TABLE OF CONTENTS "" ID="1">1. INTRODUCTION> ID="2">1.1 - 1.2 "> ID="1">2. GENERAL PRESENTATION> ID="2">2.1 - 2.16"> ID="1"> The legal background of the import programmes of the sixth EDF> ID="2">2.1 - 2.8 "> ID="1"> Sectoral import programmes> ID="2">2.1 - 2.5 "> ID="1"> The special programme for heavily indebted countries> ID="2">2.6 - 2.8 "> ID="1"> The main characteristics of the import programmes> ID="2">2.9 - 2.16"> ID="1"> The Council's general objectives> ID="2">2.9 "> ID="1"> The form and content of programmes> ID="2">2.10"> ID="1"> The criteria and procedures for choosing programmes> ID="2">2.11 - 2.12"> ID="1"> Implementation procedures> ID="2">2.13 - 2.14"> ID="1"> The joint management of counterpart funds> ID="2">2.15 - 2.16"> ID="1">3. THE SITUATION OF THE IMPORT PROGRAMMES > ID="2">3.1 - 3.17"> ID="1"> Overall situation> ID="2">3.1 - 3.12"> ID="1"> Sixth EDF resources allocated to import programmes> ID="2">3.1 - 3.5 "> ID="1"> Programme types> ID="2">3.6 - 3.12"> ID="1"> The special features of certain programmes> ID="2">3.13 - 3.17"> ID="1"> Speed of execution of the programmes> ID="2">3.13"> ID="1"> Spending in excess of available appropriations> ID="2">3.14"> ID="1"> Programmes carried out in the franc area> ID="2">3.15 - 3.17"> ID="1">4. THE FINANCIAL MANAGEMENT OF THE PROGRAMMES> ID="2">4.1 - 4.56"> ID="1"> The implementation of the import programmes> ID="2">4.2 - 4.26"> ID="1"> Assessing the needs of beneficiaries> ID="2">4.3 - 4.5 "> ID="1"> Establishing programme objectives> ID="2">4.6 - 4.7 "> ID="1"> Formulating financing agreements> ID="2">4.8 - 4.9 "> ID="1"> Listing the constraints and the risks> ID="2">4.10 - 4.14"> ID="1"> Implementation methods and procedures> ID="2">4.15 - 4.17"> ID="1"> Monitoring by the supervisory authorities> ID="2">4.18 - 4.21"> ID="1"> Implementation of the accompanying measures> ID="2">4.22 - 4.26"> ID="1"> Consultation with the national authorizing officer> ID="2">4.27 - 4.33"> ID="1"> The regularity of certain practices> ID="2">4.30 - 4.33"> ID="1"> Management of the counterpart funds> ID="2">4.34 - 4.56"> ID="1"> Inadequacy of the operating framework> ID="2">4.35 - 4.36"> ID="1"> Creation of the counterpart funds> ID="2">4.37 - 4.45"> ID="1"> Use made of counterpart funds> ID="2">4.46 - 4.56"> ID="1">5. SUPERVISION AND EVALUATION OF THE PROGRAMMES> ID="2">5.1 - 5.45"> ID="1"> Supervision of the programmes> ID="2">5.2 - 5.30"> ID="1"> Role of the delegations in ACP countries> ID="2">5.2 - 5.11"> ID="1"> Supervision by the central departments> ID="2">5.12 - 5.30"> ID="1"> Appraisal of the sixth EDF programmes> ID="2">5.31 - 5.45"> ID="1"> Individual appraisals of projects> ID="2">5.33 - 5.41"> ID="1"> Sectoral appraisals> ID="2">5.42 - 5.45"> ID="1"> 6. CONCLUSION> ID="2">6.1 - 6.29" ID="2">Page" ID="1">Annex 1> ID="2">32"> ID="1">Annex 2> ID="2">33"> ID="1">Annex 3> ID="2">34"> ID="1">Annex 4> ID="2">35"> ID="1">Annex 5-1> ID="2">36"> ID="1">Annex 5-2> ID="2">37"> ID="1">Annex 6-1> ID="2">38"> ID="1">Annex 6-2> ID="2">39"> ID="1">Annex 7> ID="2">40"> ID="1">Annex 8> ID="2">41"> ID="1">Annex 9> ID="2">42"> ID="1">Annex 10> ID="2">44"> ID="1">The Commission's replies> ID="2">46">

SPECIAL REPORT No 2/94 on the import programmes carried out under the sixth EDF, together with the Commission's replies (94/C 97/01)

1. INTRODUCTION

1.1. One of the innovations introduced by the fourth Lomé Convention (seventh EDF) was the inclusion, among the instruments of ACP-EEC cooperation, of machinery for structural adjustment support(1) () consisting in particular of import programmes and the distribution of the counterpart funds generated by the various Community aid instruments.

1.2. In actual fact, similar operations had already been carried out on an ad hoc basis within the context of the previous ACP-EEC conventions under the fifth EDF(2) (), and, subsequently, by means of extensive utilization of the programmable resources of the sixth EDF and additional funds released on behalf of the Special Community Programme to assist certain poor and heavily indebted countries of sub-Saharan Africa(3) (). Given the fact that this was a new experience for the Communities, the Court of Auditors has carried out both on-the-spot and documentary audits of various import programmes that were implemented between 1987 and 1992 (Annex 1) in order to draw up a list of the main issues raised by this form of EDF intervention from the point of view of financial management.

2. GENERAL PRESENTATION

The legal background to the import programmes of the sixth EDF

Sectoral import programmes

2.1. By introducing the sectoral import programmes, the signatories of the third Lomé Convention aimed to respond to the pressing demands of numerous ACP States for the EDF to improve the overall speed of its mobilization of aid and do more than in the past to attenuate the currency shortage from which most of the ACP States were suffering.

2.2. It was for this reason that Article 188.1 of the Convention authorized the financing of 'sectoral development and import programmes, the purpose of which is to contribute to the optimum functioning of the productive sectors of the economy and to help meet basic human needs'. Only States that had already initiated measures to deal with those of their economic problems that were structural in origin were to be eligible for this type of aid; the aim of the aid in question was 'to do away progressively with the needs it fulfils'.

2.3. In practice, the sixth EDF import programmes usually went hand-in-hand with the economic recovery programmes of the ACP beneficiary States themselves, which were sponsored by the International Monetary Fund (IMF) and the World Bank(4) (). As such, the EDF programmes are not structural adjustment programmes in the proper sense of the term, but rather short-term measures to accompany reforms, the aim of which is to make up for the chronic lack of the indispensable resources that are needed for domestic production within ACP States. It is for this reason that EDF aid constitutes, in the first analysis, support for the balances of payments of the ACP States. Unlike the aid granted in the form of loans by the IMF and World Bank for similar measures, EDF aid very largely takes the form of donations.

2.4. EDF aid is given to the ACP States themselves, and not to importers, who, whether they be private undertakings or government bodies, are, in principle, required to give the State an amount in the local currency corresponding to the prices of the goods imported. The sums that are collected in this way are known as 'counterpart funds' and, in the absence of specific rules, these funds are governed by the provisions of Article 197.10 of the third Lomé Convention and must therefore be used 'for development purposes'. Counterpart funds generated in this way in local currencies are thus an extension of the aid supplied in foreign currencies(5) ().

2.5. If these short-term aid measures are to produce optimum results, they need to be implemented quickly so as to create a kind of 'critical mass' that will give rise to a chain reaction of economic stimulation. Where there are delays in the implementation of the aid, its effects are watered down and the counterpart funds in local currencies lose purchasing power as a result of the high inflation rates found in most of the ACP countries(6) ().

The special programme for heavily indebted countries

2.6. On the occasion of the Venice summit in June 1987, the Community adopted the principle of a special fast disbursement programme for the poorest and most heavily indebted countries of sub-Saharan Africa on condition that its OECD(7) () partners undertook to carry out similar operations. On 14 December 1987, after the World Bank had adopted a Special Aid Programme (SAP) with the aim of encouraging suppliers of funds to grant the poor indebted countries of sub-Saharan Africa quick-disbursement funds (over three years), the Council formally adopted the special programme put forward by the Commission. The Decision in question laid down a figure of 100 Mio ECU, an implementation schedule (1988 - 1989), the type of measures to be financed and the eligibility criteria for recipients (Annex 2). This was a programme with immediate objectives, which were limited in time, and it was designed to loosen the stranglehold of immobility in which the shortage of hard currency was keeping the imports of many ACP countries.

2.7. The overall package of 100 Mio ECU consisted of:

(a)40 Mio ECU in amounts outstanding from previous Conventions;

(b)60 million ECU of interest payments and capital repayments (collected or due in 1988 and 1989) from special loans and risk capital granted in the past by the Community and entered in the accounts opened by the Member States at the EIB.

Within the limits of the additional appropriations made available by the Member States (i. e. 60 Mio ECU), the option existed of introducing general, rather than sectoral, import programmes(8) ().

2.8. Operations under the special programme, like those under the sectoral programmes, were to be extended by means of counterpart funds generated under similar conditions. For the sake of simplicity, these funds were usually added to those of other import programmes, which allowed them to be managed together.

The main characteristics of the import programmes

The Council's general objectives

2.9. Since the entry into force of the third Lomé Convention, the Community has tried to define its position with regard to aid in support of structural adjustment. This was the case when the special programme was being discussed in 1987 and then during the deliberations that led to the Council Resolution of 31 May 1988, which, broadly speaking, can be summarized as follows:

(a)the Community intends to support pragmatic reforms that are in accordance with the policies of the ACP States, whilst taking into account the constraints affecting those States, and at a speed that is compatible with their capacities;

(b)the financial instruments must be used as effectively as possible, bearing in mind that fast-disbursement measures are complementary to longer-term development operations(9) ();

(c)where the Community is supporting sectoral policies, priority must be given to the objective of guaranteeing food supplies;

(d)the Community will pay particular attention to the social aspect of adjustment, to the socio-cultural concerns of the ACP countries and to environmental protection requirements;

(e)the Community will endeavour to coordinate its activities more systematically, not only with those of the individual Member States, but also with the International Monetary Fund and the World Bank.

The form and content of the programmes

2.10. EDF import programmes can take two forms:

(a)'materials' programmes (Annex 3), aimed at supplying significant quantities of a limited number of foodstuffs, items of equipment or basic products;

(b)'currency' programmes (Annex 4), in which financial resources are remitted to a European bank account held by the ACP country's central bank(10) () to cover the cost of import licences issued to ACP importers. The EDF's 'currency' programmes, which are generally sectoral, involve a large number of operations, each of limited dimensions(11) ().

Criteria and procedure for choosing programmes

2.11. As 'materials' programmes allow easy supervision of imports, they are made use of in difficult cases, where the ACP State's exchange rate policy is rather unrealistic or where the system of allocating foreign currency to importers is somewhat authoritarian. 'Currency' programmes, on the other hand, are usually reserved for countries whose adjustment programmes are at a more advanced stage and which have already noticeably liberalized their foreign exchange regulations.

2.12. Annex 5 is a diagram of the programme selection process. Where priority needs to be given to rapidity of disbursement (see 1.6 above), preference is usually given to 'materials' programmes or general import programmes. This makes it possible to avoid the bottlenecks characterizing sectoral 'currency' programmes and stemming from the limited absorptive capacities of an already limited number of solvent importers.

Implementation procedures

2.13. Whatever the type of programme and its beneficiaries, EDF import programmes are implemented according to similar guidelines, but their application retains a certain degree of flexibility in order to fit in with local constraints. In this context, it should be noted that:

(a)the EDF's implementation procedures for financial cooperation must be followed, in particular with regard to the eligibility of operations, competition and the rules of origin of the goods;

(b)the programmes are addressed to all firms that satisfy the rules of the recipient country for the sector concerned: for this reason, public, semi-public and private companies all have, in principle, equal opportunities for access to EDF funds;

(c)import programmes very often need a significant amount of technical assistance in the following fields:

(i)setting up the programme's operational framework;

(ii)guaranteeing an efficient and continuous application of the rules and implementation procedures;

(iii)the administrative supervision of import operations in liaison with the local customs and finance authorities;

(iv)supervising the creation and utilization of the counterpart funds.

(d)in addition to the provisions contained in the financing agreements, the implementation of import programmes usually requires specific agreements to be signed with the authorities that are directly involved, namely the central bank, central ministerial departments or the bodies in receipt of the products; the aim of these agreements is to specify the role of each of the parties before the operations get underway and guarantee that the imports are carried out quickly and that the counterpart funds are used as they should be;

(e) finally, in a large majority of cases, the financing agreements provide for the programmes to undergo independent evaluation during their implementation and, above all, upon termination.

2.14. Although the texts governing the EDF import programmes recommend coordination with the International Monetary Fund and the World Bank, they do not make the granting of aid conditional upon the prior existence of a structural adjustment programme as such. Thus, the Community was able to initiate import programmes in favour of countries which had not signed agreements with the IMF or the World Bank but had nevertheless made serious attempts at reforming their economies as a whole, or particular sectors thereof. EDF aid is granted in exchange for the reforms that the ACP State commits itself to undertaking or taking further. Consequently, all the financing agreements include more or less detailed lists of all the measures whose implementation in some way conditions the mobilization of EDF funds. In this connection, the Commission holds that, although there is no direct link between the amount of aid and the levels of the reforms requested, it is clear that a certain correlation does exist and that it would be pointless to claim to carry out reforms without achieving a 'critical mass' of aid(12) (). In each of the programmes, it is the Commission Delegation's responsibility to assess, on the spot, whether the ACP State is actually carrying out the intended reforms and then make the following tranches of the import programmes available on a pro rata basis, in line with the progress achieved.

The joint management of counterpart funds

2.15. The third Lomé Convention practically ignored the phenomenon of counterpart funds generated by non-food aid operations(13) (). Similarly, neither the internal agreement on the financing and management of Community aid(14) () nor the financial regulation applicable to the sixth European Development Fund(15) () deals with counterpart funds, so that a legal vacuum has remained unfilled in respect of an important aspect of Community development aid.

2.16. The financing agreements for the import programmes tried to close this gap by providing for guidelines for the creation and utilization of counterpart funds in the majority of the countries. These agreements are thus often accompanied by additional agreements (see 2.13(d) above). The fact that there is no legal basis that is applicable to all ACP countries has enabled each of them to negotiate its own rules on counterpart funds, producing management systems that differ greatly from one country to another, thus complicating the Commission's central departments' task of supervising the system as a whole. In fact, the instructions sent out to the Delegations in the form of memoranda have gone no further than the most basic principles, by recommending a flexible approach in the context of a common support policy(16) () targeted at certain budgetary items or specific policies of the State in question. As for the practical procedures that were to be adopted, these memoranda dealt with them only very briefly, limiting themselves to pointing out the need:

(a)for a form of monitoring comparable with that carried out during the implementation of a project, and

(b)for the counterpart funds to pass, in the normal way, through a double signature (Commission Delegate/national authorizing officer) account(17) ().

Subsequently, more precise instructions were issued with effect from July 1990. These new instructions are examined in paragraphs 5.16 - 5.24 of this report.

3. THE SITUATION OF THE IMPORT PROGRAMMES

Overall situation

Sixth EDF resources allocated to import programmes

3.1. On 31 December the total resources of the sixth EDF amounted to 8 006,6 Mio ECU(18) (). On this same date appropriations mobilized for import programmes amounted to 845,6 Mio ECU or 10,6 %(19) () of the total funds(20) ().

3.2. In the central accounts of the sixth EDF, the import programmes themselves were divided into three groups:

(a)100 Mio ECU (of which an amount of 82,3 Mio ECU was committed) set aside for countries which were eligible for the special programme and could benefit from sectoral or general import programmes(21) () (accounts code No 1010250);

(b)207 Mio ECU (of which an amount of 194,1 Mio ECU was committed) taken from Lomé III's reserves of programmable aid (accounts code No 1010251), which were also set aside for countries that were eligible for the special programme;

(c)an unspecified amount (of which the sum of 569,2 Mio ECU was committed) included in the amount for subsidies and loans in the context of the indicative programmes and concerning all the ACP countries, including those eligible for the special programme.

Even though this collection of measures is described by the Commission(22) () as an 'instrument', it does not appear separately in the EDF's central accounts, which makes the information available to the discharge authorities less than transparent(23) ().

3.3. On 31 December 1991, the Commission had not backed up its financial statements with detailed breakdowns including all the counterpart funds that had actually been paid out or were yet to be generated pursuant to the import programmes financed by the sixth EDF. Nor had it stated to what extent and for what purposes all the funds concerned had actually been used.

3.4. Thus, on 22 June 1992(24) (), the accounts published by the EDF did not constitute an adequate source of information for operations that nevertheless represented 10 % of total funds.

3.5. Between 1987 and 1991, the Commission signed, in the context of the sixth EDF, 63 financing agreements with 39 ACP States, either completely or partly concerning import programmes, for a total of 842,57 Mio ECU(25) (). In turn, each of these financing agreements concerned one or more 'accounting projects' and certain import programmes that were simply parts of wider programmes(26) (), so that the EDF's accounts do not make it possible to compile a direct inventory of import programmes (Annex 6). With this reservation, estimated commitments for the five years concerned are as follows:

">Year"> ID="1">168,9> ID="2">18,6 %"> ID="1">299,0> ID="2">32,9 %"> ID="1">210,-> ID="2">23,1 %"> ID="1">149,6> ID="2">16,5 %"> ID="1">45,9> ID="2">5,1 %"> ID="1">873,4> ID="2">96,2 %"> ID="1">35,-> ID="2">3,8 %"> ID="1">908,4> ID="2">100 %">

Programme types

3.6. The report submitted on 31 December 1990 pursuant to Article 193.7 of the third Lomé Convention shows that four general import programmes had been concluded(27) (). An examination of the financing agreements, however, shows that 18 programmes concerning ten countries were formulated as general programmes and that these involved total commitments of 98,85 ECU (Annex 4). Because of their contents, certain 'sectoral' programmes should be considered to be virtually general programmes.

3.7. In most cases, because of an ill-adapted legal framework (Article 188.1 of the third Lomé Convention), the Commission was obliged to resort to presentational devices in order to be able to follow the Council's recommendations and coordinate its interventions with those of other donors of aid to countries in the process of adjustment. However, given that it was a question of the implementation of the Convention and that its fundamental objectives were not affected, it would have been preferable for the matter to have been referred to the ACP-EEC Council pursuant to the provisions of Article 23 (a), (b) and (g) of the Convention. The Council could then have granted a derogation (thus making for transparent management) authorizing a wider use, under specific conditions, of general import programmes.

3.8. On 31 December 1991, the 'materials' programmes covered 30 countries and amounted to 587 Mio ECU (Annex 3). They could be divided up as follows:

'Materials' programmes on 31 December 1991 > "Sectors"> ID="1">13> ID="2">151,75 > ID="3">26"> ID="1">9> ID="2">145,56 > ID="3">25"> ID="1">5> ID="2">102,88 > ID="3">18"> ID="1">3> ID="2">20,60 > ID="3">3"> ID="1">7> ID="2">118,98> ID="3">20"> ID="1">5> ID="2">47,43> ID="3">8"> ID="1">42> ID="2">587,20> ID="3">100">

3.9. The above table shows in particular that the health and education sector, which is one of the means whereby the Community is able to influence the social consequences of adjustment, has remained behind relative to other sectors(28) (). This phenomenon is explicable, at least in part, by the fact that mass imports of oil products or materials and equipment for agriculture and industry lend themselves easily to the rapid utilization of appropriations and hence to operations in support of the balances of payments of the recipient States.

3.10. The currency programmes involved 21 ACP States, of which only two, Benin and Senegal, belong to the franc area. On 31 December 1991, commitments for all of these programmes amounted to 318,1 Mio ECU, of which 219,2 Mio ECU were for sectoral programmes (Annex 4). These programmes were divided up as follows (see table in next column):

3.11. As in the case of the 'materials' programmes, operations aimed more particularly at the social consequences of the economic improvements remained limited. Nevertheless, some general programmes (Uganda, for example) included purchases for the health and education sector.

3.12. Including the funds of the special programme, rapid-disbursement aid for the recipient States was to account for around 20 % of the total of their indicative programmes(29) (). On 31 December 1991, this ceiling of 20 % of total programmable appropriations had been exceeded in the case of 20 countries (Annex 6).

'Currency' programmes on 31 December 1991: > "Sectors"> ID="1">1> ID="2">2,50> ID="3">1"> ID="1">5> ID="2">72,30> ID="3">23"> ID="1">3> ID="2">35,15> ID="3">11"> ID="1">2> ID="2">10,50> ID="3">3"> ID="1">2> ID="2">32,25> ID="3">10"> ID="1">3> ID="2">66,50> ID="3">21"> ID="1">16> ID="2">219,20> ID="3">69"> ID="1">10> ID="2">98,85> ID="3">31"> ID="1">26> ID="2">318,05> ID="3">100">

The special features of certain programmes

Speed of execution of the programmes

3.13. On 31 December 1991, the average disbursement rate for import programmes was 85 % (Annex 9). On this same date, the balances of 34 of the 106 accounting projects were shown in the central accounts of the EDF as having been disbursed. These amounted to 199,9 Mio ECU, or 27 % of the total. Taking into account the fact that the launching of the programmes was spread out over a period of time, their speed of execution is, overall, satisfactory. However, if the programmes are examined individually, several observations are called for:

(a)various programmes (Annex 7) which are indicated in the EDF's accounts as still in the process of being implemented have actually been completed, but the Commission's financial departments have not yet cleared them in the accounts: the commitments that should be cancelled in this context amounted to about 24 Mio ECU;

(b)certain 'currency' programmes are shown in the Commission's accounts for amounts that do not correspond to their real state of progress as a result of the procedure for paying out advances and because interest (in convertible currencies) received on advances deposited with commercial banks has not been entered in the Commission's accounts. In fact, advances deposited at commercial banks only become definitive expenditure within the meaning of the Financial Regulation once they have been used to pay for imports, whereas the interest received should be considered part of the miscellaneous resources allocated to the programmes, given that the financing agreements provide for them to be attached to the programmes. In order for this to be done, the bank statements which are to be forwarded to the Commission according to the financing agreements should be available in the EDF's central offices; this is not usually the case, notwithstanding that there is an instruction issued to the Delegations which has required them to be transferred to the central departments since 14 March 1991;

(c)no payments had been made against eight programmes (33,68 Mio ECU):

">Country Project No."> ID="1">Sectoral import programme III - fertilizer> ID="2">20.2.1991> ID="3">3,85"> ID="1">General import programme SAP II> ID="2">29.11.1991> ID="3">7,00"> ID="1">Technical assistance> ID="2">7.10.1991> ID="3">0,08"> ID="1">General import programme> ID="2">28.10.1991> ID="3">3,75"> ID="1">Stone clearing> ID="2">28.2.1991> ID="3">1,00"> ID="1">Special import programme (Hydrocarbons)> ID="2">11.9.1991> ID="3">9,00"> ID="1">Special import programme (Hydrocarbons)> ID="2">11.9.1991> ID="3">3,00"> ID="1">Sectoral import programme (the food industry)> ID="2">15.10.1990> ID="3">6,00"> ID="2">Total > ID="3">33,68""(L) = Financing by soft loan.

Of these programmes, the ones financed by soft loans in Ethiopia, Trinidad and Tobago look unlikely to be implemented in the near future. A revision of the financing agreements would appear to be called for.>

(d)nine programmes had a payment rate of less than 50 %:

">Country Project No."> ID="1">Food strategy support programme> ID="2">28.1.1988> ID="3">14 %> ID="4">4,1"> ID="1">Sectoral import programme III - Industrial inputs> ID="2">20.2.1991> ID="3">42 %> ID="4">13,15"> ID="1">Stone clearing> ID="2">28.2.1991> ID="3">11 %> ID="4">7,70"> ID="1">Assistance to urban populations in the field of health and housing in Madagascar> ID="2">24.11.1988> ID="3">16 %> ID="4">2,5"> ID="1">Sectoral import programme - consumer goods> ID="2">20.8.1990> ID="3">48 %> ID="4">30,00"> ID="1">Sectoral import programme (Agriculture)> ID="2">12.9.1990> ID="3">24 %> ID="4">6,00"> ID="1">Telephone cables> ID="2">21.6.1989> ID="3">45 %> ID="4">7,50"> ID="1">Support programme for the agricultural sector> ID="2">30.1.1987> ID="3">42 %> ID="4">3,48"> ID="1">Import programme and special debt programme> ID="2">1.2.1990> ID="3">36 %> ID="4">9,50"> ID="2">Total > ID="4">83,93">

Two of the programmes in the above table merit a closer examination because of their age:

(i)Mali, health section of the food safety programme;

(ii)Zambia, extended programme for the supply of agricultural inputs

A terse explanation was supplied in May 1992 by the EDF Committee for the amendment that had been made to the Madagascar health programme: it said there was a risk that imports of medicines as initially planned might be prejudicial to the interests of local industry.

Spending in excess of available appropriations

3.14. Secondary commitments for the 'inputs' section of the Rwanda food strategy support programme were in excess of the appropriations in the financing agreement:

- Primary commitments(30) () 2,40 Mio ECU

- Secondary commitments: 9,34 Mio ECU

The amendment of the allocations to the financing agreement did not result in any change to the text of the agreement.

Programmes carried out in the franc area

3.15. The programmes carried out in the franc area involved ten countries and amounted to 180,1 Mio ECU; they can be analysed by sector as follows:

">Sector"> ID="1">99,1> ID="2">55"> ID="1">18,1> ID="2">10"> ID="1">25,-> ID="2">14"> ID="1">10,-> ID="2">6"> ID="1">27,9(1)()> ID="2">15"> ID="1">180,1> ID="2">100"">

3.16. Unlike the other ACP countries, the members of the franc area do not have the problem of the inconvertibility of their currency. On the other hand, their money supplies are strictly controlled, which often leads to budgetary crises and a banking sector that is desperately short of circulating medium. In this context and insofar as the counterpart funds are generated quickly, the import programmes give no support to importers but rather provide direct or semi-direct support for the running of the State(31) () through the medium of pseudo-counterpart funds in CFA Francs, which was not provided for in the Third Lomé Convention (see 5.20). In this respect, the franc area 'currency' programmes, which have been launched in two countries (Benin and Senegal), would not appear to comply particularly well with the provisions of Article 188 of the Third Lomé Convention. The counterpart funds were usually deposited in accounts at the central banks (BCEAO or BEAC(32) ()), the first effect of which was to alleviate the Treasuries' deficits with the central banks of the States concerned.

3.17. Thereafter, the counterpart funds were used either to make good the operating deficits of semi-insolvent public companies(33) (), settle the State's arrears(34) (), finance redundancy payments to civil servants involved in the World Bank-backed early retirement programmes for civil servants(35) (), pay for current budgetary expenditure(36) (), or even, but only to a very small extent, finance local expenditure for EDF projects whose costs the governments concerned had undertaken to bear. Generally speaking, the transformation of EDF funds into pseudo-counterpart funds often allowed the financing of operations that were not directly eligible under the third Lomé Convention.

4. THE FINANCIAL MANAGEMENT OF THE PROGRAMMES

4.1. The following observations only concern the programmes that were examined, on the spot, during the Court's audit visits (Annex 1); however, the frequency with which various situations recur implies that the Commission should devote greater attention to certain aspects of the management of import programmes.

The implementation of the import programmes

4.2. The EDF import programmes carried out between 1987 and 1992 in the ten countries visited by the Court were experiencing various difficulties related to the following:

(a)assessing the needs of beneficiaries;

(b)establishing programme objectives;

(c)formulating financing agreements;

(d)listing constraints and risks;

(e)choosing the means and procedures for implementing the programmes;

(f)the operational monitoring by the supervisory authorities;

(g)the implementation of accompanying measures;

(h)consultation with the national authorizing authority;

(i)the regularity of certain practices.

Assessing the needs of beneficiaries

4.3. One of the characteristics of the European Development Funds is that their implementation is preceded by an analysis of the beneficiaries' specific needs, leading, in turn, to the drafting of an indicative programme. The purpose of these programmes is to channel the aid towards high priority 'areas of concentration'. In Kenya, Cameroon, Malawi (SFFRFM(37) ()) and Zambia, the import programmes were usually based closely on the objectives of the indicative programmes. In other cases, namely Benin, Madagascar, the Central African Republic and Malawi (ITPAC(38) ()), the programmes were carried out in sectors that were unrelated to the indicative programmes. In Benin, the sum of 16 Mio ECU was even withdrawn from a project relating to one of the areas of concentration of the sixth EDF just a few weeks after the signing of the relevant financing agreement; 8 Mio ECU were thus paid out under a programme of inputs for private industry when the imports had already taken place. It had in fact proved impossible to find a sufficient number of importers capable of mobilizing sufficiently quickly the counterpart funds needed to satisfy the State's urgent financing requirements. In the Central African Republic, an import programme for oil products was financed (7 Mio ECU) even though the authorities had asked for authorization to be able to sell the products outside their territory, which the Commission refused to allow. During the on-the-spot audit visit in December 1990, the Central African authorities were unable to supply evidence of the entry into the country and subsequent use of products that had been delivered between seven and eleven months beforehand(39) (). In these cases, the programmes are essentially seen as a means of increasing the speed of EDF disbursements and procuring budgetary resources for the recipient State.

4.4. Even where the import programmes were in line with the guidelines of the indicative programmes, the needs that they were supposed to meet were not always well assessed. The overestimation of the fertilizer needs of certain distributors in Cameroon, the lack of prior identification of measures likely to attenuate the social effects of structural adjustment in Ghana, the refusal to import the active materials needs for the production of medicines in Madagascar, the deduction of 7 Mio ECU from the spare parts supply programme in Zambia or the financing difficulties of small and medium undertakings in Uganda, are all examples of hasty need assessments, which then resulted in serious delays in implementation. In Mozambique, the inability of the local authorities to carry out the task led to the Commission placing the responsibility for analysing needs into the hands of a technical assistance organization. The analyses carried out by a relatively inexperienced consultant were rudimentary and did not make it possible to determine the requirements of importers. Once again, the result was very slow implementation of the import programmes.

4.5. In Ghana, in 1988, the financing agreement had reserved 2,5 Mio ECU in support of a programme designed to cope with the social consequences of adjustment(40) () without the measures concerned by the EDF financing being specified. At the time of the on-the-spot audit (December 1989), the action programmes had not yet been drawn up. It was only towards the end of 1990 that the Commission authorized the signing of supply contracts concerning medicines, agricultural equipment and vehicles. At the end of 1991, 20 % of the programme, or 0,5 Mio ECU, was still to be committed. This case demonstrates, given that these were rapid disbursement operations, the need for operational action programmes to be already available when the financing agreements are signed, even in fields such as this, where implementation appears to be easy.

Establishing programme objectives

4.6. In addition to deciding on the amount of EDF aid to be paid, the financing agreements also lay down programme objectives. In most of the cases examined, with the exception of Kenya (CSRP(41) (), the Commission's files do not indicate that the sums allocated to the import programmes are the result of economic calculations. On the contrary, it is clear, especially in the special debt programme (see 1.6 above), that funds are shared out before the measures are identified, and there is no way of establishing according to what criteria they are allocated.

4.7. In several cases, the objectives of the financing agreements were expressed in vague terms with no attempt to quantify them. In Mozambique, the programme was supposed to produce its effects in rural areas that were not specified in the financing agreement (see 4.23 above). In Malawi, the objective established in 1987 in an initial financing agreement, which provided for the building up of emergency stocks of fertilizer, received so little attention that it could never be achieved, for which reason the stocks had to be transformed into working capital in 1990 by a later agreement. In Kenya, the goals of the programme were twofold: the import programme was supposed to make it possible to fulfil the needs of the agricultural sector, which was undergoing adjustment (ASAO(42) ()), whereas the counterpart funds were to contribute to the reform of the cereals sector in the context of the country's food safety policy. However, as the objectives of each component had not been clearly specified and half of the imports were carried out on behalf of operations that were marginal to the fields (fertilizers and agricultural mechanization) laid down in the adjustment programme (ASAO), the link with the sectoral adjustment programme was rather lost.

Formulating financing agreements

4.8. On several occasions, it was clear that the financing agreements had been drawn up with relevant parts missing, which was liable to cause difficulties in terms of the sound implementation of the programmes. In Cameroon, the conditions for setting up and depositing the counterpart funds were so vague that by September 1993, five years after the start of the programme, they had still not been deposited in a separate account opened with a financial institution, as required by the financing agreement (see 4.39). In Uganda, the import quotas had already been set in the financing agreements, although it had not been laid down whether they were indicative or mandatory. As a result, the division of the imports into categories was not respected. An analogous situation was found in Mozambique. In Kenya, the financing agreement recommended the setting-up of a 'balanced' import programme which was never drawn up. In fact, competition from other import programmes (Japan, Germany and the World Bank in particular) made it impossible to reconcile the need for rapid disbursement with the constraints of a quota system. It was, moreover, stipulated, with the exception of specific cases, that imports were to be opened to competition. In the absence of a precise formulation, the exception became the rule and, out of 371 import licences, only two were put out for tender under the restricted procedure (three bids)(43) (). In Malawi, the implementation rate of the 'currency' programme was slowed down by the contradictions between the provisions of the financing agreement and those of the management agreement on the procedures for the payment of the counterpart funds. Such ambiguities are a source of disagreement and delays. Moreover, they can lead to different interpretations from one country to another and discriminatory treatment.

4.9. In several cases, provisions other than those in the financing agreements were applied without the agreements being amended. This practice considerably reduces the scope of the opinions issued by the EDF Committee pursuant to the provisions of

Article 19

of the internal agreement on the financing and management of the EDFs. In the eyes of the ACP countries it also reduces the value of the commitments entered into under the financing agreements. In the Central African Republic, counterpart funds intended as support for EDF projects were redirected towards the financing of settlements for civil servants resigning from their jobs under the structural adjustment programme (5,5 Mio). In the end, the government ignored this stipulation and, despite vehement protests from the Delegation, the funds were partly used to pay the current salaries of civil servants (2,4 Mio ECU). In Uganda, the payment conditions for the counterpart funds were amended, so that they were paid out directly and in advance by the government, with the result that the Delegation no longer considered it useful to monitor the imports, as it should have done under the terms of the financing agreement. The result of this was that all financial control over the programme disappeared (see 4.44). In Zambia, a transfer of 7 Mio ECU between two financing agreements referring to two completely different operations was carried out merely on the basis of an agreement between the national authorizing officer and the Commission Delegate, after the consultation of the main authorizing authority (on 11.8.1989) and the Financial Controller (on 28.8.1989) but without either financing agreement being amended and without the prior opinion of the EDF Committee. In Madagascar, the financing agreement allocated the counterpart funds to a programme for the building of subsidized housing (3 Mio ECU) and the agreement's implementation protocol provided for a yearly timetable for the utilization of the funds. However, the latter were largely frozen at the request of the World Bank, without the agreement being amended and without the matter being brought to the attention of the EDF Committee.

Listing the constraints and the risks

4.10. As most of the programmes have to meet the beneficiaries' pressing needs without delay, the amount of attention paid to the institutional constraints has sometimes been inadequate. In Uganda, Kenya, Malawi and Ghana, for example, the central banks were considered to be capable of managing the 'currency' import programmes on their own. In practice, though, these banks have not succeeded in setting up efficient systems for checking the eligibility of the applications and for issuing letters of credit to the importers. In Kenya and Uganda the delays in implementing the programmes have to some extent been alleviated thanks to technical assistance. In Cameroon the creation of counterpart funds by the Ministry of Agriculture has been seriously affected by the authorities' delays in fixing the sales prices of fertilizers.

4.11. In a number of countries with inconvertible currencies (Ghana, Kenya, Malawi, Mozambique, Uganda and Zambia), it is in practice impossible for creditworthy traders to get their assets out of the country. Foreign investors can only repatriate their profits with difficulty, whilst residents cannot finance expenditure abroad. An easy way to overcome these problems is to inflate the invoiced value of imports. This is a particularly attractive option as the exchange rates applicable in the case of import programmes are most often very favourable to the importers. The risks inherent in this situation are twofold: the eligibility rules may be got round, to the advantage of influential importers, and the effectiveness of the programmes may be reduced by an increase in prices. The ways of protecting oneself against these risks were not systematically brought to the attention of those responsible for the programmes. The reality of such risks is illustrated by the Malawi 'currency' programme, where a balance of 3 Mio ECU has remained frozen because of the central bank's refusal to maintain price controls before the loading of the goods.

4.12. In Mozambique, the Commission accurately pinpointed the weaknesses of the administration. On the other hand, it paid scant attention to the situation of continuing insecurity and was led to agree to the importation of goods which proved to be extremely difficult to distribute in rural communities. Similarly, the actual creditworthiness of importers was so poorly assessed that numerous operations were abandoned, seriously delayed or even blocked by the Mozambique authorities themselves(44) (). In Zambia, a programme for supplying spare parts was undertaken for the State fertilizer producer (NCZ)(45) () without the uncertainties as to its long-term viability being taken into account(46) (). The programme eventually had to be interrupted half-way. In Malawi, although the (subsidized) fertilizers were reserved for small farmers there was no provision for any measure to combat the repeated evasions of the rules in favour of certain large tobacco producers.

4.13. Even when attention is paid to the constraints, those relating to the Commission are rarely considered. For example, certain financing agreements gave the responsibility for extensive monitoring and control work to the Delegations whereas no one had established in advance that the latter actually had the necessary resources at their disposal. In Ghana, Madagascar, Malawi, Kenya, Uganda and Zambia the Delegations have not always been able to carry out their supervisory tasks properly due to a lack of appropriate resources (suitable staff or competent technical assistance).

4.14. The delays in implementation resulting from the constraints and risks having been ignored cause the programmes to be spread out over long periods. As they thereby lose their 'critical mass' effect, this cannot but detract from their impact (see 2.5 above). For these reasons, the Commission should carry out a systematic examination of the main obstacles which the programmes are likely to encounter before the financing agreements are signed. Once the main constraints and risks have thus been identified, the checking and monitoring procedures could be adopted in full awareness of the facts and could be specifically set out in the terms of reference of the technical assistants attached to the programmes.

Implementation methods and procedures

4.15. From the very beginning it was agreed that the import programmes would abide by the rules generally applicable to EDF projects (see 2.13(a)). Generally speaking, the 'materials' programmes have suffered little disruption from these rules. Nonetheless, in the case of hydrocarbon imports (152 Mio ECU in total, of which 35,3 Mio underwent an on-the-spot examination), the payment of advances representing 60 % of the contract value amounted to an advantage granted to the petroleum companies to the financial detriment of the EDF. In fact, as the prices invoiced by the distributors were still those applicable on the date on which the products were delivered, such advances cannot be justified from an economic point of view.

4.16. The implementation of the 'currency' programmes, on the other hand, has often been hampered by the competition rules, the rules on invoicing and, to a lesser extent, the rules of origin. This was in particular the case in Ghana, Malawi, Mozambique and Uganda. In this last country, the importers were practically encouraged to split up their purchases in order to evade the constraints of the tender procedure. This led to a pointless increase in administrative work without providing any assurance that the prices invoiced by the suppliers were valid. A similar splitting-up of orders was also observed in Kenya. Since the aim was to maintain the flow of imports, the Commission should have paid greater attention to current practices in the trade and should have refrained from asking importers to suspend their relations with their usual suppliers. At the same time, it should have concentrated its controls on the risk areas, i.e. the prices invoiced and the actual delivery of goods to the recipient countries. In this respect, special arrangements or derogations could have been requested of the ACP/EEC Council (see 3.7). As the rules governing the choice of procedures to be followed for invitations to tender were not adopted in advance, importers were treated differently from one country to another, as can be seen from the following table:

Competitive tendering thresholds "(000s of ECU)"" ID="1">Benin> ID="2"" 500> ID="3">not required> ID="4">< 500> ID="5">nil"> ID="1">Ghana> ID="2"" 500> ID="3">not required> ID="4">< 500> ID="5">nil"> ID="1">Kenya> ID="2"" 500> ID="3">300 to 500> ID="4">10 to 299> ID="5"" 10"> ID="1">Malawi> ID="2"" 500> ID="3">not required> ID="4">5 to 500> ID="5">< 5"> ID="1">Mozambique> ID="2">nil> ID="3">25 to 500> ID="4">< 25> ID="5">none"> ID="1">Uganda> ID="2"" 500> ID="3">20 to 500> ID="4">5 to 19> ID="5">no exclusions"> ID="1">Zambia> ID="2">nil> ID="3">20 to 250 000 US$> ID="4">5 to 19 000 US$> ID="5">< 5000 US$">

4.17. The procedure initially selected by the Commission for the payment of counterpart funds by the importers also hindered the implementation of some programmes. In Kenya, Uganda, Ghana, Malawi, Mozambique and Zambia, the financing agreements required that the total value of the imports be deposited in advance at the moment the letters of credit were made out. In view of the often lengthy delays (six months and more) in the supply operations and of the more realistic conditions that gradually came to be offered by other donors, several EDF programmes made little or no progress. In contrast, in Mozambique the government authorities granted several importers extended payment deadlines without obtaining the Community's permission in advance (see 4.38 below). These delays contributed to the erosion of the value of the counterpart funds (see 4.50 below).

Monitoring by the supervisory authorities

4.18. The import programmes are implemented by various operators who are, in principle, subject to monitoring by the national EDF authorizing officer and the Commission. In the case of 'currency' programmes, or even complex 'materials' programmes, as in Mozambique, technical assistance services have generally been made responsible for the daily monitoring of operations. Usually their monitoring of the awarding of import licences was good. The Kenya programme was, nonetheless, marked by a particularly benevolent attitude vis-à-vis the importers (see 4.7 above). As the terms of reference of the technical assistants were not always precise, the documentary aspect of the monitoring and controls on the supplies themselves were more lax. In all the cases examined, the checks on the accounts were clearly inadequate, both in the case of foreign currency bank accounts and counterpart fund accounts. Given the lack of technical assistance, examples of ineligible operations were uncovered in greater numbers in Ghana and Benin.

4.19. Aside from the technical assistance, the financing agreements included two ways of disciplining the implementation of the import programmes:

(a)the concluding of agreements laying down the methods for implementing the programmes;

(b)the setting-up of monitoring committees.

The table below gives an overview of the situations encountered during the on-the-spot checks.

4.20. For the great majority of the programmes, was decided on the conclusion of complementary agreements. In practice, these agreements served primarily to provide a framework for the creation and utilization of the counterpart funds. Subsidiarily, they facilitated the operation of bank accounts in Europe in the case of the 'currency' programmes. Experience showed that the programmes got off the ground more swiftly when the administrative agreements were negotiated prior to the financial agreements entering into force. This was in particular the case in Ghana (currency), Kenya and Malawi (ITPAC). Some of these agreements did nonetheless run into implementation problems as a result of underestimation of the constraints. In this respect, the role initially assigned to the central banks (Kenya, Malawi and Uganda) provides a good example (see 4.10 above). In most cases, the difficulties were subsequently overcome by using the services of commercial banks or technical assistants.

4.21. In six of the ten countries visited, the programmes were supposed to be supervised by monitoring committees, most often made up of representatives of the national authorizing authority, the central bank, the ministries concerned and the Commission (through its Delegation). This system rarely functioned well, either because the committee never met (Central African Republic, Madagascar, Mozambique and Uganda) or because it did not require regular and detailed reports to be submitted (Kenya and Cameroon).

Implementation of the accompanying measures

">Country Programme"> ID="1">not provided for> ID="2">not provided for> ID="3">11,00"> ID="1">not provided for> ID="2">not provided for> ID="3">18,40"> ID="1">provided for> ID="2">provided for> ID="3">15,00"> ID="1">provided for> ID="2">provided for> ID="3">9,00"> ID="1">provided for> ID="2">not provided for> ID="3">11,50"> ID="1">provided for> ID="2">provided for> ID="3">42,00"> ID="1">provided for> ID="2">provided for> ID="3">17,25"> ID="1">provided for> ID="2">not provided for> ID="3">39,81"> ID="1">provided for > ID="2">not provided for> ID="3">13,50"> ID="1">provided for> ID="2">provided for> ID="3">70,00"> ID="1">provided for> ID="2">provided for> ID="3">7,00"> ID="1">provided for> ID="2">provided for> ID="3">32,25"> ID="1">provided for> ID="2">provided for> ID="3">14,2"> ID="1">provided for> ID="2">provided for> ID="3">17,80"> ID="1">provided for> ID="2">provided for> ID="3">8,00">

4.22. Under the special conditions set out in the financing agreements(47) (), the recipient States undertake to take the measures necessary to ensure that the programmes are carried out fully. In practice, however, the ways in which the measures were to be monitored were rarely specified. Furthermore, they were often too generally worded to be suitable for an effective check. In Benin, the obligations undertaken related mainly to the implementation of the structural adjustment measures negotiated with the IMF and the World Bank, which did nothing to ensure that the EDF operations were fully carried out, or that the counterpart funds were used efficiently. In this respect, the last agreement signed within the framework of the seventh EDF looks more hopeful.

4.23. In Mozambique, the government undertook to implement measures to:

(a)reform the public finances;

(b)encourage the rapid implementation of the programme;

(c)guarantee the best possible use of the counterpart funds;

(d)facilitate the effective distribution of the aid to the final recipients.

These measures remained no more than good intentions and there was no dialogue between the partners. For example, the procedures for invitations to tender and customs clearance proved to be ineffective. The knowledge which the Commission had at its disposal concerning the actual state of Mozambique's public finances was inadequate in a case concerning the management of macro-economic programmes. Finally, there is no evidence to indicate that it was indeed the rural populations who were the main beneficiaries of the programme. On the contrary, the information received during the Court's on-the-spot check tends to indicate that, to a large extent, the consumer goods got no further than greater Maputo.

4.24. In Zambia, the government had filed neither the reports nor the action plans required by the implementation agreements in respect of the financing agreement for the import programme for agricultural inputs intended for small farmers. As the goods were imported quickly, the Delegation had scant means of ensuring that these obligations had been met. On the other hand, the domestic sales prices for fertilizers do seem to have been fixed, as agreed, at a level close to the import prices. As for the provisions relating to the counterpart funds, they were largely ignored, as they were currency programmes that had been examined in October 1990(48) () (see 4.40).

4.25. In Cameroon, the State had undertaken to introduce a mechanism for taxing rice imports in order to support the rice projects in the North. These latter, although not financially viable, nonetheless constitute an important link in the food-sufficiency policy of that country. As these obligations were not met, the prospects for the survival of these projects are not good, and nor are those for the creation of counterpart funds by SEMRY.

4.26. In Malawi, the government seriously delayed the fertilizer import programme because it repeatedly deferred payment of the subsidies which it owed to the importing body, which it had obliged to sell the imported fertilizer at reduced prices.

Consultation with the national authorizing officer

4.27. In cases where the import programmes ran into problems because the recipient State was not meeting its obligations, the consultation procedures with the national authorizing authority(49) () turned out to be rather ineffective.

4.28. In Kenya, the authorities never took any action to ensure that large importers paid over the counterpart funds without delay at the end of the contractual 90-day period. In Mozambique, the implementation of the second programme was considerably delayed by the national authorizing authority's inability to learn from the lessons of the first programme. It was not possible to establish any kind of dialogue, even where it was a question of deciding on the use of the counterpart funds. In Cameroon, the Delegation refrained for a long time from intervening with the national authorizing authority concerning the creation and use of the counterpart funds, with the result that it was kept at arm's length during the discussions which led to the adoption of the 'performance contracts' concerning the financial rehabilitation of the fertilizer distributors(50) () (see 4.39 and 5.9). In September 1992 the protocols on the administration of the counterpart funds had still not been signed by the Cameroon authorities, as the attempts to influence the national authorizing authority had remained without effect. Payment of the counterpart funds was thus delayed by at least three years due to the authority's failure to act. In the Central African Republic, the presence of the national authorizing authority still did not result in the setting up of a monitoring committee, which that same authority was supposed to chair. Nor was it possible to obtain from the national authorizing authority proof that the petroleum products supplied had indeed arrived in the country and that they had not been re-sold to a third party (see 4.3). In Uganda, although the government undertook in the financing agreement to provide the Community with all relevant information on the implementation of the programmes, the national authorizing authority only took action after some delay when there was a problem with the dispatch of the legal documents relating to imports financed by the EDF.

406(01).14.29. In Malawi, the national authorizing authority did not succeed in getting the central bank to agree to maintaining price controls on loading, which led to the currency programme, with an unused balance of 3 Mio ECU (see 4.11 above), being frozen. Similarly, the fertilizer supply programme was delayed by about two years because the national authorizing authority did not have the necessary powers to ensure that the administrative bodies upheld the commitments entered into by the State. In Zambia, in April 1990, the national authorizing authority was unable to prevent an untimely withdrawal of 190 Mio ZMK, or 6,4 Mio ECU, of counterpart funds. This money was intended to be used for a short-term loan by the government to NCZ and the Commission was only informed of this intention after the event. In Ghana, the national authorizing authority was unable to prevent the confiscation of counterpart funds or ensure that they were rapidly returned by the State.

The regularity of certain practices

4.30. The provisions of Article 223 of the Third Lomé Convention provide cover for unexpected increases in costs and expenditure which may arise during the implementation of the programmes. 'In exceptional circumstances' the excess payment may be financed by the EDF. On the basis of these provisions, the principal authorizing officer for the sixth EDF decided to increase the ceiling of the financing agreements for certain 'currency' programmes in Benin and Uganda and for a 'materials' programme in Mozambique. The procedure followed for raising these ceilings does not appear to conform to the provisions of the Convention, or to those of the internal financing agreement. In fact, as it was a question of financing new operations and not of following up measures already under way, which would have been doomed to failure for lack of a modest supplementary financing, the matter should have been brought to the attention of the EDF committee. The Financial Controller has not expressed any reservations about this practice.

4.31. In the case of the petroleum product import programme in Madagascar, the national authorizing authority, in 1988, ordered 113 500 tonnes of petroleum products even though the financing agreement only provided for 100 000 tonnes. The Delegation considered that any exceeding of the limit could be covered using the 15 % facility provided for in Article 223-6 of the Third Lomé Convention. This sort of practice is quite clearly irregular, since, ex hypothesi, the financing agreements include adequate appropriations to cover any exceeding of the price limit and contingent expenditure. Meeting the cost of excess expenditure within the 15 % limit by using funds left over from other projects can only be seen as a stop-gap measure, to be resorted to in exceptional circumstances. A 15 % margin above the agreed ceiling once a contract has been launched cannot be permitted. In the case in point, the country's account did not show any available residue and once the increase had been authorized its account was in effect considerably overdrawn. This situation has to be seen in the light of the provisions of Article 19 of the financial regulation(51) (), which lays down that formal approval of proposals for commitments of expenditure is intended to confirm the availability of appropriations, which was not the case here.

4.32. In the case of several 'currency' programmes, whereas the financing agreements, or the agreements entered into under them, provided for payment to be made in tranches, each new tranche being disbursed only once there was evidence that the previous tranche had been properly used, the Commission, at the request of the beneficiary States, paid out the new tranches in advance, without these conditions having been fulfilled. This was the case in Kenya, Uganda, Benin, Malawi and Ghana. In these cases, the Financial Controller, whilst expressing reservations, did not consider it necessary to withhold his approval.

4.33. On several occasions the Commission's Financial Controller gave his approval 'for the purpose of regularizing the situation' (AT Mozambique, for example,) because he considered himself to have been confronted with a fait accompli. Such a practice, even though not expressly forbidden by the financial regulation(52) (), would appear not to be in accordance with the principle of prior approval.

Management of the counterpart funds

4.34. The management of the counterpart funds comprises two stages: the creation of the funds and the subsequent spending of them. In the case of the sixth EDF, these stages were organized by the financing agreements and in many countries specific agreements set out the procedures to be followed, and sometimes even the fields in which the funds were to be used. A large number of the problems encountered may be traced back to the numerous different systems for administering the funds.

Inadequacy of the operating framework

4.35. The counterpart funds of six of the 15 programmes which were subject to an on-the-spot visit (see 4.19 above) were supposed to have been subject to a management agreement, to be reached between the national authorizing authority and the Commission Delegate. Three of these agreements were drawn up, with Kenya, Madagascar, and Mozambique(53) (). Agreements were also concluded for five other programmes, although this was not provided for in the financing agreements. The countries concerned were Malawi, Uganda, and Zambia (three programmes). In the end, only half of these agreements were implemented. It is probable that in the absence of explicit provisions in the Lomé Convention certain national authorizing authorities encountered difficulties in getting their countries' financial administrations to accept that the counterpart funds, which until that point had not been subject to any restrictions, were supposed from then on to be managed jointly with the Commission.

4.36. The practical effect of these agreements was generally reduced, due to the fact that they did not include a precise plan for the use of the counterpart funds and there was no provision for any special procedure in the event of one of the parties defaulting.

Creation of the counterpart funds

4.37. In the countries with weak currencies, any delay in the payment of the funds in relation to trade practices constitutes a serious advantage for the debtor, which results, for the EDF, in an equivalent reduction in the purchasing power of the counterpart funds. For this reason, the payment deadlines provided for in the financing agreements need to be studied carefully and then respected, so as not to create conditions of unfair competition, such as might penalise certain enterprises. In practice, although the EDF was strict with regard to some importers, excessively long payment periods were observed in several cases.

4.38. In Mozambique importers were supposed to pay for their purchases when the goods arrived, using bank loans to do so if necessary. In actual fact, the banking sector did not bridge the payment gap and periods of time that were often large (several months and even several years in extreme cases) were granted to those who could not pay immediately, contrary to the provisions of the financing agreement. During the on-the-spot check, it turned out that amounts due totalling some 2 Mio ECU were still outstanding, whilst financial interest of at least 0,58 Mio ECU had been paid to the authorities and had not been credited to the counterpart funds. In the Central African Republic, the importer of petroleum products was granted four months within which to pay, which he then exceeded by three months. On this occasion, the counterpart funds effectively gave the importer the benefit of an unauthorized subsidy amounting to about 1,5 Mio ECU.

4.39. In Cameroon, the absence of an agreement specifying the methods for implementing the financing agreement served as a pretext for the fertilizer distributors to keep the counterpart funds resulting from their sales and to consider them to be permanent sources of finance. Despite several reminders, the amounts owed by the distributors (totalling 17,5 Mio ECU) had still not been paid into the counterpart fund account in June 1992, although the fertilizer had been delivered to Cameroon in two loads in 1989 and 1990. The precarious financial situation of SODECOTON(54) () and of SEMRY (2) leaves room for doubt as to their actual ability to repay this sum, quite apart from any question concerning the repayment of subsidies by the State.

4.40. In Zambia, the State-owned enterprise NCZ was granted a payment deferral of nine months in the case of one of its import programmes. This deadline was subsequently extended by several years as a result of a rescheduling of the company's debts. In the case of its import programme for raw materials for fertilizer production, NCZ was unable to pay over the counterpart funds which it owed to the State (about 16 Mio ECU). For this reason the Commission was obliged to agree to half of the amount owing being considered a capital injection (stabilization subsidy) whilst the other half was transformed into an advance to be repaid in four annual tranches from 1992 to 1995(55) ().

4.41. Malawi's fertilizer import programme was supposed to lead to the constitution of a fund of working capital to be used for the financing of the subsequent supply campaigns for small farmers (maize producers). During the June 1991 on-the-spot visit, it was obvious that the missing funds could only be made good using gifts from other donors. Its prospects of operating autonomously were clearly compromised because the proceeds of the sales were not adequate for financing the marketing costs and the costs of replenishing stock.

4.42. In the case of the Kenya, Malawi, Uganda, and Ghana 'currency' programmes, accounts had been opened with European banks by the recipient States in order to receive the advances paid by the EDF. The interest paid by the banks on these deposits was supposed to be used for financing additional imports and building up counterpart funds. During the on-the-spot visits, it was observed that the Delegations concerned had not followed up the problem and no addition to the counterpart funds had been made. The sums involved amounted to about 1,25 Mio ECU in the case of Kenya, 1,3 Mio ECU in the case of Malawi and are not known for Uganda(56) (). For its part, the Ghana Commercial Bank in London, where the Commission had deposited the advances for Ghana's 'currency' programme, had not paid the interest provided for in the financing agreements. At the time of the audit the Commission had taken no action here in spite of the size of the amounts left on deposit due to the prolonged freezing of the programme.

4.43. In December 1989, during the on-the-spot visit to Ghana, delays were observed in relation to the payment of counterpart funds for the fertilizer programme. In fact, only 64 % of the 626,7 Mio Cedis had, at the time, been received. The Delegation's annual report for 1990 shows that the payment rate was still below 30 % one year later. In July 1991 an agreement seems to have been reached with the authorities to overcome the problems encountered up to that time.

4.44. In the case of Uganda, although the financing agreement stipulated that the importers were to pay the counterpart funds themselves in settlement of their purchases, it was the Bank of Uganda which paid the counterpart funds on the date on which the advances were deposited by the Commission. In three cases, however, delays resulted in a loss of value equivalent to about 4,5 Mio ECU which at the time of the audit in December 1990 had not been made good in any way by the central bank. In April 1990, the Commission, faced with an inextricable accounting situation, negotiated a repayment of 1 003 USH with the Bank of Uganda. In ECU terms, this represented less than 20 % of the initial loss. A more formal procedure for modifying the specific conditions of the financing agreement would probably have rendered the obligations of the Uganda authorities explicit, thereby ensuring better safeguarding of the value of the counterpart funds.

4.45. Whereas in some countries the counterpart funds are deposited at commercial banks in interest-bearing accounts, in many other cases these funds are paid into a non-interest-bearing account opened with the central bank. This practice leaves the funds unprotected against the effects of monetary erosion. Such a situation was found in Benin, Madagascar, Ghana, Mozambique, Malawi and Uganda.

Use made of counterpart funds

4.46. Originally, the counterpart funds were supposed to be used mainly for the financing of development operations, and in particular to cover national expenses arising from EDF projects. This principle derived from the position taken by the Commission, namely that development did not come from providing support to the balance of payments but from the effective use, for development purposes, of counterpart funds generated by macro-economic aid. Subsequently, in view of the volume of the counterpart funds, the limited absorptive capacities of the projects and the extent of the financing requirements of the structural adjustment programmes, the Community gradually moved towards allocating counterpart funds to budget resources being used to finance economic rehabilitation policies. However, as this change only came about gradually, it resulted in hesitations and delays which reduced the effects expected from the use of the counterpart funds.

4.47. In Uganda, it had been agreed with the national authorizing authority that the counterpart funds would, in principle, be used on EDF projects. On this basis, the Delegation used them systematically for all local payments without explicitly warning the Commission's central services, whose accounts were thereby distorted, the commitments being entered in the accounts under EDF appropriations whilst the corresponding payments were charged to the counterpart funds.

4.48. In two of the countries visited by the Court (Kenya and Malawi) the financing agreements had expressly stipulated the fields in which the counterpart funds were to be used. In these two cases, the funds were used quite rapidly for the objectives stipulated. In Malawi (the 'currency' programme), where the objective was to rebuild the national maize reserves, it proved impossible to ensure that the prices applied by the State grain marketing body (ADMARC)(57) () did not include a substantial margin (about 20 %) which allowed it to reduce its operating losses. In Kenya, the counterpart funds were quickly used by the NCPB(58) () to buy up the maize from the 1989 and 1990 harvests.

4.49. In five countries, given the absence of a pre-established programme for their use, the counterpart funds moved over extended periods through a series of non-interest-bearing bank accounts, whilst at the same time the local currency was rapidly losing purchasing power. When the on-the-spot visits were made, losses of value on funds deposited in local currency were estimated to be as follows:

(i)Ghana: actual situation unknown

(ii)Madagascar: 2,51 Mio ECU

(iii)Mozambique: actual situation unknown

(iv)Uganda: 14,9 Mio ECU

(v)Zambia: 9,5 Mio ECU.

4.50. If a detailed programme for using the funds had been drawn up, that might have led to them being used more rapidly and to their purchasing power thus being maintained. The financing agreements for Zambia did provide for such programmes to be drawn up but in fact they never were.

4.51. In Ghana and Zambia, notwithstanding the principle of joint administration of the counterpart funds by the national authorizing authority and the Commission Delegate, irregular withdrawals were made by the national authorities from the counterpart accounts. The amounts thus withdrawn were 5 663 Mio Cedis(59) () in Ghana and 190 Mio Kwacha (6,2 Mio ECU) in Zambia.

4.52. In Mozambique, on 25 April 1990, the Commission agreed to the funds for its programmes not being deposited in a special bank account. Subsequently, on the pretext that the account in question was also used for operations other than Community aid, the Bank of Mozambique refused to show the bank statements to the Commission. The actual balance of the funds therefore remains unknown and there is no proof that they were properly used for eligible expenditure. In fact, the administrative agreement relating to the counterpart funds provided for in the financing agreements pinpointed three fields of use:

(i)repayment of the State's debt to the Bank of Mozambique (60 %);

(ii)emergency aid and aid for alleviating poverty (30 %);

(iii)financing of local expenditure for EDF projects (10 %).

The 'Counterpart Fund Committee' set up to supervise the operations has never actually done so, with the result that the agreement on the administration of the counterpart funds has remained a dead letter. At the time of the on-the-spot visits, only two emergency food aid operations, representing 12 % of the funds available for this purpose, had been used.

4.53. In two countries in the franc area (Benin and the Central African Republic) the counterpart funds were used to help to prop up the public finances. These operations were supported by the World Bank and came within the framework of the structural adjustment programmes.

4.54. In Benin, the import programmes served as a mere support for the creation of counterpart funds which were supposed to finance:

(a)the national Ministry of Education's payment arrears (study grants and maintenance work in schools) amounting to 4 Mio ECU;

(b)a programme of early retirement for civil servants for 11 Mio ECU.

4.55. At the time of the on-the-spot audit in December 1989, although there were plans to finance the expenditure for the beginning of the school year 1989-90, an amount of 600 Mio FCFA (1,7 Mio ECU) had been paid to the State to cover the grants for the years 1985 to 1988. As for the voluntary redundancy programme, the EDF counterpart funds only permitted the financing of 60 % of the redundancies planned and there was no indication as to which other donor would finance the remaining 40 %.

4.56. In the Central African Republic, the counterpart funds were supposed to be used to finance local expenditure for two EDF rural development programmes. At the request of the national authorizing authority, the funds were redirected to a programme of early retirement for civil servants. At the end of December 1990 the government had deposited about 6,1 Mio ECU in a double signature account. In 1991, 4,9 Mio ECU was used, half of that amount for a civil service redundancy programme and the other half to pay current salaries for the police and army. This irregular use of the funds illustrates the scant security which a double signature account system affords, since it does not follow through to payment to the final recipient. In cases like this there is clearly no way of avoiding technical assistance. In October 1992 the Commission said that, after vehement protests from the Delegation, the Central African government had finally made good the funds that had been withdrawn unwarrantedly.

5. SUPERVISION AND EVALUATION OF THE PROGRAMMES

5.1. The implementation of the import programmes has the special feature of being mainly located downstream of the EDF's central accounting system. In order to ensure adequate monitoring, therefore, the supplier of funds is obliged to maintain a stronger local presence. Furthermore, the local administrations or financial institutions rarely have the administrative capacity needed to follow through such large-scale programmes properly. An examination of the sixth EDF programmes shows, however, that a local presence alone does not guarantee the success of programmes the implementation of which should conform to certain clear principles, whether in respect of the objectives pursued, the implementing methods or the specific responsibilities falling to the various bodies concerned. Lastly, the assessment of the effects of import programmes is a particularly delicate exercise, which has to be prepared and monitored very carefully.

Supervision of the programmes

Role of the delegations in ACP countries

Feasibility studies

5.2. In the ACP countries, the primary responsibility for organizing the programmes lies with the Delegations, because they are well informed about local circumstances. In practice, however, experience has shown that, in the case of the 'currency' programmes, the Delegations have only a very imperfect understanding of the prevailing banking and trading procedures because these fields are often foreign to them. The experience gained in Malawi, Ghana and Uganda illustrates this point. This is why it seems to be a good idea, prior to undertaking new operations, to carry out feasibility studies and to analyse not only the implementing procedures but also the workload which the application of the procedures planned entails for each body involved.

Accounting monitoring of the programmes

5.3. Where the counterpart funds are generated through a number of operations and the programmes are carried out in tranches, the operations have to be traced back using a strict accounting system. This is one aspect which has been widely ignored by the Delegations. Several of them discovered only after a significant delay the problems entailed in the implementation of the sixth EDF, when they tried to ascertain whether the authorizations issued had in fact produced results. Too frequently, the Delegations had concentrated their monitoring activity on the prior authorization of operations and had failed to pay sufficient attention to the task of implementation on the ground. In several countries, as a result, audits of the accounts had had to be commissioned in order to establish the actual financial situation of the programmes. This was in particular the case in Cameroon, Uganda, Ghana, Kenya and Mozambique.

Assessment of the results

5.4. Whilst in most cases the carrying out of import contracts and, to a lesser extent, the generation of the counterpart funds could be definitively surveyed, the same cannot be said of the impact of the programmes with regard to the objectives pursued. In many cases, it turned out that the Delegations did not realize that they were responsible for evaluating the success of the programmes. Most frequently, even if they had wanted to, they would not have been in a position to do so, due to a lack of appropriate references and yardsticks. The volume of the sums implemented by the EDF would require that, when preparing measures, greater attention be paid to the objectives pursued so that proper methods for measuring the impact of the measures undertaken could be drawn up. It should be stressed here that the impact of the programmes has to be felt first of all among the importers, then among the final recipients of the counterpart funds. Giving the import programmes a macro-economic significance ought not, in itself, to constitute a reason for excluding any possibility of evaluation.

5.5. When the programmes are being prepared, the Delegations should therefore pay greater attention to the operational framework within which they will be called upon to carry out their responsibilities. At the same time, it would be desirable for the measures implemented by the various suppliers of funds to be better coordinated. Improved coordination would make it easier to list the constraints applying to and the special characteristics typifying the intervention fields. Coordination would also make it possible to ensure that the programmes of the various suppliers of funds compete with one another. Greater harmonization of the suppliers of funds in respect of implementation procedures and the monitoring of programmes, finally, would simplify the task of the ACP countries and would reduce the difficulties which arise when, for example, it is necessary to establish that the goods are being imported, and the counterpart funds used, in accordance with the regulations(60) ().

The role of the Delegations in the implementation of the programmes

5.6. When the programmes are actually being implemented, the Delegations are unable, without outside help, to ensure that the operations are monitored in detail. This is why recourse to technical assistance services has become an increasingly common practice. Under these conditions, the Delegations have to carry out a three-fold task:

(a)to guide and control the technical assistance action;

(b)to account to the central services for the implementation of the financing agreements and the accessory agreements;

(c)to agree with the national authorizing authority measures to be taken to ensure that the operations are properly carried out.

5.7. The Court's on-the-spot controls showed that the Delegations had rarely taken action to clarify the terms of reference of the technical assistants and to remove the doubts and ambiguities concerning the tasks entrusted to the latter. Some Delegations had found, to their surprise, as they went along that the services provided by the technical assistants left something to be desired, both as regards the extent of their work and the form and content of the accounts they rendered. This was particularly true in the cases of Uganda and Mozambique. The task of assessing the impact of the programmes on the final recipients was ultimately largely neglected by the technical assistants. More explicit terms of reference as regards the tasks to be carried out, specifying more clearly the type of relations to be maintained with the delegation and the national authorizing authority, should improve the monitoring of the implementation of the programmes.

5.8. Information was sent to the central services only irregularly. Although in the case of some programmes the central country desks were reasonably aware of the progress of the programmes (Benin, Ghana or Kenya, for example), they more often than not had only limited information on the actual state of progress. In fact, the Delegations generally contented themselves with forwarding the periodic reports of the technical assistants, where these existed, without further comments (Mozambique, Uganda), whilst in numerous cases they were late in drawing up their own quarterly or annual reports. Where there was no technical assistant (Malawi, Cameroon, the Central African republic, Zambia) the information received was scant.

5.9. Without clear guidelines as to the extent of their role, the Delegations often paid little attention to the physical, administrative and accounting monitoring of the programmes and left the central services unaware of the practical difficulties encountered. In Cameroon, for example, the Delegation has for a long time shown no interest in the fertilizer distributors' situation, or in the generation of the counterpart funds, and it only reverted to its supervisory role when an independent audit was carried out. In Ghana, although the Delegation had properly supervised the 'currency' programme, it had not managed to organise similar supervision for the 'materials' programme, probably due to inadequate coordination with the assistance given by other suppliers of funds(61) (). In Malawi, supervision of the 'currency' programme was affected by the fact that the post of economic advisor remained vacant for an extended period. In Mozambique, the Delegation relied too heavily on the technical assistance and thus lost control of the programme, both as regards the administration of the imports system and as regards the counterpart funds. In Uganda, more attention should have been paid to the checking of the papers relating to imports, the monitoring of banking transactions and the supervision of the services provided by the technical assistance.

5.10. The inadequate framework in which the counterpart funds were placed resulted in a very unfocussed form of management by the Delegations and they did not always clarify their responsibilities in the light of that management. The central services, for their part, were only partially informed of the actual implementation procedures.

5.11. The extent and quality of relations with the national authorizing authorities varied from country to country. It was observed that, in numerous cases, the Delegations were unable to establish the dialogue with the national authorities provided for in the Lomé Convention, or that, where these were established, the results were very limited (see 4.28 and 4.29). Moreover, the delegations rarely asked the central departments to take action to find a way round the obstacles encountered.

Supervision by the central departments

5.12. Whereas projects of the 'traditional' type are subject to considerable supervision by the central departments, for a long time the import programmes of the sixth EDF were not subject to such supervision. Although the 'materials' programmes were treated in the same way as supply contracts as far as the awarding and implementation of them were concerned, neither the technical nor the financial departments were given responsibility for the overall supervision of the import programmes or, more specifically, for managing the counterpart funds. As a rule, the country desks usually played a less prominent role once the financing agreements had been signed and their involvement with the programmes ceased once the payments were entered in the central accounts.

5.13. The fact that the implementation of programmes was, for the most part, appraised in terms of commitments and payments entered in the central accounts no doubt goes some way towards explaining the reluctance of the country desks to monitor programmes beyond this stage(62) (). Such an approach is, however, deceptive, since in the case of the 'currency' programmes, it fails to indicate actual progress made, while for the majority of the programmes it overlooks how the counterpart funds are generated and how they are used (see 5.21 below).

5.14. In order for the central departments to be able to provide genuine support for the Delegations when programmes are being implemented in recipient countries, programme supervisors should be designated, whose task it would be to ensure that appropriate measures were taken to guarantee the successful completion of the programmes.

Differences of opinion between departments

5.15. Appraisals of the operations of the sixth EDF have shown on several occasions that the various departments of the Commission have different perceptions of the objectives and guiding principles of the programmes. Thus, in the case of Mozambique, it transpired that in June 1991 the Delegation had adopted a 'minimalist' approach where the counterpart funds were concerned, taking the view that politico-economic reality could not be ignored and that it had to avoid getting involved in discussions with the government about the way the counterpart funds were actually allocated. For their part, the central departments believed that the Commission should not abandon the idea of channelling the counterpart funds towards what were considered priority sectors. This explains how certain ambiguities arose which were detrimental to good management. In Uganda, although the central departments believed that imports should concern certain sectors which had experienced difficulty in obtaining import licences, the Delegation had opted for giving priority to the rapid use of the funds. This resulted in licences being granted for imports of doubtful eligibility and made it extremely difficult to obtain the information needed for the purpose of checking the imports in question. For very similar reasons, the Delegation in Ghana chose to postpone implementing the programme until the State had fulfilled its commitments. For the 'currency' programme in Kenya, the central departments considered it necessary to modify the procedure for transferring the counterpart funds so as not to cause delays by imposing unacceptable financing conditions on importers. With regard to a similar case in Malawi at the same time, the central departments did not consider it necessary to make the same sort of modifications to the conditions for transferring the counterpart funds.

Instructions governing the import programmes

5.16. When the Third Lomé Convention came into force, the Chief Authorizing Officer sent a 'memorandum concerning sector-based import programmes' to the departments and Delegations under his jurisdiction. The document in question, which was revised in February 1989, was accompanied by the qualification 'does not constitute formal instructions' owing to the experimental nature of the programmes at the time. This situation probably explains the coexistence, at that time, of conflicting notions of the objectives to be pursued, the priorities to be selected, the procedures for implementing programmes and the scope of departmental responsibilities.

5.17. In order to clarify which objectives were to be pursued and which principles observed by all departments, in July 1990 and March 1991 new instructions were included in the 'Collection of instructions'(63) (). The instructions in question deal with certain practical procedures for implementing the import programmes and the way in which the counterpart funds are to be generated, monitored and disbursed. In practice, the various instructions were only applied to programmes which were funded once the seventh EDF had come into force. They thus call for the following observations.

Instruction relating to the 'currency' programmes

5.18. According to the instructions, the principal objective of the 'currency' programmes is to supply recipient countries with a 'rapid disbursement facility' to support their balance of payments. Such support comes within the framework of the structural adjustment of external trade transactions, i.e. the abolition of administrative checks and red tape with a view to liberalizing trade.

5.19. In order to ensure that programmes are as effective as possible, the EDF has selected the principles of rapid disbursement, limitation of administrative burdens imposed on the ACP states and observance of trading and banking practices.

In spite of a clear attempt to simplify things, the instructions in question are still cumbersome in places, indicating how difficult it is to depart from public-sector practices when dealing with the private sector. In this respect, the procedures for issuing invitations to tender and the rules concerning billing currencies should be made more flexible. Similarly, in the financing agreements the checks that are to be carried out on the eligibility of imports should be more closely related to the risks that are run, e.g.:

(a)checking loading prices to ensure that there is no over-invoicing with a view to transferring funds clandestinely outside the ACP countries, as checks on prices at the moment of arrival are ineffective in this respect;

(b)checking importers' solvency in order to avoid problems with the generation of the counterpart funds;

(c)checking goods imported by the recipient country to ensure that they are not re-sold abroad with a view to building up a 'nest-egg' of convertible assets; or, at the very least, obtaining bank guarantees;

(d)carrying out checks on final recipients in order to ensure that funds are not misappropriated by influential groups (town/countryside clashes, ethnic groups, producers of certain products, etc.).

5.20. On the other hand, the instructions are still not explicit enough concerning certain subjects, particularly as regards coordination with other providers of funds and the tasks for which the various Commission departments are responsible. Lastly, the instructions continue to make it possible to implement 'currency' import programmes for the benefit of countries in the franc area, which is not in line with the requirement to give support to importers. The aim in fact is either to subsidise a body which has no counterpart funds, or to supply the State with the fiscal resources in CFA francs that it lacks, the importation process only being used as a pretext to claim funds.

Instructions concerning the establishing and monitoring of the counterpart funds

5.21. The instructions issued by the Commission (March 1991) lay down that the counterpart funds are 'public funds which are allocated to the recipient States', the management of which must come within the framework of a 'coherent policy for public finances'. As such, the funds should be established on the basis of the import values converted at the exchange rate which is applicable when the goods are imported into the recipient country. Furthermore, they should be deposited according to the agreed timetable for similar commercial transactions. Audits should deal with the way the account is replenished and the way funds are used. Although the objectives of the audit are clearly stated, the Delegation's role is ambiguous. Indeed, although it is laid down that the delegation is to receive the bank statements and that it shall have access to the documents held by the ACP authorities, its only explicit obligation is to submit a quarterly report to the central departments 'based on the information supplied by the authorities'. It is not itself obliged to keep complete accounts concerning the programme(64) (), although that is indispensable if there is to be an effective audit. Such provisions are not sufficient to ensure that there will be no further monitoring problems of the kind that characterized the implementation of the import programmes of the sixth EDF.

Instructions concerning the guidelines for using the counterpart funds

5.22. The guidelines for using the counterpart funds laid down by the Commission reflect the following fundamental principles:

(a)the need to distinguish between minor recipients and more important recipients of aid: with regard to the latter, the project approach is to be dropped in favour of a new approach based on budgetary support;

(b)the need to maintain a general approach to the counterpart funds and to apply the same general principles to them;

(c)the need to establish a scale of priorities:

(i)the social dimension of adjustment;

(ii)support for the sectors concerned;

(iii)restoration of public finances.

(d)the need to establish when funds are to be used as soon as the financing agreements have been signed;

(e)the need to clear funds which have not been used as part of concerted action taken by all donors.

5.23. Comparing these new guidelines with previous experience shows that the EDF approach has definitely been rationalized. The instructions issued by the Commission nevertheless involve a considerable risk, as they fail to specify the actual scope of cooperation between aid donors. The fact is that without close cooperation between the various suppliers of funds to a given Member State, it will remain practically impossible to carry out comprehensive checks of the way the State in question implements its budget. This being so, it would be a fallacy to assume that the mere device of entries in the budget will be enough to ensure that the counterpart funds are being correctly used in the sectors that have been given priority. In any case, Commission Delegations are not equipped to carry out the checks in question unassisted. Lastly, since the counterpart funds were mainly intended to make up for shortfalls in revenue in the ACP States, particular attention should be paid to the matter in the context of the structural adjustment policies to which the EDF is required to contribute.

5.24. Despite the considerable need for aid with regard to fiscal policy, regulations concerning tariffs and the strengthening of tax collection in the ACP States, in practice, these areas have barely been touched on by aid from the sixth EDF. However, if the aim of measures taken within the framework of the EDF is to 'do away progressively with the needs it satisfies'(65) (), fiscal policy cannot be overlooked. In this respect, Article 244 (i) of the Fourth Lomé Convention lays down that EDF support may be granted within the framework of reforms implemented or envisaged at the macro-economic level.

Central accounting system

5.25. The EDF's 'central' accounting system was not designed to make it possible to monitor import programmes. It cannot be used to monitor the 'currency' programmes beyond the payment of advances by the EDF into bank accounts opened in Europe by the recipient States, even though this is only the first stage in the process of implementing a project. In the case of the 'materials' programme