SPECIAL REPORT No 2/95 concerning the Stabex fund in the context of the first financial Protocol of the fourth Lomé Convention together with the Commission's replies (95/C 167/01)

(Observations pursuant to Article 188C (4), subparagraph 2, of the EC Treaty)

TABLE OF CONTENTS

Page 1. INTRODUCTION 2

2. OUTLINE DESCRIPTION OF THE STABEX SYSTEM 3

3. THE MANAGEMENT OF THE LOMÉ IV STABEX ALLOCATION 4

Financial situation of Lomé IV Stabex 4

Insufficiency of resources 4

'All Destinations' Status 5

Measures taken to combat shortages of Stabex resources 6

Allocation of Resources by Country 7

4. THE CALCULATION OF STABEX TRANSFERS 7

Timetable and reliability of statistics 7

Reductions in transfer entitlements 8

Errors noted in calculation of Stabex transfers 9

The impact of quality on price 9

5. THE PAYMENT OF STABEX TRANSFERS 9

6. THE PREPARATION OF THE FRAMEWORKS OF MUTUAL OBLIGATIONS 10

Provisions of the Convention concerning the utilization of funds 10

Procedures for preparing frameworks of mutual obligations (FMOs) 11

Delays in preparation of FMOs 12

Identification of operations to be financed 12

Conditionality 13

Commission procedures 13

7. THE UTILIZATION OF STABEX TRANSFERS 14

Financial implementation of the frameworks of mutual obligations 14

Analysis of allocation of Stabex funds 14

Import programmes 14

Page Internal debt relief measures 18

Price stabilization 20

Projects 21

8. IMPLEMENTATION OF ACP STATES' COMMITMENTS 21

The principle of conditionality in relation to Stabex 21

Types of conditions 22

Respect of conditionality 22

9. FINANCIAL AND ACCOUNTING PROCEDURES 25

Legal framework for implementation of Stabex operation 25

Functioning of the double signature accounts 25

Counterpart funds 25

Financial monitoring of Stabex by the Commission 26

10. MONITORING AND EVALUATION OF LOME IV STABEX 26

11. CONCLUSION 27

General context of the implementation of the Stabex system 27

Economics of the system laid down in the Convention 27

Financial management 28

Implementation of the Stabex transfers 28

Overall assessment 28

The Commission's replies 38

1. INTRODUCTION

1.1. Stabex is one of the main financial instruments created by the Lomé Conventions with the aim of assisting African, Caribbean and Pacific (ACP) States. The Stabex system is designed to guarantee the stabilization of ACP States' export earnings from the Community for certain agricultural products, laid down by the Convention (1). As such it has a unique role in development cooperation.

1.2. According to Article 186.1 of the Lomé IV Convention, the aim of stabilizing ACP States' export earnings is that of: 'remedying the harmful effects of the instability of export earnings and to help the ACP States to overcome one of the main obstacles to the stability, profitability and sustained growth of their economies, to support their development efforts and to enable them, in this way, to ensure economic and social progress for their peoples by helping to safeguard their purchasing power'.

1.3. While preserving the same basic objective as previous Conventions, the Lomé IV Convention has introduced a number of significant changes in the Stabex system (see 2.8). Its continuing importance is underlined by the fact that the first Financial Protocol of Lomé IV allocates 1 500 Mio ECU to Stabex (for the implementation years 1990-1994), which represents 12,5 % of the total resources available under the Protocol.

1.4. The Court of Auditors has carried out an audit of Stabex operations under Lomé IV for the period 1991-1993 (2). The audit paid particular attention to the effects of the changes to its functioning introduced by the new Convention. However, as the new system has only been in place for a short time, some of the conclusions can only be considered provisional. The Court's observations are based on the results of on-the-spot audits of five Stabex beneficiaries (3) and detailed documentary audits for all the other beneficiary countries.

1.5. On various occasions the Court noted contradictions between the objectives assigned by the Convention to the Stabex system. As is shown in paragraphs 6.1 to 6.8 below, we are not, pace the Commission, talking about a hierarchy of objectives but of opposed objectives, some of which tend to counteract the effects of falls in revenue whilst others are supposed to deal with the causes. These contradictions often lead to delays in implementation and render the procedures more cumbersome. This situation cannot be remedied by mere amendment of the Commission's management practices. These ambiguities and contradictions must be removed from the Convention itself so as to arrive at a consistent policy in respect of the various financial instruments.

2. OUTLINE DESCRIPTION OF THE STABEX SYSTEM

2.1. The purpose of this chapter is to provide a basic overview of how the Stabex system operates. A diagram of the mobilization procedures for the Stabex instrument is provided in Annex 1.

2.2. The overall Stabex allocation is divided into five annual instalments (4), each of 300 Mio ECU, covering the lifetime of the first Financial Protocol of Lomé IV.

2.3. At the end of each calendar year, the Commission determines for each ACP State whether it has suffered a loss of export earnings for any of the 49 (largely agricultural) products listed in the Convention (5) where earnings from that product represent more than a certain percentage of the country's total export earnings (6).

2.4. The export earnings for the year under consideration (known as the 'application year') are compared with a reference level for export earnings established over a defined period (7).

2.5. If it is established that there has been a fall in export earnings for a particular product for the application year compared with the reference level, the ACP State concerned is entitled to a transfer for that product from the annual Stabex instalment. The amount of the transfer is calculated on the basis of the amount of the fall in export earnings (Article 197).

2.6. Prior to the transfer(s) being paid over, the ACP State informs the Commission of how it proposes to use the funds to which it is entitled (Article 209). In principle, the funds are to be used to assist the sector in which the loss of earnings has occurred (Article 186).

2.7. Within twelve months of the mobilization of the funds, the ACP State reports to the Commission on how the funds have been used (Article 212).

2.8. The main innovations of Lomé IV are as follows:

(a) while previous Conventions required ACP States to repay Stabex transfers under certain conditions, this is no longer the case under Lomé IV;

(b) Lomé IV provides for much closer control over how the ACP State uses Stabex transfers:

(i) for each transfer the ACP State and the Community are to agree on a detailed programme for using Stabex funds to be set down in a document entitled 'Framework of Mutual Obligations' (FMO) which is signed by the Commission and the National Authorizing Officer (NAO) of the ACP State (Article 210);

(ii) Stabex transfers are first paid into a dual-signature bank account in Europe from which funds are only released for disbursement as and when operations specified in the framework of mutual obligations are implemented (7.1), and only after the signature of the Commission delegate in the ACP State concerned, as well as that of the NAO, has been obtained. The Convention also requires counterpart funds generated by Stabex operations to be held in joint accounts (Article 211).

This closer control over the utilization of Stabex transfers was introduced in return for the Community agreeing that future transfers should be in the form of grants rather than loans;

(c) while not explicitly stated in the Convention itself, the term 'Framework of Mutual Obligations' implies the existence of conditions concerning the utilization of Stabex transfers which the ACP States undertake to fulfil;

(d) Lomé IV Article 186.2. states that the transfers are to be used in sectors recording a loss of export earnings 'for the benefit of economic operators adversely affected by the loss'. The reference to Stabex being used to benefit economic operators is in contrast to the previous two Conventions where funds were to be used for 'maintaining financial flows in the sector in question' (8). This change, which complements the aim of safeguarding the population's purchasing power (see paragraph 1.2. above), was intended to ensure that a greater proportion of the transfers went to producers;

(e) as far as the calculation technique is concerned, the main innovation has been that the statistics for exports to the Community used for calculations should in principle be those produced by the Statistical Office of the European Communities (Article 200.2). Under previous Conventions, calculations were based on close cross-checks of the export statistics supplied by the ACP States and the Community.

3. THE MANAGEMENT OF THE LOMÉ IV STABEX ALLOCATION

Financial situation of Lomé IV Stabex

3.1. As at 31-12-93, Stabex primary commitments (9) made under Lomé IV amounted to 876,5 Mio ECU. Secondary commitments (10) and payments from the EDF accounts both amounted to 789,7 Mio ECU. The situation by application year is set out in the table below:

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3.2. The difference between primary commitments and payments was very largely due to the fact that the Commission had blocked the signing of transfer agreements, amounting to 85,1 Mio ECU, to three countries because of their political situation (11). In fact the fourth Lomé Convention includes respect for human rights as a general condition for the granting of aid to all EDF operations (12) and the Commission and has not only blocked three Stabex transfers but has also provisionally withheld its signature to FMOs with two other countries (Equatorial Guinea and Togo).

3.3. On 31 December 1993, no definitive transfer decisions had yet been carried out for the 1992 application year although normally these decisions should have been taken by 31 July 1993 (Article 207 (3) of the Convention). This situation arose because of the shortage of Stabex resources to meet eligible transfers.

3.4. The payment figures for the 1990 and 1991 application years should be treated with caution, inasmuch as they do not reflect the actual implementation of Stabex-financed operations but simply transfers from the EDF accounts into ACP States' bank accounts in Europe (see 2.8 (b) (ii) below). By presenting only payments made from the EDF accounts, the Commission's annual financial statements thus give a misleading impression of Stabex operations. An analysis of final payments is given in Chapter 7 of this report.

Insufficiency of resources

3.5. For each of the 1990, 1991 and 1992 application years, the 300 Mio ECU annual instalment for Stabex was insufficient to cover losses in eligible export earnings. This was despite the fact that the Stabex resources for the First Financial Protocol of Lomé IV had been increased by 62 % in nominal terms compared with Lomé III and that the provisions of the Convention leading to a reduction in the basis for calculating entitlements to transfers had been applied in the prescribed manner (13).

3.6. Thus, as Table 3.2. below shows, for the first three application years of Lomé IV, total losses of earnings compared to the reference level amounted to 4 142 Mio ECU, resulting in gross Stabex transfer bases of 3 289 Mio ECU, compared with total Stabex allocations of 900 Mio ECU. This left a total financing gap of 2 389 Mio ECU. By various procedures examined in paragraphs 3.11. to 3.15., it was possible to raise the allocation to 1 205,5 Mio ECU. However, this still left a coverage rate of only 40,7 % for the three years.

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3.7 The excessive recent demands on the Stabex system in fact represent a continuation of the problems already faced by the system under Lomé III for the 1987, 1988 and 1989 application years.

3.8. These difficulties reflect above all the exceptional decline in commodity prices in recent years, which can essentially be traced to continually expanding production in the face of stagnant or only slowly growing demand. In the context of the ACP States, coffee and cocoa, in particular, have been affected by this decline in prices following the collapse of the agreements between producer and consumer countries covering these products. Thus, real coffee prices in 1991 were just 38 % of their 1980 level, while cocoa prices were only 32 % of the 1980 level.

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3.9. It is to be noted that the insufficiency of resources has been exacerbated by the ACP-EEC Council decision taken in November 1991 to waive the requirement for the 13 ACP States that were not classified among the least developed to repay, in certain circumstances, transfers received under the first three Lomé Conventions. The amount of transfers potentially repayable in this way could have amounted to 900 Mio ECU.

'All Destinations' Status

3.10. A further feature in the operation of the Stabex system itself which increased the problem of the insufficiency of resources was compensation for certain losses on exports to non-Community countries. The provisions of the Lomé IV Convention (Article 189 (3)) contain a new clause whereby falls in export earnings may be automatically compensated on the basis of exports of a Stabex product to all destinations, and not just the Community, but only in cases where at least 70 % of an ACP State's earnings from products covered by the system come from exports to non-Community countries. However, 13 countries which were granted an 'all destinations' status on the basis of a special derogation under previous Conventions continued to enjoy this status under Lomé IV, even though the proportion of non-Community export earnings of five of them (Burundi, Cape Verde, the Comoros, Ethiopia, and Rwanda) was less than 70 % of total export earnings. While the derogation for the 13 countries was to continue only for an interim period of three years under Lomé IV, it has since been extended for another year, but only for 1993. In view of the shortage of resources which has constantly plagued the system since 1987, the maintenance of this derogation, which cost a total of 96,1 Mio ECU for the application years 1990-92, is open to question.

Measures taken to combat shortages of Stabex resources

3.11. In order to increase the amount of resources available for Stabex, Article 192 of the Lomé Convention provides for interest earned on Member States' contributions to the Stabex system to be credited to the system's resources. Whereas they could have been placed in a special account with clearly indicated interest rates, Stabex contributions are in fact held in the same accounts as other EDF contributions and a notional interest rate is calculated. This lack of transparency in the system enabled the Commission to state, for the 1992 application year, that Stabex interest available to finance transfers amounted to approximately 30 Mio ECU whereas, according to the accounts of the EDF accounting officer, there was only 1 Mio ECU available. The resources for the subsequent years were thus reduced by 29 Mio ECU.

3.12. The Lomé IV Convention provides for a series of steps to be taken in application years where annual Stabex instalments and interest earned are insufficient to cover transfer entitlements. Thus, in the first place, Article 194 (1) states that advance use may be made of up to 25 % of the following year's instalment. If resources available are still less than the total amount of the transfer bases, Article 194 (2) provides for a 10 % reduction of each transfer basis. If the situation is still not resolved after this procedure, Article 194 (4) states that: 'the Council of Ministers shall evaluate the situation on the basis of a Commission report on the probable development of the system and shall examine the steps to remedy that situation, within the terms of this Convention'.

3.13. For the 1990 application year it was decided by the ACP-EEC Committee of Ambassadors (14), on the basis of Article 194 (4) to increase the 7th EDF Stabex allocation by 100 Mio ECU, principally by transferring to Stabex resources allocated to the Sysmin (support for ACP mining) instrument under previous Conventions (15). As a result of this operation, together with the advance use of 25 % of the 1991 application year instalment and the utilization of interest earned on Stabex funds, a total of 483,7 Mio ECU was made available for the 1990 application year. This still only covered 39 % of the financial needs of the system, however (see Table 3.2).

3.14. For the 1991 application year, the ACP-EEC Committee of Ambassadors decided once more to increase the resources available for that year by authorizing advance use of 12,5 % of the annual instalments for both the 1993 and 1994 application years, in addition to the 25 % advance from the 1992 application year. The total of 391,5 Mio ECU thus made available allowed a coverage rate of 40,9 % (see Table 3.2).

3.15. As already noted in recent Annual Reports of the Court of Auditors, the measures taken by the ACP-EEC Committee of Ambassadors do not fall 'within the terms of the Convention' insofar as:

(a) a transfer such as that made from Sysmin to Stabex for the 1990 application year is not provided for within the general terms of the Convention (16);

(b) the advance use of annual instalments other than the annual instalment directly following the application year in question is not provided for in the Convention (17). The European Parliament's Development and Cooperation Committee has expressed its concern over this procedure in its Opinion on the discharge for the 1992 European Development Fund accounts.

3.16. For the 1992 application year, the Community did not agree to make any additional funds available to Stabex to cover the shortfall for that year. The ACP States' reaction was to insist that additional resources should be made available. As a result, it was only in February 1994 that the ACP States accepted the situation, while expressing reservations and continuing to claim, as in previous years, a right to compensation for the deficit (434 Mio ECU). In this connection, the ACP/EEC Council of Ministers had formally stated in May 1992 that there could not in future be any compensation to cover those years in which there had been an insufficiency of resources, without however questioning the provisions of Articles 194-4 and 195 of the convention.

3.17. For the forthcoming revision of Lomé IV, the ACP States have proposed that a special mechanism should be established to allow ACP States which have not received their full transfer entitlement to have the amount of the shortfall in the transfer deducted from their debts towards the European Community.

3.18. As a result of the continuing insufficiency of Stabex resources, the ACP-EEC Committee of Ambassadors agreed in October 1991 that a study should be carried out to find possible solutions to this problem. The study's initial findings, issued in November 1993, were not satisfactory and no further action was taken to find a solution.

Allocation of Resources by Country

3.19. For the first three application years of Lomé IV, a total of 40 of the 69 ACP States (58 %) have been allocated Stabex transfers. Under Lomé III, 37 out of 66 ACP States (56 %) had received Stabex transfers (18). Details of transfers to individual countries under Lomé IV are given in Annex 2 while Table 3.4 below highlights the principal Stabex beneficiaries under Lomé III and Lomé IV.

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3.20. Whereas under Lomé III, a quarter of the transfers went to the Côte d'Ivoire, the latter's share under Lomé IV has fallen to 18 %. On the other hand, the proportion of Stabex transfers allocated to the three main beneficiary countries remains almost as high under Lomé IV (46,2 %) as under Lomé III (46,8 %).

3.21. Whereas under Lomé III, the 43 ACPs classified as 'least-developed' received 40,1 % of Stabex transfers, under Lomé IV the 44 ACP States in this category received 48,2 %. Nevertheless, the richest third of ACP States continue to be allocated more than half of Stabex resources. This situation is clearly related to the nature of Stabex, the size of transfers being linked to the volume of agricultural trade with the European Community.

4. THE CALCULATION OF STABEX TRANSFERS

4.1. The assessment of transfer entitlements is the responsibility of the Commission. A small division (VIII/B/3) exists for this purpose (19).

Timetable and reliability of statistics

4.2. The Lomé IV Convention (article 207-3) imposes a tight timetable for the completion of assessments, all transfers being required to be decided by 31 July of the year following the application year (see 3.3. and 3.16.).

4.3. The new procedure (under Lomé IV), whereby Stabex transfers are assessed primarily on the basis of the Community's import statistics, has led to a considerable improvement in the way the Stabex system operates. However, it is not possible to complete an assessment without reference to certain statistics which only the ACP States are able to provide (20). These statistics are particularly important for making the reductions provided for in the Article 203 procedure (see paragraphs 4.4.-4.6.) and in cases where ACP States have the benefit of 'all destinations' status (see paragraph 3.10. above). It was noted in relation to statistics supplied by the ACP States that:

(a) the reliability of some statistics is open to question, essentially due to the limited capacities of the ACP States' statistical services. Although the Convention (Article 199 (1)) provides for statistical cooperation to ensure the efficient and rapid functioning of the Stabex system, there has been little cooperation in practice (21);

(b) while the deadline of 31 March set by the Convention (Article 207.1) for submission of statistics by the ACP States was generally respected, the Commission frequently noted anomalies in the statistics which required correction, because ACP countries only submit provisional data for this date;

(c) although the Commission's Delegations are required to certify the correctness of statistical data provided by the ACP countries, they can hardly do so without carrying out detailed investigations, for which their resources are generally insufficient.

Reductions in transfer entitlements

4.4. For the three application years 1990 to 1992, the provisions of Article 203 of the Lomé IV Convention were extensively applied in the calculation of Stabex transfer entitlements. This Article lays down that where the trend of an ACP State's production of the product in question, exports to all destinations, or exports to the Community shows significant changes, consultations shall take place between the Commission and the ACP State concerned to determine whether the transfer basis is to be maintained or reduced, and, if reduced, to what extent (22).

4.5. For these three years, the transfer bases were thus reduced by a total of 580 Mio ECU. These reductions call for the following reservations:

(a) the Stabex Beneficiaries' Handbook (Lomé IV) states that if an ACP State is fully responsible for the drop in production and/or exports, the transfer base shall be reduced by the same percentage as the drop in production and/or exports. On the other hand, if the ACP State is only partially responsible for the drop, the amount of the transfer reduction may be diminished. In cases where the loss of earnings is due to factors outside the control of the ACP State, such as a natural disaster, adverse weather, or a fall in world market prices, no reduction is to be applied (23). However, in practice, it is difficult to quantify how far drops in production are the responsibility of the ACP State and how far they are due to external factors, notably the drop in world prices. While the latter is very frequently a factor, mismanagement of the sector concerned by the ACP State may also often, to varying degrees, affect the situation;

(b) the consultation process in fact gives the Stabex division of the Commission a considerable role in determining the size of the reduction to be made to the final transfer. The Delegations and other Commission departments have had little input in the process. The fact that the consultations have, in practice, to be completed within a short time also limits the scope for a full investigation of the extent to which different factors have caused the drop in production;

(c) there is also a risk that the outcome of the consultations will be influenced by the negotiating capacity and weight of the various ACP States concerned rather than objective technical considerations;

(d) although he may do so, the Financial Controller (DG XX) does not carry out a review of how reductions made under Article 203 were calculated. As the matter is brought to his attention at too late a stage in the procedure, he is not in a position to influence the negotiation process.

4.6. A review of a large sample of the 1990 and 1991 transfers which had been subject to the Article 203 procedure showed that, generally speaking, drops in production had always resulted in proportional reductions in transfers. However, two important exceptions must be pointed out:

(a) in the Côte d'Ivoire, a 41,5 Mio ECU reduction corresponding to a 22,8 % fall in marketed coffee production in 1991 was not applied to the transfer basis by the Commission on the grounds that a revision of the Côte d'Ivoire's statistics had already led to a 34,8 Mio ECU reduction and that the Commission did not believe 'it could have brought about the same level of reduction by conducting its enquiry otherwise' (24). The amount of the reduction was thus more influenced by the negotiations than by the calculation based on the purely technical factors laid down in the Convention;

(b) in Cameroon, for 1991, transfer bases were not reduced, despite a 25,8 % fall in cocoa and a 22 % fall in the case of coffee, which would have led to a 45,6 Mio ECU reduction in the transfer base. The Commission considered that the falls in production were the result of the structural adjustment policies it was supporting and therefore made no reductions. However, by acting in this way it ignored the fact that the reduction in production was an objective of structural adjustment and Cameroon was already receiving payments from the Community to assist it through the adjustment process (25).

Errors noted in calculation of Stabex transfers

4.7. Various cases were noted where transfers had been incorrectly calculated:

(a) an overpayment of 1 298 287 ECU was made to Uganda on its 1991 coffee transfer because of the incorrect treatment of a previous advance payment made in 1981; in its reply to paragraph 15.76 of the Court's annual report on the financial year 1993, the Commission said it had 'initiated procedures, as notified to the budget authorities, to recover the ECU 1 298 330 wrongly paid to Uganda'. The amount was to be deducted from transfers in respect of the 1992 year of application. At the end of the first quarter of 1995, however, the Commission had still not given the Court proof of the actual recovery of the amount concerned;

(b) the 1991 transfer basis for coffee from Burundi was understated by 1,55 Mio ECU because of an arithmetical error in its calculation;

(c) due to a calculation error, partly attributable to the confused data supplied by the ACP State, no transfers for the 1990 application year were made to Lesotho for mohair and wool although the combined transfer bases for these products amounted to at least 1,16 Mio ECU.

These errors point to the need for stricter checks by the Financial Controller (see 4.5.(d)).

The impact of product quality on prices

4.8. In many ACP countries, there has been a deterioration in product quality, often resulting from such factors as a lack of investment in agricultural inputs and inadequate extension facilities and a shift from plantation to smallholder production (26). It is important to note that this drop in quality, which is essentially the responsibility of the producing country itself, has also been a significant cause of the fall in prices. However, the Convention deals exclusively with changes in quantity and price and has no provisions for taking into account the part played by declining quality in falls in prices.

5. THE PAYMENT OF STABEX TRANSFERS

5.1. The Lomé IV Convention requires that, when a transfer agreement is signed, the funds should be paid over in ECUs into an interest-bearing account (see 2.8). Under previous Conventions, the total amount of the transfer was paid over directly to the ACP State after the transfer agreement had been signed. This meant that the Commission had little control over the actual utilization of the funds.

5.2. These new arrangements have resulted in several new practices:

(a) the Lomé Convention refers only to the requirement for the Commission to be one of the joint signatories. In practice, however, the Head of Delegation of the Commission in the ACP State concerned by the transfer has been made the account signatory for the Commission. This creates a second level of management of EDF funds which, though under the control of the Commission, is not recognized by the EDF Financial Regulation, and is not subject to the approval of the authorizing officer, the EDF accounting officer and the Financial Controller (27);

(b) the Lomé Convention does not specify the location of the ECU account for Stabex transfers, although it does in the case of structural adjustment transfers (Article 250.3). The Commission has taken the position, arguing by analogy, that ECU accounts are only to be opened in Europe, on the grounds that funds are more secure in Europe and that ECU interest rates are higher there (28);

(c) for everyday management, another tier of joint signatory accounts has had to be established in each ACP State to enable payments in local currency to be made;

(d) finally, to ensure that operations are clearly accounted for, the Commission has insisted that separate accounts (or sub-accounts) should be opened for each application year.

All of this mechanism makes management by the Commission's Delegations cumbersome, with no related increase in their resources.

5.3. A feature of the new system has been the often considerable delays in the payment of transfers, as can be seen from the statistics in Table 5.1. (29). Originally payment was to be made immediately after the signing of the transfer agreement which, for its part, would have been completed immediately after the transfer decision (30). However, in practice, for the 1990 application year, the median time for payments to European bank accounts (to be carried out after the transfer decision) was five and a half months, whereas for the 1991 application year the time required was four and a half months.

5.4. Although the Lomé IV Convention allows advance transfers of funds prior to the end of the year of application on the basis of estimates of likely losses, no such advances have been made as they were under the previous Conventions. The main reason for this is the difficulty of determining the size of advances in a situation where the insufficiency of resources requires transfer levels to be scaled down.

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5.5. While there has been some improvement in payment times for the 1991 application year, the delays are nevertheless of a serious nature, particularly given that Article 206 of the Lomé IV Convention specifically states that: 'the ACP State concerned and the Commission shall take such steps as are required to ensure rapid advances and transfers . . .'

5.6. The essential reason for the delays has been the length of time taken to open the ECU bank accounts. In certain cases, ACP States, noting that the Convention itself did not require ECU accounts to be opened in Europe, wished to open ECU accounts in their own countries. In fact the Commission, in its first guidance notes, while expressing a preference for a European location for the accounts, was ready to admit exceptions (31). While the principle that accounts were to be opened in Europe was accepted as from the 1991 application year, the requirement for new accounts/sub-accounts to be opened for each application year has led to even longer payment delays.

5.7. In practice, the ACP States have been made responsible for opening the bank accounts. Not only the Convention but also the Stabex beneficiaries' handbook is silent on who is responsible for opening the accounts. Once this question had been settled, however, the ACP States did not always make the necessary arrangements rapidly.

5.8. Despite the delays in paying funds into European bank accounts, ACP States earned significant amounts in interest on funds in these accounts, largely as a result of subsequent delays in implementing Stabex operations. Thus, it is estimated that total interest earned on these accounts amounted to 50 Mio ECU as at 31 December 1993. It is likely that interest earned could have been even higher had ACP States required banks to tender for the placement of Stabex funds. Only one country, Madagascar, chose to do this.

5.9. While in virtually every case interest was paid by European banks on Stabex monies deposited with them, approximately a third of ACP States subsequently transferred these funds to an account with a local bank which did not pay interest, despite the requirements of the Convention (Article 211.3). In Burundi, for example, it was estimated that the non-payment of interest on Stabex led to a loss of income of over 0,7 Mio ECU for the 14 months from July 1992 to September 1993.

6. THE PREPARATION OF THE FRAMEWORKS OF MUTUAL OBLIGATIONS

Provisions of the Convention concerning the utilization of funds

6.1. It would have been possible to conceive of Stabex simply as a system to help ACP States by providing compensation for loss of export earnings. Indeed, Article 186 (1) of the Lomé IV Convention refers to 'the aim of remedying the harmful effects' of export earnings rather than their causes. Transfer payments could thus be made to the ACP State to afford assistance at the macroeconomic level, notably by compensating for the loss of foreign exchange by providing balance of payment support to maintain import levels or service external debt. This stabilizing function of Stabex emerges from the requirements of the Lomé IV Convention for the rapid implementation of Stabex transfers (32).

6.2. However, Article 186.2 restricts the use of transfers by requiring that, in order to attain the objectives laid down in Article 186.1, the 'transfers shall be devoted, in accordance with a framework of mutual obligations to be agreed between the ACP State concerned and the Commission in each case, either to the sector, interpreted in the widest possible sense that recorded the loss of export earnings and be used there for the benefit of economic operators affected by the loss, or where appropriate, to diversification, either for use in other appropriate productive sectors in principle agricultural or for the processing of agricultural products'.

6.3. Stabex is thus required by the terms of the Convention to be used in a sectoral context. However, Article 209.4 notes that the transfer should be used to second any adjustment operation and support reforms taking place in the sector in question.

6.4. The requirement of Article 186 of the Lomé Convention for the transfers to be used in the sectors affected by loss of earnings is based on the following principles:

(a) as Stabex transfers are generated by drops in export earnings in relation to specific products, it is logical to link utilization of the transfer to the sector affected by the loss, rather than using it at the macroeconomic level;

(b) in terms of the aid instruments available under the Lomé Convention, Stabex has a sectoral role which complements the macroeconomic vocation of the structural adjustment funds and the interventions at project level of the National Indicative Programmes;

(c) the causes of losses of export earnings should be tackled in order to reduce the need for further transfers to the sector in question.

6.5. However, the following observations may be made concerning these principles:

(a) in many ACP States the importance of Stabex products to the economy is such that losses in export earnings in the sector concerned have a serious impact at macroeconomic as well as sectoral level;

(b) it should be established whether specific instruments should have, or do have, a unique vocation. Thus, for example, National Indicative Programme funds under Lomé IV have been extensively used to support structural adjustment programmes (33). The element unique to each instrument is in fact not always its vocation but the criteria for determining eligibility for aid from the instrument;

(c) it may be argued that transfers should be directed not to sectors in decline but to those where there is potential for growth. Moreover, present economic orthodoxies being promoted in Africa emphasise the desirability of the market allocating funds, rather than relying on assistance from public funds.

6.6. Independent of the issues noted above, a fundamental contradiction exists between, on the one hand, the aim that Stabex should be a quick-disbursement instrument and, on the other, the policy of investing transfers in the agricultural sector in order to bring about long-term solutions to the problems faced by the sector. It could be argued that the National Indicative Programme (NIP), for which an implementation timeframe of at least five years is specified, would be a more suitable instrument for such an approach. Indeed, the flow of Stabex funds to a country over a period of several years is difficult to predict, whereas the amount of NIP funds available is fixed at the beginning of the five-year period. This makes planning medium to long term investments easier with NIP funds than with Stabex funds.

6.7. The actual application of Stabex funds was debated at length within the Commission during the first two years of the Convention, notably between those seeking to insist on the sectoral vocation of Stabex and those wishing to use it in a broad macroeconomic context to provide balance of payments and budgetary support. The fact that the utilization of Stabex transfers often leads to the generation of counterpart funds has further fuelled the debate. Various ACP States have also formulated their own opinions as to the utilization of transfers by attempting to take account of their own particular circumstances.

6.8. In February 1991, the Commission initially stressed the sectoral role of Stabex. Subsequently, in May 1992, it placed considerably more emphasis on the link and coherence between Stabex and structural adjustment.

Procedures for preparing frameworks of mutual obligations (FMOs)

6.9. The proposals for the utilization of funds submitted by the ACP States to the Commission (2.6) are examined jointly (Article 209 (3)) and, when agreement has been reached, the ACP State and the Commission sign the protocol setting up a framework of mutual obligations (Article 210).

6.10. The substantial analysis document provided for in Article 209 of the Fourth Lomé Convention calls not just for information but 'analysis', which should examine not only the problems encountered by the sector but also the policies being pursued by the ACP State in the sector. This analysis should ensure that the ACP States have put clear policies in place prior to determining specific measures to finance.

6.11. The substantial analysis document was intended to be the basis for drafting the FMO document. With the support of the Stabex beneficiaries' handbook, (4.5(a)), no general guidelines were issued by the Commission to ACP States stating more precisely what was required in the substantial analysis.

6.12. As already noted, the Framework of Mutual Obligations represented a completely new procedure and the Commission developed various guidelines concerning the format and content of this document. Thus, in February 1991, a checklist of the main points to be included in the FMOs was established (34). This was followed by the identification in June 1991 of fixed clauses to be included in each FMO (35). Finally a proposed outline for FMOs was issued in May 1992 (36). However, these various documents ought to be systematically distributed to the ACP States, because they will be required to make proposals.

Delays in preparation of FMOs

6.13. As was the case for the payment of Stabex transfers into ACP States' European bank accounts, the stage of preparing the utilization of Stabex funds has required considerably more time than was originally foreseen. While it had been foreseen that draft FMOs might be available by the time of the transfer decisions, the median time between the 1990 application year transfer decision and the signature of the FMOs for the 1990 application year amounted to 12 months (37). Thus the FMOs for 14 countries were not signed within twelve months of the transfer decision (38).

6.14. For the 1991 FMOs, the median time required increased still further to 19 months, the first FMO (Côte d'Ivoire) not being signed until almost eight months after the transfer decisions had been taken. Only five other countries had signed the FMO by the end of July 1993, 12 months after the transfer decisions (39).

Identification of operations to be financed

6.15. The actual choice of measures to be financed was frequently the subject of lengthy negotiations between the ACP State and the Commission as well as within the ACP administrations. The ACP State and the Commission were supposed to consult with other donors over proposed uses to ensure proper coordination. While such negotiations and consultations inevitably required time, the process was often extended as a result of differing views on the admissibility and desirability of proposed uses of Stabex. This was particularly the case in relation to ACP proposals to utilise funds directly to support price stabilization Funds for their own commodities or to finance numerous individual projects. In general, the Commission did not accept either approach. In the case of the stabilization Funds, it sought to persuade ACP States to adapt domestic commodity prices to world prices; it also encouraged them to pursue an overall sector approach aimed at overcoming the problems of the sector, rather than following the traditional project approach which had limited results.

6.16. The process of preparing the FMOs was also made longer because the substantial analyses carried out by the ACP States often proved to be of limited utility. In many cases, they were overly concise (e.g. the Central African Republic 1990 and 1991; Tanzania 1990; Ethiopia 1991), submitted late (e.g. Ghana 1990 and 1991; Kenya 1990 and 1990; Madagascar 1990) or, in certain cases, not submitted at all (Côte d'Ivoire 1991; Ethiopia 1990; Uganda 1991). The observed shortcomings were due to the failure of individual ACP States, the sectoral policies of which have not always been consistent, to produce adequate proposals for utilizing the Stabex funds. Moreover, the need to redesign sectoral policies to reflect new structural adjustment programmes or re-examine them following changes in government further contributed to delays. For its part, the Commission on several occasions found itself in the position of having little experience of the sector concerned by the transfer and therefore not being able to evaluate proposals made by the ACP State or itself contribute to policy formulation (40).

6.17. The size of some of the transfers meant that a considerable planning effort was required. Apart from the absolute size of certain transfers, the size of the transfer relative to overall EDF aid is an indication of the additional workload involved, particularly for the Commission's Delegations. Thus, for 19 countries, the combined Stabex transfers for the 1990 and 1991 application years amounted to more than 20 % of their National Indicative Programme (NIP) allocations covering the five years of the First Financial Protocol of Lomé IV (see Appendix 4). For three of these countries, the transfers were actually greater than their NIP allocation (Côte d'Ivoire: 181 %; Cameroon: 124 %; Papua New Guinea: 105 %).

6.18. The fact that the 1991 FMOs are taking on average significantly longer to prepare than the 1990 FMOs is due to the time required to implement the 1990 FMOs, it being generally desirable to evaluate existing operations before preparing new FMOs. There is thus a risk that there will be a build-up of Stabex transfers waiting to be disbursed, as transfers are generated more quickly than funds can be disbursed. This is even more the case as a result of the delays in taking the transfer decisions for the 1992 application year caused by the hesitations of the ACP countries.

Conditionality

6.19. Apart from the negotiations regarding the utilization of the funds, the conditionality attached to the release of funds to ACP States was a further important factor slowing down the preparation of the FMOs. The concept of making the utilization of transfers conditional on the ACP State respecting certain commitments was new to Stabex. The Convention itself did not clearly spell out the notion of conditionality, but merely hinted at it in Article 210 in the phrase 'Framework of mutual obligations'. The ACP States thus had to adapt to a new dimension to Stabex which was not always easily accepted.

6.20. The specific conditions which the Commission desired to see attached to the release of Stabex funds in most cases focused on the liberalization of the sectors concerned by the transfers. Reservations on the part of the ACP States, whether for technical reasons connected with the specific proposals put forward for reform, or for political reasons owing to the threat posed by the reform process to certain interest groups, required considerable negotiation to overcome. The Commission had to be careful to identify commitments which were of sufficient import, once implemented, to have an impact on the sector while avoiding insisting on commitments which would not be complied with and would hence cause funds to be blocked.

Commission procedures

6.21. While the process of negotiation between the ACP State and the Commission often took considerable time, within the Commission the period required for the different departments which approve the proposals (Delegation, Stabex service, Structural Adjustment Unit, geographical services, Chief Authorizing Officer (41)), has further slowed down the finalization of the FMOs. The need to reconcile the differing opinions of the departments concerned over certain utilizations has contributed to such delays.

6.22. Two other specific procedures have further delayed the process of approval:

(a) while initially the Commission took the view that the FMOs could be signed by Commission Delegates on behalf of the Commission, from September 1992 onwards a different interpretation of Article 210 of the Convention was applied, so that each FMO had to be signed by the Chief Authorizing Officer after approval by the Commission;

(b) all FMOs, once finalised but before signature, are required to be submitted to Member States for information and a period of one month must elapse before the FMO can be signed. In fact, only one case was identified (42) where a Member State raised a question at this stage. This procedure, which supplements consultations between the Delegation and the Member States represented in the ACP State during the drafting of the FMO, does not appear essential.

6.23. Lastly, it should be noted that while the Convention, in an effort to ensure that Stabex fulfils its vocation as a quick-disbursement instrument, lays down strict deadlines for establishing transfer rights and making transfer decisions, no deadlines exist for the implementation of subsequent stages of the system. On the other hand, however, Annex XLVI to the Convention states that: 'The Contracting Parties agree to adopt the simplest possible procedures for the application of Article 210 and Article 211 (2) and (3) with a view to making transfers available to the ACP States as swiftly as possible.' Accordingly, a broader delegation of powers to the Commission's Delegates, together with a boost to their resources and increased ex post audits, would have been desirable.

7. THE UTILIZATION OF STABEX TRANSFERS

Financial implementation of the frameworks of mutual obligations

7.1. As of 31 December 1993 the Commission's central departments had no information either on overall payments from these ECU accounts or on the disbursement of Stabex counterpart funds. According to the Commission, the reason for this is that, once the money is paid out from the EDF accounts it becomes the property of the ACP States. However valid this view might be, it clearly behoves the Commission to monitor the actual implementation of a system which it is responsible for managing until completion.

7.2. In order to overcome this lack of information, the Court requested each Commission Delegation responsible for an ACP State which had received a Lomé IV Stabex transfer to provide information on final Stabex disbursements as of 31 October 1993, or two years after the transfer decisions had been taken for the 1990 application year.

7.3. From the information supplied by the Delegations, it is estimated that, as far as transfers for the 1990 application year are concerned, 291,6 Mio ECU of the 437,6 Mio ECU paid into the ACP States' European bank accounts (See Table 3.1) had been disbursed as of 31 October 1993, which corresponds to an implementation rate of 67 %. It is important, however, for this rate to be seen in context:

(a) firstly, disbursements were intended to compensate for the effects of losses in revenue suffered in 1990, that is almost three years earlier;

(b) secondly, 53 % of the total funds disbursed only concerned two countries, the Côte d'Ivoire and Cameroon (43), which each had disbursement rates of more than 90 %. Apart from these two countries, only four others had a disbursement rate of more than 90 % (Burundi, Ghana, Papua New Guinea and Tanzania). Eighteen countries had a disbursement rate of less than 50 % and half of these had made no disbursements at all (Benin, Burkina Faso, Kiribati, Mali, Sao Tomé, Sierra Leone, Togo, Tuvalu, Western Samoa). Thus, excluding the Côte d'Ivoire and Cameroon, the average disbursement rate was below 50 % (see Annex 5);

(c) in ten countries, it was intended that ECU payments would create counterpart funds in local currency with a total approximate value of 186 Mio ECU. Of this amount, the local currency equivalent of only approximately 53 Mio ECU had been disbursed as of 31 October 1993, a utilization rate of 28 % (see Annex 6);

(d) while in European bank accounts, the Stabex transfers had generated significant amounts of interest, estimated to be approximately 50 Mio ECU on 31 December 1993. These came on top of the original transfers.

7.4. As far as the 1991 application year was concerned, on 31 October 1993, 15 months after the transfer decisions had been taken and almost two years after the financial year in which the losses in export earnings had occurred, only 39 Mio ECU of the 352,1 Mio ECU paid into ACP States' European bank accounts had been disbursed. This represented an implementation rate of just 11 %. Once again, the majority of these payments were made in the Côte d'Ivoire (36,7 Mio ECU), only two other countries, Cameroon and Uganda, having commenced disbursements. This situation is largely to be explained by the fact that, as of 31 October 1993, most 1991 FMOs had only recently been signed or had still to be signed (see paragraph 6.14).

Analysis of the allocation of Stabex funds

7.5. Table 7.1 summarizes the main uses of Stabex transfers as provided in the FMOs which had been signed as of 31 December 1993:

>TABLE>

7.6. The following paragraphs highlight the particular issues that have arisen during implementation and examine the reasons for slow disbursement in specific countries.

Import programmes

General Import Programmes

7.7. Three East African countries allocated the majority of their 1990 Stabex transfers to general import programmes (GIPs):

>TABLE>

7.8. The choice of an import programme can be considered appropriate in so far as the loss of earnings has led to a reduction in the foreign exchange available for imports. None of these countries having convertible currencies, the loss of foreign exchange was particularly problematic. It was also expected that an import programme would permit the rapid disbursement of funds. However, given that Stabex is intended to be a sectoral instrument, it might have been expected that the transfers would have been used to support a sectoral rather than a general import programme. Nevertheless, general import programmes were preferred by the Commission for the following reasons:

(a) linking the utilization of Stabex funds to general import programmes financed from EDF structural adjustment funds strengthened the Community's support for the structural adjustment process;

(b) general import programmes were in greater harmony with the policy of the liberalization of foreign exchange mechanisms being pursued under the structural adjustment programmes;

(c) the sectors concerned did not appear to be in much of a position to absorb large sectoral import programmes;

(d) each GIP was to give rise to counterpart funds which would themselves be allocated to the agricultural sector.

7.9. In Tanzania, Stabex funds were used to support a GIP to which 30 Mio ECU from Lomé IV structural adjustment support funds were also allocated. This operation can be considered to have been relatively successful, despite initial delays which occurred after the signing of the FMO (12 September 1992). These were due to an agreement between the Government and the Commission to disburse the structural adjustment funds first. Nevertheless, the full allocation of 16 Mio ECU from the Stabex transfer was disbursed between March and September 1993 on goods of a productive nature as required by the FMO.

7.10. By contrast, utilization of funds for the GIP in Uganda was blocked as of August 1992, by which time only 9,3 Mio ECU (33,2 % of allocation) had been disbursed. This was because the country's requirements for such aid in 1992 and 1993 were only half the estimated figure and the country preferred to make use of other support measures that allowed the counterpart funds created to be channelled directly to the Treasury (budgetary support). The utilization of structural adjustment funds also suffered considerable delays (44).

7.11. In Burundi, 9 Mio ECU of the Stabex transfer was added to structural adjustment funds of 12 Mio ECU to finance a GIP. Although it had been planned that the 21 Mio ECU would be disbursed in 10 months, in October 1993, 15 months after signature of the FMO, utilization of the structural adjustment funds had yet to begin, as documentation to justify the utilization of the Stabex funds was still being put together.

7.12. Although a first tranche of the Stabex transfer (4,5 Mio ECU) was released in July 1992, the documentation to justify its utilization for oil imports was not submitted by the Burundi authorities until December 1992. The second tranche was not released until March 1993 and the supporting documentation not provided until September 1993. The delays involved are even less justified in view of the fact that the financing of imports was largely retroactive (45). They are to be largely attributed to administrative inefficiencies and problems in finding import documentation complying with EDF regulations, notably certificates of origin and pro forma invoices. In these circumstances it is clear that Stabex funds were not used for a GIP but only as balance of payments support. Thus, the requirement for imports to comply with EDF regulations may merely be seen as a cosmetic exercise whose only effect is to generate pointless administrative costs.

7.13. In a fourth country, Ghana, the 1990 FMO allowed the Stabex transfer (6,9 Mio ECU) to be made available directly to the Bank of Ghana to increase its exchange reserves without there being a GIP. The FMO thus sought only to attach conditions to the release and use of the resultant counterpart funds on the basis of the fact that the Ghanian currency was internally convertible (46). This approach, while having the clear advantage of accelerating the disbursement of Stabex funds, raises questions concerning the degree of currency convertibility required in a particular country before such a policy is implemented (47). It is also unclear why Ghana still uses GIPs to disburse structural adjustment funds when this is not required for Stabex resources.

7.14. Moreover, the increasing liberalization of foreign exchange markets in many African countries may invalidate the GIP/SIP approach with its strict requirements concerning supporting documents (48).

Sectoral Import Programmes

7.15. Several countries allocated their Stabex transfers entirely or largely to sectoral import programmes. The main countries concerned were Ethiopia, Rwanda, Kenya, Mauritania and Madagascar.

7.16. Ethiopia established SIPs both for the sectors generating the Stabex transfers (coffee and leather) and for other sectors as is shown in Table 7.3:

>TABLE>

7.17. The FMO was drawn up in the context of the Emergency Recovery and Reconstruction Programme (49) which was financed by several donors and launched in July 1992 to help the country, which was just emerging from civil war. Approximately 60 % of the funds were to be devoted to quick-disbursement operations under the ERRP. However, notwithstanding the possibilities for simplification offered by Article 248 of Lomé IV, approximately half of the value of the supplies to be purchased were subject to EDF procurement procedures. The unfamiliarity of beneficiaries with these procedures, the considerable workload involved and numerous delays meant that no supplies had actually been delivered as of 31 October 1993, eight months after the signing of the FMO.

7.18. The large allocation of funds to the transport sector was partly intended to overcome the transportation difficulties faced by all crops. This objective was to be achieved in the short term through the provision of spare parts for vehicles.

7.19. Although only 28,4 % of the Stabex funds were allocated directly to the coffee and leather sectors, applications from these sectors amounted to much less than this and only concerned 20,6 % of the available funds. On the other hand, applications had been received for 87,6 % of the funds allocated for agricultural diversification operations outside the coffee and leather sectors. It would thus seem that a sectoral import programme for the agricultural sector as a whole, without funds being specifically directed to the coffee and leather sectors, might have been more appropriate.

7.20. The 1991 FMO (signed on 26 August 1993) sought to tackle the problem of slow tendering procedures by enabling operations targeted on urgent rehabilitation needs to follow similar procedures to those established for emergency assistance contracts under Article 300 of Lomé IV. At the end of 1993, the implementation of the programme had only just started and the effects of this change in procedures did not appear to be decisive.

7.21. In Rwanda, the national administration, following the example of the three East African countries examined in paragraphs 7.9. to 7.11., had wished to use the funds to finance a GIP but the Commission instead insisted on the implementation of an SIP. The programme sought to provide urgently needed inputs for the sectors affected by the loss of earnings in 1990, principally coffee. However, while it was intended that the inputs should be made available in October 1992, at the beginning of the new season, on 31 October 1993, only 35 % (4,9 Mio ECU) of the 14 Mio ECU reserved for the SIP part of the FMO had been disbursed. The delays were due to the internal tensions already faced by the country, the weakness of its administration, and the unsuitability of lengthy EDF tendering procedures.

7.22. In Kenya, a sectoral import programme for the agricultural sector as a whole was initially adopted. The authorities felt that the absorptive capacity of the coffee sector itself, where the losses occurred, had already been taken up and therefore decided to allow imports within the agricultural sector to be determined by the market. However, in January 1993, to respond to what was considered by the authorities to be an emergency situation, and in the context of a complete revision of the FMO (8.24), 20 Mio ECU was reallocated to an emergency fertilizer import programme designed to meet the needs of the new cereal planting season in the first quarter of 1993. This programme encountered a number of problems:

(a) the Kenyan authorities overestimated the amount of fertilizer required by failing to take account of fertilizer imports by the private sector (50);

(b) despite the Commission's efforts to accelerate tender procedures, the first deliveries only took place in May 1993, partly as a result of difficulties encountered at the tender evaluation stage;

(c) because of the devaluation of the Kenyan shilling and the late delivery of the fertilizer, the surplus consignments had to be sold below import prices.

7.23. In Mauritania, a sectoral import programme for 8 Mio ECU was used to finance the purchasing of goods and services for the fisheries sector, which had suffered a loss of earnings. The programme was launched in August 1992 and by the end of October 1993 only 5 Mio ECU (62,5 %) had been used because private sector firms resented the requirement that supplies costing more than 100 000 ECU had to be subjected to tendering procedures, a practice to which they were not very accustomed. In order to get round this requirement, the imports were split up so as to make purchases correspond to the needs of the vessel for one single tide (51), or less than 100 000 ECU.

7.24. In the case of Madagascar, because the World Bank was already carrying out restructuring programmes in the two main sectors (coffee and vanilla) generating the transfers, it was decided to allocate the transfer to an import programme to support manufacturing firms. After the signature of the FMO in July 1992, the first tranche of the programme for 10,5 Mio ECU was disbursed and justified between October 1992 and February 1993. In all, 757 orders were placed, of which 276 were for less than 5 000 ECU. Inadequate documentation proved a frequent problem, particularly with regard to certificates of origin. As of 31 October 1993, the second tranche had not been released because of the Government's failure to meet certain conditions laid down in the FMO.

Utilization of counterpart funds

7.25. For those countries which used Stabex funds to finance general and sectoral import programmes to provide balance of payments support, the counterpart funds generated by these programmes also represented an important source of assistance (7.3 (c)). Although the possible uses of counterpart funds resulting from Stabex operations were not explicitly laid down in Lomé IV, the Commission, in its various guidelines, notably Article 186.2, insisted that they should be used in accordance with the provisions governing the Stabex system, and that their specific utilization should be agreed in the relevant FMOs (Article 211-3). This approach reflects the significance of the counterpart funds to ACP States' economies and the desire to ensure that they are utilized effectively, but the necessary controls thus created slowed down Stabex implementation still further.

7.26. In several countries, the counterpart funds were used in the same sector as those that had generated the Stabex transfers:

(a) in Ghana, the 6,9 Mio ECU raised in counterpart funds was used to pay end-of-service entitlements to approximately 5 300 staff affected by redundancies at the Ghana Cocoa Board. To ensure the exercise was correctly implemented, the payments were made in two tranches, each one subject to an external audit. No major problems were identified on this occasion;

(b) in Tanzania, counterpart funds generated by the GIP were allocated to supporting the prices paid to coffee producers with the aim of maintaining their confidence in the sector. Approximately 420 000 farmers benefited from the scheme. The payments, made between August and October 1993, generally provided a 20 % increase on domestic prices for the 1990-91 season. The scheme was carefully designed both to ensure that payments actually reached farmers and to reward those that produced better quality coffee. Overall, the scheme can be considered a success. However, in the south of the country where these were the only payments the farmers received in 1993, it is doubtful that coffee production was revitalized;

(c) in Burundi, for the local currency equivalent of 9 Mio ECU which was to be generated from the GIP, the 1990 FMO did not allocate any amounts to specific utilizations but simply stated four priority areas. In fact, by October 1993 when 79,5 % of the funds to be generated had been disbursed, nearly all of the disbursements (the equivalent of 6,9 Mio ECU) involved support to just one of these priority areas: the coffee stabilization Fund, for which the hard currency funds allocated for this purpose had proved insufficient (see paragraph 7.49);

(d) for Uganda, the 1990 FMO set down an indicative allocation of the 14 Mio ECU in counterpart funds to be generated by the first tranche of the GIP. The funds were to be allocated to the cotton sector (9 Mio ECU), in particular in the form of a crop financing revolving fund, and to the coffee sector (5 Mio ECU). While operations in the coffee sector to assist the Coffee Marketing Board proceeded satisfactorily, the cotton crop financing revolving fund experienced difficulties. On 31 October 1993, of the 4 500 Mio Uganda Shillings (Ush) lent since May 1992 (52), only 2 200 Mio Ush had been repaid, mainly as a result of one of the three organizations benefiting from the loans, the Lint Marketing Board, having defaulted on a repayment of 1 200 Mio (Ush) (53). The difficulties encountered seem to have arisen because of the continued fall in world cotton prices and the fact that, at the time, the Commission had a limited knowledge of the Ugandan cotton sector. Contrary to the provision in the FMO regarding the allocation of counterpart funds, in December 1992, 300 Mio Ush was disbursed to support an army retrenchment programme involving the demobilization of 22 000 soldiers. The utilization of Stabex funds in this way is clearly outside the scope of the instrument.

7.27. In four other countries, the FMOs allocated at least part of the counterpart funds outside the sector generating the transfer:

(a) in Ethiopia, the counterpart funds were to be used in the context of the ERRP (7.16-7.20). Priority attention was to be given to the local costs of the ERRP and in particular local expenditure under the ERRP social fund. Despite the emergency nature of the programme, no counterpart funds had been spent as of 31 October 1993;

(b) in Madagascar, counterpart funds generated by the first tranche of the SIP were used to support the 1992 and 1993 national budgets to cover priority areas in health, education and public works. While such a usage was not foreseen for Stabex, it corresponded to a policy agreed in the context of Madagascar's National Indicative Programme, and approved by Council resolutions adopted in May 1991, whereby all counterpart funds, whichever instrument had generated them, would be used in a consistent fashion;

(c) similarly in Rwanda, counterpart funds were to be used to support the national budget, in accordance with an agreement on the utilization of counterpart funds which had been reached between the Rwandan authorities and the principal donors in the country. However, due to the large amount available and the low disbursement rate of the national treasury, no Stabex counterpart funds had been disbursed as of 31 October 1993;

(d) in Kenya, the 1990 FMO provided for the counterpart funds to be allocated outside the coffee sector, as was the case with the transfer itself. Thus, the first tranche of 10 Mio ECU in counterpart funds generated by the SIP was used to contribute to the Community's continued large scale support of the country's cereal sector reform programme (CSRP) (54). However, after difficulties were encountered in the implementation of the CSRP, the remaining 20 Mio ECU in counterpart funds to be generated were reallocated to the coffee sector in spite of the sector's very limited absorptive capacity. Disbursement was nevertheless suspended, pending agreement between the Kenyan government and the Commission on an appropriate reform policy for the coffee sector.

Internal debt relief measures

7.28. Whereas for ACP States with non-convertible currencies Stabex transfers above all provided a means of easing their balance of payments difficulties through financing import programmes, countries in the franc zone primarily used the 1990 transfers to tackle the financial difficulties faced by the coffee and cocoa sectors. In these countries, stabilization funds had not been enough to compensate for falling world prices in the late 1980s. Indeed, as domestic price reductions had been insufficient and the surpluses generated in earlier years had often been used for purposes outside the price stabilization systems, the latter ended up bankrupt, threatening the collapse of the crop marketing system (producer, banks and exporters) and placing a growing burden on State finances. The persistently overvalued CFA franc only exacerbated these problems (55). The authorities of the franc zone prevented governments from reacting by increasing the money supply and Stabex funds were thus employed to try to address the internal debt problem that had arisen through the mismanagement of agricultural price stabilization schemes in the Côte d'Ivoire and Cameroon and, to a lesser extent, in the Central African Republic. In each case, the granting of Community aid was made subject to specific commitments from the governments to reform the sectors concerned (see Chapter 8).

7.29. In Cameroon, the stabilization board, the ONCPB (56), had become bankrupt as a result of the Government's consistent policy of maintaining producer prices for coffee at levels considerably higher than world prices, which had fallen steeply since 1987. Moreover, it had also preserved the system of administratively fixed prices for intermediaries of the system (buyers, factories, exporters), which were set at levels considerably higher than their actual costs. In 1989, the coffee and cocoa sectors had become virtually paralysed as a result of ONCPB's debts towards the various economic operators, estimated at more than 100 000 Mio FCFA (288 Mio ECU).

7.30. In response to this situation, the donors supported the Cameroon government in its efforts to reform the sectors concerned (see paragraphs 8.20. to 8.22.), while providing the majority of the finance to allow the sectors' debts to be paid off. In 1989 and 1990, the Community contributed 48 000 Mio FCFA (138 Mio ECU), almost half of the funding needed, using Lomé III Stabex transfers for the 1988 and 1989 application years.

7.31. At the time, it had been foreseen that the restructuring process would be completed and financial equilibrium restored without the need for further Stabex interventions. However, delays in adjusting domestic prices to world prices resulted in further arrears being generated. In this situation, the Commission decided that part of the 1990 Stabex transfers to Cameroon (57) could also be used to pay off these arrears, while nevertheless insisting that this was the final year in which Stabex funds would be used in this way. Thus a total of 14 984 Mio FCFA (43,0 Mio ECU) was allocated in the 1990 FMO for this purpose.

7.32. As a result, producers received the payment of two sums: one of 2 164 Mio FCFA (6,2 Mio ECU) to cover the debts of the stabilization fund and another of 2 857 Mio FCFA (8,2 Mio ECU) to cover those of exporters. Whereas the 1990 FMO only provided explicitly for the reimbursement of the principal on the new support arrears (7.31) resulting from the delays that had occurred in the process of reform, the sum of 7 776 Mio FCFA (22,3 Mio ECU) was paid over directly to 19 exporters in order to cover both past claims (the 1986-1990 harvests) and the interest owing to the banks by exporters who had not been able to repay their loans (58). More generally, it should be stressed that it is difficult to judge whether the payments made were always justified in the case of old operations because of the considerable scope economic operators had for manipulating the system (e.g. the virtual impossibility of establishing whether sales actually took place, administratively fixed prices bearing no relation to real costs and the problem of some operators being both debtors and creditors of ONCPB).

7.33. Despite the large amounts contributed under the 1990 FMO, as of 31 July 1993 it was still estimated that the debts of the stabilization board amounted to approximately 20 000 Mio FCFA, of which about half was owed to exporters for price support measures. At the same time, however, ONCPB still held significant assets, notably property in Cameroon and France, which, if the government had not been against it, could have been used to help to pay its creditors, thereby proportionately reducing the drawings on Stabex funds.

7.34. The Commission maintained a firm position towards the Cameroon authorities during the negotiation of the 1991 FMO, insisting that the 1991 Stabex transfers (69,2 Mio ECU), should be used to encourage the development of production in the coffee and cocoa sectors and the promotion of the rural sector in general.

7.35. In the Côte d'Ivoire, 82,9 Mio ECU of Stabex transfers were used to pay off internal debt, not only relating to the coffee and cocoa sectors, which had given rise to the 1990 Stabex transfers, but also in the cotton and rubber sectors. These measures were part of a World Bank agricultural adjustment programme and, at a macroeconomic level, the economic recovery programmes, in particular, those seeking to restore balance in public finance and clear the internal and external arrears of the government.

7.36. In relation to the coffee and cocoa sectors, as in Cameroon, the maintenance of a guaranteed price to producers that was considerably higher than the world price had caused the stabilization fund (CSSPPA (59)) to become seriously indebted towards the economic operators. This was despite the fact that, under Lomé III, the Côte d'Ivoire had received 365,3 Mio ECU in Stabex transfers.

7.37. At the same time, in 1992, the indebtedness of the Treasury towards the central bank (BCEAO) (60) had risen to 160 000 Mio FCFA (459 Mio ECU), even though the authorities of the franc zone had set a ceiling of 120 600 Mio FCFA. A proportion of this debt had been incurred after a Treasury decision to buy back stocks of low-quality coffee and cocoa from the coffee/cocoa seasons 1985/86 to 1988/89 (61) which had originally been purchased by exporters who had then been unable to sell them. The exporters thus found themselves unable to repay their banks, who in turn were unable to repay the BCEAO which had refinanced the loans for the season. In June 1990, so as to restore a degree of liquidity to the sector and thereby complete the 1990/91 harvest, the Treasury purchased the stocks at the same price that the exporters had paid for them rather than at their disposal value. Following a series of agreements reached between June 1990 and December 1991 between the State, the BCEAO, the local banks and exporters, a solution to these problems had been found in principle without the need for Stabex support, thus allowing the various parties concerned to take part in the 1990/91 and 1991/92 harvests.

7.38. In spite of these agreements to eliminate overhangs from the past, 12 620 Mio FCFA (37,8 Mio ECU), or approximately 40 % of the funds available under the 1990 FMO, an amount which represented 7,8 % of the total of Stabex transfers made to all ACP States for the 1990 application year, was paid over on 26 November 1992, to reduce the Treasury's debt to the BCEAO. The reason given to justify this utilization was that the operations linked to the coffee and cocoa sectors described above had to some extent contributed to this indebtedness. The allocation in 1992 of a significant proportion of the 1990 Stabex transfers to clearing the deficit of the Treasury with the central bank was not, contrary to what the Commission says, directly related to the functioning of the sector. On the contrary, it constituted a major macro-economic support for the State's financial dealings and a practical way of correcting the consequences of risky past political and financial decisions. It therefore constituted a dubious use of Stabex when compared with its intended role.

7.39. In addition, approximately 5,7 Mio ECU was allocated to paying off the CSSPPA's debts towards four banks (62) and a further 2,9 Mio ECU to two companies and a local insurance firm.

7.40. A further 12 000 Mio FCFA (34,4 Mio ECU) was allocated to the cotton and rubber sectors to reduce the debts of the CSSPPA and of the State towards these sectors which mainly resulted from a failure to pay export subsidies. Thus the CIDT (63) received 9 000 Mio FCFA and a further 3 000 Mio FCFA was paid to three companies involved in rubber production. These payments in fact constituted the main single utilization of Lomé IV Stabex funds for diversification purposes. The use of Stabex funds in this field is problematic in so far as the system of export subsidies which was largely responsible for the debt would not have been necessary had the CFA franc not been over-valued. Nevertheless, the payments made allowed the sectors to survive until a devaluation did eventually take place in January 1994.

7.41. The 1991 FMO for the Côte d'Ivoire provided for further large operations to pay off internal debt. In total, such operations amounted to 11 900 Mio FCFA (35,7 Mio ECU out of total transfers of 71,8 Mio ECU) and consisted mainly of CSSPPA debts concerning VAT and marine insurance (4 200 Mio FCFA), the repayment of export subsidies and other debts to the CIDT (4 000 Mio FCFA) as well as the repayment of export subsidies to the rubber sector (3 000 Mio FCFA). Once again, therefore, funds were used to cover commitments from the past which had not been met by the State.

Price stabilization

7.42. In several countries, Stabex transfers were used to stabilize or support domestic producer prices. Given that stabilization is one of the objectives of Stabex, this might be considered a natural use of Stabex transfers. However, the poor management of stabilization funds in certain countries made this a particularly difficult area when it came to the allocation of funds under Lomé IV.

7.43. The country to make the greatest use of Stabex transfers for price stabilization/support under Lomé IV has been Papua New Guinea (PNG), all its transfers being allocated to this purpose under the 1990 FMO (24,9 Mio ECU) and the 1991 FMO (17,2 Mio ECU). This represented a continuation of the PNG policy under Lomé III. The Commission was ready to support such a utilization on the basis that stabilization funds in PNG had been relatively well managed in the past.

7.44. Thus, all the 1990 transfer had been disbursed by the end of 1992. Apart from representing a means of ensuring rapid disbursement, the mechanism also succeeded in transferring funds to smallholders (64) and plantations. The Government of PNG also provided a significant contribution. As a result, production of the country's main export crops (coffee, cocoa, copra and palm oil) all increased over the 1991-93 period. Basically viable but heavily indebted estates were able to continue in business, thus helping to stem the rural-urban drift from which the country suffers.

7.45. The utilization of Stabex resources in this way was not without its problems. While it was originally intended that prices would be reduced to world market levels over a three to five year period from 1989, a change of government in mid-1992 led to support prices being frozen at their subsidized levels. Although the price stabilization policy was intended to give the agriculture sector time to take steps to become more competitive, only limited progress was made in this area, the government, in fact, transferring funds from agricultural investment to price support for reasons of social stability. The sustainability of the scheme appeared questionable, especially as Stabex transfers are expected to decline in subsequent years.

7.46. While in two other Pacific States, Kiribati and Vanuatu, Stabex transfers were also used for price stabilization, in Africa funds were only used for this purpose in a limited number of cases, the main countries being Cameroon, Côte d'Ivoire and Burundi.

7.47. The 1990 FMO for Cameroon provided for a total of 3 900 Mio FCFA (11,2 Mio ECU) to be made available for stabilization purposes. The great majority of these funds (3 400 Mio FCFA) were provided to support robusta coffee prices. The need for the funds arose because the Government, having already set the 1990-91 prices at too high a level in relation to world prices, maintained the same price levels for the 1991-92 season. This was despite the continued fall in world prices and government undertakings, made as part of the overall restructuring of the coffee and cocoa sectors, to reduce domestic prices to reflect world prices. Moreover, the loss of an estimated 7 000 Mio FCFA (20,1 Mio ECU) from the stabilization fund in 1991, because of unwarranted withdrawals by the Treasury, had reduced the reserves available to the fund and made the use of Stabex funds unavoidable. However, as was the case for repayment of internal debt, the Commission refused to provide any further support to the stabilization fund under the 1991 FMO.

7.48. In the Côte d'Ivoire, while no funds had been provided for stabilization purposes under the 1990 FMO, the 1991 FMO allocated 3 500 Mio FCFA for this purpose. This was despite the fact that one of the conditions of the 1990 FMO had been for the Côte d'Ivoire to release the resources necessary to cover any possible deficit in the coffee and cocoa sectors as from the 1991/92 harvest. In order to preserve its credibility in the eyes of its ACP partners, the Commission ought to desist from such inconsistent actions and should refuse to compromise on questions of principle of this kind.

7.49. In Burundi, 2,5 Mio ECU in hard currency was provided for price stabilization purposes. This amount of 2,5 Mio ECU, which was provided for in the FMO and supplied in hard currency - whereas all the Fund's payments were made in local currency - could not be justified during the Court's on-the-spot audit in September 1993. In October 1993 (see paragraph 7.26 (c)), the equivalent of a further 6,9 Mio ECU in counterpart funds generated by the GIP had also been used for price stabilization. The Commission thus accepted support being provided for the stabilization fund without it having clear information on how the fund operated. In actual fact, the support helped maintain a pricing system which the wider restructuring of the sector sought to reform. Approximately 2,7 Mio ECU of the funds provided in local currency for the stabilization Fund were thus used by the Burundi authority responsible for the stabilization Fund for other interventions in the coffee sector without this being agreed in advance with the Commission.

Projects

7.50. A number of countries used Stabex transfers to finance projects designed to assist either the sector where losses had occurred or other agricultural sectors.

7.51. Certain smaller countries thus allocated the bulk of their Stabex resources to development projects. In such cases, although the amount of the transfer was small compared to other Stabex transfers, in relation to these countries' national indicative programmes it was relatively large (e.g. Grenada 45 %; Vanuatu 24 %; Solomon Islands 24 %; Western Samoa 24 %). While the amounts concerned provided the opportunity for measures which could have a clear impact on the sectors in question, their implementation placed a considerable workload on the small Commission Delegations in these countries. At the same time, in most cases, disbursements tended to be slow.

7.52. Thus, for example, the 1990 FMO provided for the financing of no fewer than 11 projects in the Solomon Islands. On 31 December 1993, 17 months after the signing of the FMO, disbursements amounted to only 29 % of the transfer amount while the main project to be financed, a smallholder development programme, was not scheduled to be completed before 1998.

7.53. Several larger countries (e.g. Uganda and Burundi) also included agricultural development projects in their 1990 FMOs. Implementation rates in these cases were also generally slow and placed an additional burden on delegations.

8. IMPLEMENTATION OF ACP STATES' COMMITMENTS

The principle of conditionality in relation to Stabex

8.1. Although financial assistance to the economies of ACP States suffering from losses of export earnings is an essential part of the role played by Stabex, encouraging the ACP States to reform their economies, particularly those sectors relating to Stabex products, is just as important. Stabex is able to do this thanks to a Lomé IV innovation, consisting of making the utilization of Stabex transfers conditional on the ACP States fulfilling certain commitments laid down in each FMO.

8.2. The subordination of the utilization of Stabex funds to a series of conditions under Lomé IV reflects an increasing recognition by donors that a number of aid projects and programmes have failed in the past because of the excessively large imbalances, both in certain sectors of activity and at macroeconomic level, in the recipient countries. Thus it was considered that unless ACP States implemented reforms, particularly in sectors suffering export losses, the benefits that these sectors stood to gain from Stabex transfers risked being greatly diminished.

8.3. This approach is conceptually sensitive, to the extent that the Commission cannot place conditionality over the eligibility of an ACP State for a Stabex transfer. Once it has been established by the terms of the Convention that an ACP State has suffered a loss of export earnings which entitles it to a transfer, this right cannot be denied and the Commission can only introduce conditions concerning the utilization of the resources in question. This chapter reviews how it was possible to subordinate the releasing of funds to the fulfilment of certain conditions in practice.

Types of conditions

8.4. Generally, the conditions attached to the utilization of Stabex transfers operated at three levels:

(a) general commitments;

(b) specific commitments;

(c) financial and administrative provisions.

These conditions correspond to those found in the structural adjustment support programmes.

8.5. General commitments refer to the ACP States' continued adherence to all the structural and sectoral adjustment measures agreed with the donors. Specific commitments normally involve particular undertakings agreed upon by the ACP States in the context of the FMOs. Financial and administrative provisions concern requirements relating to the implementation of individual Stabex operations, such as the submission of the necessary documentation on import programmes before further funds are released.

8.6. Of particular importance in both the 1990 and 1991 FMOs were general and specific commitments by ACP States to reform their coffee and cocoa sectors. In many ACP States, the mismanagement of these sectors by government through marketing boards or stabilization Funds had contributed significantly to the crisis in which these sectors found themselves. Thus, commitments most often included measures aiming at:

(a) the liberalization of internal and external marketing;

(b) reducing the role of the State in managing the sectors;

(c) establishing a financial equilibrium in the sectors by adjusting domestic prices to world prices;

(d) ensuring producers obtained a fairer share of the export price;

(e) increasing the influence of the private sector, in particular producers, over decisions affecting the sector concerned;

(f) improving the quality of crops, notably by price incentives and better quality control.

8.7. When deciding upon what conditions to attach to the release of Stabex funds, the Commission had to find the right balance so that the conditions chosen would be of sufficient weight to lead to significant reforms but would not be so demanding as to prevent the ACP States from being able to implement them and thus block Stabex disbursements.

8.8. The scope of the conditions laid down in the FMO and the evidence required of their fulfilment do however vary considerably from country to country. Thus, in the Côte d'Ivoire and Cameroon, detailed conditions were laid down for each component to be financed and specific documents were required as proof that the measures had been taken. In other countries, for example Ethiopia, Ghana and Papua New Guinea, the conditions were less wide-ranging and the proof required of their implementation not stated. In general, the existence of structural adjustment programmes in a country facilitated the setting of conditions, since conditions relating to the sector concerned could be taken over from the adjustment programme. This was particularly the case, for example, in the Côte d'Ivoire and Uganda.

Respect of conditionality

Macroeconomic Conditions

8.9. In some countries (65), general commitments included the pursuit of macroeconomic policies established in the context of structural adjustment programmes. However, in practice, the extent to which the Commission linked the respect of these policies to the release of funds varied from one country to another.

8.10. Thus, in Rwanda, although the government committed itself in the 1990 FMO to further implement its structural adjustment programme, the Stabex funds continued to be disbursed even after donors suspended funding under the structural adjustment programme because of the government's failure to comply with it adequately.

8.11. In contrast, in Madagascar, where the general and specific commitments made in the FMO were based on the country's further implementation of structural adjustment measures, the Commission took a firmer position. Thus, disbursement of the second tranche of the Stabex SIP was suspended for approximately 12 months pending the drawing-up of a satisfactory budget, involving, in particular, the cutting off of funds for what were considered to be 'white elephant' projects.

8.12. In two other countries Stabex payments have been continued, although the EDF has suspended disbursement of structural adjustment support:

(a) in Cameroon, the 1991 Stabex transfer of 69,2 Mio ECU was released even though the release of the Lomé IV structural adjustment funds had been suspended since the end of 1992 because of the country's failure to respect the structural adjustment programme (66);

(b) in Kenya, Stabex transfers for the 1990 and 1991 application years amounting to 46,3 Mio ECU were released despite the fact that most of the donors, including the Community itself, had blocked the release of quick-disbursement funds because of the political situation in the country (67).

8.13. The fact that the carrying out of reforms was only included among the FMO commitments in a limited number of countries undergoing structural adjustment constitutes a discriminatory treatment of certain ACP countries. It also points to the need for the Commission to establish a clear policy with regard to the relationship between Stabex and structural adjustment support in the case of countries which benefit from both instruments. In particular, it should decide whether failure to comply with structural adjustment programmes should lead to the suspension of Stabex transfers. In so far as Stabex can be considered a quick-disbursement instrument with similar functions to the balance of payments support associated with structural adjustment aid, the continuation of Stabex disbursements in cases where structural adjustment support has been suspended may be considered to be an inconsistent policy and undermine donor coordination.

Sectoral Level Reforms

8.14. It is at the level of sectoral reform that compliance with the general and specific conditions laid down in the FMOs has most often proved problematic. This situation can be explained by a number of factors, notably the fact that the reforms envisaged are frequently on a considerable scale, affecting key sectors of the economy.

8.15. In these circumstances, when the Commission has had to decide whether conditions have been adequately respected, it has been faced by two contradictory objectives:

(a) seeking to maintain Stabex's traditional role as a quick-disbursement instrument;

(b) trying to ensure conditions are met, which may imply the blocking of disbursements for a period.

In this case, it may be particularly difficult to take a decision where, in overall terms, an ACP State has made progress with the restructuring of the sector concerned but specific conditions forming part of the reform are not adequately fulfilled.

8.16. In the Côte d'Ivoire, the restructuring of the coffee and cocoa sectors, carried out in the wider framework of the country's Agricultural Sector Adjustment Programme, led notably to the effective liberalization of internal marketing, one of the general commitments of the 1990 FMO. But as far as the liberalization of external marketing was concerned, while some progress had been made, the situation concerning several specific commitments had remained unclear. In particular:

(a) serious doubts existed over whether the 'programme de ventes anticipées à la moyenne' (PVAM) had been fully introduced by the CSSPPA (68);

(b) the non-implementation of an electronic system designed to make the CSSPA's awarding of contracts to exporters more transparent;

(c) uncertainty over whether the CSSPPA had reduced its direct sales to 10 % of total exports as required.

8.17. Despite doubts on the part of the Commission over compliance with conditions in these areas, the Stabex funds were released after a period of blockage. However, the problematic nature of their release is best demonstrated by the fact that the implementation of the PVAM and the electronic mail system were once more included as conditions in the 1991 FMO. Reluctance on the part of the CSSPPA to communicate information on the state of the reforms, due both to the commercially sensitive nature of such information and the technical nature of these reforms, made the Commission's task a particularly difficult one. The use of technical assistance provided by the APROMA (69) consultancy to monitor the implementation of reforms performed a valuable role in aiding the Commission in this task.

8.18. In Tanzania, significant progress was also made in the restructuring of the coffee sector. However, the bill to liberalize the coffee sector was not passed until August 1993, after virtually all the hard currency component of the FMO had been disbursed, despite the fact that the liberalization of the sector was a general commitment of the government. As far as the specific commitments of the FMO were concerned, whereas the organization of the Export Division of the Tanzanian Coffee Marketing Board had actually been rationalized, significant problems still remained with export procedures, notably in relation to the limited number of buyers with access to auctions.

8.19. In Cameroon, where the FMO also aimed at the liberalization of the coffee and cocoa sectors, one of the major reforms was the abolition of the ONCPB (70), which was to be replaced by a much smaller organization with no part at all to play in the marketing and exporting of cocoa and coffee, its role being limited to monitoring and checking the quality of the products. The replacement of the ONPB by the ONCC (71) was one of the general conditions of the 1990 FMO while the effective functioning of the ONCC and the satisfactory further implementation of the liquidation of the defunct ONCPB was a condition for the release of the second tranche of the Stabex transfer.

8.20. Although the ONCC was established, there were considerable misgivings on the part of donors concerning its functioning, particularly in relation to the size of its budget, where salary costs, travel expenses and expenditure on the furnishing and rehabilitation of accommodation for its management appeared excessive. However, the Commission did not consider the situation to be so serious as to justify blocking or delaying Stabex disbursements.

8.21. The liquidation of the ONCPB was marked by very slow progress, partly as a result of the government's reluctance to relinquish certain assets as the donor community was financing its liabilities. After the dismissal of the liquidator by the Cameroon authorities and the failure to replace him within a satisfactory period of time, the Commission blocked further utilization of the 1990 FMO. However, the Stabex system being such that the Commission cannot actually withdraw Stabex transfers once an ACP State's entitlement to them has been established, the balances were transferred to the 1991 FMO, their release being conditional once more on the satisfactory liquidation of the ONCPB.

8.22. In Papua New Guinea, the conditions of the FMO were not adequately respected. They provided for the establishment of industry corporations to take over the running of the cocoa, copra and oil palm sectors along the same lines as the new Coffee Industry Corporation. However, as a result of no industry corporation being set up for the cocoa and copra sectors, and the new palm oil industry corporation only being invested with some of the intended functions, the same conditions were repeated in the 1991 FMO. Although a further condition of the 1990 FMO was that the Government would take steps to improve extension, training and research in the three sectors in question, no framework was established for evaluating progress. Thus, this condition was also repeated in the 1991 FMO without any assessment being made of progress to date. In fact, progress made was only limited. The problems encountered can be partly explained by the failure to release funds in tranches subject to the implementation of the conditions of the FMO. They were also caused by the lack of a formal structural adjustment programme from which conditions could be taken.

8.23. In Kenya, the Commission found itself faced by the Government with a clear abandonment of the latter's undertakings concerning the liberalization of the maize sector (72). In this case, the Commission took the view that the suspension of Stabex transfers would not bring the Gove