TABLE OF CONTENTS

Abbreviations. 3

Executive summary. 7

Introduction. 14

1........... Beyond MDGs and Beyond Aid. 15

1.1........ Towards an Integrated Approach to All Financing Processes. 15

1.2........ Towards a Comprehensive Approach to All Financing Sources. 17

1.3........ Strengthening Global Governance. 20

2........... Domestic Public Finance for Development 22

2.1........ Domestic Resource Mobilisation. 22

2.2........ Maintaining Sustainable Debt Levels. 31

3........... Private Finance for Development 35

3.1........ Private Investment for Development 35

3.2........ Trade and Development 42

3.3........ Remittances for Development 47

4........... International Public Finance for Development 47

4.1........ Introduction. 47

4.2........ Official Development Assistance (ODA) 47

4.3........ Funding for Tackling Climate Change. 47

4.4........ Funding for Addressing Biodiversity Challenges. 47

4.5........ Science, Technology and Innovation (STI), including Technology Development and Transfer 47

4.6........ Future of Development Finance Reporting. 47

5........... Combining Public and Private Finance for Development 47

5.1........ Introduction. 47

5.2........ Implementation Table. 47

5.3........ Recent Trends. 47

5.4........ EU Policies and Programmes. 47

6........... Using Development Finance Effectively. 47

6.1........ Introduction. 47

6.2........ Implementation Table. 47

6.3........ EU Policies and Programmes. 47

Annex 1 – Bibliography. 47

Annex 2 – Methodology. 47

Annex 3 - Statistical Annex on ODA trends……………………………… (Volume 2 and 3)

Annex 4 – Aid for Trade Report 2013……………………………………………. (Volume 4)

Abbreviations ||

ACP || African, Caribbean and Pacific

ADF || Asian Development Fund

AfT || Aid for Trade

AGOA || US African Growth and Opportunity Act

ALSF || African Legal Support Facility

AMC || Advance Market Commitment

ANDI || African Network for Drugs and Diagnostics Innovation

AT || Austria

ATAF || Africa Tax Administration Forum

B4D || Business for Development

BE || Belgium

BG || Bulgaria

BMZ || German Federal Ministry of Economic Cooperation and Development

BWI || Bretton Wood Institutions

C2D || Debt Reduction-Development Contracts

CAC || Collective Action Clauses

CBD || Convention on Biological Diversity

CIAT || Inter-American Centre of Tax Administrations

COP || Conference of the Parties to the CBD

CPA || Country Programmable Aid

CPSS || Committee on Payment and Settlement Systems

CRS || Creditor Reporting System

CSO || Civil Society Organisation

CSR || Corporate Social Responsibility

CY || Cyprus

CZ || Czech Republic

DAC || Development Assistance Committee

DC || Developing Countries

DE || Germany

DFID || Department for International Development – UK

DK || Denmark

DMF || World Bank Debt Management Facility for Low Income Countries

DMFAS || Debt Management and Financial Analysis System – United Nations (UNCTAD)

DRTF || Debt Relief Trust Fund

DSF || Debt Sustainability Framework

EBA || Everything-but-Arms Arrangement

EBRD || European Bank for Reconstruction and Development

ECOSOC || United Nations Economic and Social Council

ECREEE || ECOWAS Regional Centre For Renewable Energy And Energy Efficiency

EDCTP || European and Developing Countries Clinical Trials Partnership

EDF || European Development Fund

EE || Estonia

EEAS || European External Action Service

EIB || European Investment Bank

EIF || Enhanced Integrated Framework

EITI || Extractive Industries Transparency Initiative

EL || Greece

EPO || European Patent Organisation

ES || Spain

EST || Environmentally Sound Technologies

ETS || EU Emissions Trading System

EU || European Union

EUR || Euro

FAT || Financial Activities Tax

FATF || Financial Action Task Force

FDI || Foreign Direct Investment

FEMIP || Facility for Euro-Mediterranean Investment and Partnership

FfD || Financing for Development

FI || Finland

FIAS || Facility for Investment Climate Advisory Services

FP || Framework Programme

FR || France

FTT || Financial Transaction Tax

G20 || Group of Twenty (G8 countries plus Argentina, Australia, Brazil, China, EU, India, Indonesia, Mexico, Saudi Arabia, South Africa, South Korea, and Turkey)

G8 || Group of Eight (i.e. Canada, France, Germany, Italy, Japan, Russia, United Kingdom and USA, plus EU)

GAVI || Global Alliance for Vaccines and Immunisation

GCCA || Global Climate Change Alliance

GDP || Gross Domestic Product

GEEREF || Global Energy Efficiency and Renewable Energy Fund

GEF || Global Environment Facility

GEOSS || Global Earth Observation System of Systems

GIIN || Global Impact Investing Network

GIZ || Gesellschaft für Internationale Zusammenarbeit

GNI || Gross National Income

GSP || Generalised System of Preferences

HIC || High Income Countries

HIF || Health Insurance Fund

HIPC || Heavily Indebted Poor Countries

HIV/AIDS || Human Immunodeficiency Virus/Acquired Immune Deficiency Syndrome

HLF || High Level Forum

HLPF || High Level Political Forum on Sustainable Development

HR || Croatia

HU || Hungary

IATI || International Aid Transparency Initiative

ICF || International Climate Fund

ICT || Information and Communication Technology

IDB || Inter-American Development Bank

IE || Ireland

IF || EIB Investment Facility

IFCA || Investment Facility for Central Asia

IFD || Innovative Financing for Development

IFFIm || International Financial Facility for Immunisation

IFHA || Investment Fund for Health in Africa

IFI || International Financial Institutions

IFM || Innovative Financing Mechanisms

ILO || International Labour Organisation

IMF || International Monetary Fund

IMF/RTC || IMF Regional Technical Centre

ISO || International Standard Organisation

IT || Italy

ITC || International Tax Compact

ITF || EU–Africa Infrastructure Trust Fund

KfW || Kreditanstalt für Wiederaufbau

LAIF || Latin America Investment Facility

LDC || Least Developed Countries

LIC || Low Income Countries (LDC+OLIC)

LT || Lithuania

LU || Luxembourg

LV || Latvia

MDG || Millennium Development Goals

MDRI || Multilateral Debt Relief Initiative

MDTF || EITI Multi-Donor Trust Fund

MIC || Middle Income Countries

MNC || Multinational Corporation

MOI || Means of Implementation

MoU || Memorandum of Understanding

MS || Member States

MSME || Micro, Small and Medium-Sized Enterprises

MT || Malta

MTO || Money Transfer Operators

NGO || Non-Governmental Organisation

NIF || Neighbourhood Investment Facility

NL || Netherlands

ODA || Official Development Assistance

OECD || Organisation for Economic Cooperation and Development

PCD || Policy Coherence for Development

PEFA || Public Expenditure and Financial Accountability

PEFA-PFM || Performance Measurement Framework for Public Finance Management

PFM || Public Financial Management

PIDG || Private Infrastructure Development Group

PPIAF || Public-Private Infrastructure Advisory Facility

PPP || Private Public Partnerships

PRD || Poverty-Related Diseases

PSD || Payment Services Directive

PT || Portugal

R&D || Research and Development

REACT || Renewable Energy and Adapting to Climate Technologies

REDD and REDD+ || Reducing Emissions from Deforestation and Forest Degradation. REDD+ goes beyond deforestation and forest degradation, and includes conservation, sustainable management of forests and enhancement of forest carbon stocks.

REGMIFA || Regional Micro Small and Medium-Sized Enterprises Investment Fund for Sub-Saharan Africa

REPARIS || The Road to Europe: Programme of Accounting Reform and Institutional Strengthening

RO || Romania

SE || Sweden

SK || Slovak Republic

SIDS || Small Island Developing States

SME || Small and medium-sized enterprises

StAR || Stolen Assets Recovery Initiative

STI || Science Technology & Innovation

TA || Technical Assistance

TCX || The Currency Exchange

TIEA || Tax Information Exchange Agreements

TR AID || Transparent Aid

TRA || Trade-Related Assistance

TRIPS || Agreement on Trade-Related Aspects of Intellectual Property Rights

UK || United Kingdom

UN || United Nations

UN DESA || United Nations Department of Economic and Social Affairs

UNCAC || United Nations Convention Against Corruption

UNCTAD || United Nations Conference on Trade and Development

UNEP || United Nations Environment Programme

UNFCCC || United Nations Convention on Climate Change

UNGA || United Nations General Assembly

UNITAID || International Drug Purchasing Facility

US or USA || United States of America

US$ || United States Dollar

VAT || Value Added Tax

WB || World Bank

WIPO || World Intellectual Property Organisation

WP-STAT || Working Party on Development Finance Statistics

WTO || World Trade Organisation

EXECUTIVE SUMMARY

This Staff Working Document is the eleventh in a series of annual progress reports prepared by the European Commission since 2003 (previously referred to as ‘Monterrey reports’) under its mandate from the Council to monitor progress and report annually on the European Union’s collective commitments, initially focusing on official development assistance (ODA) commitments agreed to at the 2002 Monterrey International Conference on Financing for Development. The Council subsequently extended the original mandate to other areas of Financing for Development, including domestic resource mobilisation, aid effectiveness, aid for trade and ‘fast-start’ climate finance. The table below summarises progress by the EU and its Member States in the implementation of 40 commitments in all areas of Financing for Development.

Overall, the 2013 EU Accountability Report found:

· substantial progress on EU commitments concerning private investment, trade, finance relating to climate change adaptation and mitigation, STI and innovative financing sources and instruments;

· moderate progress on EU commitments concerning domestic resource mobilisation, debt sustainability, remittances, biodiversity protection and development effectiveness; and

· limited or no progress on EU commitments concerning volumes of ODA.

All commitments analysed in this report have emerged over the past decade, as new challenges have become clearer and the EU has recognised the need to strengthen its leadership role in finding solutions to global problems.

EU Commitment || Target Date || Status[1] || Comments

1. Domestic Resource Mobilisation || || ||

Support on tax policy, administration and reform || No date specified || || Member States (MS) are providing support, but this is still rather limited.

Support for established regional tax administration frameworks (e.g. CIAT, ATAF) || No date specified || || The EU and six MS support the ATAF; four MS are members of the CIAT.

Exploring country-by-country reporting by MNCs, exchange of tax information, transfer pricing and asset recovery || No date specified || || 26 MS and the Commission are members of the Global Forum on Transparency and Exchange of Information for Tax Purposes. Five MS participated in the OECD’s informal Task Force on Tax and Development, which includes a work stream on transfer pricing. Six MS support the StAR Initiative.

Encourage the participation of developing countries in international tax cooperation || No date specified || || 17 MS and the Commission support at least one forum or dialogue platform, including the OECD Convention on Mutual Administrative Assistance in Tax Matters; the International Tax Dialogue and the International Tax Compact.

Ratify and implement the UN Convention Against Corruption (UNCAC) and the OECD Convention on Combatting Bribery of Foreign Public Officials in International Business Transactions || As soon as possible, preferably before 2010, for UNCAC; no date specified for OECD Convention || || Germany and the Czech Republic have not ratified UNCAC. 22 MS are party to the OECD Convention but, according to Transparency International, only four actively, and seven moderately, enforce it.

Support transparency and accountability through EITI and similar initiatives, possibly also in other sectors || No date specified || || Ten MS and the Commission supported the EITI in 2012, e.g. through direct support to the Secretariat, bilateral support at country level or through the MDTF; five MS provided support to other initiatives (e.g. the Construction Sector Transparency Initiative and the Kimberley Process).

2. Debt Sustainability || || ||

Support existing debt relief initiatives, in particular the HIPC Initiative and the MDRI || No date specified || || Three countries reached HIPC completion point in 2012. Several MS initiatives support MDRI and similar programmes.

Support discussions, if relevant, on enhanced sovereign debt restructuring mechanisms, on the basis of existing frameworks and principles || No date specified || || Limited support (only the EU and 11 Member States see a need for reform, not necessarily structural).

Participate in international initiatives such as the WB/IMF Debt Sustainability Framework (DSF) and promote responsible lending practices || No date specified || || A recent IMF assessment found broad compliance with the DSF[2].

Promote the participation of non-Paris Club members in debt-workout settlements || No date specified || || No bilateral action, only support for dialogue through one annual meeting with non-members, not attended by China and India[3].

Take action to restrict litigation against developing countries by distressed debt funds || No date specified || || No action to restrict litigation mentioned by MS, only legal support to developing countries for litigation through multi-donor trust funds (e.g. DMF, ALSF).

3. Private Investment for Development || || ||

Support the development of the private sector, including small and medium-sized enterprises, through measures to enhance the overall investment climate for their activity, inter alia by promoting inclusive finance and through relevant EU investment facilities and trust funds || No date specified || || The EU and MS have provided substantial funding for private sector development (in 2004-10, the Commission alone provided EUR 2.4 billion in direct support in the form of grant funding). Since 2007, the EU, together with some MS, has set up eight regional blending facilities, covering all regions of EU external cooperation. Several MS’[4] national development finance institutions also support blending activities (EU facilities and others). MS reported over 100 ODA activities for private sector development in 2012.

Strengthen the EIB’s capacity to support EU development objectives and promote the efficient blending of grants and loans in third countries, including in cooperation with MS’ finance institutions or through development financing facilities || No date specified || || Half of the Commission-funded private sector development support mentioned above was channelled through the EIB. Support for blending facilities as described above.

Enhance efforts to promote the adoption by European companies of internationally-agreed CSR principles and standards, the UN Guiding Principles on Business and Human Rights and the OECD Guidelines for Multinational Enterprises || No date specified || || Exploratory research was undertaken by the Commission in June 2012. Commitments by large EU enterprises are expected by 2014[5].

Respond to the Commission’s invitation to develop or update MS’ plans or lists of priority actions in support of CSR || No date specified || || On-going discussion with MS on plans and peer review mechanism[6]. Several MS intend to complete their plans in 2013.

4. Trade and Development || || ||

Increase collective TRA to EUR 2 billion a year by 2010 (EUR 1 billion from MS; EUR 1 billion from Commission). Around 50% of the increase to be available to ACP countries. || 2010 || || Collective EU TRA commitments reached EUR 2.8 billion in 2011; EU collective wider AfT amounted to EUR 9.5 billion. TRA to Africa increased by 50% in 2011 as compared with 2010.

Sustain EU and MS efforts, giving increased attention to LDCs and joint AfT response strategies and delivery || No date specified || || Active participation in the EIF, a multi-donor programme to help LDCs become more active in the global trading system. The proportion of EU collective AfT going to LDCs increased from 16% in 2010 to 19% in 2011. However, these shares are much lower than those of non-EU DAC donors.

Reach agreement on regional AfT packages in support of ACP regional integration, under the leadership of the ACP regional integration organisations and their Member States, and involving other donors || No date specified || || In terms of total volume, regional AfT is growing faster than overall AfT. In 2011, the EU and MS committed EUR 726 million to ACP regional programmes and projects (8% of collective EU AfT, as compared with 4% in 2008). EUR 642 million were committed to Sub-Saharan Africa alone. Challenges were encountered with respect to the absorption capacity and performance of some regional organisations and their capacity to effectively coordinate donors.

Continuously review the EU’s AfT strategies and programmes, taking into account lessons learnt and focusing on results || No date specified || || The EU is active in the International Policy Dialogue on Aid for Trade in the OECD (latest meeting in January 2013) and WTO (next Global Aid for Trade Review in July 2013). Regular discussions are held with MS and an EU monitoring report on AfT is published annually as part of this Accountability Report.

Enhance the complementarity and coherence between trade and development instruments, focusing on LDCs and developing countries most in need, and increasing private sector involvement || No date specified || || The Trade, Growth and Development Policy adopted in 2012 enhances complementarity and coherence and takes a differentiated approach to LDCs and other developing countries most in need. The new GSP adopted by the EU in 2012 focuses on countries most in need, strengthens the GSP+ as an incentive to good governance and sustainable development and makes the scheme more transparent, stable and predictable.

Better coordinate EU AfT, and align it behind the development strategies of partner countries || No date specified || || 38% of the respondents to a survey carried out in 2013 among EU Delegations and EU MS field offices in developing countries (see AfT report in Annex) believe that there have been moderate improvements in coordination (including through joint needs assessments, implementation and monitoring/evaluation).

5. Remittances and Development || || ||

Enhance the development impact of remittances || No date specified || || The EU and several MS have launched initiatives to train migrants and foster migrants’ savings and diaspora investments in their countries of origin.

Reduce the average cost of transferring remittances from 10% to 5% by 2014 || 2014 || || The average cost of sending remittances from the EU is estimated at 10.6% of the amount sent – higher than the global average of 9.1% and only marginally lower than the EU average of 11.71% in Q3 2008, when monitoring of remittance costs started.

6. Official Development Assistance || || ||

The EU and MS agreed to achieve a collective ODA level of 0.7% of GNI by 2015 || 2015 || || The EU ODA/GNI ratio is projected to reach 0.43% by 2015.

Take realistic, verifiable action to meet individual ODA targets by 2015 and share information about this action || No date specified || || 22 MS provided information on 2013 financial year allocation, but limited information was provided on realistic/verifiable action.

Increase collective ODA to Sub-Saharan Africa || No date specified || || 2012 EU ODA to Sub-Saharan Africa increased as compared with 2004.

Provide 50% of the collective ODA increase to Africa as a whole || No date specified || || Only 7% of total EU ODA growth between 2004 and 2012 went to Africa.

Provide between 0.15% and 0.20% of collective ODA/ GNI to LDCs by 2010 || 2010 || || EU ODA/GNI to LDCs was 0.14% in 2010, 0.13% in 2011, and 0.12% in 2012.

7. Funding for Tackling Climate Change || || ||

Contribute EUR 2.4 billion annually in 2010-12 to ‘fast start’ climate funding || End 2012 || || The EU and MS contributed EUR7.3 billion in 2010-12 to ‘fast start’ climate funding.

Work towards pathways for scaling up climate finance from 2013 to 2020 from a wide variety of sources to reach the international long-term joint goal of mobilising US$ 100 billion a year by 2020 || 2013-20 || || Not applicable yet. Work has started.

8. Funding for Protection of Biodiversity || || ||

Hyderabad commitment to double total biodiversity-related international financial resource flows to developing countries (in particular LDCs, SIDs and countries with economies in transition), as compared with 2006-10, by 2015 and at least maintain this level until 2020 || 2015 and 2020 || || Not applicable yet.

9. Science, Technology and Innovation || || ||

Improve mechanisms for international STI cooperation and for the development of ICT on major sustainable development challenges || No date specified || || The EU Research Framework Programme and EU ODA increasingly support cooperation with partner countries in a range of sectors. Several EU-funded research projects have specifically targeted the use of ICT to share experience and knowledge across countries[7].

Promote clean and environmentally sound technologies as a means to facilitate a transition to a green economy for all countries, regardless of their development status || 2014-20 || || The EU and 15 MS support STI and technology transfer activities relating to the green economy.

Support STI research cooperation and capacity building to enhance sustainable development in developing countries, including through the new Horizon 2020 research and innovation programme’’ || 2014-20 || || ’Horizon 2020 will put increased emphasis on STI partnerships with developing countries, in particular through bi-regional partnerships. Several MS implement programmes in this field.

10. Innovative Financing Sources and Instruments || || ||

Consider proposals for innovative financing mechanisms with significant revenue generation potential, with a view to ensuring predictable financing for sustainable development, especially for the poorest and most vulnerable countries || No date specified || || Several MS are using innovative sources of development funding, although they accounted for only 2% of ODA in 2010-12. It is unclear whether revenue generation for development from existing and new taxes (e.g. FTT) will be significant.

Promote new financial tools, including blending grants and loans and other risk-sharing instruments || No date specified || || Several blending instruments have been introduced and further developed over 2012, now covering all regions of EU external cooperation. The EU Platform for Blending in External Cooperation was established in December 2012.

Use innovative financing mechanisms taking into account debt sustainability and accountability and avoiding market disturbances and budgetary risks. || No date specified || || MS and Commission funds for innovative financial instruments increased from EUR 600 million a year in 2010-11 to over EUR 2 billion in 2012.

11. Development Effectiveness || || ||

Implement the European Transparency Guarantee and commitments relating to the common open standard for the publication of information on development resources, e.g. by publishing implementation schedules by December 2012, with the aim of full implementation by December 2015 || December 2012 (schedules) and December 2015 (implementation) || || By December 2012, the Commission and 20 MS, including all nine that are signatories to IATI, had published schedules to implement the common standard. In their schedules, the Commission and 13 MS set out plans for implementation by 2015. A majority of the schedules (11 out of 21) were rated ‘unambitious’ by Publish What You Fund (PWYF). 19 MS had a rating of ‘poor’ in PWYF’s 2012 Transparency Index, four MS and the Commission were rated as ‘fair’ and four MS as ‘moderate’.

Promote joint programming and increase coordination in order to develop a EU joint analysis of, and response to, partner countries’ national development strategies || No date specified || || Joint programming was taken forward in six partner countries in 2012 and is expected to be in place at the start of the next programming period (2014) in at least eight. The opportunities for joint programming were assessed on the ground in a total of 55 countries and preparations for joint programming will go ahead in almost all of these. Nine MS have issued guidelines on joint multi-annual programming.

Implement the results and mutual accountability agenda || No date specified || || Currently, the EU and 24 MS participate in mutual accountability arrangements in over 10% of their priority countries, and 13 MS and the EU do so in 50% or more. The EU and 21 MS participate in country-level results frameworks and platforms in over 10% of their priority countries, and 12 MS and the EU do so in 50% or more.

Introduction

This Accountability Report is the eleventh in a series of annual progress reports prepared by the European Commission since 2003 (previously referred to as ‘Monterrey reports’). Building on previous reports, it assesses where the EU and its Member States stand in relation to 40 common commitments on Financing for Development. This report focuses on the evolution in key areas since the 2012 report, and thus only summarises issues discussed at length last year.

The Report responds to the Council’s invitation to the European Commission to monitor progress and report annually on common EU commitments, initially focusing on ODA commitments made at the 2002 International Conference on Financing for Development in Monterrey. The Council later expanded the original monitoring mandate to cover other areas of Financing for Development, including domestic revenue mobilisation, aid effectiveness, aid for trade, and fast-start climate finance.

For the third time, the Commission presents a single, comprehensive report covering all topical issues of the international Financing for Development agenda. This year, the report also covers Science, Technology and Innovation, to reflect new commitments made as part of the Rio+20 process, and domestic resource management in addition to resource mobilisation, in line with the new EU Budget Support Guidelines. Building on this comprehensive approach, the report is also intended to contribute to discussions on the post-2015 international development framework, including the UN Special Event to review progress towards achieving the MDGs. Financing and other Means of Implementation issues are an integral part of the discussions on the Rio+20 follow-up on sustainable development and the post-2015 overarching framework.

The report is based on input provided by the 28 EU Member States, including Croatia, and the Commission through (i) the 2013 EU annual questionnaire on Financing for Development, which covers key EU commitments related to the international Financing for Development agenda, and (ii) public sources and online databases on development cooperation.

The Council also called on the Commission to make the annual progress report a model of transparency and accountability. As in 2011 and 2012, all Member States have agreed to the online publication of their replies to the annual questionnaire on Financing for Development. The Commission complements this exercise through Donor Profiles that give an overview of the overall development strategy of each Member State. All these documents are available on the EuropeAid webpage[8].

Annex 1 lists the bibliography for all chapters. Annex 2 presents the methodology applied for analysing ODA and climate finance. Annex 3 is the Statistical Annex on ODA trends (including individual graphs for all EU Member States showing the gaps to reaching 2015 targets). Annex 4 consists of the Aid for Trade Report 2013.

1. Beyond MDGs and Beyond Aid

The Millennium Development Goals (MDGs) and the funding commitments of the Monterrey Conference were made more than a decade ago. Over this period, the global political and economic landscape has significantly changed. Growth in emerging economies has become the key driver of the global economy. Disparities among and within developing countries have increased and the GNI per capita of a few upper middle-income countries has outscored that of some European Member States. Likewise, new actors have emerged in the development arena, including from the private sector. The understanding of what development means is also changing, with a greater focus on sustainability in all its dimensions, and broader issues relating to governance, human rights and peace and security.

1.1. Towards an Integrated Approach to All Financing Processes

EU Commitments

· Council Conclusions of 25 October 2012 on Rio+20, §33: Underlines the need for coherence, coordination and non-duplication of efforts with regard to the Financing for Development process; expresses its support for an integrated approach to the various MoI aspects of the Rio+20, the post-2015 development agenda and other relevant processes, given that the potential financing sources are the same, and highlights the importance of addressing in a comprehensive manner the various strands relating to finance and technology transfer including those undertaken in the context of climate change, biodiversity and desertification.

· Council Conclusions of 25 June 2013 on the Overarching Post-2015 Agenda, §17c: There is a need for a common and comprehensive approach to financing for development beyond 2015. It will be important to address, in a coherent and comprehensive manner, relevant international processes relating to finance, role of ODA, innovative sources of financing, financial regulation and illicit financial flows, technology transfer, capacity building, trade and those processes undertaken in the context of climate change, biodiversity and desertification. It will also be important to bear in mind the outcome from Rio+20 on a process proposing options for a financing strategy for sustainable development.

As emphasised throughout the EU public consultation on ‘Towards a post-2015 development framework’[9] and underlined in the European Report on Development 2013[10], the values and principles of the Millennium Declaration remain relevant today, but achieving them ‘requires agreement on a broader set of goals than the MDGs, (…) a wider range of instruments than ODA, the main tool of the MDG effort, and an approach that moves beyond the historical donor-recipient relationship.’

The goal of EU Development Policy, as stated in the European Consensus on Development[11] and in Article 21 of the Treaty on European Union[12] and Article 208 of the Treaty on the Functioning of the European Union[13], remains ‘poverty elimination in the context of sustainable development’[14]. The ‘Agenda for Change’[15] further underlines the importance of promoting ‘inclusive and sustainable growth for human development’, stressing that ‘development is not sustainable if it damages the environment, biodiversity and natural resources and increases the exposure/vulnerability to natural disasters.’

The recent UN Task Team Report on the Post-2015 Development Agenda on ‘A renewed global partnership for Development’ stated clearly that the commitments made at Monterrey will remain an important cornerstone of this renewed global partnership for development[16]. However, while the framework agreed at Monterrey remains useful, it should be extended to accommodate recent developments. Some of these developments have been incorporated into the Global Partnership for Effective Development Cooperation, agreed to at the Busan High Level Forum on Aid Effectiveness in 2011.

In February 2013, the Commission adopted a Communication on ‘A Decent Life for All: Ending poverty and giving the world a sustainable future’[17]. The Communication proposes a common approach to the follow-up of Rio+20, and in particular the definition of Sustainable Development Goals, and to the review of the Millennium Development Goals. It suggests working towards an overarching framework to address these issues. In June 2013, the Council endorsed this general approach.[18]

International processes have multiplied, and there is now a momentum for consolidating these. The UN High Level Panel on post-2015 has published its report, the UN Open Working Group on Sustainable Development Goals has started its work and the UN Expert Committee for proposing options on a sustainable development financing strategy is being established. Various other processes also ponder what the post-2015 agenda should look like and how this could be implemented. Recent reports from the UN Secretary General, ECOSOC and UN General Assembly resolutions[19] all seem to favour merging the Financing for Development and Rio+20 Means of Implementation follow-up strands.

In May 2013, the High-Level Panel of Eminent Persons on the Post‐2015 Development Agenda published its final report[20], in which it also recognised the need to promote a single and coherent post-2015 development agenda that integrates economic growth, social inclusion and environmental sustainability. All post-2015 intergovernmental processes, including the Rio+20 follow-up, should be coherent and brought together into one comprehensive vision and approach.

The European Union can lead these processes as it did for the Monterrey and Doha Conferences on Financing for Development, and this is the time to flesh out the Union’s vision for a post-2015 overarching framework.

At the time of drafting this report, financing issues had been actively discussed neither in the post-2015 development agenda nor the Rio+20 follow-up process[21]. However, an intergovernmental expert group is being established in the framework of the Rio+20 follow-up to propose options for a sustainable development financing strategy by 2014; and the UN will decide in 2013 on the appropriateness of holding a new Financing for Development Review Conference.

As stated in the Global Partnership Roadmap for 2013[22], ‘bridging the Financing for Development and post-2015 discussions is the nascent intergovernmental process on sustainable development finance. The UN intergovernmental expert group is expected to be composed of 30 experts from different regions, and will hold four meetings in 2013 and two meetings in 2014. The process will assess financing needs, consider the effectiveness, consistency and synergies of existing instruments and frameworks and evaluate additional initiatives. A report should be presented to the UN General Assembly in 2014 and this sustainable development finance process may eventually be integrated with the existing FfD process’.

As potential sources of finance are identical and limited, the means to achieve poverty eradication and sustainable development should not be considered or measured separately. In its Conclusions on Rio+20[23], of October 2012, the Council of Ministers expressed ‘its support for an integrated approach to the various Means of Implementation aspects of the Rio+20, the post-2015 development agenda and other relevant processes, given that the potential financing sources are the same’.

Every euro allocated to serve global policy objectives can only be spent once, but may, at the same time, serve several objectives. As underlined in the EU’s contribution to the Rio+20 Outcome Document[24], ‘a joint approach by traditional donors, emerging economies, international financial institutions (IFIs) and the private sector is needed, addressing the ‘silo’ approach to channelling funds and ensuring a more effective identification and use of existing resources, as well as mobilisation of available and innovative sources of finance’. As shown Table 1.1.1 below, the Financing for Development process encompasses all Means of Implementation. The process started at Rio+20 has the potential to have essentially the same scope. Other financing initiatives do not necessarily address some of the issues (e.g. remittances, trade, debt or systemic issues). The present report provides an overview of all the different means, including, for the first time, Science, Technology and Innovation.

Table 1.1.1 – Elements of Means of Implementation Covered under existing UN Processes

Means of implementation for: || Process

Financing for Development || Rio+20 || Climate Change || Biodiversity

Domestic resources || Yes || Yes || Yes || Yes

Private flows, FDI, innovative mechanisms || Yes || Yes || Yes || Yes

Other private flows/CSR/Remittances || Yes || Yes || Yes || No

Trade || Yes || Yes || Yes || No

ODA || Yes || Yes || Yes || Yes

Effectiveness || Yes || Yes || Yes || Yes

Capacity building || Yes || Yes || Yes || Yes

Innovative sources || Yes || Yes || Yes || Yes

Debt || Yes || Yes || No || Yes

Systemic issues/international architecture || Yes || Yes || Yes || No

Policy Coherence for Development and other policy challenges || Yes || In part || No || In part

Science, Technology and Innovation || In part || Yes || Yes || Yes

1.2. Towards a Comprehensive Approach to All Financing Sources

EU Commitments

· Council Conclusions of 25 October 2012 on Rio+20, §34: Underlines that resources for the implementation of sustainable development policies have to be mobilised by all types of stakeholders and come from all sources, national and international, public and private as well as financial and non-financial actions.

· Council Conclusions of 25 June 2013 on the Overarching Post-2015 Agenda, §17d: The mobilisation of all resources, public and private, domestic and international and their effective and innovative use will be vital for the successful development and implementation of the [post-2015] framework.

Recent studies[25] show that most developing countries have the financial means to end poverty[26] by 2030. While the cost is negligible for Upper MICs, it is estimated at around 5.5% of GDP in 2008 for Lower MICs (an amount that could be easily covered for example by better tax collection), where almost 80% of the global poor live (bearing in mind that every individual country situation is by definition unique). MICs also have stronger national buffers to deal with exogenous shocks. Progress depends primarily on the design and implementation of appropriate national policies to ensure the inclusiveness of development and pro-poor growth. In contrast, the investment needs of LICs for ending poverty were estimated at 25.4% of their GDP[27] in 2008, and they are projected to remain significant in 2020 (14.9%), and 2030 (9.7%). LICs have much lower levels of national resource mobilisation and greater vulnerability to global shocks due to low buffers. The progress in LICs will continue to require external financing to support national efforts in ending poverty by 2030.

At an aggregate level, as shown in Table 1.2.1 below, most resources to end poverty by 2030 can be mobilised by the public sector domestically and by the private sector both domestically and internationally, while public international finance is very small in comparison. Data are readily available only for ODA, while they need to be assembled from a variety of sources for all other means of implementation. The methodology used in assembling such data is described in Annex 2.

Public finance fulfils the same function whether coming from domestic or external sources. Domestic public finance is directly available for implementing government plans from the moment of collection. International public finance should complement domestic resources and help to implement nationally owned development strategies, using development finance effectively.

For middle-income countries, domestic revenues constitute the main financial source, while ODA has only a marginal role (0.4% of GDP). The domestic revenues of low-income countries are relatively lower, and ODA remains a significant source (12% of GDP) representing the most important external financial flow.

The aggregate data above hide many national-level differences. While the specific situation of each country requires an individual approach, the above analysis shows massive differences of vulnerabilities and abilities between MICs and LICs. Yet, it is clear that all countries need to do more to mobilise resources and use them in a targeted way in order to reach the global development goals.

Private sector finance accounts for about one quarter of all flows in both low-income and middle-income countries. It can serve as means of implementing the fight against climate change and the protection of biodiversity, or be leveraged through innovative financial instruments like blending, presented in Chapter 5. This illustrates the extent to which private finance has become pivotal in many developing countries and confirms the need to work more closely with private sector actors and include them into the post-2015 dialogue.

While all resources fluctuate somewhat, domestic sources tend to be more stable and exceed by far external finances. Experience shows that, with the right policies, more resources can be mobilised. With regard to private finance and private sector actors, it is important to work towards streamlining their contribution towards global goals, including through the use of policy incentives.

Table 1.2.1 – Total Resources Available to Developing Countries by Income Group

(EUR billion, 2010)

Flow || LIC || MIC || Unallocated by income || Total

Amount || share of GDP || amount || share of GDP

Public Domestic Finance || 42 || 13.1% || 3,275 || 22.0% || || 3,317

Tax revenue || 41 || 13.0% || 3,211 || 21.6% || || 3,252

Public or Publicly Guaranteed External Debt || 0 || 0.0% || 64 || 0.4% || || 65

|| || || || || ||

Memo item: Total Reserves || 41 || 12.9% || 4,033 || 27.1% || || 4,074

|| || || || || ||

Public International Finance || 39 || 12.1% || 57 || 0.4% || 63 || 158

ODA Grants || 35 || 11.2% || 28 || 0.2% || 29 || 92

(of which EU) || 15 || 4.8% || 11 || 0.1% || 13 || 39

Concessional Loans || 1 || 0.2% || 5 || 0.0% || 2 || 7

(of which EU) || 0 || 0.1% || 1 || 0.0% || 1 || 3

Other official finance || 2 || 0.7% || 24 || 0.2% || 28 || 54

(of which EU) || -0 || -0.1% || -2 || -0.0% || -2 || -4

International security operations || || || || || 5 || 5

(of which EU) || || || || || 2 || 2

|| || || || || ||

Private Finance – domestic and international || 71 || 22.4% || 3,538 || 23.8% || 42 || 3,652

Domestic Private Investment || 42 || 13.1% || 2,636 || 17.7% || || 2,678

External private finance (debt, FDI, portfolio investment, remittances) || 29 || 9.2% || 902 || 6.1% || 42 || 974

of which: Private non-guaranteed External Debt || 1 || 0.2% || 69 || 0.5% || || 70

FDI || 11 || 3.5% || 431 || 2.9% || || 443

Foreign Portfolio Investment || || 0.0% || 181 || 1.2% || || 181

Remittances || 18 || 5.5% || 221 || 1.5% || || 238

(of which EU) || 3 || || 40 || || || 43

Private charity || || || || || 42 || 42

|| || || || || ||

Total finance for investments || 151 || 48% || 6,870 || 46% || 105 || 7,126

|| || || || || ||

International Trade (facilitates private and public finance mobilisation) || || || || || ||

Total volume of developing countries’ exports of goods and services || 78 || 24.5% || 4,304 || 29.0% || || 4,382

See Annex 2 for details on the methodology used. Data on EU private finance flows to and EU imports from developing countries as a group are not currently provided by Eurostat.

1.3. Strengthening Global Governance

EU Commitments

· Council Conclusions of 18 May 2009, §36: Considering that world trade, investment and financial stability are essential for restoring global sustained growth, the Council welcomes the G20 agreement on the reform of the mandates, scope and governance of [International Financial Institutions]to reflect, inter alia, changes in the world economy and the new challenges of globalisation, to ensure greater voice and representation for emerging and developing countries, including open, transparent and merit-based top management selection processes.

The European Union promotes effective multilateralism and supports the fundamental role of the UN system in global governance. It is indeed a founding principle of the EU, as stated in Article 21 of the Lisbon Treaty[28].

Many development challenges of the 21st century, spanning from climate change to biodiversity protection, from fighting illicit capital flows to increasing developing countries’ access to global markets, from financial stability to security, defy borders, call for innovative instruments, blur the lines between development cooperation in the context of sustainable development and other policy fields, and require solutions that are often not only multilateral, but also multipolar involving new or re-emerging sovereign players, and a much more active civil society without borders. The new Global Partnership for Effective Development Cooperation that has recently emerged calls for a more inclusive, efficient and effective global governance – an important objective of the EU. To this end, there is a need to reform the institutional framework, centred on the UN System, while confirming its leading role in the coordination and monitoring of the implementation of global policy goals.

An important step in this direction was made at the Rio+20 Conference, held in June 2012 in Rio de Janeiro, which initiated a process to strengthen the institutional framework for sustainable development. This includes further integration of sustainable development within the work of the General Assembly and of the Economic and Social Council (ECOSOC) as a key element of the overarching framework of the UN activities and its agenda setting. In this context, Rio+20 decided to establish a High Level Political Forum (HLPF) on Sustainable Development, replacing the Commission on Sustainable Development. The HLPF will, among other agreed functions[29], follow-up on the implementation of sustainable development commitments, provide political leadership and guidance, enhance integration of the three dimensions of sustainable development, improve cooperation and coordination within the UN system, and strengthen the science policy interface. The EU and Member States support the idea that the HLPF should be ‘directly linked with ECOSOC, and working at a higher political level (UNGA) at regular intervals’[30]. This should contribute to enhance coherence with the review of the MDGs and the post 2015 framework.

A High Level Panel (HLP) of Eminent Persons was also established by the UN Secretary-General to make proposals on the post-2015 Development Agenda. The HLP formulated recommendations regarding the vision and shape of a ‘Post-2015 development agenda that will help respond to the global challenges of the 21st century, building on the MDGs and with a view to ending poverty’ in May 2013. The Panel also advised on how to strengthen the global partnership for development, improve accountability at all levels, build political consensus on the Post-2015 development agenda, and include the private sector.[31]

With regard to International Financial Institutions, IMF members are in the process of ratifying the 2010 Quota and Governance Reform, which is a major achievement in enhancing the credibility, legitimacy and effectiveness of the Fund. All EU Member States have fully ratified the 2010 Quota and Governance Reform. In January 2013, the Executive Board formulated important building blocks for agreement on a revised quota formula and agreed that the review of the quota formula will be taken together with the 15th General Review of Quotas by January 2014. An agreement on an integrated package needs to be reached by that deadline. It is foreseen that the review will lead to further increases in the quota shares of dynamic emerging market economies.

The World Bank governance reform process is less advanced. Some progress has been made on the implementation of the 2010 reforms for enhancing voice and participation of developing countries and meeting new challenges, but more is needed in terms of finding an appropriate voting formula by 2015 and ensuring that future selection processes are truly merit based regardless of nationality.

The World Bank has recently put forward its Common Vision Paper, outlining the proposed goals and principles for the future strategy of the World Bank Group, to be endorsed in 2013. With the aim of ending extreme poverty and promoting shared prosperity and environmental sustainability, the World Bank goals and principles mirror very much those of the EU Agenda for Change.

2. Domestic Public Finance for Development

2.1. Domestic Resource Mobilisation

EU Commitments

· EU policy on tax and development is set out in the 2010 Communication on ‘Tax and Development – Cooperating with Developing Countries on Promoting Good Governance in Tax Matters’[32] and the accompanying Staff Working Document. Their main recommendations were endorsed by the Council in its Conclusions of 14 June 2010[33] and by the European Parliament in a resolution of March 2011. In these Conclusions, the Council encouraged the Commission and Member States to:

1. support developing countries in tax policy, tax administration and tax reforms, including in the fight against tax evasion and other harmful tax practices;

2. support, including financially, already established regional tax administration frameworks such as CIAT (Centro Inter-Americano de Administraciones Tributarias) and ATAF (African Tax Administration Forum), as well as IMF Regional Technical Centre;

3. work towards exploring country-by-country reporting as a standard for multinational corporations; a global system for exchange of tax information; reducing incorrect transfer pricing practices; and promoting asset recovery;

4. encourage the participation of developing countries in structures and procedures of international tax cooperation should be strongly encouraged, including in the United Nations and the OECD, in the International Tax Dialogue and International Tax Compact; and

5. enhance their support to the EITI (Extractive Industries Transparency Initiative) and consider expanding similar practices to other sectors.

· The relevance of this agenda was reinforced through the 2011 Commission Communications on ‘An Agenda for Change‘ and ‘The future approach to EU Budget support to third countries’[34]. These Communications provide further emphasis on tax policy and administration by stating that ‘the EU will continue to promote fair and transparent domestic tax systems in its country programmes, in line with the EU principles of good governance in the tax area, alongside international initiatives and country by country reporting to enhance financial transparency’[35]. The main recommendations of the Agenda for Change were endorsed by the Council in its Conclusions of 14 May 2012.

· In September 2012, the EU adopted new ‘Budget Support Guidelines’ in line with the 2011 Communication which places a stronger emphasis on encouraging partner countries’ efforts to mobilise domestic revenues and to reduce their aid dependency. In particular, the guidelines state that ‘within budget support contracts, DRM will be considered within the macroeconomic (fiscal policy) and public financial management (tax administration) eligibility criteria, and it should be given greater attention in policy dialogue and capacity development.’

· An updated synthesis of EU position on tax reform is presented in the 2012 Commission Communication on ‘Improving EU support to developing countries in mobilising Financing for Development‘[36]. The Commission stressed that ‘it is up to the partner government to enact and uphold the appropriate regulatory measures and policies to ensure that the virtuous cycle of tax collection-development spending-development progress-increased tax collection materialises. The EU and its Member States can facilitate this process by continuing to expand their support to strengthen the capacity of tax systems, and to ‘incorporate tax administration and fair tax collection, including rationalising tax incentives and good governance in tax matters, into policy dialogue with partner countries.’ Additional support can be through regulatory means, such as combating illicit capital flows and reducing the misuse of transfer pricing as well as strengthening the Extractive Industries Transparency Initiative (EITI) and adopting legislation for country by country reporting for multinational enterprises.

· The EU has committed to take action at the international level to fight corruption, tax evasion and illegal financial flows. In the Council Conclusions of 11 November 2008 (EU position for Doha FfD conference), §18, the EU promised in particular to:

1. ratify and implement the United Nations Convention against Corruption (Merida) as soon as possible and best before 2010;

2. adhere to the OECD Convention on Combating Bribery of Foreign Officials in International Business Transactions;

3. adopt and implement international norms to prevent money laundering, as well as the financing of terrorism and proliferation, support international cooperation repatriation of stolen assets, among those the Stolen Assets Recovery initiative (STAR); and

4. promote the principles of transparency and accountability over natural resource revenue by supporting and implementing the Extractive Industry Transparency Initiative (EITI), as well as other specific initiatives aiming at improved governance and transparency in the extractive sector.

· Commission Communication of 6 December 2012 (and ensuing ECOFIN Council Conclusions of 14 May 2013 and European Council Conclusions of 22 May 2013) on an Action Plan to strengthen the fight against tax fraud and tax evasion[37]. The Action Plan sets out 34 actions that the Commission proposes to take with Member States over the next two years, in order to combat tax fraud and evasion, and is accompanied by two Recommendations on measures intended to encourage third countries to apply minimum standards of good governance in tax matters, and on aggressive tax planning[38].

2.1.1. Introduction

Domestic revenue is the most important source of development finance directly available to governments. As emphasised in the 2012 Communication on Improving EU support to developing countries in mobilising Financing for Development[39] ‘the primary responsibility for development lies with the developing countries themselves’. Studies have shown that many developing countries need substantial additional revenue[40] and a corresponding increase in fiscal space to finance poverty-reduction and adaptation to climate change. Increasing domestic revenue not only supports this type of spending, it also allows a country to assume ownership for its policy choices, thus strengthening good governance[41].

The objective of this section is to present current EU thinking and progress in the area of tax and development. The analysis below reveals that the EU policy framework put forward in 2010 has been mainstreamed by some Member States and associated with an emerging consensus amongst practitioners on how best to support tax reforms to enhance effective domestic resource mobilisation. The rest of the section presents the evolution of EU and Member State’s support during the past year.

2.1.2. Implementation Table

The table below summarises progress made in 2012 in implementing the EU commitments on domestic resource mobilisation. Further details are discussed in the main text.

EU Commitment || Target Date || Status[42] || Comment

Support on tax policy, administration and reform || No date specified || || Member States (MS) are providing support, but this is still rather limited.

Support for established regional tax administration frameworks (e.g. CIAT, ATAF) || No date specified || || The EU and six MS support the ATAF; four MS are members of the CIAT.

Exploring country-by-country reporting by MNCs, exchange of tax information, transfer pricing and asset recovery || No date specified || || 26 MS and the Commission are members of the Global Forum on Transparency and Exchange of Information for Tax Purposes. Five MS participated in the OECD’s informal Task Force on Tax and Development, which includes a work stream on transfer pricing. Six MS support the StAR Initiative.

Encourage the participation of developing countries in international tax cooperation || No date specified || || 17 MS and the Commission support at least one forum or dialogue platform, including the OECD Convention on Mutual Administrative Assistance in Tax Matters; the International Tax Dialogue and the International Tax Compact.

Ratify and implement the UN Convention Against Corruption (UNCAC) and the OECD Convention on Combatting Bribery of Foreign Public Officials in International Business Transactions || As soon as possible, preferably before 2010, for UNCAC; no date specified for OECD Convention || || Germany and the Czech Republic have not ratified UNCAC. 22 MS are party to the OECD Convention but, according to Transparency International, only four actively, and seven moderately, enforce it.

Support transparency and accountability through EITI and similar initiatives, possibly also in other sectors || No date specified || || Ten MS and the Commission supported the EITI in 2012, e.g. through direct support to the Secretariat, bilateral support at country level or through the MDTF; five MS provided support to other initiatives (e.g. the Construction Sector Transparency Initiative and the Kimberley Process).

2.1.3. Recent Trends

Domestic tax revenues represented a significant share of the overall development finance available for both low income and middle income countries in 2010, as shown in Figure 2.1.3.

Figure 2.1.3 – Domestic Tax Revenues as a Share of Total Resource Flows of Low-Income (LIC) and Middle-Income Countries (MIC) in 2010

The relative level of domestic revenue collection is generally a function of per-capita income. The ratio between tax revenues and GDP in developing countries varies, but is in general a smaller share of GDP than in higher income countries. Overall, government revenues have been a stable and increasing source of financing[43] for most developing countries, except for LICs where ODA funding often exceeds efforts in domestic revenue mobilisation. On average, tax revenues account for 13% of GDP in LICs, 20% of GDP in MICs, and 35% of GDP in High Income Countries (HICs)[44]. Moreover, the share in LICs has been essentially stationary since 1970, while it has grown in both MICs (+9%) and HICs (+4%). This is partly for structural reasons, but mostly results from suboptimal tax systems (e.g. narrow tax base) and weak tax administration (collection capacity). Fragile countries, in particular, have much lower average tax revenue (14%) as a proportion of GDP than non-fragile countries (20%)[45]. Natural resources are an important source of tax revenues: between the early 1980s and 2005, resource-rich countries in sub-Saharan Africa increased their tax–GDP ratios by about seven percentage points; non-resource related tax revenue in the region, on the other hand, was essentially stagnant[46].

The most significant additional long-term mobilisation efforts should be undertaken by LICs and fragile states, which lag behind in terms of tax ratio, while avoiding distortions that would penalise private sector investment. This usually involves institution and state building, but does not preclude shorter-term reforms even in the absence of fully effective institutions[47].

Many developing countries offer tax incentives and exemptions to investors, particularly in areas which would otherwise be considered undesirable for investment. For example, in the last decades many African countries provided tax exemptions in their Value Added Tax (VAT) system and other forms of tax incentives and exemptions. Tax incentives and their corresponding tax expenditures have been characterised as ‘substantial’ even if they are not easy to quantify on the basis of a consistent methodology and they vary significantly from one country to the other[48]. Tax incentives are estimated to reduce tax revenues by several percentage points of GDP (e.g. 3% in Tanzania according to the Tanzania Revenue Authority[49]) and their efficacy in attracting foreign direct investment is also open to question, especially in Africa[50].

Illicit financial flows[51] are particularly harmful for developing countries, although their size is difficult to estimate. According to a recent report by Global Financial Integrity[52], developing countries lost EUR 442 billion per year through illicit flows over the decade 2000-2010. In 2010 alone, illicit outflows from developing countries had grown to EUR 649 billion – almost six times the value of net ODA from all donors in the same year.

2.1.4. EU Policies and Programmes

2.1.4.1. Domestic Revenue Mobilisation

The EU and 19 Member States[53] reported new initiatives to strengthen developing countries’ tax systems. This reflects the continued importance of taxation in support to developing countries. The content of such support varied from the very narrow (e.g. study tours for instance in the case of Czech Republic and Romania) to the quite broad and multi-country programmes (e.g. UK support to EITI, and France’s support to capacity building in West Africa). New initiatives in the area of domestic revenue mobilisation include Germany’s support to South Sudan and UK’s support to the Palestinian Authority.

A recent UK Parliamentary report[54] has put added emphasis on the importance of tax in developing countries, in line with EU commitments. The critical importance of taxation in development and poverty reduction is at the centre of this report. It states that effective tax collection involves: (a) with respect to the extractive industries, a heavier focus on taxing volumes of extraction or turnover; and (b) improved collection of personal income taxation, VAT and local property taxation. Underpinning the latter is an urgent need to provide incentives for formalisation of enterprises to join the formal sector. The report underlines the global nature of tax collection, where regulatory issues play a major role, and recommends enacting laws unilaterally requiring (i) tax authorities to exchange information automatically to deter cross-border tax evasion; (ii) corporations to report their financial information on a country-by-country basis; and (iii) assess any new primary or secondary UK tax legislation against its likely impact on revenue-raising in developing countries – especially to discourage the misuse of transfer pricing.

The 2012 Accountability Report had noted the absence of a joint diagnostic framework for assessing tax systems. In the course of 2012, efforts have been made by several donors (including EU MS and the Commission) and the IMF to develop a joint assessment tool. The 2012 report had also noted that the coordination and complementarity of the Member States’ approaches could be enhanced, while country coverage seemed improved based on suitable division of labour between Member States. These observations appear to remain valid and international coordination platforms (e.g. the International Tax Compact) should be further deployed. Finally, there is no information on whether the weakness related to the relatively low engagement with national parliaments and civil society organisations have benefitted from any specific support. These organisations are an important part of the good governance and accountability frameworks in developing countries and would benefit from capacity-building.

To improve support to developing countries, several new studies provide guidance for prioritisation and sequencing of support and identify approaches that are the likeliest to succeed, as discussed in Box 2.1.4 below.

Portugal remains the only Member State to report funding tax reform in developing countries at a share above 50% of its ODA for public financial management (PFM). Another fourteen Member States[55] provide support for tax reform, but at lower shares of their PFM aid, while nine Member States[56] do not provide any. These results are in line with what had been reported last year.

The EU and twelve Member States[57] report monitoring domestic resource mobilisation through budget support operations. The monitoring takes place in a number of ways, with many taking advantage of this task being performed by donor groups and/or through Joint Performance Assessment Frameworks – which minimises the reporting burden imposed on recipient countries. Other approaches have been pursued by Austria, through its dialogue on aid dependency, Germany’s ‘fiduciary risk assessment tool’ which sets a 10% threshold on revenue to GDP as a trigger for budget support, and Denmark, which is issuing new guidelines on budget support to address this area more systematically.

The EU and the majority of Member States support developing countries’ efforts to assess the impact of tax incentives. Member States’ support is largely through technical assistance, provision of experts, twinning, training and studies. Some, such as Germany and Denmark, go beyond the simple quantification of the expenditures and assess impact in terms of investments, cost benefit and efficiency. Other donors, such as the UK, Germany and Ireland also provide indirect support by funding related work by institutions such as the IMF (including its Regional Assistance Centres) and the World Bank, in line with the Council Conclusions of June 2010 on Tax and Development.

Box 2.1.4 –Tax and Development: recent findings

A 2013 OECD study[58] shows that taxation should be regarded not only as a means to raise revenue but also as an essential component of good governance. In that sense, how revenue is collected is as important as how much gets collected. And linkages between taxation and governance also involve supporting institutions and organisations outside the revenue system (e.g. the Judiciary, Parliament, civil society). Donors can support revenue collection processes, but partner country ownership and leadership are preconditions for success.

Two focused studies conducted in 2012 by the International Centre for Tax and Development, with funding from DfID and Norad, update knowledge in selected areas, provide further validation of current approaches, and may help EU and Member States to prioritise their interventions:

· The report on Taxation and Development[59] summarises lessons learnt from 50 years of research. It concludes that: (i) encouraging and funding local think tanks has important long-term payoff; (ii) better tax policy and administration depend on country circumstances and need to be tailor-made; and (iii) support needs be oriented to build capacity within and outside government and sustaining such efforts over the long-term.

· The report on Donors, Aid and Taxation in Developing Countries[60] proposes seven ‘big picture’ considerations for the design of donor programmes: (a) supporting local leadership of reform efforts; (b) incorporating more systematic political economy analysis into the design and implementation of reform; (c) designing tax reform that seek to foster broader linkages between taxation, state-building and governance; (d) paying careful attention to the complexity of the relationship between aid and tax effort; including tax exemptions on aid; (e) better designing tax-related conditionality, particularly by developing a more nuanced set of performance indicators; (f) ensuring the effective coordination of donor interventions; ; in line with the implementation of the Paris declaration and subsequent commitments and (g) paying greater attention to the international policy context, and particularly the role of tax exemptions for donor projects, tax havens and tax evasion by some multinational corporations in undermining developing country tax systems.

There is still no consensus in the EU on foregoing tax exemptions on projects financed through external aid. At EU level, some progress has been achieved in this area, for instance when financing framework contracts, but there continues to be lack of consensus on the way forward. Some Member States, such as France, Romania and Slovenia have mainstreamed this approach in their disbursement of foreign aid. Others, such as Denmark, have implemented it partially – in the case of VAT on goods and services purchased in partner countries. A few Member States are not in favour of the elimination of exemptions on various grounds including the concern it will reduce the volume of goods, services and civil works that may be purchased. A large majority of Member States consider however that a coordinated approach towards the elimination of tax exemptions would be desirable, arguing that such an approach would need to: (a) apply to all donors, not just European ones; (b) exclude humanitarian aid; (c) be based on a prior study that determines which exemptions to be maintained and provides a thorough analysis of implications; and (d) be linked to harmonisation of taxes within the EU.

2.1.4.2. Tax Evasion and Fraud

Tax evasion and fraud are widely believed to be important factors limiting revenue mobilisation but also undermining good governance and institutional development. Tax evasion and fraud threaten governments´ revenues, both in developed and developing countries, thereby limiting their capacity to carry out their economic policy and to proceed to necessary structural reforms. Tax evasion generally comprises illegal arrangements where liability to tax is hidden or ignored, i.e. the taxpayer pays less tax than he is legally obligated to by hiding income or information from the tax authorities. Tax fraud is a form of deliberate tax evasion which is generally punishable under criminal law. The term includes situations in which deliberately false statements are submitted or fake documents are produced[61].

In recent years, the challenge posed by tax fraud and evasion has increased considerably. The globalisation of the economy, technological developments, the internationalisation of fraud, and the resulting interdependence of tax authorities reveal the limits of strictly national approaches and reinforce the need for joint action. The interaction of many different tax systems in the context of a global economy creates many possibilities for the undermining of tax systems[62]. The private sector is accused to use the possibilities offered by ‘tax havens’ which, generally speaking, are countries that base their attractiveness on opacity and harmful tax competition in the direct tax area to relocate their tax bases in their low-tax jurisdictions, and to conceal this from their country of residence (through means such as obstacles to the identification of beneficial ownership, bank secrecy and conduit companies).

The revenue losses which can arise from both tax evasion and tax fraud as well as tax avoidance[63] are difficult to estimate. According to some estimates concerning only the United States, the revenue cost of profit shifting towards ‘tax havens’ by US multinationals could be up to EUR 45 billion, while individual tax evasion could cost up to EUR 38 billion yearly[64]. Estimates of this kind are not available for the EU, but on the basis of the similar amount of FDI stocks in ‘tax havens’ in both USA and the EU, the tax revenue losses can be estimated to be of similar magnitude[65].

The OECD and the G20 have been calling for more determined action to combat tax evasion and fraud. There is growing pressure on tax havens to increase the transparency of their tax systems and put an end to unfair competitive practices. The EU and most Member States have provided further support for addressing tax evasion, tax fraud and harmful tax competition, and promote the principles of good governance in tax matters in their cooperation policy.

In the area of exchange of information, the EU and twenty-six Member States are supporting the Global Forum on Transparency and Exchange of Information for Tax Purposes. According to OECD data[66], sixteen Member States[67] signed a total of thirty-six new Tax Information Exchange Agreements with twenty-seven developing countries in 2012. In addition, Croatia has signed fifty-five Double Taxation Agreements and is continuing with the negotiations in order to spread the network of Double Taxation Agreements as a good tool for tackling cross-border tax evasion.

Furthermore, several Member States, such as Germany, Ireland, Luxembourg, the Netherlands, the Slovak Republic and the United Kingdom supported initiatives in 2012 such as the International Tax Compact[68] (ITC) and the OECD tax and development programme[69] aimed at helping developing countries fight tax evasion, improve information exchange and limit the misuse of transfer pricing.

In 2011, the Commission initiated a Tripartite Initiative with the World Bank and the OECD to enhance the capacity of developing countries to adopt and implement Transfer Pricing Guidelines while providing a secure and stable environment for multinational corporations to invest in these countries. This initiative supports training and technical assistance initiatives in countries that are politically committed and institutionally ready.

In March 2012, the European Council called on the Commission to step up action against tax fraud and tax evasion. The European Parliament had also adopted a Resolution in April 2012 calling for concrete ways to combat tax fraud and tax evasion[70]. In response to this, the Commission adopted a Communication in June 2012 on ‘Concrete ways to reinforce the fight against tax fraud and tax evasion including in relation to third countries’[71], setting out key challenges posed by tax fraud and evasion, and concrete measures to address them, highlighting the importance that EU partners under international trade and cooperation agreements commit to good governance principles in the tax area.

In December 2012, the Commission adopted an Action Plan to strengthen the fight against tax fraud and tax evasion[72]. Through the description of 34 specific actions, the Action Plan presents a comprehensive set of measures to help Member States protect their tax bases and recapture taxes legitimately due. This action plan is accompanied by two recommendations to encourage Member States to take immediate and coordinated action on aggressive tax planning and so called ‘tax havens’[73]. These initiatives constitute an immediate response to the identified needs to ensure a coherent policy vis-à-vis third countries, to enhance exchange of information and to tackle certain fraud trends. Furthermore, it calls for EU Member States to consider offering closer cooperation and technical assistance to third countries, especially developing ones, which are committed to complying with minimum standards of good governance in tax matters in order to assist them in fighting effectively against tax evasion (e.g. possible secondment of tax experts to such countries for a limited period of time) which could have a positive impact on their capability to raise revenues and institutional development.

2.1.4.3. Money Laundering, Illicit Flows, and Corruption

More coordinated international action to prevent money leaving developing countries illicitly and taking the necessary policy measures (fiscal transparency and exchange of information, country-by-country reporting, anti-money laundering measures, efficient tax collection systems) to reduce illicit flows would bring a significant increase in resources that are available to developing countries’ governments.

In February 2013, the Commission adopted two proposals to reinforce the EU’s existing rules on anti-money laundering and fund transfers. The proposals include a directive on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing and a regulation on information accompanying transfers of funds to secure ‘due traceability’ of these transfers. Both proposals fully take into account the latest Recommendations of the Financial Action Task Force (FATF), the world anti-money laundering body, and go further in a number of fields to promote the highest standards for anti-money laundering and counter terrorism financing.

Many Member States have in the past provided support to developing countries in combating corruption and money laundering, some of which is on-going. The Commission has allocated more than EUR 93 million on 69 projects dedicated to the fight against corruption in various regions since 2009. Moreover, the Commission is financing a number of Rule of Law and sectoral capacity building projects that address corruption indirectly.

EU Member States are signatories to several conventions aimed at combatting corruption, including the OECD Anti-Bribery Convention, and the UN Convention Against Corruption (UNCAC). Twenty-two EU Member States[74] are signatories of the OECD Convention, while all Member States and the EU have signed UNCAC. According to the 2012 Transparency International Progress Report on Country Enforcement of the Anti-Bribery Convention[75], only four EU Member States[76] (out of the twenty-two analysed in the report) do actively enforce the OECD Anti-Bribery Convention, while five do not enforce it at all[77]. Germany and the Czech Republic are the only EU Member States that have not ratified the UNCAC yet, although they signed it, respectively, in 2003 and 2005[78].

At the Third Conference of States Parties in Doha, in November 2009, it was decided to set up a Mechanism for the Review of Implementation of the UNCAC (UNCAC Review Mechanism). Only the executive summaries of the country review reports are published, unless a reviewed country chooses otherwise. Austria, France, Germany, the Netherlands, Sweden and the UK have supported financially the review mechanism with EUR 1.3 million over the period 2010-2012.

The Stolen Asset Recovery (StAR) initiative was launched in 2007 by the World Bank and UN to support international efforts to end safe havens for corrupt funds. In 2012, six Member States[79] provided support to the StAR Initiative in various forms (including financial support, or staff secondment). Spain is providing Albania with training on fighting money laundering and financial crimes.

2.1.4.4. Extractive Industries

In 2011, the European Commission proposed amendments to the existing Transparency and Accounting Directives regarding transparency requirements for listed and large non-listed EU companies, and made proposals on country by country reporting[80]. The main thrust of the proposal[81] is to provide mandatory disclosure requirements for extractive industry companies on a country and project basis. These requirements are in line with the voluntary requirements set by the Extractive Industry Transparency Initiative (EITI) standards.

In 2012, the Commission and ten Member States[82] supported EITI, either politically, technically or financially. Financial support was channelled through direct support to the EITI Secretariat, bilateral support at country level and/or through the EITI Multi-Donor Trust Fund (MDTF). Germany for instance is supporting EITI implementation through bilateral and regional technical cooperation projects. Other recent financing provided by Member States in this area include UK’s contribution of about EUR 30 million to a World Bank project[83] in the Democratic Republic of Congo, or Belgium’s contribution of EUR one million to the Extractive Industries Technical Advisory Facility.

There is no consensus among Member States over whether and how the approach of EITI should be extended to other sectors. Some would be favourable to such extension to sectors such as forestry and/or on the basis of country driven priorities. Others are in favour of strengthening the reporting requirements under the existing EITI, as it is currently under way.

Germany is supporting the Constructive Sector Transparency initiative (CoST).

2.2. Maintaining Sustainable Debt Levels

EU Commitments

· The EU is committed to supporting debt sustainability in developing countries, in line with the 2001 Doha Declaration. This has been clearly articulated, inter alia, in the Council Conclusions of 18 May 2009 (§12), which state that ‘the EU will continue supporting the existing debt relief initiatives, in particular the Heavily Indebted Poor Countries (HIPC) Initiative and Multilateral Debt Relief Initiative (MDRI) and values the Evian approach as an appropriate flexible tool to ensure debt sustainability’. The EU also confirmed that it ‘supports discussions, if relevant, on enhanced forms of sovereign debt restructuring mechanisms, based on existing frameworks and principles, including the Paris Club, with a broad creditors’ and debtors participation and ensuring comparable burden-sharing among creditors with a central role for the Bretton Woods Institutions (BWI) in the debate’.

· More recently, the Council Conclusions of 15 October 2012 stated that (§3) ‘The EU will continue to deliver on debt relief commitments to support the sustainability of public finances in developing countries, participate in international initiatives such as the WB/IMF Debt sustainability framework, and promote responsible lending practices. Moreover, the EU will promote the participation of non-Paris Club members in debt-workout settlements, and Member States that have not yet done so will take action to restrict litigation against developing countries by distressed-debt funds. The EU will also support developing countries’ efforts to avoid unsustainable debt levels.’

2.2.1. Introduction

Many developing countries built up their foreign debt to unsustainable levels in the 1970’s and 1980’s. Starting from the mid 1990’s and accelerating from the mid 2000’s, heavily indebted developing countries have received debt relief, whereby a large share of past official debt to bilateral and multilateral official creditors was forgiven or repaid through grants, allowing these countries to reallocate resources from debt service to development expenditure.

As debt relief has also created fiscal space for new borrowing, often from emerging donors, there is always a risk that the debt of poorer countries might return to unsustainable levels.

2.2.2. Implementation Table

The table below summarises progress made in 2012 in implementing the EU commitments on debt sustainability. Further details are discussed in the main text.

EU Commitment || Target Date || Status[84] || Comment

Support existing debt relief initiatives, in particular the HIPC Initiative and the MDRI || No date specified || || Three countries reached HIPC completion point in 2012. Several MS initiatives support MDRI and similar programmes.

Support discussions, if relevant, on enhanced sovereign debt restructuring mechanisms, on the basis of existing frameworks and principles || No date specified || || Limited support (only the EU and 11 Member States see a need for reform, not necessarily structural).

Participate in international initiatives such as the WB/IMF Debt Sustainability Framework (DSF) and promote responsible lending practices || No date specified || || A recent IMF assessment found broad compliance with the DSF[85].

Promote the participation of non-Paris Club members in debt-workout settlements || No date specified || || No bilateral action, only support for dialogue through one annual meeting with non-members, not attended by China and India[86].

Take action to restrict litigation against developing countries by distressed debt funds || No date specified || || No action to restrict litigation mentioned by MS, only legal support to developing countries for litigation through multi-donor trust funds (e.g. DMF, ALSF).

2.2.3. Recent Trends

Net external private and public debt flows to developing countries represented a marginal share of the overall development finance available for both low income and middle income countries, as shown in Figure 2.2.3.

Figure 2.2.3 – Net External Public and Private Debt Flows as a Share of Total Resource Flows of Low-Income (LIC) and Middle-Income Countries (MIC) in 2010

Borrowing by developing countries is an important source of finance that dissociates government spending from revenue inflow fluctuations, and allows frontloading development investments. As such, borrowing can be a stable source of finance. In this context, it is important to note the stabilising role international official lending has played in the financial crisis during the first year of the crisis, replacing private sector lending that contracted significantly in 2009.

Overall, the total external debt outstanding as a percentage of GNI declined from 37.9% in 2000 to 21.5% in 2011, and debt service to export ratio of developing countries has declined from 20.4% in 2000 to 8.8% in 2011. The improvement in debt indicators was widespread across regions. Low income countries also improved their external debt to GNI ratio from 68.7% in 2000 to 28.7% in 2011, and their debt service to export ratio from 11.2 to 4.6% over the same period[87].

In 2011, net debt inflows from official creditors declined by 14%, while net debt inflows from private creditors remained steady. In 2010 and 2011, private lending proved more resilient and remained close to its 2007 peak in both years, with volumes 6 to 14 times higher than public and publicly guaranteed lending. This growing importance of private lending, even though within a framework of improving debt indicators, poses a risk to overall economic stability as systemic unsustainable private debt tends to become public debt. A study of 90 defaults and renegotiations on debt owed to private creditors by 73 countries found that debt renegotiations have an average length of over seven years, produce average creditor losses of 40% and lead to limited debt relief[88].

2.2.4. EU Policies and Programmes

Substantial debt relief was provided in 2012 by EU Member States, either bilaterally or through multilateral initiatives such as the HIPC and MDRI. Over the period 2000-2011, debt relief provided collectively by the EU Member States and the Commission amounted to EUR 58 billion at 2010 prices, equivalent to 71% of global debt relief.

Active participation in the HIPC (Heavily Indebted Poor Countries) Initiative - aiming at providing debt relief to Low Income Countries - continued in 2012. Full relief was granted to the three countries that reached HIPC completion point in 2012: Ivory Coast, Guinea and Comoros. The Paris Club reached debt restructuring agreements for Guinea, St Kitts and Nevis, Côte D’Ivoire and Myanmar.

UNCTAD prepared a set of principles on sovereign lending and borrowing in 2011, and launched the endorsement process at the Doha Conference in December 2012. The principles aim to reduce the frequency and severity of debt crises by developing a set of voluntary guidelines that promote and reinforce responsible sovereign lending and borrowing practices. Lack of globally agreed rules and regulations guiding sovereign financing have contributed to irresponsible sovereign borrowing and lending to sovereign countries. The principles are meant to fill this gap.

Several debt swap programmes have been launched by Member States in developing countries. EU Member States and the Commission also contributed to the Debt Relief Trust Fund (DRTF) that allows the participation of the African Development Bank in the HIPC Initiative. Some Member States also assisted countries that are not eligible for HIPC. The United Kingdom, for example, provides bilateral assistance to poor countries that are not eligible for debt relief under the HIPC initiative. Under the UK Multilateral Debt Relief Initiative (UK MDRI), the UK reimburses ten per cent of qualifying countries’ debt service payments to the World Bank and African Development Bank. The UK provided over EUR 18 million via the UK MDRI in 2012 and is scheduled to provide up to EUR 3.3 million in 2013.

The EU is focusing on supporting stronger debt management capacities and better public finance management. Several EU donors and the Commission support UNCTAD’s Debt Management and Financial Analysis Software (DMFAS) Programme, and the World Bank’s Debt Management Facility (DMF), to strengthen debt management capacity in Low Income Countries through the provision of software and technical assistance. DMF support in particular focuses on diagnosing weaknesses in the management of debt and in the set-up of medium term reform strategies, as well as legal support against vulture funds. Several EU Member States address the problem of vulture funds also through the African Legal Support Facility (ALSF), administered by the African Development Bank.

Existing debt workout mechanisms for Low Income Countries (e.g. HIPC, Paris Club) need to be adjusted to reflect a changing reality: only four potentially eligible countries remaining for HIPC, increased importance of emerging donors, and shift of debt portfolios to private commercial lending. There is also increasing demand within the UN System for reopening the international discussion on a structured approach to solving sovereign debt crises[89] with a series of meetings organised by the Economic and Social Council to consider options. According to some Member States, the promotion and further development of collective action clauses (CAC) in bond contracts are preferable to the alternative of large-scale structural changes to the current mechanisms available to LICs. Sovereign debt restructuring has long been complicated by a free rider problem, as any restructuring had to be negotiated with each bondholder individually. CACs allow borrowers to restructure their debt if a qualified majority of bondholders agrees to the proposed terms.

3. Private Finance for Development

3.1. Private Investment for Development

EU Commitments

Private Sector Development

· Council Conclusions of 15 June 2010 on the Millennium Development Goals, §25: The EU and its Member States will continue to encourage and to support the development of the private sector, including small and medium enterprises through measures enhancing the overall investment climate for their activity, inter alia through promoting inclusive finance and through relevant EU Investment Facilities and Trust Funds. § 27. In the framework of the review of the European Investment Bank’s (EIB) external mandate, the EU and its Member States should strengthen the capacity of the EIB to support EU development objectives and to promote efficient blending of grants and loans in third countries including in cooperation with Member States finance institutions or through facilities for development financing.

· Council Conclusions of 9 March 2012 on Rio+20, §30: Underscores the importance of the private sector and of partnerships between the private and the public sector in promoting investment, trade and innovation, including in delivering a global GESDPE.

· Council Conclusions of 14 May 2012 ‘Increasing the Impact of EU Development Policy: an Agenda for Change’: The private sector and trade development are important drivers for development. An enabling business environment and more effective ways of leveraging private sector participation and resources in partner countries as well as increased regional integration, aid for trade and research and innovation will be key to the development of a competitive private sector. This has to go along with promoting labour rights, decent work and corporate social responsibility.

Corporate Social responsibility

· Council Conclusions of 11 November 2008 (EU position for Doha FfD conference), §25: [the EU] will further enhance efforts to promote the adoption, by European companies, of internationally agreed principles and standards on Corporate Social Responsibility.

· Council Conclusions of 18 May 2009 (Support to developing countries in coping with the crisis), §9: The EU underlines the importance of the concept of corporate social and environmental responsibility.

· Council Conclusions of 15 June 2010 on the Millennium Development Goals, §26: In addition the EU and its Member States commit to increasing their efforts to mobilise the private sector and engage with business to help accelerate progress towards the MDGs including by promoting the UN Global Compact and the Corporate Social Responsibility principles. Innovative public-private partnerships with the business and NGO community, combining and reinforcing each other’s knowledge and capabilities, can enhance the effectiveness of our aid.

· Competitiveness Council Conclusions of 5 December 2011, §7: Welcomes the Communication from the Commission A Renewed EU Strategy 2011-2014 for Corporate Social Responsibility as well as of the Social Business Initiative; emphasises market advantages of responsible business conduct; encourages the Member States to respond to the Commission’s invitation to develop or update their plans or lists of priority actions in support of the Europe 2020 Strategy.

· Council Conclusions of 9 March 2012 on Rio+20, §30: reaffirms the need to implement worldwide sound corporate governance as well as international principles and standards on corporate social responsibility.

3.1.1. Introduction

The private sector is a critical stakeholder and partner for development. It plays a key role in supporting inclusive growth, notably by creating jobs (local small-scale businesses provide 90% of jobs in developing countries)[90], providing essential goods and services (including health, education, water, energy and infrastructure), as well as being a major source of tax revenues.

Engaging the private sector as a development partner has been an approach pursued since the 1980s by bilateral donors and multilateral organisations. It has been rallying even more support in recent years, as illustrated by the official recognition of the importance of the private sector as actor in development at the Busan 4th High-Level Forum on Aid Effectiveness in 2011, and at the Rio+20 Summit in 2012.

Against this background, and as stated in the ‘Agenda for Change’, the EU is thus striving to work more closely with the private sector for achieving the objective of inclusive and sustainable growth and poverty eradication.

When considering the role and contribution of the private sector to development outcomes, it is important to acknowledge that the private sector is not a homogeneous entity. It should indeed be captured in its multiplicity, ranging from micro, small and medium enterprises (MSMEs) - operating in the informal or formal sector - through to large multinational corporations (MNCs). Development partnerships with the private sector must therefore be tailored to the type of private actors that are being considered, including by distinguishing between foreign and local private companies, and between large firms and MSMEs.

Such partnerships with the private sector can take many forms. For instance, at the level of policy reform, business and professional associations, trade unions and private sector organisations, as well as large operators can play an important role in policy dialogue around reforms to improve the business environment.

At the level of private companies’ business operations, development partnerships should be promoted in areas that advance both development and business outcomes so that they are mutually reinforcing (e.g. inclusive business models and responsible business practices, public-private partnerships for the delivery of basic public goods and infrastructure services, and/or business linkages through a ‘growth poles’ approach etc.).

At the level of development financing, innovative financial mechanisms can be used to leverage additional private finance for delivering public goods. The main EU instruments to engage with the private sector at the level of development financing are the Regional Investment Facilities, which combine EU grants with loans in view of unlocking additional financing for important investments in EU partner countries. The use of so-called blending mechanisms[91] to catalyse private investment has increased in 2012. Support to the private sector – mainly SMEs – was in 2012 twice the amount of 2011 and represented 13% of the total grants blended that year. A new ‘EU Platform for Blending in External Cooperation’[92] was established in December 2012 with the European Development Finance Institutions (EDFI) to further increase this catalysing role.

Domestic and foreign private investments are a key source of employment, wealth creation and innovation, and as such, can contribute to sustainable development and poverty reduction in developing countries[93]. The ‘Agenda for Change’ also stresses that private domestic and foreign investment and improving infrastructure are critical success factors for igniting and sustaining private sector growth.

In June 2012, at the G20 Summit in Mexico, the Working Group on Private Investment and Job Creation presented its report on ‘Promoting responsible investment for sustainable development and job creation’[94]. Eleven key policy recommendations were made to developing countries and development partners for creating a supportive environment for domestic and foreign private investment. These recommendations are grouped into the following four distinct policy stages:

· Improving the business climate and the regulatory framework for foreign and domestic investment;

· Assisting developing countries to attract the most value adding investment to their economies;

· Promoting responsible investment in value chains; and

· Stimulating investment in local enterprise development.

3.1.2. Implementation Table

The table below summarises progress made in 2012 in implementing the EU commitments on private sector development. Further details are discussed in the main text.

EU Commitment || Target date || Status[95] || Comment

Support the development of the private sector, including small and medium-sized enterprises, through measures to enhance the overall investment climate for their activity, inter alia by promoting inclusive finance and through relevant EU investment facilities and trust funds || No date specified || || The EU and MS have provided substantial funding for private sector development (in 2004-10, the Commission alone provided EUR 2.4 billion in direct support in the form of grant funding). Since 2007, the EU, together with some MS, has set up eight regional blending facilities, covering all regions of EU external cooperation. Several MS’[96] national development finance institutions also support blending activities (EU facilities and others). MS reported over 100 ODA activities for private sector development in 2012.

Strengthen the EIB’s capacity to support EU development objectives and promote the efficient blending of grants and loans in third countries, including in cooperation with MS’ finance institutions or through development financing facilities || No date specified || || Half of the Commission-funded private sector development support mentioned above was channelled through the EIB. Support for blending facilities as described above.

Enhance efforts to promote the adoption by European companies of internationally-agreed CSR principles and standards, the UN Guiding Pri