COMMUNICATION FROM THE COMMISSION TO THE COUNCIL, THE EUROPEAN PARLIAMENT AND THE COURT OF AUDITORS - FINANCIAL INFORMATION ON THE 6th, 7th AND 8th EUROPEAN DEVELOPMENT FUNDS - 2002

TABLE OF CONTENTS

1. Introduction

2. Political and economic context of our cooperation with the ACP region

3. General overview

3.1. Commitments and payments

3.2 Effective availability and use of EDF resources

3.3 Action to speed up expenditure of commitments

3.4 Sector distribution

4. Implementation by sector

5. Devolution of resources and decision-making powers to the Commission's delegations

5.1 Phase one of devolution: progress report

5.2 Phase two of devolution: progress report

5.3 Phase three of devolution: progress report

Annex: 6th, 7th and 8th EDF (31/12/2002) - progress by instrument

1. Introduction

The EU's relationship with the ACP region was renewed in June 2000 with the signing of the Cotonou Agreement, which provides a new 20-year Partnership Agreement. In 2002, both sides have continued with the ratification process that is necessary before the Agreement officially enters into force in April 2003.

A major step forward was taken in September 2002, with the launch of the negotiations between the EU and ACP countries on the new Economic and Partnership Agreements (EPAs). These agreements will combine trade and development issues in ways tailored to national and regional conditions in full conformity with WTO arrangements. The EPA negotiations will be completed within the next five years and will enter in to force by 1 January 2008 unless earlier dates are agreed.

Overall, the Community has reinforced its focus on Africa in 2002, where the development challenges - in terms of destitution, marginalisation and lack of capacity - are greatest. The Community's relationship with Africa is evolving in response to initiatives such as the launch of the African Union and the adoption of its socio-economic programme - the New Partnership for African Development (NEPAD) - at the African Union's first Summit in Durban in July 2002.

2. Political and economic context of our cooperation with the ACP region

ACP countries include some of the world's poorest countries with serious governance problems. The level of risk of operating in these countries is therefore inherently very high and their capacity to meet the 'aid partnership' requirements is limited.

The implementation of our co-operation with the ACP countries is more and more closely linked to the political context, with Member States delaying or suspending cooperation both at the programming and programmes/projects levels, due to human rights or other democratic concerns and implementation constraints in the partner country.

A large proportion of moneys is programmed to the poorest countries, a significant number of which are in crisis (e.g. Sudan, Congo RD, Congo Brazzaville, Sierra Leone, Liberia, Burundi, Ivory Coast, Rwanda, Haiti) where aid often has to be suspended.

The 'poverty reduction' and economic performance of those ACP countries receiving direct budgetary aid is variable. If the 'good governance' criteria which the international community sets and the technical conditions agreed for disbursement are not fulfilled, then payments are withheld.

3. General overview

3.1. Commitments and payments

New commitments in 2002 amounted to EUR 2 115 million (just over the EuropeAid target of EUR 2000 million). Payments reached EUR 1 902 million, also just over the EUR 1 850 million annual target. The initial target of EUR 2 000 million was downsized, taking into account that the payment of the last tranche concerning HIPC (EUR 150 million) to the EIB has been delayed to 2003 [1].

[1] Debt relief provided by the EIB intervenes when countries have reached their 'completion point'. However, due to the falling world market prices for certain export products, the foreseen economic recovery and thus the attainment of the 'completion point' for the countries concerned has been delayed.

The new commitments level of EUR 2 115 million is slightly above the 2001 figure of EUR 1 920 million. Approximately EUR 790 million of the 2002 total was taken from the general reserves of the 8th European Development Fund (A-envelope) on the base of transitional measures, given that the ratification of the Cotonou agreement was not completed in 2002 and the 9th European Development Fund could not therefore be made available. Commitments relating to the national and regional programmes of ACP countries were by about EUR 50 million less than forecasted but this was outweighed by higher than forecast "risk capital" loans from the European Investment Bank.

The Commission has also succeeded in freeing up EUR 346 million in unused moneys which had previously been committed but not subsequently used in the projects for which it was earmarked. This money - commonly known as 'de-commitments' - will now be reallocated within the respective national and regional programmes in 2003. This brings the 'net' level of new commitments in 2002 to EUR 1768 million. This compares with EUR 1 554 million in 2001.

As a result of these decommitments, the level of funds which has been committed to programmes but not yet paid out - commonly knows as 'Reste à Liquider' (RAL) - stabilised (and even slightly reduced) by the end of 2002 (EUR 8 469 million at the close of 2001 and EUR 8 385 million at the close of 2002).

Concerning payments, the final amount reached EUR 1 902 million, the net amount (-/- recoveries) being EUR 1 853 million.

Compared with the forecasts, some delays have been observed concerning the instrument 'Structural Adjustment Facility' (EUR 130 million) and as well for the Indicative Programmes (NIP/RIP: EUR 100 million). On the other side, the Commission has been able to pay out EUR 98 million on the A and B envelopes (transitional measures) and another EUR 87 million on Sysmin resources.

The figures above need to be seen as a year's performance in the context of the longer term multi-annual EDF cycle. Since 1989 the average annual primary commitments (gross figures) have been approx. EUR 2 033 million for commitments, EUR 1 645 million for contracts and EUR 1 594 million for payments (see graph).

Since the start of the EuropeAid Co-operation Office (January 2001) our capacity for implementation has increased (25-35%): the level of contracts (EUR 2 200 million) and payments (EUR 2 000 million) in the last two years is well above the average of the 12 preceding years: both around EUR 1 600 million.

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3.2 Effective availability and use of EDF resources

The total figure for EDF moneys allocated to ACP countries and OCTs until the end of 2002 (6th, 7th and 8th EDFs) is EUR 32 840 million. Of this figure, EUR 29 921 million has been formally committed, i.e. decisions have been taken to go ahead on specific projects. Of these allocations and commitments, EUR 21 536 has been paid. This means that there is a theoretical gap between moneys originally earmarked for ACP countries in the long-term programming process and amounts paid out (for the last three EDFs combined) until close 2002, of EUR 11 304 million. This is made up of the EUR 2 919 million allocated but not committed, and the remaining EUR 8 385 million committed but not yet paid (see table in annex).

* EUR 2 900 million allocated but not committed

Countries are allocated or earmarked money 'in theory' while actual cooperation may be subsequently suspended with a given country by decision of the EU Member States for political or practical reasons (civil wars, security situation, etc), which means that no commitments (specific projects) can then be approved (e.g. Zimbabwe and Liberia).

Allocated but uncommitted moneys cannot - under the present legal framework - then be spent elsewhere. Allocations are frozen until Member States decide to resume cooperation with the given country. For example, in Madagascar, where there has been a political crisis, the planned EUR 70 million support programme has been blocked for a year by EU Member States (Dec 2001 to Dec 2002) until the green light was recently given. In Angola, EUR 83 million which could not be implemented during the period of war was only reallocated to post war reconstruction in May 2002. In Eritrea, EUR 80.3 million allocated to this country for (already prepared) emergency reconstruction and demobilisation programmes is still uncommitted and therefore unavailable for the Commission to spend.

The country/region allocations allocated but not committed represent approximately EUR 1 700 million of the above amount (EUR 2 900 million), the balance concerning non-programmable aid. It is estimated that around 40% (EUR 680 million) of this EUR 1 700M has been allocated to countries in crises or that are just coming out of one (Comoros, Liberia, Eritrea, Sudan, Haiti, Sierra Leone, Nigeria, Burundi, Ivory Coast, Togo, Central African Republic, Zimbabwe, Angola, Madagascar).

* EUR 8 400 million committed but not paid

It is normal to have a large amount of unpaid commitments: there is always a gap between committing the money for a (multi-annual) project, starting it up and then having to pay the contractors in tranches, on the basis of progress in implementation (which can last several years). This is especially the case at the start of a new EDF cycle (i.e. in 2003 for the 9th EDF)

Commission's unspent commitments seem in line, if not proportionately lower, with the average in EU Member States. Amounts vary enormously, as do the budgetary and legal contexts, but even taking all these elements into account, the Commission's performance is comparatively good. On a recent fact finding mission, none of the EU national development agencies visited considered the level of unspent commitments as problematic.

* Problematic unspent commitments

Among the EUR 8 400M of unspent commitments, the Commission has identified two types of 'abnormal' or problematic unspent commitments: the 'sleeping' commitments, on which we have seen no financial movements (i.e. contracts or payments) on the project in the last two years and the 'historic' outstanding unpaid moneys committed to projects some time ago (i.e. commitments made before 1997, which remain unpaid).

The total amount of 'abnormal' unspent commitments (EUR 1 205 million) represents 14.4 % of the total RAL; this figure is 14.3 % for the budget lines managed by AIDCO.

Commitments identified as problematic occur, for the large part, in countries where projects have been decided on, but then cooperation has been temporarily suspended or delayed (for reasons of security, civil war etc, or when more generally conditions are not fulfilled for effective implementation). For example, in Madagascar, a EUR 72.5 million road programme approved (committed) in February 2000 only started implementation this year, due to the political crisis 2001/2002. Alternatively there may be ongoing legal disputes on the project (following an audit etc) which have necessitated the freezing of payments to respect basic financial probity. Government Poverty Reduction programmes being supported by the EC in Namibia, Zambia, Senegal, Niger, Sierra Leone and Congo have all undergone such delays in 2001/2002 (recently de-blocked) when payments were suspended following negative reviews.

3.3 Action to speed up expenditure of commitments

The use of the global allocations by the different EDFs indicates still rather low levels of contracts and payments for the 8th EDF, which is mainly caused by the National and Regional Indicative Programmes and in some extent by the OCTs. However it should be noted that the use of allocations on the level of non-programmable aid (8th EDF) is by comparison rather high, which confirms the increasingly important role played by the 'rapid disbursement instrument' budgetary aid, the use of which has been extended to include HIPC as well as the already established structural adjustment projects. These instruments may also include sector programmes in the future. It should be noted as well that the overall level of contracts and payments during the last two years is well above the average of the last twelve years (see Chapter 3.1).

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Forecasts for new commitments in 2003 may be situated in a range between EUR 2 500 and EUR 2 700 million and payments will be in the order of EUR 2 100 million. For the coming years, forecasts indicate that the available resources should be committed within the time-span of the Cotonou Agreement (5 years). The commitments have been front loaded for this period, while it is foreseen as well that contracting and payments will increase during the second year (2004) of the implementation period.

Furthermore, there is a substantial effort going on to speed up the expenditure of commitments and to reduce both of the 'sleeping' and 'historic' unspent commitments so that moneys can be 'decommitted' for the defunct project and immediately reprogrammed for the countries for which they were earmarked [2]: in 2002 the total amount was reduced by EUR 310 million and estimations for the year 2003 indicate a further reduction by EUR 470 million.

[2] This is a peculiarity of the EDF, while for EC budget appropriations, de-commitment implies loss of relevant funds.

Efforts in the short term to speed up the expenditure of commitments and to reduce problematic unspent commitments:

In the framework of the RELEX reform, the reduction of the problematic / abnormal (historic and/or dormant) unspent commitments) is a specific priority.

An intensive programme of bilateral meetings with every ACP Head of delegation with the Director General or Deputy Director General of EuropeAid to speed up expenditure of commitments and to identify and reprogram problematic unspent commitments (in the framework of ACP seminars organised between February and March 2003).

The Commission is exploring new ways of working in partnership with ACP countries, for instance the increased use of direct part-financing of ACP country's public budget within an agreed government 'poverty reduction' framework. These 'budgetary support decisions' represented EUR 550 million in 2002, and do away with the long wait for individual project design, implementation and accounting, although partner governments must fulfil certain policy and economic performance "standards" for payments to be made.

The use of existing EDF reserves for new initiatives, including fast disbursing initiatives such as contributions to international agencies or donors (HIPC, WHO).

Efforts in the medium term to speed up the expenditure of commitments and to stop the occurring of unspent problematic commitments:

Under the new Financial Regulation which has come into force with the entry into force of Cotonou, the Commission has the power to suspend the use of direct labour contracts in an ACP country if there are still outstanding requests from the EC for recoveries of moneys due under these contracts. This should improve the incentives to partner countries to resolve outstanding financial issues.

Furthermore, the following measures in the new financial regulation should accelerate implementation and keep therefore RAL within acceptable limits:

- "sunset clause": time limit (N + 3) for concluding contracts after which non-contracted funds should be automatically decommitted

- extension of commitments : only one extension on 6,7,8th EDF commitments is allowed, for a period of three years maximum.

The Commission is currently implementing a major programme of structural reform for external aid. This means that, increasingly, the Commission's offices in the field are being given the resources and powers to monitor performance and take decisions 'on the ground'. This should substantially contribute to a reduction in delays in the implementation of programmes/projects.

EU Member States have recently agreed to Commission proposals that EDF allocations be reduced for individual countries in crisis (e.g. Haiti, Liberia and Togo) so that resources can be re-allocated to other performing countries.

3.4 Sector distribution

The sector breakdown shown in the figure below combines the figures of the commitments for the 6th, 7th and 8th EDF and shows a comparison between the overall figures (1986-2002) and the year 2002.

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1. Education

2. Health and population policies

3. Water and sanitation

4. Government, civil society and other social

services

5. Transport

6. Communication

7. Energy

8. Financial intermediaries , business services

9. Agriculture, livestock and fisheries // 10. Industry and mineral resources

11. Trade and tourism

12. General environment protection

13. Other multi-sector

14. Structural adjustment, balance of

payments/budget support

15. Actions relating to debt

16. Emergency relief, refugees

17. Not specified

Social infrastructures and services (sectors 1-4 in the above list - DAC Group 1) represent 15.8% of the total commitments in the overall figures and 22.7% for the year 2002, confirming the increasing importance of this sector - more in particular health and Government, civil society and other social services - in the implementation of our development policies.

During the year 2002 commitments concerning the sectors energy, financial intermediaries, industry and mineral resources (mainly EIB operations) and structural adjustment (10.3% in 2001 and almost 25% during 2002) saw their relative importance increase compared with the overall figures.

On the other hand, a decrease in relative importance may be noted concerning education, agriculture, environment, other multi-sector and trade & tourism during the year 2002.

4. Implementation by sector

In 2002, work continued on a large number of programmes and projects provided for by the Partnership Agreements with the ACP countries in various areas. Details of some of the most noteworthy are given below.

There were 30 budget support programmes ongoing in 2002. The various tranches of funding were released only where the recipient countries complied with the relevant conditions. Significant amounts were paid to Burkina Faso, Zambia and Tanzania. In countries where the Commission had identified shortcomings in the management of public finances, delays in the economic reform process or insufficient Government commitment to poverty reduction, payments were temporarily suspended (Senegal, Malawi, Gabon and the Central African Republic).

By way of support for private sector development, a mid-term review of the Business Assistance Scheme Programme (EBAS) was carried out in 2002. It showed that the programme had a good image in the private sector, that it was being effectively implemented and that satisfaction levels amongst beneficiaries was high. When the review was carried out, more than EUR19 million had been committed since the launch of the programme in 1999, for 863 projects in 55 ACP countries.

In the field of health, the Commission continued to demonstrate its firm commitment to combating HIV/AIDS and poverty-related diseases. In particular, the Commission contributed EUR 60 million to the Global Health Fund, in line with the EC action plan on infectious diseases.

In terms of capacity building, the decentralised cooperation programme with Zimbabwe provides an example of successful cooperation in a politically difficult environment. Launched in 2000 to support grass-roots initiatives, the programme is a precursor to the Cotonou Agreement, which, for the first time, officially recognised the role of non-state actors in the development process. The success of the programme has prompted national NGOs to form a forum for non-state actors which has an official place on the steering committee for the programme.

In Rwanda, the Commission has also, since 1998, financed a programme to support efforts at grass-roots level to rebuild local infrastructure (e.g. schools, health centres, bridges and markets).

Road construction and road repairs were amongst the most significant infrastructure projects, in sub-Saharan Africa, for example. Work was done on a number of segments of the roads that form the East African Northern and Central Corridor across Tanzania, Kenya and Uganda (EUR265 million); improvements were made to the Northern Coastal Highway in Jamaica (EUR80 million) and, in Ethiopia, large amounts were invested in moves to link the interior to the coast and to improve connections with Addis Ababa (EUR325 million).

Current water projects cover the whole range of water-related issues: resource management, distribution networks, sewerage, institutional support and water policy. Successes included: projects to supply water to a number of regions in Ghana (EUR56 million), supply and sewerage for three towns in Uganda with a combined population of 100 000 (EUR18 million). In addition, stations capable of receiving weather information via Meteostat satellites were installed in 45 countries, which should benefit the whole of Africa.

The education programmes approved in 2002 cover all levels: primary and secondary education and vocational training and higher education. With other donors, the Commission is helping Tanzania and Namibia to devise new sectoral approaches. In Botswana, Ethiopia, Fiji and Papua New Guinea, cooperation took the form of assistance in developing infrastructure, from the rehabilitation of primary schools to the building of universities. Lastly, institutional support programmes for Comoros and Ethiopia helped build national planning and monitoring capacity in the field of education.

A total of 298 results-oriented monitoring visits were made to 40 ACP countries in 2002. The projects are performing well in terms of efficiency and impact; results in terms of poverty reduction, are particularly good in the education sector.

The projects that ended in 2002 are summarised below.

In 2002, 70 transport and infrastructure projects were completed, with 2 500 km of road repaired or built. New major routes include: the Gitarama-Kibuye road in Rwanda (EUR41 million), the only asphalted connection to Kibuye; the Magta Lahjar-Djouk road in Mauritania (EUR17 million); and the Ramu road in Papua New Guinea, to which significant improvements have been made.

In the healthcare sector, the St. Kitts & Nevis hospital and the Karl-Heusner Memorial Hospital in Belize were completed.

Five grass-roots programmes were completed in 2002. All had a very positive impact on socio-economic development. In Uganda, 500 social infrastructure projects have been completed to date (primary schools, health centres and drinking water infrastructure). The initiatives have also helped the process of decentralisation and local administrative consolidation.

In the field of institutional support, the programme designed to reinforce the OAU's conflict-prevention capacity was completed. The programme helped with peace-keeping operations and with the process of drawing borders following the conflict between Ethiopia and Eritrea.

Eleven education projects were completed in 2002. Most of the projects were primarily geared towards "millennium development goals" and were thus concerned with primary education. However, they also contributed to the setting up of training schemes across a wide range of fields, responding to the specific labour market requirements (development of human resources, public administration, transport and food security, prevention of HIV/AIDS).

In relation to water, the Negril/Ocho Rios programme (EUR40 million), which provided 40 000 people in Jamaica with a sewerage and waste-water-treatment system, and the water-supply project for 55 000 people in rural areas of Samoa (EUR18 million) both helped considerably to improve living conditions for the most poor people.

5. Devolution of resources and decision-making powers to the Commission's delegations

5.1 Phase one of devolution: progress report [3]

[3] 6 delegations covering 10 countries (4 regional delegations cover 7 countries - not including Cuba): Senegal + Gambia, Cape Verde (3 pays); Côte d'Ivoire + Liberia (2 countries); Kenya + Somalia (2 countries); Dominican Republic (not including Cuba) (1 country); South Africa; Mali.

In the first half of 2002, the Heads of delegation signed the subdelegations submitted to them. In that period, Directorate C organised a support missions to all of the delegations, essentially to give advice on how to use the accounting tools and on the contractual and financial procedures to be used post-devolution.

From May to September, verification missions were organised: technical and administrative checks were performed in each delegations to establish how it was implementing the subdelegations (checks on sample transactions, organisation and sequence of file processing by the operational departments and the contracts/finance departments etc.) The missions also helped ensure that that the delegations understood the new tasks and responsibilities that they had been given as a result of operational devolution.

The verification missions raised a number of issues, most of which have already been resolved, or will be shortly.

The main issues were:

* staffing by officials in certain delegations;

* changes to financial and contractual channels to achieve greater harmonisation of EDF and Budget circuits (to reflect the changes introduced by the new Financial Regulation for the 9th EDF);

* the availability of all approvals in OLAS (and the changes made to bring them into line with the new circuits for the 9th EDF);

* clarification of the rules governing approvals in OLAS and of the deputising rules;

* the lack of a specific charter for EDF authorising officers;

* the availability on the Internet of manuals and descriptions of procedures concerning financial and contractual matters.

Towards the end of the year, technical work was done on devolution of the cooperation programme with Cuba (covered by the delegation in the Dominican Republic.

5.2 Phase two of devolution: progress report [4]

[4] 8 delegations covering 9 countries (1 regional delegation covers 2 countries): Cameroon, Benin, Guinea, Niger, Tanzania, Madagascar, Ethiopia (+ Djibouti), Burkina Faso.

At the hearings held in February 2002 with the eight Heads of delegation involved in phase two of the devolution exercise, the delegations' requirements in terms of additional resources were validated and the first preliminary steps were taken in the process of arranging the subdelegations.

Thirteen officials were selected and trained for the "finance/contract" sections. These officials are now in place and the last three CF officials are being recruited. The process of recruiting individual experts, local staff and ALAT is well advanced. Secure satellite connections have been established in most delegations.

There are a number of constraints relating both to recruitment of "finance/contract" officials and operational staff with the framework of the devolution exercise and to the deadlines for finding solutions to the delegations' buildings requirements.

Subdelegations were signed in November for the Burkina Faso Delegation and in December for the Ethiopia and Tanzania delegations. The preparatory work done in three other phase-two delegations (Cameroon, Guinea and Benin) was examined in December and the subdelegations were sent out in January 2003. The Niger and Madagascar delegations are set to sign their subdelegations in February 2003.

5.3 Phase three of devolution: progress report [5]

[5] 30 delegations covering 58 countries and 11 OCTs (9 regional delegations cover 37 countries and 11 OCTs): Barbados + Antigua and Barbuda, Dominica, Grenada, St Kitts and Nevis, St Lucia, St Vincent and the Grenadines; OCTs: Montserrat, Anguilla, British Virgin Islands. (7 countries + 3 OCTs); Fiji + Samoa, Kiribati, Nauru, Cook Islands, Tuvalu, Palau, Marshall Islands, Tonga, Niue, Micronesia; OCTs: New Caledonia, French Polynesia, Wallis and Futuna, Pitcairn Islands; (11 countries + 4 OCTs); Gabon + Equatorial Guinea, Sao Tome e Principe (3 countries); Ghana + Togo (2 countries); Guyana + Trinidad and Tobago, Suriname; OCTs: Aruba, Netherlands Antilles . (3 countries + 2 OCTs); Jamaica + Belize, Bahamas. OCT: Turks and Caicos Islands. (3 countries + 1 OCT); Lesotho + Swaziland (2 countries); Mauritius + Comoros, Seychelles; OCT: Mayotte (3 countries + 1 OCT); Papua New Guinea + Solomon Islands, Vanuatu (3 countries); Angola; Botswana; Burundi; Central African Republic; Congo; D.R. Congo; Eritrea ; Guinea-Bissau; Haiti; Malawi; Mauritania; Mozambique; Namibia; Nigeria; Uganda; Rwanda; Sierra Leone; Sudan; Chad; Zambia; Zimbabwe.

At the beginning of May, Directorate C launched phase three of the devolution exercise, which covers 30 delegations.

As part of the preparatory technical work, four seminars were held from 24 June to 18 July, culminating in a meeting of the working part on devolution. For each country, the following files were examined individually and in depth:

* an analysis of the current project portfolio and of progress on it by each delegation;

* an exact breakdown of current delegation staff (including all types and categories of staff, with an exact statement of their duties) and an analysis of additional requirements relating to the devolution process;

* a draft organisation chart for each delegation;

* an estimate of logistical requirements (telecommunications, IT, office space etc.);

* the Head of delegation's mandate.

The files, once finalised at the meetings of the working party on devolution, were sent for validation to the Directors-General of AIDCO, DEV and RELEX. Additional officials' posts identified in this process have been included in the 2003 rotation exercise launched in 2002.

In December 2002 and January 2003, the Directors-General of AIDCO, DEV and RELEX endorsed 30 Heads of delegation. Work on the devolution set-up and, in particular, recruitment of contract staff (local staff, ALATs and individual experts) to be funded by the 9th EDF was part of the preparations for the entry into force of the Cotonou Agreement on 1 April 2003.

Annex: 6th, 7th and 8th EDF (31/12/2002) - progress by instrument

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