ARCHIVES HISTORIQUES 
DE LA COMMISSION 
 
 
 
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DOCUMENTS "COM" 
 
 
 
 
COM (85) 547 
 
 
Vol. 1985/0 201 
  
 
Disclaimer  
Conformém ent au règlement (CEE, Euratom) n° 354/83 du Conseil du 1er février 1983 
concernant l'ouverture au public des archives historiques de la Communauté économique 
européenne et de la Communauté européenne de l'énergie atomique (JO L 43 du 15.2.1983, 
p. 1), tel que modifié par le règlement (CE, Euratom) n° 1700/2003 du 22 septembre 2003 
(JO L 243 du 27.9.2003, p. 1), ce dossier est ouvert au public. Le cas échéant, les documents 
classifiés présents dans ce dossier ont été déclassifiés conformément à l'article 5 dudit 
règlem ent. 
In accordance with Council Regulation (EEC, Euratom) No 354/83 of 1 February 1983 
concerning the openin g to the public of the historical archives of the European Econom ic 
Communit y and the European Atom ic Energy Communit y (OJ L 43, 15.2.1983, p. 1), as 
amended by Regulation (EC, Euratom) No 1700/2003 of 22 September 2003 (OJ L 243, 
27.9.2003, p. 1), this fi le is open to the public. Where necessary, classified documents in this 
file have been declassified in conformity with Article 5 of the aforementioned regulation.  
In Übereinstimmung mit der Verordnung (EWG, Euratom) Nr. 354/83 des Rates vom  1. 
Februar 1983  über die Freigabe der historischen Archive der Europäischen  
Wirtschaftsgemeinschaft und der Europäischen Atomgem einschaft (ABI. L 43 vom  15.2.1983,  
S. 1), geändert durch die Verordnung (EG, Euratom) Nr. 1700/2003 vom 22. Septem ber 2003  
(ABI. L 243 vom 27. 9.2003, S. 1), ist diese Datei der Öffentlichkeit zugänglich. Soweit  
erforderlich, wurden die Verschlusssachen in dieser Datei in Übereinstimmung mit Artikel 5  
der genannten Verordnung freigegeben.  
COMMISSION OF THE EUROPEAN COMMUNITIES
C0M<85) 547 final  
Brussels, 14 October 1985
JOINT COMMISSION/EIB COMMUNICATION TO THE COUNCIL  
ON THE IMPLEMENTATION OF COMMUNITY AID TO THE ACP  
STATES AND OCT/OD AT 21 DECEMBER 1984.
COMC85) 547 final

CONTENTS
INTRODUCTION
I. General problems of implementation
A. Resources administered by the Commission
B. Resources administered by the Bank
II. Taxation
III. Improving payment procedures
A. Resources administered by the Commission
B. Resources administered by the Bank
IV. Overruns
A. Incidence of overruns
B. Suggested remedies
V. Loan recovery problems
VI. Utilization of aid
A. Resources administered by the Commission
B. Resources administered by the Bank
VII. External indebtedness of ACP States

In pursuance of Article 25 of the Internal Agreements on the financing  
and administration of Community aid (fourth and fifth EDF), the  
Commission and the European Investment Bank report jointly to the  
Council on how Community aid is implemented and used by the recipient  
countries.
The present report covers the years 1983 and 1984. Since negotiations  
for the new Lomé Convention, signed in lace 1984, were going on for  
much of this period, the Commission and Bank have thought best not  
simply to update the essentially quantitative information contained in  
previous reports' but to undertake a more qualitative assessment,  
considering inter alia certain fundamental points which arose during  
those negotiations, including the tax treatment of Community-financed  
operations and the ACP States' external debt. The same consideration,  
however, justifies the continued inclusion of a number of sensitive  
issues whose persistence highlights the practical difficulties in the  
way of Community aid operations: problems with project implementation
and the recovery of loan repayments, and the continuing efforts of the  
funding bodies to improve contract payment procedures. This report  
also contains two new items not previously covered: a preliminary
estimate of project cost overruns (the main quantitative component)  
together with suggestions for avoiding their recurrence; and, in response  
to requests formulated by the Member States when earlier reports were  
discussed, a consideration of project evaluation, which gives some  
indication of how Community aid is used - we have here been concerned,  
however, to avoid going over ground already covered in reports or 
communications submitted to the Council in other connections.
C0M(80)107, 24 April 1980  
C0M(81)825, 11 January 1982  
C0M(83)421, 4 July 1983

-  2 -
I. General problems of implementation  
A·  Resources_adm 2nlstered_b^_the_Comm 2SSion
As the Commission has made clear in previous reports, problems with the  
implementation of aid arise at all stages of a project from identification  
to full operational status. Without over-generalizing - for such  
problems are not necessarily encountered in all ACP countries, or at  
all stages of a project in a given country - such difficulties are to  
a great extent the result of local administrative shortcomings. The  
Community has raised these matters with its partners at meetings of  
the Article 108 Committee set up by Lomé II. In the present report  
we will simply be looking at one or two of these characteristic problems  
in the light of the most recent experience with EEC-ACP financial and  
technical cooperation. They can be classified under three broad  
headings: administrative delays, administrative incapacity, and
dispersal of responsibilities.
(a) Administrative delays occur at various stages from project  
identification onwards, and while most indicative programmes were rapidly  
drawn up, not all ACP States managed to select individual projects within  
a reasonable time. In Guinea, for instance, three and a half years after  
Lomé II came into force approved projects had been found for less than a  
quarter of the indicative programme.
Considerable delays are also encountered in the signing of financing  
agreements and loan contracts. In reality the problem is not so marked  
with financing agreements proper, being significant only in the case of  
certain regional projects requiring the signatures of more than one  
country; where major delays do often occur is with the financing contracts  
relating to special loans. A loan contract sent to Trinidad and Tobago  
in 1980, for instance, was not signed until 1984. Such delays are rarely  
caused by substantive problems with contract clauses; instead, they  
reflect the frequent inability of ACP countries to complete the necessary  
formalities with dispatch, since the approval of numerous administrative  
or financial bodies may be required.

- 3 -
There are also numerous instances of ACP States having difficulty in  
carrying out projects properly on schedule. In Lesotho, for example,  
there are generally delays in the issue of provisional acceptance papers  
for contract supplies, while countries like Niger, Somalia and Liberia  
have been dilatory in providing the auxiliary services (e.g. electricity  
supplies) needed to enable projects to start up in time.
(b) A second source of problems concerns the actual ability of the  
administration in certain countries to fulfil the duties incumbent on  
them under the Lomé Convention. In many cases the local administration  
proves unable to prepare invitation to tender dossiers unaided, even if  
it has undertaken to do so without the help of a technical assistant.  
Similarly, in some ACP countries the Commission has had to prepare EDF  
payment orders, collect the supporting documents and get them signed by  
the national authorizing officer and the ministries concerned.
(c) The study of specific typical cases of the difficulties encountered
in financial and technical cooperation activities has brought to light a  
problem which can be regarded as lying at the root of a number of the  
shortcomings detected: the tendency towards fragmentation of responsibility
for decision-making. Uganda is typical in this regard. Project  
identification is delayed because the approval of some fifty officials
must be sought before a project request can be finalized. There is, on  
the other hand, a Central Tender Board which is empowered to award all  
government contracts and does so quite promptly. There should be a  
similar centralization of responsibilities at other stages of the project  
procedure, and other countries might usefully follow the same example,  
if necessary with the help of technical assistance.

- 4 -
B. Resourçes_admi^i^tered_by_the_Bank
The Bank Lends money not only to ACP governments but also in many cases to  
state, semi-state or private concerns, whose management structures are  
generally such as to prevent most of the problems encountered by the  
Commission.
Nevertheless, because of general economic and financial problems and  
sometimes also of domestic political considerations or administrative  
red tape, some ACP States have been late or remiss in fulfilling their  
duties or have blocked or delayed the release of resources needed to  
complete or commission theoretically "priority" projects. Thus a number  
of Bank-financed projects are or have been faced with obstacles for which  
the main responsibility lies with the ACP State itself, necessitating  
constant monitoring of the progress of those projects and efforts to find  
ways of enabling the economic objectives to be fulfilled. Here are some  
examples of these problems:
- delays in the payment by a country of its share of the financing,  
budget contributions or administrative bills (Régie du Chemin de Fer  
Abidjan-Niger (RAN) in Ivory Coast/Burkina Faso; Société Ivoirienne  
d'engrais (SIVENG) in Ivory Coast; and the Liberia Electricity Corporation  
(LEC) project);
- late or incomplete coverage of foreign exchange requirements (the LEC  
project in Liberia, and Morogoro Canvas Mill and Tanganyika Development  
Finance (TDFL) in Tanzania);
- postponements or major delays in the provision of supporting  
infrastructure or back-up investments (development of tourist facilities  
in Mali, Gezira Managil Textile Company (GEMATEX) in Sudan).
These drawbacks often go hand in hand with problems in the way the aid is  
actually used.

- 5 -
II.  Taxation
As regards implementation of Lomé II, which is still under way, the tax  
and customs treatment of Community-financed contracts is defined in  
Protocol No 6 to the Convention. Article 1 of that Protocol provides  
that EDF contracts shall be subject to tax and customs arrangements  
"no less favourable than those applied vis-à-vis the most favoured State  
or most favoured international development organization", and Articles  
2 to 12 lay down a number of more specific rules.
Like the Community, other donors operate on the principle that no tax  
should be paid in an ACP State on contracts financed as part of their  
aid programmes. Member States of the Community and the World Bank  
confirm that no tax is levied on the external cost component of their  
aid programmes. Throughout the ACP States the World Bank and at least  
one EEC Member State's bilateral aid agency have been granted exemption  
from all taxes.
Enquiries addressed by the Commission in 1983 to its Delegates, however,  
revealed that in at least 30 ACP States the EDF had not enjoyed  
most-favoured tax status; in 18 other ACP countries, by contrast, the  
Community had obtained either most-favoured tax treatment or full  
exemption from taxes.
The problems which have arisen with the application of Protocol No 6  
are due not only to its misinterpretation by some ACP States in the light  
most advantageous to themselves, but to the outright refusal of some  
countries to apply it at all, even when its provisions are perfectly  
clear, and in spite of their obligations under the Lomé Convention  
(Protocol No 6 forms part of the binding provisions of the Convention).
The Commission estimates that some 100 million ECU or approximately 6%  
of the indicative programmes of 26 ACP States will be creamed off by  
those countries' tax systems if the present rules continue to be applied  
until the Lomé II indicative programmes are complete. Around half of  
that figure is made up of tax paid on projects already approved; the  
remainder represents tax which would be payable on future contracts.
A large proportion of the tax levied relates to works contracts,  
accounting for up to 35% of the value of EDF-financed works contracts.

-  6 -
Without a doubt the levying of such taxes and the uncertainty as to  
their incidence has prompted tenderers to raise the prices of their  
bids to cover the tax bill (or the risk of taxation) in ACP States.
In addition, the negotiation and signing of EDF contracts have been  
delayed because of contractors' uncertainty on the question of taxation.  
The net result of ACP tax problems has been to inflate the cost of EDF  
contracts and delay and complicate their execution to the direct  
detriment of the ACP States themselves.
Against such a background the Community proposed to the ACP States that  
under Lomé III project and programme financing should enjoy freedom from  
all tax and customs charges. The ACP States refused, however, and the  
arrangements for the new Convention are similar to those in Protocol No 6.  
Nevertheless, on the strength of the findings it uncovered in its  
enquiries to Delegates the Commission is determined that in future the  
ACP States must comply with their undertakings on this score; this will  
be a sine qua non for the grant of financing. A rule of "the whole  
Protocol, though nothing but the Protocol" should lead to full exemption  
in a substantial number of ACP States.
The Bank for its part accepts the practice of including taxes when a  
project is drawn up, its costs worked out and the comprehensive financing  
plan established. It takes care, however, to see that all payment of  
taxes or other fiscal dues is contractually excluded from the sums it  
transfers to borrowers for the purchase of goods or services it finances.

- 7 -
III. Improving payment procedures  
A.  Resources_administered_by_the_Commission
In the interests of maintaining the European Development Fund's reputation  
as a "good payer" the Commission has consistently sought ways to speed up  
payment procedures, white providing the necessary safeguards for the  
project supervisory authorities. The 1982 decision to cut down the  
number of payment instalments for supply contracts was discussed in the  
preceding report, and since then the Commission has been working on two  
further changes: first, it has been moving towards an alignment of special  
loan payment procedures on those for grants, and second, it has been  
discussing with the interested parties the possibility of easing the rules  
governing the provision of performance bonds.
(a) Until May 1983 the Commission, like the Bank, transferred credits to  
the borrower who in turn had to pay the contractors, the aim being to keep  
clear for firms the distinction between the supervisory authority/borrower  
and the Commission/lender and to involve the recipient authorities directly  
in execution of the loans.
In practice this two-step process proved increasingly unsatisfactory, with  
more and more delays due essentially to failings on the part of the  
administrations concerned.
In these circumstances it was decided to allow borrowers, if they so 
wished, to have special Loans dealt with in the same way as grants, i,e.  
the Commission would pay the money direct to the contractor on the  
borrower's instructions.
However, two conditions attach to the new procedure:
1. it is not automatic; it cannot be used against the wishes of the 
borrower who prefers to continue with the old arrangements;
2. it is essential to obtain either case-by-case or blanket authorization  
in advance from the authority responsible for the management of the  
ACP country's external debt in order to prevent any subsequent dispute  
about execution of the special Loan.

-  8 -
Use of the direct payment system for special loans represents a  
substantial procedural streamlining which should speed up payments while  
offering the same safeguards which have already proved their worth with  
grants.
The Delegates were asked in a circular dated 19 May 1983 to inform their  
interlocutors in the ACP States of the availability of the new formula.
(b) The Commission had its attention drawn to criticisms made by certain  
banks of the system whereby contractors are required to lodge a deposit  
to guarantee the refund of sums paid to them in the event of unsatisfactory  
performance. The critics alleged that obliging suppliers to put up a  
bond in respect of the first 60% instalment (payable with the order) which  
is only redeemable at the time of provisional acceptance imposes a burden  
on businesses, and that other practices current in international trade  
such as letters of credit or stand-by arrangements would allow payment in  
full without the need to lodge a deposit.
The Commission took the point and has been considering this question in  
liaison with the interested parties, who have provided further details of  
these arrangements. Talks are still going on (at mid-1985), but the  
Commission now feels, whatever the subsequent findings, that the suggested  
new system would offer less protection to the ACP States, since payment  
would take place simply on presentation of the documents when the goods  
were shipped and not on their acceptance at the other end in good working  
order, not to mention the cash problems for the Commission if payment in  
full through the Community's paying bodies became the rule. The Commission  
also learned from contractors that the financial burden associated with the  
deposit system is due to the inflexibility of some Member States' banking  
systems rather than the guarantee mechanism itself; some banks, for instance,  
require firms to give a deposit before the guarantee is issued, which

- 9 -
clearly removes the whole point of the 60% "advance" paid as the first  
payment instalment. Thus while the Commission is not ruling out some  
relaxation of the guarantee system hitherto in use for EDF-financed  
contracts, it intends to proceed only after mature consideration and  
with the assurance that the banks concerned have assimilated all the  
"ins and outs" of the traditional EDF method.
B. Resources_admi_nistered_b^_the_Bank
Given its internal operating procedures and the fact that its loans in  
many cases account for only a small proportion of a project, the Bank  
is not in a position to settle directly with contractors working for its  
borrowers.^ However, its range of disbursement procedures gives it the  
flexibility to deal efficiently with the different situations which arise,  
taking into account the particular circumstances of borrowers as well as  
ACP States.
The best safeguards are offered by the system of refinancing on the basis  
of documentary proof of payments effected or work carried out by the  
borrower, since this allows the Bank to pay out the loan as and when  
performance progresses, and monitor the rate of commitment of the  
borrower's own funds and the payments of co-financiers. This is the  
preferred procedure for both local currency and foreign exchange payments.
However, the Bank also uses more flexible prefinancing methods on a  
case-by-case basis to cope with the specific problems of some borrowers,  
particularly in cases where borrowers experience difficulties in getting  
permission to buy or transfer foreign currencies. The borrower then has  
to provide regular proof for each tranche of how the money has been used  
before any new payments are made.
The Bank also has special procedures for paying up both equity it acquires  
direct, using risk capital, on behalf of the Community, and share-holdings  
subscribed by governments or development finance bodies using funds  
supplied by the Bank.
The only exception is for risk capital loans to finance studies or  
technical assistance, when the borrower - usually a government, but  
sometimes a development bank - has formally to acknowledge itself  
debtor for the sums paid direct to the consultant as performance of  
the contract proceeds.

-  10  -
IV. Overruns
Now that 86% of the money from the fourth EOF has been spent, the Commission  
is in a position to give an initial assessment of cost overruns on projects  
financed by that Fund, though it is too early yet to attempt such an  
exercise for the fifth Fund. The Commission has considered both the  
incidence of cost overruns and possible means of preventing their occurrence.
A. Inc 2dence_of_overruns
1. The Commission's investigations revealed a volume of overruns of
57 370 Q00 ECU on 84 projects to a total value (initial commitments) of  
345 328 000 ECU, i.e. an increase of 16.6% overall.
We hasten to say, however, that these figures are strictly marginal in  
relation to total fourth EDF commitments; the projects concerned account  
for no more than 4.24% by number and 11.4% by volume of that Fund, and the  
total overrun accounts for just 1.90% of total commitments. Note also  
that 68 Cor 80%) of the overruns found amount to 15% or less of the initial  
commitments concerned, below the ceiling within which the EDF's  
Chief Authorizing Officer is empowered to approve additional commitments  
(see Article 56 of the Financial Regulation applicable to the fourth EDF),  
while seven fall within the 15%—50% bracket and eight in the 5Q%-100%  
bracket. In only one case did an overrun exceed 100%.
2. Looking at the reason for these overruns, the underlying causes can be  
divided into three broad categories:
- The need for additional funds to pay for the extension of operations  
already under way or for extra work and supplies. These causes account  
for an aggregate overrun, of 20.8 million ECU, or 36.3% of the total  
figure.
- Purely financial factors such as price inflation, exchange rate movements,  
the under-estimating of costs prior to issue of invitations to tender, or  
payment by the Community of costs which should have been financed by the 
recipient country. Those factors underly overruns amounting to
20.5 million ECU, or 35.7% of the total.

-  11 -
- Increases incurred because of difficulties arising with implementation  
(unforeseen contingencies and changes to the initial contract  
specifications). Overruns attributable to these causes amount to  
16.1 million ECU, 28% of the total.
3. These figures give a preliminary idea of the scale of cost overruns.
At this stage no significant trends seem to emerge from a comparison of  
the countries or sectors concerned. However, the Commission reserves  
the right to comment in greater detail on this at a later date should  
more pertinent information come to light in the course of continuing  
implementation of the fourth and fifth EDF.
B. Suggested_remedies
1. While some of the factors mentioned above might seem to be beyond  
reasonable control, linked as they are to cyclical developments, precautions  
are nevertheless possible. In particular, initial cost estimates could
be made more accurate. The Commission has been testing the approach used 
by other donors such as the IBRD and the FAC whereby the invitations to  
tender are issued before the financing decision is adopted, so that at the  
time the decision is taken, better information is available as to the cost  
of the contract or project.
Here are the figures for advance invitations to tender as a proportion of  
all those issued in the years concerned:
- 1982: 18.5% of the total by number and 47.8% of the total by value;
- 1983: 24% of the total by number and 46% of the total by value;
- 1984: 24% of the total by number and 53% of the total by value.
2. That "experimental" procedure has now been enshrined in the new Lomé
Convention (Article 223(7)), which states that "in order to cut down the 
likelihood of overruns to a minimum, the ACP States and the Community  
shall make every effort to ... issue invitations to tender before taking '  
the financing decision".
As regards Commission-administered resources, the Commission has worked  
out with the Member States a number of groundrules for use of the new system  
in the interests of ensuring its transparency and efficiency.

-  12  -
The Council's ACP-FIN Working Party has formulated the following operating
guidelines:
- the EDF Committee must give prior approval for the issue of each advance  
invitation to tender;
- the ACP-EEC Courier must have advance notice of the issue of all  
invitations to tender;
- the key criterion is not the size of a contract but its urgency; a  
small tender may be just as urgent as a large one, and this, the  
urgency of the work or supplies, is what counts, e.g.:
.  works: the need to get road works under way or at least organize the
site before the rainy season;
.  supplies: the need to supply fertilizers in time for sowing so that
a whole growing season is not lost;
- the object of the exercise should be borne in mind: the aim is to get  
a better idea of prices so as to reduce or eliminate the risk of  
overruns, and thus the advance issue of invitations to tender is called  
for in times of inflation (whether in Europe or ACP countries) and for  
complicated projects where no study, however detailed, can produce as  
accurate an idea of costs as a bid from interested firms;
- equality of the conditions of competition is important: an international
invitation to tender can only be issued on the basis of a complete  
technical and administrative dossier; tender calls in advance of  
financing decisions must not be authorized at the expense of a proper  
invitation to tender dossier;
- coordination among financing bodies: many important donors use the
advance invitation to tender method; in the interests of coordination,  
therefore, this approach should be followed for all co-financed projects,  
whether the co-financing is joint (a single invitation to tender for all  
funding bodies) or parallel (synchronization of the invitations to  
tender issued by the different funding bodies);

- 13 -
- the whole operation has to be carefully planned from start to finish;
the invitation to tender must be impeccably timed so that (a) the
results are available in time to make any necessary adjustments to the  
cost estimate derived from the preliminary study and (b) the contract  
can be concluded - following approval by the EDF Committee, adoption of  
the financing decision and the signing of the financing agreement -  
within the ninety day period for which tenders are binding; this means  
invitations to tender must be issued neither too late nor too early;
- invitations to tender must be issued subject to financing being obtained
from the Community, i.e. at the recipient country's own risk; this must  
not preclude publication of the invitation to tender in the Official  
Journal, arrangements for simultaneous publication with the recipient  
country, and compliance with the prescribed Community procedures (public  
opening of bids, presence of the Commission Delegate, and approval by  
the Commission - Brussels or Delegate - of the results of the invitation  
to tender).

- H  -
V. Loan recovery problems
The worsening economic and financial situation of many ACP States, some  
of which have been forced to seek debt rescheduling agreements with the  
IMF, Paris Club or London Club, has had direct repercussions on the  
servicing of Community loans because of:
- the resultant cash flow or budgetary problems experienced by both  
business and governments;
- balance of payments problems and shortages of foreign exchange, which  
have meant sometimes lengthy delays for the Community's customers in  
obtaining transfer authorization from the central banks or monetary  
authorities of the countries concerned;1
- the deteriorating financial position of some borrowers, which may be  
chiefly due to failure on the part of a government to take necessary  
action (e.g. postponing permission for price rises despite formal  
undertakings given to lenders).
Instances of late repayment have increased; but above all, the length  
of the delays has increased to an alarming extent despite the Bank's  
having markedly stepped up its appeals and démarches to the borrowers  
and authorities of the ACP States concerned.
While the outstanding payment situation and the short and medium-term  
prospects are not yet catastrophic, they are worrying, especially where  
loans from the Bank's own resources are concerned, since problems of  
this kind can affect the Bank's general credit standing. The Bank's  
recovery procedures involve prompt and timely notification to the  
guarantor ACP State of any significant repayment delays, followed by  
repeated reminders. Where payment continues to be delayed the Bank  
advises the country concerned of the consequences of an official  
calling-up of its guarantee: suspension of all new lending and payment
of current loans until the sums owed by the borrower are settled in full.
Despite the ACP States' undertakings in the Conventions (Article 67 of
Loué I and Article 158 of Lomé II).

- 15 -
To date it has almost always proved possible to recover outstanding  
payments using these procedures; either the monetary authorities of  
the ACP State concerned have finally put the necessary foreign currency  
at the borrower's disposal, the government, as guarantor, has provided  
a failing borrower with an advance or to all intents and purposes  
settled on behalf of the borrower, or else the Bank has contractually  
called in the guarantee and the country concerned has fulfilled the  
obligations incumbent on it.
The only time this procedure failed to work was the LEC-Bushrod loan,  
when despite repeated démarches by the Bank, backed by the Commission  
and the Commission Delegate, Liberia, the guarantor, did not honour its  
obligations with regard to two payments due on 30 April and  
31 October 1984 and the Bank had to turn, as a last resort, to the  
guarantee provided by the Member States.*
Where loans on risk capital are concerned the major servicing delays  
occur with operations in countries suffering from particularly severe  
financial and economic problems or involving borrowers in deeply  
troubled sectors. The Bank has kept up repeated pressure and the  
only payments now long overdue (over six months late) are confined to  
Liberia, Rwanda and Sudan.
The only postponement of payment accorded on a contractual basis is  
still that relating to the Gezira Managil Textile Company (GEMATEX) in  
Sudan, where commissioning of the mill depends on a satisfactory  
electricity supply; the Sudanese authorities were to have provided this  
in 1983, but the earliest possible date is now 1986. The servicing of  
a risk capital operation and two special loans granted to Chad for two  
industrial projects (Société Textile du Tchad and Société Nationale  
Sucrière) was interrupted from 1978 to 1982 because of the civil war  
but in the end the Chad authorities, the Commission and the Bank  
between them came to a most satisfactory agreement and nearly all the  
outstanding payments have now been cleared - the last three repayments  
on the STT loan are due to be made very shortly.
Following repeated demands and the blocking of all fresh money from  
the Community (including aid administered by the Commission) Liberia  
finally paid the two outstanding instalments and the Bank immediately  
transferred the money back to the Member States.

- 16 -
In the case of Commission special loans the Bank is simply mandated for  
recovery and arrears of payment persist (some repayments are almost  
three years overdue) despite repeated approaches to the authorities of  
the countries concerned, which, however, are only a handful ~ Mauritania,  
Sudan and Guinea. The Bank is in close touch with the Commission and  
Commission Delegates, who are endeavouring to find solutions to these  
problems. Broadly speaking, the situation appears more or less to  
have stabilized for the moment, and there is no marked deterioration  
in special loan repayments.
The Commission and the Bank have been looking at ways of achieving  
greater solidarity for the purposes of coordinated action to improve the  
servicing of Community loans in some ACP States, and an experiment  
involving the use of foreign currency equivalent to local expenditure  
on EDF-financed projects to pay all Community loans is currently being  
tried out for the first time in Tanzania by agreement with the government,  
with some success. Repayments for the second half of 1984 were made  
without too much delay; the experiment will continue throughout 1985, and  
it is to be hoped the method can be used elsewhere in future (Article 227).
Currently under consideration by the Council's working party of financial  
experts.

- 17 -
VI. Utilization of aid
Under Article 25 of the Internal Agreement the Commission and the Bank  
are required to ascertain how projects financed by Community aid are  
used by the recipients and examine the extent to which the objectives  
of financial and technical cooperation have been attained.
A. Resources_admini§tered_by_the_Commission
For its part, the Commission believes that the work done over the last  
few years on ex post evaluation of development projects fulfils the  
function described above.
Evaluations undertaken to date fall basically into three categories,  
setting aside "à la carte" evaluation of certain specific points carried  
out at the request of the department concerned:
1- Sectoral evaluation:  evaluations have been carried out for the
following sectors:
.  health service
.  rural and urban water supplies  
.  integrated agricultural projects  
.  education and training  
.  roads
.  livestock production.
2- System evaluation:  to date the following instruments of development
cooperation have been evaluated:
.  micro-projects and projects co-financed with NGOs  
.  Stabex 
.  food aid
.  technical assistance.
3. Comprehensive evaluation of all sectors, development instruments and  
non-Community aid programmes in a given country or region; the following  
evaluations have been carried out:
.  Cameroon  
.  Niger 
.  Rwanda 
.  Senegal  
.  Zaire 
.  Zambia

- 18 -
Discussion papers and summary reports were produced for each of the above  
evaluation exercises.
In some cases meetings of ACP/EEC experts and representatives from the  
Member States took place for the purpose of working out certain "basic  
principles" for a given field. The following such seminars have been  
held:
.  December 1978, Freetown, Sierra Leone: health,
.  November 1979, Bamako, Mali: drinking water supplies;
.  February 1981, Lomé, Togo: agricultural development;
. March 1982, Addis Ababa, Ethiopia: education and training;
. May-June 1983, Niamey, Niger: roads;
. January 1984, Nairobi, Kenya: livestock production;
. April 1984, Harare, Zimbabwe: technical assistance.
The "basic principles" drawn up at those meetings go to the ACP-EEC Council  
for approval and are then disseminated widely amongst all interested parties.
The Member States are thus supplied with information at the key stages of  
the evaluation process; the Commission therefore sees no need to provide  
details in this report of the way in which recipient countries use  
Community aid, and would refer Member States to the comprehensive  
documentation they have already received.

- 19 -
B.  Resources_adm 2ni_stered_b^_the_Bank
The Bank's supervisory and follow-up procedures broadly take the same form  
for operations inside and outside the Community. In addition, the same  
basic banking criteria are observed - as indeed is the case with project  
appraisal too - both for loans from the Bank's own resources and operations  
for which it has received a special mandate. The procedures are designed  
to enable the Bank to supervise and monitor the execution and subsequent  
operation of projects it finances. Assessments are based on periodical  
reports which borrowers are contractually required to furnish (project  
progress reports, financial statements and other financial information),  
on-site inspections, and contacts and talks with borrowers, the  
authorities of the ACP State concerned, and co-financing bodies. The  
Bank's findings are then set out in in-house reports which examine and  
analyse the main features of the operations being financed. Where  
special problems occur, conclusions and recommendations for action are  
regularly submitted to the Bank's decision-making bodies.
To date it has not been the Bank's practice to carry out systematic  
ex post evaluations of the real impact and full consequences of projects  
financed either inside or outside the Community. However, its work of  
analysis allows efficient supervision of the use to which aid is put and  
a broad assessment of the extent to which its objectives have been or are  
likely to be attained. This is a question to which the Bank is currently  
devoting considerable thought.
The conclusions reached by the Bank on the basis of this work over the  
past two or three years indicate a number of key problems, generally  
related to the economic and financial difficulties besetting certain  
ACP States. Here are examples, in no particular order of importance,

-  20  -
of the main problems which have affected projects financed by the Bank:
(a) government price freezes or delays in authorizing price rises, or  
prices set too low - Société Sucrière de la C0M0I (S0SUC0, formerly  
SOSUHV), in Burkina Faso; Moulin du Sud-ouest (MSO) in Ivory Coast;  
Bamburi Portland Cement and South Nyanza Sugar (SONYSUGAR) in Kenya;  
National Electric Power Authority (NEPA) in Nigeria;
(b) taxation or inadequate administered prices for local raw materials -  
Société Textile du Cameroun pour le linge de maison (SOLICAM);  
Société Minière du Rwanda (SOMIRWA);
Ce) reconsideration of or delays in implementing intergovernmental  
agreements - regional projects: Ciments del'Afrique de l'Ouest
CCIMAO), and the RAN project;
(d) particularly severe or persistent political unrest - Société Textile  
du Tchad (STT); Société Nationale Sucrière du Tchad (SONASUT).
\ e  have cited projects which represent typical instances of the problems  
considered and may be commented on in detail when this report is
< 6 X | S .i[ n i nso«

-  21 -
In addition to the above, the following factors also caused problems:
(e) cyclical factors and worldwide recession occasioning low or falling  
prices for export commodities - the Dwangwa Sugar Corporation (DSC)  
project in Malawi; Royal Swaziland Sugar Corporation (RSSC);
Générale des Carrières et des Mines (GECAMINES) in Zaire; Zambia  
Consolidated Copper Mines (ZCCM);
(f) the inadequacy of management structures or technical assistance -
the NEPA project in Nigeria, SOMIRWA in Rwanda, and the Société  
Nationale pour le Développement de La Palmeraie et des Huileries  
(SONAPH) in Togo; ~ ~  —---
(g
) unfavourable market trends or production capacity failing to reach  
forecast levels - the Novotel hotel project in Ivory Coast and the  
"Gaweye" hotel project in Niger; Poura gold mine in Burkina Faso;
M30 in Ivory Coast; Industries Chimiques du Senegal (ICS); SICOR in  
Ivory Coast;
(h) exceptional or persistent drought conditions, which directly or  
indirectly affected many of the projects financed by the Bank -  
agricultural or hydro-electric projects (particularly severely hit  
was the SONAPH project in Togo);
(i) problems with the supply of local raw materials (the Kenya Furfural  
Company (KFC) project).
At the same time the depressed level of economic activity in a number of  
ACP States has directly affected the financial position of many small  
businesses receiving support from development banks to which the Bank  
has accorded global loans; the development banks are accordingly  
experiencing severe problems with payment arrears which in some cases  
have seriously upset their financial structure: Kenya's Industrial
Development Bank (IDB), the TDFL in Tanzania and the Development Bank  
of Zambia (DBZ).
In liaison with the other co-financing agencies concerned, the Bank is  
continually engaged with the project promoters and government authorities  
concerned in endeavours to analyse the causes of problems which have  
arisen and seek suitable ways of achieving the objectives laid down.  
Prospects for some of the projects are already looking up, but elsewhere  
the problems are far from solution and the outlook for some schemes is  
very bleak (the GEMATEX project in Sudan, ClMAO, the KFC in Kenya and  
the MSO in Ivory Coast).

-  22  -
VII. External indebtedness of ACP States
The external debt burden is a major problem of Third World countries  
which has recently been occupying the headlines. While discussion has  
mainly centred on Latin America, debt problems also affect a number of  
ACP countries which have been hard hit by falling export earnings due  
to the slump in commodity prices.
(a) In 1982 ACP public debt totalled $51.4 billion (an increase of nearly  
ninefold since 1970) or 12.3% of all developing-country debt.^
Of that amount, $750 million is owing to Community institutions  
($450 million to the EIB and $300 million to the EDF), representing  
1.5% of total ACP debt.
(b) If the Community accounts for such a small proportion of the total,  
it is because aid accorded under the Lomé Conventions is primarily  
in grant form; the weighted average grant element of all EDF funds  
is 94% (including the subsidization of interest rates on loans  
granted by the EIB from its own resources).
The degree of concessionality of aid under Lomé II is also reflected  
in the breakdown of programmed aid. In the case of the 35 least-  
developed ACP countries, 89% of the aid was in grant form, compared  
with 79% for the other ACP States. In addition, when the definitive  
totals of the Lomé II indicative programmes were settled it was  
decided that 90 million ECU which was to have been used for special  
loans under those programmes would be given in grant form instead,  
the aim being to improve the financial situation of the 14 countries  
concerned. This is one example of the Community's flexibility and  
pragmatism towards ACP States suffering severe problems of  
indebtedness.
A lower figure is obtained for the ACP States by looking at debt  
servicing costs, which amount to only 9% of the developing-country  
total, a probable reflection of the generally softer loan terms offered  
by the Community.

- 23 -
A number of Community aid resources also indirectly help lighten the  
debt burden of the ACP States. Three are particularly noteworthy:
- the appropriations in the Community's general budget for food aid  
operations, which constitute a significant help to ACP States'  
balance of payments;
- the use of a delegated paying agent to deal with local expenditure;  
this provides an inflow of foreign exchange, as the Commission  
makes transfers to the ACP States in European currencies to cover  
these costs, which amount to nearly 47% of EDF spending;
- Community participation in co-financing operations, which often acts  
as a catalyst for further flows of finance to ACP borrowers on more  
favourable terms than they could otherwise have obtained. This is  
explained by the Community's own credit standing and the fact that  
it often agrees to take responsibility for the financing of  
start-up operations, supplying grants or special loans to finance  
infrastructure or the non-profit-making components of a project.
The pressing nature of the debt problem and the magnitude of the  
difficulties it causes were kept in mind during the negotiations for  
Lomé III, which contains a number of provisions directly concerned  
with ACP indebtedness:
- a general clause provides that at the ACP States' request the  
Community shall lend technical assistance in studying and finding  
practical solutions to their debt, debt-servicing and balance of  
payments problems (Article 198);
- there are also more specific provisions dealing with the problem of  
debt-servicing; one of the criteria for deciding the method of  
financing where the Bank's own resources are concerned is that  
"account shall be taken of factors guaranteeing the service of  
repayable aid" (Article 197(4)); similarly, another new clause,  
Article 229(5), provides that "in order to contribute towards the  
servicing of the debt resulting from Community loans from the  
Bank's own resources, special loans and risk capital, the ACP  
States may, in accordance with arrangements to be made on a  
case-by-case basis with the Commission, use the available foreign

- 24 -
currency Zln the accounts of the paying agents.7 as and when debt  
repayments fall due and up to the amounts required for payments  
in national currency".
However, these evidences of concern about ACP indebtedness must not  
be seen as tending towards one conceivable radical solution: an
across-the-board measure to relieve the burden of ACP debts to the  
Community by outright cancellation or consolidation.
Such a step would be inappropriate, given that these debts make up  
only a small proportion of ACP States' total indebtness (see above).
In any case, a general relief measure would not necessarily  
operate to the advantage of ACP States, either:
- directly, since it would harm the creditworthiness of those with  
access to capital markets, or:
- indirectly, since it would also diminish the EIB's creditworthiness  
on those markets (and hence the terms on which it can borrow or  
lend), for the simple reason that the Bank's credit depends partly  
on the value of its current loans. The same arguments would  
apply to a measure directed solely at special loans. A debt  
relief measure confined to special loans would in any case be of  
minimal benefit to the ACP States in terms of their immediate or  
future balance of payments situation.
Nor would across-the-board debt relief benefit all ACP States  
equally; in many cases the beneficiaries would be those who are  
already better off.
Finally, such a measure could amount in some cases to the provision  
of assistance to the irresponsible rather than the truly needy.
That would be most unfortunate, since there is little prospect
that debt relief would be granted in addition to normal Community aid.

- 25 -
Accordingly, the Community does not intend to embark on a course  
whose attractions are more apparent than real, and which would  
teach the countries concerned the wrong development lessons. The  
institutions concerned prefer the sensible use of the instruments  
available to them in the new Convention as a means of making a  
more constructive contribution to helping their ACP partners with  
their debts.