, http://register.consilium.europa.eu/pdf/en/12/st10/st10029.en12.pdf

[15]             e.g. OECD (2011), Tackling Climate Change and
Growing the Economy. http://www.oecd.org/dataoecd/28/18/44287948.pdf

[16]                http://europa.eu/rapid/pressReleasesAction.do?reference=MEMO/12/375&format=HTML&aged=0&language=en&guiLanguage=en

[17]             http://europa.eu/rapid/pressReleasesAction.do?reference=IP/12/300&format=PDF&aged=0&language=EN&guiLanguage=fr

[18]             http://ec.europa.eu/europeaid/what/development-policies/documents/agenda_for_change_en.pdf

[19]             http://ec.europa.eu/enterprise/policies/sustainable-business/files/csr/new-csr/act_en.pdf

[20]             http://www.consilium.europa.eu/uedocs/cms_Data/docs/pressdata/en/intm/126548.pdf