COMMISSION STAFF WORKING DOCUMENT

EU Accountability Report 2012 on Financing for Development Review of progress of the EU and its Member States

Accompanying the document

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

Improving EU support to developing countries in mobilising Financing for Development. Recommendations based on the 2012 EU Accountability Report on Financing for Development.

TABLE OF CONTENTS

1........... Reducing aid dependency and increasing sustainable Financing for Development............ 12

1.1........ Improving domestic resource mobilisation...................................................................... 12

1.1.1..... Strategic Orientations.................................................................................................... 12

1.1.2..... EU assistance to developing countries in tax and customs reform and related capacity building 14

1.2........ Maintaining sustainable debt levels................................................................................. 20

1.2.1..... Honouring EU commitments on debt relief..................................................................... 21

1.2.2..... Public Debt Management: a critical component of debt sustainability.............................. 21

1.2.3..... Diversified sources of lending and debt vulnerabilities..................................................... 23

1.2.4..... The status of Vulture Fund Litigation............................................................................. 24

2........... International Private Flows for Development.................................................................. 27

2.1........ Supporting trade as an engine for development.............................................................. 27

2.1.1..... Towards a more focused EU policy framework on Trade and Development................... 27

2.1.2..... Taking stock of the way the EU has delivered on its Trade and Development commitments since 2002 28

2.1.3..... Progress on Aid for Trade............................................................................................ 29

2.2........ Remittances as an instrument of development................................................................. 31

2.2.1..... Towards a renewed EU overarching framework for the cooperation with third countries in the area of migration and mobility.................................................................................................................. 31

2.2.2..... Progress on remittance outflows.................................................................................... 32

2.2.3..... Reducing transfer costs of remittances........................................................................... 33

2.2.4..... Donor initiatives............................................................................................................ 34

3........... Leveraging International Development Finance: beyond official, beyond development and beyond assistance 35

3.1........ Innovative Financing – Sources and Mechanisms........................................................... 35

3.1.1..... Distinction between innovative financing sources and mechanisms................................... 36

3.1.2..... State of play and revenues raised by existing innovative mechanisms............................... 37

3.1.3..... Major EU initiatives...................................................................................................... 38

3.1.4..... EU Blending Mechanisms............................................................................................. 38

3.2........ Facilitating Private Investment....................................................................................... 39

3.2.1..... Framework for Private sector-led growth...................................................................... 39

3.2.2..... Corporate Social Responsibility (CSR)......................................................................... 46

4........... International Development Finance: EU support to global goals...................................... 50

4.1........ Scaling up Official Development Assistance (ODA)....................................................... 50

4.1.1..... EU ODA Commitments in the Global Context............................................................... 50

4.1.2..... EU ODA Performance 2005-2011 compared to other donors...................................... 51

4.1.3..... Performance on ODA targets (2005-2011)................................................................... 52

4.1.4..... Achievement of the 0.7% ODA/GNI Target by 2015.................................................... 54

4.1.5..... The Way Forward........................................................................................................ 58

4.1.6..... Falling short of EU’s promise on ODA to Africa............................................................ 58

4.1.7..... Honouring the EU commitment on ODA to Least Developed Countries......................... 59

4.2........ Scaling up funding for tackling Climate Change and Biodiversity in the context of Sustainable Development 61

4.2.1..... Climate change fast-start finance................................................................................... 61

4.2.2..... Biodiversity.................................................................................................................. 65

4.2.3..... Sustainable Development.............................................................................................. 69

4.3........ Seeking synergies in EU support................................................................................... 70

5........... Making EU actions more effective for development....................................................... 71

5.1........ Making EU aid more effective....................................................................................... 71

5.1.1..... EU and Member States performance in implementing the Paris Declaration (2005-2010) 72

5.1.2..... EU and Member States action on alignment................................................................... 73

5.1.3..... EU and Member States action on complementarity and division of labour effectiveness... 75

5.1.4..... EU and Member States actions on mutual accountability and managing for results........... 76

5.1.5..... The Post-Busan Dialogue on Development Effectiveness............................................... 78

5.2........ Supporting better Global Governance............................................................................ 79

5.2.1..... The Evolving Global Context......................................................................................... 79

5.2.2..... Reforming Multilateral Institutions.................................................................................. 80

Annexes 82

LIST OF ACRONYMS ||

A2II || Access to Insurance Initiative

ACP || Africa, Caribbean and Pacific

ADA || Austrian Development Agency

ADB || Asian Development Bank

ADF || Asian Development Fund

AfDB || African Development Bank

AFI || Alliance for Financial Inclusion

AfT || Aid for Trade

AMC || Advance Market Commitment

ASEAN || Association of Southeast Asian Nations

AT || Austria

ATAF || Africa Tax Administration Forum

B4D || Business for Development

BE || Belgium

BIO || Belgian Investment Company for Developing Countries

BMI/SBI || Belgian Corporation for International Investment

BMZ || Germany’s Federal Ministry for Economic Cooperation and Development

BPC || Building Productive Capacity

CBD || Convention on Biological Diversity

CDE || Centre for the Development of Enterprise

CDM || Clean Development Mechanism

CER || Certified Emission Reduction

CGAP || Consultative Group to Assist the Poor

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

CRW || IDA Crisis Window

CSO || Civil Society Organisation

CSR || Corporate Social Responsibility

CZ || Czech Republic

DAC || Development Assistance Committee

DDA || Doha Development Agenda

DE || Germany

DFI || Development Financial Institutions

DFID || Department for International Development - UK

DK || Denmark

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

DMFAS || Debt Management and Financial Analysis System from United Nations UNCTAD

DTC || Double Taxation Convention

DTIS || Diagnostic Trade Integration Study

EAC || East African Community

EBRD || European Bank for Reconstruction and Development

ECB || European Central Bank

EDF || European Development Fund

EDFI || European Development Finance Institution

EGI || Ethical Globalisation Initiative

EIB || European Investment Bank

EIF || Enhanced Integrated Framework

EITI || Extractive Industries Transparency Initiative

EPA || Economic Partnership Agreement

ES || Spain

ETS || EU Emission Trading System

EU || European Union

EUR || Euro

FAC || Foreign Affairs Council

FAO || Food and Agriculture Organisation

FAT || Financial Activities Tax

FDI || Foreign Direct Investment

FI || Finland

FIRST || Financial Sector Reform and Strengthening Initiative

FLEGT || Forest Law Enforcement, Governance and Trade

FR || France

FTA || Free Trade Agreement

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

GDP || Gross Domestic Product

GEEREF || Global Energy Efficiency and Renewable Energy Fund

GEF || Global Environment Facility

GIZ || Gesellschaft für Internationale Zusammenarbeit

GNI || Gross National Income

HDI || Human Development Index

HIPC || Highly Indebted Poor Countries

HLF || High Level Forum

HU || Hungary

IBRD || International Bank for Reconstruction and Development

IDB || Inter-American Development Bank

IE || Ireland

IF || EIB Investment Facility

IFAD || International Fund for Agricultural Development

IFCA || Investment Facility for Central Asia

IFFIm || International Financial Facility for Immunisation

IFI || International Financial Institutions

ILO || International Labour Organisation

IMF || International Monetary Fund

IPD || Innovative Partnerships for Development

IPSAS || International Public Sector Accounting Standards

IT || Italy

ITC || International Tax Compact

ITF || EU–Africa Infrastructure Trust Fund

ITRS || International Transactions Reporting System

KfW || Kreditanstalt für Wiederaufbau

LAIF || Latin America Investment Facility

LDC || Least Developed Countries

LT || Lithuania

LIC || Low Income Countries (LDC+OLIC)

LMIC || Lower Middle Income Countries

LU || Luxembourg

LV || Latvia

MDG || Millennium Development Goals

MDRI || Multilateral Debt Relief Initiative

MIGA || Multilateral Investment Guarantee Agency

MoU || Memorandum of Understanding

MS || Member States

MSME || Micro, Small and Medium Enterprises

MT || Malta

MTO || Money Transfer Organisation

NGO || Non Governmental Organisation

NIF || Neighbourhood Investment Facility

NL || Netherlands

NORAD || Norwegian Agency for Development Cooperation

ODA || Official Development Assistance

OECD || Organisation for Economic Cooperation and Development

OECS || Organisation of Eastern Caribbean States

OJ || Official Journal

OLIC || Other Low Income Countries

PCD || Policy Coherence for Development

PEFA || Public Expenditure and Financial Accountability

PEM || Public Expenditure Management

PFM || Public Financial Management

PPP || Private Public Partnerships

PSD || Payment Services Directive

PT || Portugal

REDD and REDD+ || Reducing Emissions from Deforestation and Forest Degradation. REDD+ goes beyond deforestation and forest degradation, and includes the role of 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

ROAP || Regional Office for Asia and the Pacific

ROSC || Report on the Observance of Standards and Codes

SE || Sweden

SME || Small and medium-sized enterprises

SWC || System-Wide Coherence Reform

TA || Technical Assistance

TCX || The Currency Exchange

TD || Trade Development

TEEB || The Economics of Ecosystems and Biodiversity Study

TIEA || Tax Information Exchange Agreements

TNA || Trade Needs Assessment

TPR || Trade Policy Regulations

TRA || Trade Related Assistance

TRAdj || Trade Related Adjustment

TRI || Trade Related Infrastructure

UK || United Kingdom

UMIC || Upper Middle Income Countries

UN || United Nations

UNCCD || United Nations Convention to Combat Desertification

UNCTAD || United Nations Conference on Trade and Development

UNEP || United Nations Environment Programme

UNFCCC || United Nations Convention on Climate Change

UNITAID || International Drug Purchasing Facility

US or USA || United States of America

USD || United States Dollar

WB || World Bank

WBIF || Western Balkans Investment Framework

WFP || World Food Programme

WTO || World Trade Organisation

EXECUTIVE SUMMARY

This Staff Working Document is the tenth in a series of annual progress reports drafted since 2003 for the purpose of assessing where the EU and its Member States stand in relation to their common commitments on financing for development, including aid effectiveness, aid for trade, fast-start climate finance and good governance in tax matters.

The EU and its Member States are making substantial efforts to achieve international targets on the quantity and quality of Official Development Assistance (ODA), as enshrined in the Millennium and Paris Declarations. Collectively the EU is not only the world’s largest provider of ODA in value, but its ODA/GNI ratio is more than double those of Japan and the USA. The EU has also made a greater contribution to the achievement of the aid effectiveness agenda than any other bilateral donor. The EU is keeping to its commitments on fast-start climate finance, has achieved the goal of providing ODA to LDCs equivalent to 0.15 % of GNI, and has increased EU ODA to Sub-Saharan Africa by around EUR 5.5 billion in real terms over the period 2004-2011.

While the direction of change is positive, the pace of implementation is modest. This report shows in fact that the EU and its Member States missed their collective 2010 ODA/GNI target of 0.56%, and in 2011 the ODA/GNI ratio declined from 0.44% to 0.42%, while aid volumes fell by about EUR 400 million. The EU scaling-up process has been uneven, with asymmetric efforts. Member States that do not contribute fairly to the burden-sharing effort endanger the performance of the EU as a whole and substantially increase the risk of failure for future ODA targets.

The projections confirm that Member States do not plan to make the necessary increases under the current tight budget conditions. At today’s pace, the 0.7% target will not be achieved by 2015 as planned. Based on the projections provided by Member States and/or estimates prepared using their 2006-2011 compound annual growth rate, the EU27 ODA is expected to increase to 0.45% by 2015. Considering the expected GNI growth rate till 2015, reaching the 0.7% ODA/GNI target would require the EU and its Member States to dramatically step up efforts and almost double their current ODA in nominal terms. At the current pace, there is a delay equivalent to about 25 years on the path to 0.7%, as ODA is projected to increase at an annual rate of 0.01% of GNI.

Progress on improving aid effectiveness has also been modest. As noted by the OECD DAC Secretariat in its analysis of the 2011 Paris Declaration Survey’s findings, these were ‘sobering’ for all donors, including the EU and its Member States. As a whole, the EU met only one of the twelve indicators relating to donor performance (i.e. coordinated technical cooperation). However, OECD DAC also concluded that ‘considerable progress has been made towards many of the remaining targets’. Most of the overall progress among bilateral donors worldwide was made possible by the performance of EU Member States, which was generally above the ‘all donors’ average, showing a significant commitment to achievement of the goals of the Paris Declaration under difficult global conditions.

The Monterrey Consensus and the Doha Declaration recognise the importance of other financial flows besides ODA. If sustainable progress towards the MDGs is to be achieved, the financing discussion should concentrate on increasing developing countries’ overall revenue base for development. The EU can effectively assist its partners in increasing their domestic resources for development in line with the principles of good governance in tax matters (transparency, exchange of information and fair tax competition). Enhanced international cooperation in tax matters in particular will not only increase domestic revenues in developing countries by reducing tax evasion, it will also help to address money laundering, corruption and the financing of terrorism.

As noted in recent EU policy statements on budget support, and on increasing the impact of EU development policy, fair and transparent tax systems are central to fostering citizenship and state-building, leading to enhanced domestic accountability and political participation. Member States are increasingly focusing on the issue of taxation and development. The EU and most Member States undertook new initiatives in 2011 to support tax reforms in developing countries. Many Member States delivered training indirectly by funding specialised programmes managed by international organisations ( such as the IMF, OECD, etc.). Other support focused on tax policy reforms and related legislation.

The EU has consistently supported developing countries in using trade as a tool for development. Since 2007, the EU and its Member States have been driving the global Aid for Trade efforts, confirming again in 2010 the EU’s position as collectively the largest provider of AfT in the world. Indeed, the EU and its Member States together accounted for around 32% of total AfT flows in 2010, reaching more than EUR 10.7 billion (EUR 8.2 billion from Member States and EUR 2.5 billion from the EU), an increase of 4.2% in comparison with 2009. The EU and its Member States have exceeded their 2010 EUR 2 billion target for Trade Related Assistance (TRA) since 2008. However, for the first time since 2005 there has been a decrease of TRA, in 2010. Total TRA in 2010 reached EUR 2.6 billion, compared to EUR 2.8 billion in 2009 (or -8% in 2010, as compared to +24% in 2009).

The Commission and the EU Member States are steadfastly committed to providing debt relief and are increasingly prioritising the prevention of unsustainable debt. In 2011, the EU provided debt relief through participation in the World Bank's Debt Relief Trust Fund (DRTF) to fund the participation of the African Development Bank in the HIPC Initiative. By the end of 2011, 32 countries had reached HIPC completion point, with another seven sub-Saharan countries potentially eligible.

The 2011 Commission Staff Working Paper on ‘Migration and development’ provides further analysis of the achievements since 2005 in the area of remittances, and identifies some remaining challenges, including capacity building to support partner countries interested in designing regulatory frameworks and in promoting financial literacy, new technologies and access to credits to stimulate productive investment and job creation. According to the latest estimations of the World Bank, global remittance flows to developing countries increased by 12.1% in 2011, and are expected to grow at a rate of 7-8 % annually to reach EUR 333.5 billion by 2014. At EU level, total EU27 remittance outflows amounted to EUR 31.2 billion in 2010, a 3% increase from the previous year (EUR 30.4 billion in 2009), most of which are sent to developing countries.

At EU level, remittance services have been made cheaper, more transparent, more competitive and more reliable. In particular, the transposition of the 2007 Payment Services Directive (PSD) into the national legislation of a majority of EU Member States has contributed to increased transparency in the provision of payment services, including the remittance market. Moreover, several EU Member States (including France, Germany, Italy, the Netherlands and the United Kingdom) have set up their own remittance price comparison websites on costs and quality of services.

In the current context of financial crisis and budgetary austerity, discussions on innovative financing mechanisms have gained a new resonance, both within the EU and at global level. A good illustration of this growing interest in innovative financing mechanisms is the G20’s formal agreement for the first time to support innovative financing for development and climate change and to move forward by using a menu of options. Twelve Member States are currently using or are planning to use one or more of the existing innovative financing mechanisms to raise funds for development and/or climate action. Examples of these mechanisms are the International Finance Facility for Immunisation (IFFIm), the Advance Market Commitments (AMC), the air ticket levy, and the EU Emissions Trading System. Following on from a Commission proposal, the EU is currently discussing the possible establishment of a Financial Transaction Tax as a new own resource for the EU budget. While the revenues raised would not be earmarked for development per se, they could nonetheless facilitate Member States’ efforts to mobilise funding required for meeting aid targets and tackling other global challenges.

Recent EU policy statements have given added emphasis to inclusive and sustainable economic growth as a crucial element contributing to long-term poverty reduction and also leading to wealth and job creation. The EU and its Member States support programmes to achieve these goals by improving competitiveness of local private sectors, enhancing the investment climate, promoting MSMEs, facilitating access to finance and encouraging public-private partnerships. Blending mechanisms can leverage additional financial resources for development at a time when the prospects for increased foreign investment look uncertain. The Busan meeting put forward a framework to enable the participation of the private sector in the design and implementation of development policies. Furthermore, Corporate Social Responsibility has been given added prominence in order to improve the quality of growth.

The need for improved global governance has been recognised following the Busan Forum during which the EU played a prominent role. This involves broadening cooperation to all development partners. The EU is committed to self-restraint with regard to avoiding further proliferation of global and thematic programmes or vertical funds, and will seek to use and strengthen the existing channels. Completing the reforms of multilateral institutions thus takes on added prominence. These reforms entail increasing developing countries’ representation and voice.

The way forward

In the context of various ongoing international processes, discussions on ODA, climate finance, sustainable development, biodiversity and global public goods are closely linked. There seems to be an emerging international consensus that a joined-up approach is thus needed to tackle global challenges. The proposals for defining new aggregates that would enhance accountability fall into three broad categories: (a) changing how we measure development efforts; (b) changing what we measure (including by complementing/replacing ODA with a broader aggregate); or (c) changing where we measure ODA/GNI ratios (at the recipient level rather than at the donor’s level). These discussions will have an impact on future EU Accountability Reports.

Introduction

This Staff Working Document is the tenth in a series of annual progress reports drafted since 2003 (previously labelled ‘Monterrey report’). Building on previous reports, it assesses where the EU and its Member States stand in relation to their common commitments on financing for development. This report is especially focused on the evolution in key areas since the previous one, and thus only summarises issues discussed at length last year.

The Report fulfils 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 all areas of financing for development, including aid effectiveness, aid for trade, tax governance and development, and fast-start climate finance.

The report is also intended to serve as input for EU preparations for several international meetings to be held in 2012, for the operationalisation of the Busan High Level Forum IV on aid effectiveness held in late November 2011, and the bi-annual WTO/ OECD monitoring meeting of all donors on aid for trade. It will also contribute to discussions on the post-2015 MDG framework, including the UN MDG Review Summit.

The report is based on input provided by EU Member States and the Commission through (i) the 2012 EU annual questionnaire on Financing for Development, which covers key EU commitments related to the international financing for development agenda, (ii) the bi-annual 2011 trade and development WTO/OECD survey, (iii) the complementary in-country monitoring, through EU Delegations, of aid for trade provided by EU donors and (iv) public sources and OECD online databases on development cooperation (IDS Online).

The Council also called on the Commission to make the annual progress report a model of transparency and accountability, and for the second time the Commission is presenting a single, comprehensive report covering all topical issues of the international financing for development agenda. Furthermore, like last year, 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. These are available on the EuropeAid webpage. 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 from 2010 to reaching 2015 targets for ODA to Africa and ODA to LDCs). Annex 4 consists of the Aid for Trade Report 2012.

1. Reducing aid dependency and increasing sustainable Financing for Development

1.1. Improving 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”[1] and accompanying Staff Working Document. Their main recommendations were endorsed by the Council in its Conclusions of 14 June 2010[2] and by the European Parliament resolution of March 2011.

● The relevance of this agenda was reinforced through the 2011 Commission Communication on “The future approach to EU Budget support to third countries”.[3] The “Agenda for Change” Communication provides 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”.[4] The main recommendations of the Agenda for Change were endorsed by the Council in its Conclusions of 14 May 2012.[5]

The objective of this chapter is to present EU progress in implementing the Monterrey consensus, and subsequent Doha declaration in the area of tax and development. The recent Busan Partnership for Effective Development Cooperation highlights the relevance of this area by emphasising its role in underpinning sustainable development and combating illicit flows by addressing tax evasion.[6]

As evidenced by the fiscal difficulties experienced worldwide during 2011, domestic resource mobilisation is more crucial than ever for creating a sustainable fiscal space to implement and support development programmes.

1.1.1. Strategic Orientations

Taxes are essential for sustainable development, the legitimacy of the State, economic stability, and the financing of public services and infrastructure. The Commission's Communication on Tax and Development argued that development aid policies should contribute to building effective, efficient, fair, and sustainable tax systems in line with the principles of good governance in tax matters (transparency, exchange of information and fair tax competition) and to helping generate sustainable revenues in partner countries. The Council Conclusions on Tax and Development of 14 June 2010 stated that the EU would support developing countries in tax policy, tax administration and tax reforms, including the fight against tax evasion and other harmful practices.[7] A recent IMF paper[8] reviews issues and good practices concerning revenue mobilisation in developing countries and provides a useful complementary road-map on implementing reforms in this area. Some of its proposals are taken on board below.

Following the Monterrey Conference of 2003, there has been no visibly increased emphasis on tax reform in developing countries, which is in contrast to the significant scale-up of reforms in the mirror area of public expenditure management. The 2011 Agenda for Change Communication[9] calls on the EU and its Member States to accelerate progress in this area through promoting more domestic resource mobilisation in line with the principles of good governance in tax matters, inter alia in the context of budget support operations. Furthermore, as noted in the 2011 Communication on Budget support[10], fair and transparent tax systems are central to fostering citizenship and state-building, lead to enhanced domestic accountability and political participation. Both Communications also reaffirm the principle whereby EU budget support should complement the partner country's own efforts to mobilise domestic revenues. The EU will thus continue to promote domestic resource mobilisation in its country programmes and will pay special attention to reforms in this area when considering eligibility to Budget Support.

Complementing the above-mentioned EU policies, Member States are increasingly focusing on the issue of taxation and development. Recently issued policy statements or analysis include:

· A DFID briefing note issued in 2009, but still reflecting current UK policy, highlights how effective tax systems are central to core priorities including promoting economic growth, tackling climate change and achieving the Millennium Development Goals. It points that the tax system is at the heart of an effective State. Taxes, raised in ways that encourage economic growth and promote political accountability, build the political legitimacy of the State and offer the eventual “exit strategy from aid”. Furthermore, in February 2012, a select committee[11] of the UK Parliament reporting on tax and development made the case that in view of substantial funding available to tax agencies, UK aid should focus more on neglected areas such as international and subnational taxation, encouraging broader citizen engagement, and building specialised expertise in tax administrations.[12]

· In 2011, the French Ministry of Finance issued a working paper entitled “Orientations for French Cooperation in Tax Matters.”[13] Noting that taxes are the largest source of development finance, the report argues for more attention to be paid to revenue mobilisation through taxes. It concludes that in order to enhance the impact of actions this context justifies strengthening bilateral cooperation in the field of tax mobilisation while ensuring it is well articulated with both France’s bilateral budget support and with all the multilateral programmes.

· The German Ministry of Economic Cooperation and Development, in collaboration with the OECD, has funded a report on appropriate modalities for supporting tax systems.[14] The objective of this 2011 study was to assess the role of various aid approaches and to identify practical recommendations for improving development assistance in this area.

1.1.2. EU assistance to developing countries in tax and customs reform and related capacity building

Supporting domestic resource mobilisation in developing countries remains the most important element of tax reform from a macroeconomic standpoint. For low income countries, it is important not only to increase domestic revenues, but possibly to consider the tax system as a whole: its composition, its impact on economic activity and private investment, its redistributive effects and its impact on state-building.

There is limited systematic and comparable information on tax systems of developing countries. There appears to be support for establishing a standard diagnostic framework for assessing tax programmes, styled after the Public Expenditure and Financial Accountability (PEFA) framework that has been widely used for budget assessments. Nevertheless, recent studies provide insights for specific regions:

· A news release by OECD in January 2012 underlines the role of rising tax revenues in Latin America’s economic development. It shows that the average tax to GDP ratio in 12 Latin American and Caribbean countries rose almost continuously from 14.9% in 1990 to 19.2% in 2009. This increase reflects strong economic growth, taxation of non-renewable natural resources, and better management of tax administrations. As these countries find themselves in relatively strong economic conditions, they are able to consider reforms that generate long-term, stable resources for governments to finance development.

· A 2012 report by the Asian Development Bank[15] considers the issue of how mobilised revenue can help alleviate inequality. It notes that both government spending and taxation can affect inequality and that more tax revenues can be mobilised by broadening tax bases and improving tax administration.

The need for additional revenue is substantial in many developing countries, but the quality of measures also matters. More fundamentally still, the centrality of taxation in the exercise of State power means that more efficient, fairer, and less corrupt tax systems can spearhead improvement in wider governance relations. Developing countries bear primary responsibility for building and improving efficient and fair tax systems and committing the necessary resources thereto, with EU and Member States supporting these efforts.

It is unclear whether Member States pursue coordinated and complementary approaches to avoid aid fragmentation and unmet demand in some countries – especially those with limited donor presence. Nevertheless, a division of labour based on comparative advantage seems to be applied in practice to improve coverage of recipient countries.

In contrast to the previous period, the EU and its Member States do not report initiating any new support to national supreme audit institutions, nor were civil society organisations (CSOs) and parliaments specifically targeted. The relatively low level of engagement with CSOs and national parliaments may lead to low level of stakeholder ownership of tax reform. Indeed, where CSOs are weak, key stakeholders in reforms may lack a voice. Similarly, parliaments lacking an adequate understanding of public financial management issues may not fully appreciate the importance of the laws presented to them in this area, and may not sufficiently scrutinise public financial management and hold governments to account.

Mobilising domestic financial resources for development

The EU and most Member States undertook new initiatives in 2011 to support tax reforms in developing countries. Exceptions include both new Member States and some Eurozone members. The breadth and scope of activities were quite diverse with respect to focal countries and type of assistance. Capacity building activities commonly reported included the development of financial management systems, research programmes, training and study tours. Many Member States deliver training indirectly by funding specialised programmes managed by international organisations (such as the IMF, OECD etc.). Other activities focused on tax policy reforms and related legislation. Most of the assistance was concentrated on ACP countries, ENP countries and candidate countries for EU membership, as well as Latin America, in contrast with what was reported last year. Ministries of finance as well as tax and customs administration constituted the bulk of beneficiaries in recipient countries. While three-quarter of Member States provide no or limited support for domestic resource mobilisation in the context of Public Financial Management reforms, they nonetheless recognise its importance and monitor progress. Only Portugal reports a substantial level of support.

The EU and about one-third of Member States monitor domestic resource mobilisation. Typically, this is done in the context of budget support operations, notably through a Financial Management criteria. Some Member States such as Austria and Finland rely on specific indicators to monitor domestic resource mobilisation. Similarly, Sweden and Germany refer to indicators embedded in joint assessment frameworks. The latter also conducts annual fiduciary risk assessments in each country receiving budget support; revenue/GDP below 10% is considered as grounds for exclusion from such support. Finally, DFID’s monitoring is indirect, through project monitoring of interventions which aim to improve revenue collection in countries.

Limiting the impact of tax expenditures

The general EU position is to discourage tax avoidance. However, a number of developing countries, investors and development partners have put forward arguments either in favour of or against specific regimes. The basic case made in favour of tax expenditures (including exemptions, deductions and credits) is that they promote economic development, for instance by reducing investment costs, help overcome market distortions elsewhere and avoid regressive taxation, such as taxation of humanitarian aid. The case against specific regimes argues that they lead to revenue loss, may reduce transparency and create an uneven playing field, while many of the benefits may be gained through appropriate provisions in the general tax code.

Tax expenditures are substantial in most developing countries and half of EU Member States support initiatives aimed at improving tax collection and reducing exemptions. The EU supports partner countries in this area through various initiatives. The Commission Communication on Tax and Development gives a strong signal towards reducing tax exemptions and provides the basis for technical cooperation with partner countries in the tax area, as well as for the bilateral support provided through the EU Delegations. Most of the aid provided by Member States is through technical assistance. This includes direct support such that provided by Belgium to Burundi, Germany to African and Latin American countries, France’s fiscal diagnostic, dissemination of best practice by Latvia, and the UK's support to Kosovo[16]. Romania’s support is provided through the sponsoring of study tours for experts from Iraq and Palestine. Another approach is to fund regional centres, especially those associated with the OECD and the IMF. Member States providing such support include Germany, Spain, Hungary and the UK. Finland’s involvement in this area was through participation in joint public expenditure reviews in Tanzania.

There is no consensus between Member States on whether or not tax exemptions should continue to be sought on projects financed through external aid. The debate concerns whether tax exemptions reflect a specific case or should be dealt with by encouraging coherence with the general EU stance against it, and if taxes are to be financed who should do so (donor, beneficiary, and/or government). One rationale for continued exemptions as opposed to funding of taxes by donors is to ensure that maximum amount of funding is used to support the specific project, as opposed to providing the government’s consolidated budget with resources. Austria for example notes the risk of providing such additional resource to governments with weak governance structure. The UN has also argued that taxation hinders humanitarian assistance and proposes that this type of aid be exempted. In addition to being in-line with the general position on tax exemption, one argument in favour of funding taxes by development partners is pragmatic, in line with growing programmatic lending and to avoid project implementation difficulties due to insufficient counterpart funding and/or delays in granting of tax exemption.

Some donors and international financial institutions, including the World Bank[17] in 2004, have already changed their rules and regulations towards funding all reasonable project costs including taxes. The practice regarding tax exemptions of EU projects is also moving in this direction. However, a common approach has not yet been adopted by Member States. Some are considering eliminating the requirement that their projects be tax exempt without necessarily adopting a formal position on the matter (e.g. Finland, Denmark and UK), while others have either expressed cautious support (e.g. Austria, Cyprus, Czech Republic, Germany) or are in favour of no longer requiring tax exemptions (Estonia, Slovenia, France and Romania are already implementing this measure) and/or start funding taxes. Despite progress, the following considerations still remain: (a) certain types of exemptions may need to remain (humanitarian aid, officially supported credits, and exemptions based on double taxation treaties); (b) donor approaches (EU, OECD and UN) would need to be harmonised; and (c) as pointed out by Hungary, specifics would need to be worked-out.

1.1.3. Promoting good governance in the tax area

The EU and most Member States have provided support in the past for addressing tax evasion and harmful tax competition, and promote the principles of good governance in tax matters in their cooperation policy.

The EU promotes the principles of good governance in tax matters with partner countries by:

· Including specific references to the principles of good governance and to the need for strengthening tax systems in economic cooperation, partnership and other agreements with third countries.

– Making the best use of its relevant dialogue and assessment tools for the monitoring of domestic revenue efforts and good governance commitments. Mainstreaming DRM issues into EU budget support programmes.

– Providing capacity building in tax matters to developing countries committed to the principles of good governance in the tax area.

The Commission and nine Member States reported new activities in 2011. Member States completing new Tax Information Exchange Agreements (TIEA) were Belgium, Czech Republic and Slovak Republic. Technical assistance and training seminars were also funded by Germany (supporting the East Africa Community and Central American countries) Spain, France (Chad), Slovak Republic (Georgia and Serbia) and UK (Kenya and Ghana). The German Federal Ministry for Economic Cooperation and Development (BMZ) also continued its support of the International Tax Compact[18] (ITC) – an informal international action and dialogue platform grouping bilateral and multilateral donors to strengthen international cooperation with developing and transition countries to fight tax evasion and avoidance.

Adoption and implementation of the OECD Guidelines on Transfer Pricing

Transfer pricing rules determine how international transactions within a multinational company must be priced to ensure each country receives its fair share of tax. The OECD Transfer Pricing Guidelines, approved by the OECD Council in their original version in 1995 (last updated in 2010), provide guidance on its application. At the OECD’s first Global Forum on Transfer Pricing on 28 March 2012, tax officials from 90 countries agreed on the need to simplify transfer pricing rules, strengthen the guidelines on intangible issues and improve the efficiency of dispute resolution. In the coming year, the Global Forum will carry out a transfer pricing risk assessment, developing a detailed “how-to” manual[19] which will establish good practices for governments when they assess transfer pricing risk at the beginning of an audit.

In the past years, about half of the Member States had already provided assistance with implementing OECD guidelines on transfer pricing. Eight Member States, as well as the EU, supported new initiatives in this area during 2011. The Commission, Netherlands and Belgium participated in the OECD task force subgroup on Transfer Pricing. Belgium, Spain, France, Slovenia and UK organised training seminars – some in collaboration with OECD. The EU and some Member States, at times in collaboration with OECD, supported developing countries in drafting transfer pricing regulations: EU pilot initiative in Ghana and Vietnam; Germany’s support to Ghana; Estonia’s support to Moldova; and UK’s assistance to Kenya and Ghana.

In 2011, the EU funded a study[20] on transfer pricing oriented towards strengthening this area in developing countries. The study recommends suitable approaches for supporting developing countries in the adoption and implementation of transfer pricing rules in line with international standards in order to increase tax revenue. The study outlines the current transfer pricing situation in Ghana, Honduras, Kenya and Vietnam, and makes recommendations for donor support to developing countries. As a follow up to the study, the Commission envisages providing support to capacity building in transfer pricing to a number of developing countries.

To increase donor coordination in the field of transfer pricing which results in better targeted and more coordinated assistance to the partner countries an OECD/EU/WB initiative on transfer pricing was initiated.

Revenue Transparency[21]

The OECD’s 2011 publication on tax transparency[22] documents substantial progress in areas such as multilateral conventions, and Tax Information Exchange Agreements as well as double taxation conventions. The number of agreements that meet the international standard has increased by more than 700 since the G20 put a spotlight on the issue. These agreements are starting to yield real results as mechanisms for the enforcement of tax laws. During 2011, members of the Global Forum on Transparency and Exchange of Information for Tax Purposes have issued reports (peer reviews) on the 14 EU Member States.[23] These reviews provide information on agreements with developing countries.

EU Member States also participate in other initiatives that contribute to transparency and combating corruption. In particular, 23 EU Member States report their support and/or adherence to the United Nations Convention against corruption[24] and 20 Member States participated in the implementation of the OECD convention on combatting bribery of foreign officials.[25] A further 9 Member States participated in the Stolen Asset Recovery initiative[26] launched in 2007 by the World Bank and UN.

In addition, in October 2011 the Commission adopted a legislative proposal[27] for a new set of disclosure requirements for extractive companies that are based in EU countries. Under the new rules, companies in the EU would have to publish all payments to the governments in countries they operate in. This proposal is currently being discussed in the Council and the European Parliament. The increase in transparency will contribute to fighting corruption, increase resource-rich countries' accountability and improve domestic revenue mobilisation.

Box 1.1.3 The Extractive Industry Transparency Initiative (EITI)

Some 3.5 billion people live in countries rich in oil, gas and minerals. Through good governance the exploitation of these resources can generate large domestic revenues to foster inclusive growth, discourage conflict and reduce poverty.

The EITI is a voluntary process aimed at strengthening governance by improving transparency and accountability in the extractive industries sector. With 35 implementing countries now, the initiative is becoming a global standard for corporate governance and transparency. The EITI requests that companies publish payments to governments, and that the latter, in turn, disclose revenues received from companies. This enhances domestic accountability and strengthens the demand for good governance so as to reduce corruption related to extractive activities. EITI implementation slowed down in 2011. Nevertheless, 13 countries have now achieved EITI-compliant status (compared to 11 last year) and 20 countries are new candidates.

The EU is an increasingly active participant in, and supporter of, this initiative. Its position is reflected in the recent European strategy on the sustainable supply of raw materials, and in the follow-up to the commitments on enhanced support made in the 2010 Tax and Development Communication. The Commission is a member of the Steering Working Group of EITI and a member/observer of the EITI Board. It provided further support to EITI during 2011 through (a) co-financing of two conferences (i.e., 5th Global Conference and National Coordinators Conference); (b) bilateral support via Delegations; and (c) contribution to World Bank EITI Trust Fund.

Several Member States listed activities in support of EITI:

· Belgium and UK provided funding to the multilateral Trust Fund administered by the World Bank. In addition to funding the Trust fund, Germany, Denmark and Netherlands also supported the EITI secretariat by funding its activities. Denmark also funded the 2011 EITI Global Conference. Netherlands was an EITI board member in 2011, hosting the 17th board meeting June 2011, and has seconded a staff member to EITI secretariat for the period 2012 – 2015.

· Germany is supporting the EITI implementation through various bilateral as well as regional TC-projects, e.g. in DR Congo.

· The Italian Government continues to support EITI by: (a) favouring its outreach proposing a suitable scoring system so as to provide an incentive for good performance by implementing Countries; (c) supporting the New EITI rules without expanding the scope of the Initiative; (d) improved monitoring. A private Italian enterprise engaged in the oil and gas, power generation, petrochemicals, oilfield services and engineering industries is implementing pilot projects and initiatives in Congo, Gabon, Nigeria, Kazhakstan and Timor Leste.

Support to international and regional initiatives, and organisations

The EU and many Member States indicated that they continued relying on intermediaries when supporting developing countries’ tax reform agendas. This is being done through international initiatives such as the Africa Tax Administration Forum (ATAF), the OECD, the International Tax Compact (ITC) and International Tax Dialogue[28] (ITD), “Centro Inter-Americano de Administraciones” (CIAT) and three IMF facilities (i.e. Regional Technical Centres, the Trust Fund on Tax Policy and Administration, and the Topical Trust Fund on Managing Natural resource Wealth).

The IMF remains the prime partner,receiving by far the most financial support. ITC was the next largest recipient, albeit at a much smaller scale. While there are a number of institutions receiving support, there is insufficient information to assess whether this leads to inefficiency and unnecessary segmentation in delivery of tax reforms.

Emerging themes

While the impact of the new approach to EU budget support will only be evident in the future, it is likely that EU and Member States will incorporate tax administration and fair tax collection as part of their budget support eligibility criteria.

1.2. Maintaining sustainable debt levels

EU Commitments

● Council Conclusions of 11 Nov 2008[29], § 44: ‘The EU will take action to help restore and preserve debt sustainability in low-income countries (…), to prevent unsustainable lending behaviour by lenders which have not contributed to alleviating the burden of poor countries, and to deter aggressive litigation by distressed-debt funds. The EU also agrees not to sell claims on HIPCs to creditors unwilling to provide debt relief.’

● Council Conclusions of 18 May 2009[30]: (§12): ‘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’.

● In line with the Doha Declaration, the EU has also confirmed in the Council Conclusions of 18 May 2009 (§12), 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 in the debate.

In 2011, the European Commission and the EU Member States have maintained their engagement in providing debt relief and are increasingly prioritising actions on the prevention of unsustainable debt, including by:

· reducing debt levels through debt relief, using existing mechanisms (HIPC, Paris Club, etc.);

· strengthening public debt management capacity to avoid unsustainable debt levels;

· supporting greater transparancy in the new forms of financing;

· fighting against aggressive litigation by vulture funds.

In addition, most EU Member States have highlighted three current challenges to continue ensuring debt sustainability:

· In light of the increased weight of bilateral non-Paris Club creditors, there is a need for more transparency and closer collaboration between these creditors and the Paris Club in order to guarantee that debt relief operations deliver sufficient relief and preserve a fair burden sharing.

· Debt relief under the HIPC Initiative and MDRI has also created new borrowing space. Domestic debt is likely to grow in importance as domestic savings increase and governments seek to develop domestic debt markets. Low Income Countries (LICs) are likely to face new risks as the range of creditors and debt instruments continues to expand.[31]

· Moreover, due in part to the current economic context, many countries remain vulnerable to shocks, particularly exporters, facing risk of unsustainable debt in the future.

1.2.1. Honouring EU commitments on debt relief

For the past decade, debt relief has been a key tool for achieving debt sustainability. It has been implemented through the HIPC/MDRI initiative, complemented with bilateral and other types of debt forgiveness.

The Commission and EU Member States have continued to deliver on their commitments on debt relief. In 2011, the EU provided debt relief through participation to the World Bank's Debt Relief Trust Fund (DRTF) to support the participation of the African Development Bank in the HIPC Initiative. HIPC Interim debt relief in the form of coverage of debt service payments or arrears clearance was also provided to the following countries: Comoros, DRC, Ivory Coast, Guinea and Togo. Full relief further to reaching HIPC completion point was provided to Liberia in early 2011.

As of end-2011, 32 countries had reached HIPC completion point, with another 7 sub-Saharan countries potentially eligible.[32]

Debt relief has markedly improved the debt position of the 32 post-completion point Highly Indebted Poor Countries, bringing their debt indicators to sustainable levels. Debt cancelation has brought, and still brings, strong positive effects for debt-distressed countries, allowing more fiscal space for poverty related expenditures.

To date, debt reduction packages under the HIPC Initiative have been approved for 36 countries, 30 of them in Africa, providing EUR 54.6 billion (USD 76 billion) in debt-service relief over time. The debt stocks of the 36 post-decision-point HIPCs have been reduced by over 90 %.[33]

It is to be mentioned that the IMF and IDA Boards had informal discussion on the future of the HIPC Initiative during 2011. So far, this question remains an open issue and the focus is rather on ensuring a close monitoring of vulnerabilities of Low Income Countries than only focusing on HIPC.[34]

1.2.2. Public Debt Management: a critical component of debt sustainability

In 2002, the Monterrey Consensus called for a speedy, effective and full implementation of the enhanced Heavily Indebted Poor Countries initiative and for increased international cooperation for sustainable debt financing.[35] The G8/Africa Joint Declaration of the Deauville G8 summit of May 2011 reiterated the call to preserve debt sustainability in Africa.[36]

Debt relief alone is not sufficient to guarantee debt sustainability. As illustrated in the latest World Bank report on HIPC Status[37], strengthening debt management capacity and institutions in HIPC countries is also a priority. According to this study, seven post-Completion Point HIPCs remain at high risk of debt distress after HIPC and MDRI relief, and 10 at moderate risk.

While good debt management has proven to be a valuable asset in mitigating the effects of external shocks, poor public debt management contributes to the negative impact of these shocks and seriously undermines a country’s ability to achieve sustainable growth. Governments, both creditor and borrower, need to closely monitor debt management.

"Debt management systems in most African countries have advanced, albeit only marginally" according to the mutual review of development effectiveness in Africa.[38] To reduce their debt vulnerabilities sustainably, countries need to pursue cautious borrowing policies and strengthen their public debt management capacity.

Beyond HIPC and MDRI, EU Member States have maintained a strong support to enhance debt management capacities of developing countries. The main international initiatives to support better debt management and to which the EU contributes include the Debt Management Facility and the Debt Management and Financial Analysis Software.[39] (see box 1.2.2) The European Commission has committed new contribution of EUR 3 million to the World Bank's Debt Management Facility (DMF Trust Fund) and EUR 3 million to UNCTAD's Debt Management and Financial Analysis Software (DMFAS); both signed in December 2011.

Box 1.2.2: The Debt Management Value Chain

● The World Bank Debt Management Facility‘s covers “upstream” activities:

- Diagnosing the performance of debt management in a country (DEMPA)

- Assistance in formulating reform plans to correct the weaknesses identified by the DEMPA (Reform Plan)

- Preparing a reform plan to address the weaknesses identified (Reform Plan)

- Preparing a medium term debt strategy (MTDS)

● The Debt Management and Financial Analysis Software from UNCTAD comparative advantage is in the ‘downstream’ activities needed for implementing the DMF Reform Plan and strategy, through:

- Supporting countries in implementing debt management reform plans

- Providing debt management systems (the DMFAS system)

- Training the debt management staff in debt reporting, operations, statistics and analysis

- Advising on debt office reorganisation, integration and staffing

- Providing sustainable support (Helpdesk) for these areas

1.2.3. Diversified sources of lending and debt vulnerabilities

In a number of LICs, finding sources to finance priority infrastructure investments has led to an increase of reliance on non-concessional external borrowing, requiring a close monitoring on the evolution of debt vulnerabilities in those countries.[40] In addition, keeping debt at sustainable levels will continue to be a necessity in the context of EU blending operations in developing countries. Debt sustainability is assessed by the European Commission in all of the activities in the framework of innovative financing (see chapter 3.1 on Innovative Financing).

Over recent years, a number of new public and private creditors have increased their lending to Africa’s Low-Income Countries, creating concerns of swelling debt burdens. Intra-developing country lending, or so-called South-South flows, have been a driving force behind the rise in lending by bilateral creditors and new commitments. Between 2007 and 2010, bilateral creditors signed new loan agreements totaling around EUR 102 billion (USD 135 billion), of which China accounted for close to one third.

Figure 1.2.3

Net Debt Flows by Creditor Type, 2001-2010 Net Debt Flows by Borrower Type, 2001-2010

Source: World Bank Debtor Reporting System in World Bank Global Finance 2012: External Debt of Developing Countries

In an effort to cast more light on the recent activities of new donors, the OECD, in collaboration with the World Bank, the United Nations Development Programme (UNDP), and the United Nations Department of Economic and Social Affairs (UNDESA), conducted a survey of nine developing countries that are considered as important new lenders (Brazil, Chile, China, India, Malaysia, Russia, South Africa, Thailand, and Venezuela). So far only Chile, Malaysia, and Thailand responded to the survey.[41]

A recent analysis by the Africa Economic Outlook[42] shows a relatively limited impact of financing from the non-Paris Club creditors, though the lack of transparency does not allow to fully measure the situation. The lack of transparency in loan contracting processes from non-Paris Club continues to constitute a risk, especially for the most fragile nations. Raising transparency standards for financial transactions between African countries and their new partners would help developing economies to borrow more sustainably. This would strengthen the credibility of the "emerging" partners as part of the international financial governance structure.[43] The G8 Action Plan for Good Financial Governance in Africa emphasises the importance of the joint World Bank-IMF Debt Sustainability Framework as the framework of choice for the “new” donors and lenders.

The growing importance of private creditors within the new lenders also increased the need for closer coordination amongst different types of lenders. In 2010, lending by private creditors to developing countries significantly increased from EUR 61.9 billion (USD 86 billion) in 2009 to EUR 320.1 billion (USD 424 billion) in 2010.[44]

The EU as a whole believes that creditor coordination is key to reaching the objective of restoring and preserving debt sustainability in LICs. In that connection, EU Member States call for enhanced dialogue and outreach to non-Paris Club offical bilateral creditors.

1.2.4. The status of Vulture Fund Litigation

The problem posed by vulture funds is also a major concern. Vulture fund modus operandi is simple: commercial creditors purchase distressed debt on the secondary market, significantly below its face value, and seek to recover the full amount, including through litigation.

Litigation is possible because most debt relief initiatives, such as the HIPC initiative, do not alter the legal rights and obligations between HIPCs and their external creditors. Accordingly, creditors are legally entitled to use available legal mechanisms to enforce their credit claims against HIPCs, unless the HIPC debtors and their creditors reach bilateral legal agreements which would put their debt into the authority of HIPC initiative.

Figure 1.2.4 Where Vulture Funds Strike[45]

The IMF reports that in some cases, the claims by vulture funds constitute as much as 12-13 % of a country’s gross domestic product; 11 HIPCs have been targeted so far in forty-six lawsuits and the plaintiffs are concentrated in three countries, ie. USA (8), British Virgin Islands (7), and the United Kingdom (4).[46] The lawsuits are mostly concentrated in a few courts (New York (15), London and Jersey (7), Paris (7)).[47]

Box 1.2.4: Vulture Funds in Figures[48]

– Vulture funds have average recovery rates of about 3 to 20 times their investment, equivalent to returns of (net legal fees) 300-2000 %.

– The vulture funds exert pressure on the sovereign debtor by attempting to obtain attachment of the government’s assets abroad: in a recent case against Zambia, a vulture fund, having bought a debt for EUR 2.16 million (USD 3 million), sued Zambia for EUR 39.55 million (USD 55 million) and was awarded EUR 11.14 million (USD 15.5 million) at High Court of England and Wales.

– Litigation is typically protracted with many lawsuits taking 3 to 10 years to “settle.” Legal documents indicate six years as a conservative medium estimate for recovery, which suggests that annualised returns average 50 to 333 %

– Some of these claims were bought at roughly 10 % of face value, implying very high gross recovery rates. Subtracting legal costs, often recouped from the sovereign debtor, these recovery rates are probably the highest in the distressed debt market.

– The World Bank estimates that more than one-third of the countries which have qualified for its debt relief have been targeted with lawsuits by at least 38 litigating creditors with judgments totalling USD 1 billion in 26 of these cases. Out of this amount 72% of the judgments have been against Regional Member Countries.[49]

In 2010, the Paris Club confirmed its deep concern over vulture fund litigation. Taking stock of the harmful consequences of litigation for HIPC countries, and consistent with the principle of comparability of treatment, the Paris Club had resolved[50] in May 2007 to avoid the sale of their claims on HIPCs to other creditors who do not intend to provide debt relief under the HIPC initiative. The Paris Club had also urged other creditors to follow suit.

In that connection, five EU Member States have implemented specific interventions in order to prevent the actions of distressed-debt funds:

– On April 6, 2008, Belgium has passed a bill to prevent the seizure or transfer of public funds for international cooperation, in particular related to the methods of the Vulture Funds. Belgium also aims to assist African countries in their legal protection against vulture funds through financial support to the African Legal Support Facility.

– Spain regularly supports, on a case by case basis, the initiatives and discussions that take place in the Paris Club in order to prevent aggressive litigation against HIPCs. Spain is committed not to sell or securitize debt owed by HIPC countries. Spain also supports the Debt Reduction Facility by the World Bank, that addresses the issue of litigating creditors.

– France is strongly supporting the Debt Reduction Facility by the World Bank.

– Italy is commited with any intervention to prevent aggressive litigation against HIPCs within the Paris Club and through the World Bank.

– In 2011, the UK made the Debt Relief (Developing Countries) Act 2010 permanent. This legislation limits the amount of money that commercial creditors can recover from developing countries progressing through the HIPC Initiative, removing the incentive to pursue them in courts.

2. International Private Flows for Development

2.1. Supporting trade as an engine for development

EU Commitments

In 2007, the EU Aid for Trade Strategy[51] aimed at increasing financial resources for Aid for Trade and improving its impact on poverty reduction. In particular, the EU committed to:

– Increasing EU Aid for Trade within the gradual increase of overall EU aid;

– Enhancing the Pro-poor Focus and Quality of EU AfT;

– Increasing EU-wide and Member State donors’ capacity in line with globally agreed aid effectiveness principles;

– Building upon, fostering and supporting ACP regional integration processes with an ACP specific angle of EU AfT.

– Collectively spend EUR 2 billion annually on Trade-Related Assistance by 2010 (EUR 1 billion from MSs and the Commission respectively). In the range of 50% of the increase to be available to ACP countries.

2.1.1. Towards a more focused EU policy framework on Trade and Development

The EU's new trade, growth and development policy outlines how the EU’s trade and investment policies should be used to foster inclusive growth and sustainable development in developing countries. In particular, the EU has agreed on the need for more differentiation among developing countries in order to better reflect their differences in needs, potentials and objectives, and to better target Aid for Trade initiatives at LDCs and other countries most in need. At the same time, LDCs need to more systematically and effectively include trade in their development strategies.

Many developing countries have deepened their integration into the world economy and have become increasingly important players in multilateral and international trade. The rise of emerging economies such as Brazil, Russia, India, China and South Africa (BRICS), both as economic and political players, is striking in that regard and it serves as a positive illustration that increased participation in world trade can be an engine for economic growth and poverty reduction in developing countries. While these changes have helped lifting hundreds of millions out of poverty, not all developing countries have enjoyed the same improvements. This is particularly true for LDCs, especially in sub-Saharan Africa, which have been further marginalised and whose economy remains vulnerable to economic shocks, notably because of their dependence on a few export products, particularly primary commodities. This points to the fact that while trade is a necessary condition for development, it is not sufficient and domestic reforms are essential to harness the benefits of trade for growth and poverty reduction.

In times of budgetary constraints and when aid budgets are being closely scrutinised, the need to improve accountability and to show results becomes even more stringent. This is especially true in the case of Aid for Trade, which has become an increasingly important priority in development cooperation. The topic was discussed at highest level in 2011, in the framework of the Third Global Review of Aid for Trade[52]. The OECD, with financial support from the European Commission, is preparing a study to analyse and assess good practices in developing country-owned results measurement frameworks for trade-related aid activities, with a view to providing the development and trade community with recommendations on how to measure Aid for Trade results.[53] The European Commission is also providing funding to the International Trade Centre (ITC) for the launch of a re-developed Market Access Map, which will provide global trade related information in particular to low income countries.

2.1.2. Taking stock of the way the EU has delivered on its Trade and Development commitments since 2002

In its 2002 Communication on “Trade and Development”[54], the Commission had pledged to grant developing countries greater access to the EU market. In the 2007 Joint Aid for Trade Strategy[55], the EU and its Member States committed to provide developing countries with more Aid for Trade. The EU has delivered well on both accounts, leading the way at global level and making the EU the most open market to developing countries in the world.[56] This has mainly been achieved through the EU's Generalised System of Preferences. In particular, the 'Everything but Arms' scheme provides LDCs with duty-free quota-free market access to the EU for all their products except arms. As for the GSP+, it is the flagship EU trade policy instrument supporting sustainable development and good governance in developing countries.

In addition, the EU has facilitated the use of existing preferential schemes through new and simpler GSP rules of origin[57], and made it easier for developing countries to get practical information on access to the EU market through the establishment of the online Export Helpdesk.[58]

The EU has also boosted its bilateral trade relations with developing countries. Since 2002, the EU and ACP countries have been negotiating Economic Partnership Agreements. In addition, a series of Free Trade Agreement negotiations have been launched, and in several cases already concluded, with more advanced developing countries and regions.

The EU’s trade policy has also supported the promotion of regional integration of developing countries’ markets, although results have often fallen short of expectations. A key difficulty is the limited capacity of regional organisations to formulate project proposals that are viable and supported by their members.

In line with the EU PCD commitments, the EU has strived to improve the coherence and complementarity between the EU’s trade and development policies. Several key areas of progress were identified in the “EU 2011 Report on Policy Coherence for Development”[59], including trade negotiations, market access, the decent work agenda, corporate social responsibility, and intellectual property rights. These orientations were fully taken into consideration in the 2012 Communication on "Trade, Growth and Development", adopted by the Commission on 27 January 2012[60]. The Communication sets new orientations for the next decade on ways to improve the contribution of the EU's trade and investment policies to development. This was followed, on 16 March 2012, by the adoption of Council Conclusions[61] on this topic. The latter set out how Aid for Trade from the EU and its Member States can be better targeted, notably through:

– continued global leadership of the EU and its Member States to respond to the Aid for Trade demands;

– better targeted, result-oriented and coordinated Aid for Trade as part of the aid and development effectiveness agenda, as agreed in Busan;

– encouraging developing countries to integrate trade as a strong component in their development strategies;

– enhancing the complementarity and coherence between trade and development instruments;

– greater focus on LDCs and developing countries most in need;

– better coordination of EU and Member States’ AfT and alignment with strategies of partner countries;

– support aimed at helping developing countries' small-scale operators to capture the benefits of trade;

– work with new and traditional partners to increase the effectiveness of the Enhanced Integrated Framework and other internationally recognised frameworks, and focus on impact and results.

2.1.3. Progress on Aid for Trade[62]

Since 2007, the EU and its Member States have been driving the global Aid for Trade efforts, confirming again in 2010 the EU’s position as collectively the largest provider of AfT in the world. Indeed, the EU and Member States accounted for around 32% of total AfT flows in 2010, reaching more than EUR 10.7 billion (EUR 8.2 billion from EU Member States and EUR 2.5 billion from the EU), an increase of 4.2% in comparison with last year.

As highlighted in last year’s report, the EU and its Member States had already met their 2010 EUR 2 billion target for Trade Related Assistance (TRA) since 2008, however, for the first time since 2005, there was a decrease of TRA between 2009 and 2010Total TRA in 2010 reached EUR 2.6 billion, compared to EUR 2.8 billion in 2009 (or -8% in 2010, to be compared to +24% in 2009).

Figure 2.1.3. Aid for Trade (EU and Member states, in EUR million)

A central observation is the growing complementarity between the EU and its Member States, in terms of geographical distribution, sector presence, instruments used and size of projects.

– In terms of geographical distribution: Africa continues to receive the largest share of AfT flows (38% of the total), both from the EU and from the Member States, with a total of EUR 3.9 billion in 2010. It is followed by Asia (20%), Europe (13%) and America (9%). The second primary destination of EU AfT flows is Europe, while it is Asia for Member States. The share of AfT to LDCs declined to 16% of total AfT in 2010 (EUR 1.7 billion against EUR 8.7 billion to non-LDCs), compared to 22% in 2009. This is partially due to cyclical and EU programming factors.

– In terms of sectoral presence: while the EU AfT projects are essentially focused on three main sectors, namely agriculture (35%), transport and storage (29%) and energy (13%), Member States are more focused on energy (33%), with agriculture and transport representing smaller shares of the total (17% and 12%). Moreover, Member States are also present in banking and financial services, while the EU is not.

– In terms of instruments used: while grants still represent 100% of AfT programmes of the EU institutions, Member States finance 43% of their AfT programmes through loans, and 13% through equity investments. As a result of this, the share of grants has decreased in the overall AfT flows of the EU and Member States, while it has substantially increased for loans. This could also explain the decrease of the share of AfT flows to LDCs, which are the primary beneficiaries of grants.

– In terms of size of projects: the average size of EU projects is ten times the average size of Member States projects (EUR 11.2 million in the case of EU and EUR 1.1 million for Member States).

The analysis of replies from the EU Delegations and Member States Representations in developing countries to this year's AfT questionnaires shows a moderate improvement in terms of the partner-donor policy dialogue; the availability of updated trade needs assessments; joint operations and harmonisation; the inclusion of strategic regional economic integration priorities into the national development plan or trade strategy; and in highlighting the prominent hurdles for assessing AfT programmes and projects.

2.2. Remittances as an instrument of development

EU Commitments

· Since 2009, the EU and its Member States are committed “to promote transparent, cheaper, faster and more secure flows of remittances to migrants’ countries of origin, and to ensure that relevant legislation does not contain provisions hampering the effective use of legal remittance channels”[63].

2.2.1. Towards a renewed EU overarching framework for the cooperation with third countries in the area of migration and mobility

On 29 May 2012, the Council adopted Conclusions[64] on “The global approach to migration and mobility”, following the Commission Communication on this subject issued in November 2011.[65] The objective was to strengthen the overarching framework for the cooperation with third countries in the area of migration and mobility, which was defined for the first time in 2005. One of the operational priorities is precisely to maximise the development impact of migration and mobility, including by facilitating remittances and reducing transaction costs. In particular, the Council reaffirmed “the need to ensure faster, easier and cheaper remittance transfers and enhance the impact on development of social and financial remittances while ensuring coherence with other development priorities”.

The 2011 Commission Staff Working Paper on “Migration and development”[66] accompanying the afore-mentioned Communication provides further analysis of the achievements since 2005 in the area of remittances, and identifies some remaining challenges, including on capacity building to support partner countries interested in designing regulatory frameworks and into promoting financial literacy, new technologies and access to credits to stimulate productive investment and job creation.

In 2011, the European Commission launched a study to assess the state of implementation of existing EU commitments with regard to remittances. The study will be published in the second half of 2012.

While migration and mobility can, if properly managed, contribute to the reduction of poverty in developing countries, proper attention is now also being paid to minimising the negative side-effects of the EU migration policy.[67] In particular, in line with the Policy Coherence for Development commitments, the EU and its Member States must pay due attention to the possible downsides of migration, notably its social costs and the risks of households becoming dependent on income from remittances.

2.2.2. Progress on remittance outflows

According to the latest estimations of the World Bank[68], recorded[69] global remittances flows to developing countries are estimated at EUR 267.5 billion (USD 372 billion) in 2011, an increase of 12.1% over 2010, and are expected to grow at a rate of 7-8 % annually to reach EUR 333.5 billion (USD 467 billion) by 2014.

As shown in the graph below, global remittance flows have been growing steadily during the crisis in comparison to other private resource flows. However remittances from the EU have kept momentum since 2008[70].

Figure 2.2.2

Source: World Bank, 2012[71]

At EU level, total EU27 remittance outflows amounted to EUR 31.2 billion in 2010, a 3% increase from last year (EUR 30.4 billion in 2009), most of which are sent to developing countries.

According to Eurostat[72], the outflow of workers' remittances was highest in 2010 in Spain (EUR 7.2 billion or 23% of total EU27 remittances), Italy (6.6 billion or 21%), Germany (3.0 billion or 10%), France (2.9 billion or 9%), the Netherlands (1.5 billion or 5%) and Greece (1.1 billion or 3%). Among these Member States, the share of extra-EU27 remittances in the total ranged between 67% in Germany and 91% in Greece. In 2010, the majority of Member States recorded similar levels of outflows of workers' remittances to 2009.

2.2.3. Reducing transfer costs of remittances

At the Cannes G20 Summit in November 2011, G20 members agreed to reduce the average cost of transferring remittances from 10% to 5% of the amount transferred by 2014.[73]

Although remittance costs have fallen steadily in recent years, they remain high, especially in Africa.

Figure 2.2.3

Source: World Bank, 2011[74]

As seen in figure 2.2.3 above, remittance costs on average continue to remain high, impacting many poor migrants and their families. Efforts to reduce remittance costs include increasing market competition in many remittance corridors and wider application of cheaper and more convenient remittance technology. Also there is a great need to improve data on remittances and migration at the national and bilateral corridor levels, for more accurate monitoring of progress towards the agreed objective. It is estimated that reducing these costs to an average of 5 % (compared to the current average, which is roughly twice that) would save EUR 10.8 billion (USD 15 billion).[75]

At EU level, remittance services are being made cheaper, more transparent, more competitive and more reliable.

In particular, the transposition of the 2007 Payment Services Directive (PSD) into the national legislation of a majority of EU Member States has contributed to increased transparency in the provision of payment services, including the remittance market. Moreover, several EU Member States (including France, Germany, Italy, the Netherlands and the United Kingdom) have set up their own remittance price comparison websites on costs and quality of services. The above mentioned (par. 2.2.1.) study launched by the European Commission will include elements to assess the feasibility of a common EU portal on Remittances.

2.2.4. Donor initiatives

Several EU Member States such as Austria, France, Germany, and the Netherlands have either launched or supported the launch of studies and workshops aimed at improving the knowledge about the main remittance channels and payment systems. For instance, France has funded a study on “Reducing the costs of migrants’ remittance and optimising their impact on development remittance channels from France to Maghreb and the ‘franc’ area”, the results of which were presented in February 2012.[76] The recommendations of the study, carried out by the credit institution “Epargne sans Frontières” (Savings without Borders) and co-financed by AfDB and the French Development Agency, centred on cutting the cost of migrant money transfers and boosting their effect on the development of African countries.

A number of EU Member States (including Denmark, France, Germany, the Netherlands, and Poland) have also taken specific actions in 2011 aiming at increasing remittances’ channelling to productive and social investments. For example, Germany is in the process of setting up a social lending and knowledge brokerage project aiming at offering migrants a systematic way of collecting and spending remittances as well as sharing knowledge on small enterprise development or social investment in their countries of origin.

3. Leveraging International Development Finance: beyond official, beyond development and beyond assistance

3.1. Innovative Financing – Sources and Mechanisms

EU Commitments

● Council Conclusions of 14 June 2010[77] (§31): Innovative financing sources and mechanisms complement other resources. The EU seriously considers proposals for innovative financing mechanisms with significant revenue generation potential, with a view to ensuring predictable financing for sustainable development, especially towards the poorest and most vulnerable countries. The EU calls on all parties to significantly step up efforts in this regard, welcomes the ongoing work by the Leading Group on innovative Financing for Development, and takes note of the ongoing work of the Task Force on International Financial Transactions for Development and of the Task Force on Innovative financing for Education.

● Council Conclusions of 14 November 2011[78] (§3.5): Engage the private sector in aid and development effectiveness in order to advance innovation, create income and jobs, mobilise domestic resources and further develop innovative financial mechanisms. (§52): The EU calls (…) on development partners to further develop and increase the use of innovative financial instruments and blending of grants and loans that enhance the catalytic role of aid in promoting private sector engagement and private sector development.

● Busan partnership for effective development cooperation, December 2011[79] (§32. C): Further develop innovative financial mechanisms to mobilise private finance for shared development goals.

In the current context of financial crisis and budgetary austerity, discussions on innovative financing mechanisms have gained a new resonance, both within the EU and at global level. A good illustration of this growing interest in innovative financing mechanisms is the G20’s formal agreement for the first time to support innovative financing for development and climate change and to move forward by using a menu of options.[80]

According to the Leading Group on Innovative Financing for Development[81], which is the main recognised international forum for discussions on this matter, about twenty countries in the world have already set up one or more innovative financing mechanisms so far. Thanks to these mechanisms, close to EUR 4.3 billion (USD 6 billion) have been raised since 2006.[82]

At the 10th Plenary Session of the Leading Group, which took place in Madrid in February 2012, the emphasis was put on the important advocacy role of the Leading Group in multilateral fora. Following the successful experience in 2010 at the UNHLPM on MDGs, the Leading Group organised another high-level side event in the context of the Rio+20 Conference, in partnership with the United Nations, in order to raise awareness on the potential of innovative financing mechanisms to mobilise resources for sustainable development.

3.1.1. Distinction between innovative financing sources and mechanisms

There is no universally accepted definition of Innovative Financing Mechanisms[83] (IFM). While the term initially referred to new sources of development financing that could complement traditional ODA[84] in a stable and predictable way[85], it has progressively been expanded to include new and innovative financial mechanisms aiming at enhancing the effectiveness and efficiency of financial flows.

The main characteristic of these mechanisms is that they differ from traditional approaches to mobilising and/or delivering development finance. They are usually complementary to traditional ODA and tend to address a specific negative externality.

IFM are thus mechanisms that (i) support fund-raising by tapping new sources and engaging investors beyond the financial dimension of transactions, as partners and stakeholders in development; and/or (ii) deliver financial solutions to development problems on the ground. They can therefore be considered "innovative" either because of the nature of sources, the way they are collected and used, or their modes of governance.

Broadly speaking, IFM can be divided into innovations in fund-raising and innovative financial solutions for development:

(1) Mechanisms that generate additional financing for development by tapping into new and innovative finance (or funding) sources (non-traditional or non-conventional ODA resources, emerging donors and the private sector). For example, global solidarity levies (such as the airline ticket tax or the Adaptation Fund) or national lotteries.

(2) Mechanisms that offer innovative financial instruments/solutions in the way revenues are collected and pooled, traditional development finance is used and aid is delivered. For example, public-private partnerships such as the International Finance Facility for Immunisation (IFFIm), or copayment schemes such as the Advance Market Commitment (AMC) mechanism.

According to a World Bank working paper[86], four types of innovative mechanisms can be distinguished:

– Private mechanisms: they involve private-to-private flows in the market and in civil society.

– Solidarity mechanisms: they include public-to-public or sovereign-to-sovereign transfers and form the backbone of multilateral and bilateral ODA and other official flows (OOF).

– Public-private partnership mechanisms: they use public funds to leverage or mobilise private finance in support of public service delivery and other public functions, such as risk management.

– Catalytic mechanisms: they involve public support for creating and developing private markets (inter alia by reducing risks of private entry).

3.1.2. State of play and revenues raised by existing innovative mechanisms

Twelve Member States are currently using or are planning to use one or more of the existing innovative financing mechanisms to raise funds for development[87].

For example:

· International Finance Facility for Immunisation (IFFIm): Six Member States (France, Italy, Netherlands, Spain, Sweden and the UK) indicated that they are contributing to the IFFIm under the GAVI Alliance. It is estimated that a total of EUR 2.4 billion (USD 3,4 billion) were levied through this mechanism for GAVI between 2006 and 2011[88].

· EU Emission Trading System[89] (ETS): Four Member States (Czech Republic, France, Germany and Hungary) indicated that they are using or considering using the auctioning of allowances under the ETS with a view to financing climate action in developing countries. In that context, Germany also explicitly targets climate adaptation activities that have biodiversity co-benefits.

· Air ticket levy: France is the only EU Member State to have introduced an air ticket levy to finance UNITAID, IFFIm and the Global Fund. France estimates that EUR 175.8 million will have been raised through this mechanism in 2011. Cyprus, Luxembourg, Spain and the UK are also supporting UNITAID[90], albeit with direct contributions from their general budgets[91].

· Advance Market Commitments (AMC): Two Member States (Italy, UK) participate in the AMC for the development and production of affordable vaccines (France indicated its support for this mechanism without contributing to it at this stage). In 2011, Italy and the UK have contributed to this mechanism by more than EUR 79 million (compared to 55 million in 2010).

· Debt2Health: Germany is the only Member State participating in this initiative, which it is using for the Global Fund to fight Aids, Tuberculosis and Malaria. In 2011, Germany contributed with EUR 3.3 million under this debt swap mechanism.

· National Lotteries: Belgium is the only Member State having declared the use of receipts from its national lottery to finance development cooperation. Part of the receipts (EUR 18.3 million) are earmarked for financing food security projects through the Belgian Fund for Food Security.

3.1.3. Major EU initiatives

At EU level, two recent initiatives are worth underlining.

First, the Commission's “Proposal for a Council Directive on a common system of financial transaction tax and amending Directive 2008/7/EC”[92], which proposes setting up a harmonised framework for financial transaction tax in the EU. Such a tax, if adopted, would be levied as a rule on all financial transactions relating to financial instruments when at least one party to the transaction is established in a Member State and a financial institution established in a Member State is involved in the transaction. The idea of an EU FTT is strongly debated among Member States with very differing views. Discussions are currently on-going in the Council and the European Parliament in order to look at all the aspects of the proposal and their implications in practice.

The financial transaction tax was proposed as a new own resource for the EU budget, in the context of the preparation of the next multiannual financial framework 2014-2020. The Commission has recently announced that, if adopted as a new own resource of the EU budget, the financial transaction tax could significantly reduce the contributions of Member States to the EU budget, in the magnitude of EUR 54 billion by 2020.[93]

Second, the extension of the EU Emissions Trading System (EU ETS) to aviation transport, the scheme for greenhouse gas emission allowance trading within the Community. As foreseen in the Directive 2008/101/EC of the European Parliament and of the Council of 19 November 2008 amending Directive 2003/87/EC, aviation activities are since January 2012 included in the emissions from all domestic and international flights that arrive at or depart from an EU airport.[94]

While these two initiatives do not foresee earmarking of resources for development per se, they are nonetheless expected to facilitate Member States' efforts to mobilise funding required for meeting aid targets and tackling other global challenges.

3.1.4. EU Blending Mechanisms

The EU blending mechanisms are an innovative financing mechanism as they leverage additional resources and investments in a context of constrained resources. In particular, involving the private sector as a partner in development to create jobs and income opportunities for the poor, as well as to leverage additional funding through blending for achieving inclusive and sustainable growth, has been recognised by the ‘Agenda for Change’, the ‘Busan Outcome document on Aid Effectiveness’ and has become common practice in development finance.

The EU blending mechanisms combine grants with additional flows (such as loans and risk capital) to gain financial and qualitative leverage, and increase EU development policy impact. The strategic use of a grant element can make projects and initiatives by public or commercial investors financially viable, thereby exerting a leveraged policy impact. The grant element may take various forms such as: direct investment grants; interest rate subsidies; technical assistance, risk capital and risk sharing mechanisms such as guarantees.[95] Beyond unlocking additional project financing, the EU grant element also reduces the price of the project for the beneficiary and contributes to complying with debt sustainability criteria.

Since 2007, the EU has set up a number of regional blending facilities: the EU-Africa Infrastructure Trust Fund (ITF) and Investment Facilities for the Neighbourhood (NIF), Latin America (LAIF) and Central Asia. Since 2007, more than EUR 760 million EU grants have been committed to 115 projects. EU grant contributions have leveraged approximately EUR 10 billion of loans by European Finance Institutions, unlocking total project financing volume totalling in at least EUR 26 billion. With three new facilities for Asia, the Caribbean and the Pacific, worldwide coverage is expected in 2012.

3.2. Facilitating Private Investment

EU Commitments

Current EU thinking on engaging with the private sector is set out in the following Council Conclusions:

· November 2008 Conclusions on a Common EU position for the Doha Financing for Development Conference[96], §10: “The EU is committed to promote policies and instruments supporting private investment and the expansion of partner countries' private sector in support of an inclusive and sustainable economic growth”.

· December 2011 Conclusions on Reinforcing industrial policy across the EU[97]: The Council welcomed the Communication from the Commission “A Renewed EU Strategy 2011-2014 for Corporate Social Responsibility as well as of the Social Business Initiative.

3.2.1. Framework for Private sector-led growth

As emphasised in the recent Communication on ‘Increasing the impact of EU Development policy: an Agenda for Change’[98], “inclusive and sustainable economic growth is crucial to long-term poverty reduction”. In many developing countries, the expansion of the private sector, notably micro-, small- and medium-sized enterprises (MSMEs) is a powerful engine of economic growth and the main source of job creation. Foreign investment also plays an important role, including through the linkages of domestic firms to international markets and through investments in infrastructure and natural resource based activities. One of the main challenges for governments in developing countries is to establish, design and implement institutional, organisational and regulatory frameworks which are conducive to, and often a pre-condition for, private sector development. Governments alone cannot create a private sector with an enterprise culture, but their actions can either hinder or facilitate it. The latter often requires far-reaching economic reforms aimed at improving the investment climate and facilitating access to finance.

A framework for private sector-led growth is incorporated within the ‘Agenda for Change’. It advocates for inclusive and sustainable economic growth, resulting in