Proposal for a Council Decision on the reallocation to cooperation operations in the Democratic Republic of Congo of payments made by the DRC in respect of special loans and of the proceeds and income from risk capital operations in the DRC under the 2nd, 3rd, 4th, 5th and 6th EDFs
Date: 2003-06-23
Institutions: European Commission
Subjects: Democratic Republic of the Congo, European Commission, European Development Fund, European Investment Bank, democratisation, economic reconstruction, election, external debt, financial aid, redemption of public debt

EN

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 23.6.2003
COM(2003) 367 final

Proposal for a

COUNCIL DECISION

on the reallocation to cooperation operations in the Democratic Republic of Congo of
payments made by the DRC in respect of special loans and of the proceeds and income
from risk capital operations in the DRC under the 2nd, 3rd, 4th, 5th and 6th EDFs

(presented by the Commission)

 
EXPLANATORY MEMORANDUM

1.  The  size  of  the  Democratic  Republic  of  Congo's  external  debt  and  the  international
response

External  debt  is  one  of  the  most  worrying  features  of  the  DRC's  economy.  As  at
31 December  2001,  the  DRC's  debt  stock  stood  at  USD 13 279.5  million,  equivalent  to
1 407.2%  of  its  exports  and  226%  of  GDP.  On  either  scale,  the  RDC  is  a  severely
debt-distressed country.

for 

Moreover,  accumulated  arrears  account 
the  external  debt:  at
31 December 2001,  the  DRC  had  accumulated  arrears  of  USD 10 081.6  million,  of  which
USD 1 932.2 million was owed to multilateral institutions, USD 7 486.4 million was owed to
creditors  belonging  to  the Paris Club,  including  nine  EU  Member  States  (Austria,  Belgium,
France,  Germany,  Italy,  the  Netherlands,  Spain,  Sweden,  and  the  United  Kingdom),  and
USD 663 million was owed to non-Paris Club bilateral creditors and commercial creditors or
represented short-term debt.

the  bulk  of 

This  extraordinary  accumulation  of  arrears  has  long  represented  the  major  obstacle  to
renewed  involvement  by  the  international  financial  institutions  despite  the  striking
deterioration in socio-economic indicators for the DRC and in its basic infrastructure.

It has taken major efforts by the DRC government and its creditors to overcome this obstacle.

With regard to multilateral creditors:

(cid:1)  The  International  Monetary  Fund  proceeded 

totalling
USD 503 million  on  12 June  2002  by  means  of  a  bridging  loan  granted  by  France,
Belgium, Sweden and South Africa.

to  wipe  off  arrears 

(cid:1)  The  World  Bank  proceeded  to  wipe  off  arrears  of  USD 338 million  on  3  July  2002  by

means of a bridging loan granted by France and Belgium.

(cid:1)  The African Development Bank group, facing total arrears of USD 778.5 million, did not
have  the  resources  available  to  provide  a  bridging  loan  and  had  to  put  together  a  hybrid
repayment/rescheduling  scheme  with  the  aid  of  contributions  from  other  donors.  This
method had previously been adopted by the World Bank for Bosnia-Herzegovina in 1996.
The immediate payment requested from donors in place of the DRC was USD 40 million
to  wipe  off  the  total  arrears  to  the  African  Development  Fund  and  USD 76  million  for
interest payments due to the African Development Bank.

Following  the  debt  discharge  of  12  June  2002,  the  IMF  approved  a  three-year  programme
worth USD 750 million in the form of a poverty reduction and growth facility. The same day,
the World Bank approved an Economic Recovery Credit worth USD 450 million to support
the Government's work on its economic and structural reform programme. 

Following an arrangement with the IMF and World Bank, on 13 September 2002 Paris Club
creditors reached agreement with the DRC Government on rescheduling the country's external
public debt. The agreement covered some USD 8 980 million, of which 16% related to ODA
loans.  Of  the  total,  arrears  on  the  principal,  interest  and  late-payment  interest  as  at
30 June 2002 accounted for USD 8 490 million, while repayments of the principal and interest
due between 1 July  2002 and 30 June 2005  accounted  for  USD 490  million.  The  agreement

2

was concluded on "Naples" terms, i.e. the pre-cutoff-date ODA loans are to be repaid over 40
years,  with  a  grace  period  of  16  years  at  a  rate  of  interest  at  least  as  advantageous  as  the
concessional rate of the loans; due dates for pre-cutoff-date commercial credits will be treated
in  such  a  way  as  to  achieve  a  67%  reduction,  taking  into  account  previous  debt  treatment
arrangements by the Paris Club. The remainder will be rescheduled over 23 years, including a
six-year  period  of  grace  at  market  rates  of  interest.  This  will  result  in  the  immediate
cancellation by Paris Club creditors of some USD 4 640 million of the DRC's external debt.
These measures will reduce the debt service due to Paris Club creditors between 30 June 2002
and 30 June 2005 from USD 9 090 million to USD 380 million. The remainder represents part
of the interest due on the rescheduled amounts and service on the post-cutoff-date debt from
2003.

The  settlement  of  arrears  has  enabled  the  international  financial  institutions  to  renew
assistance to the DRC and has put the country back into consideration for fast-track access to
the Heavily Indebted Poor Countries (HIPC) Initiative, which is planned for the end of April.
Providing  rapid  access  to  the  HIPC  Initiative  is  a  crucial  feature  of  the  international
community's  strategy  to  reduce  the  burden  on  the  DRC's  finances  and  so  pave  the  way  for
economic recovery and improved social conditions for the DRC population.

2. The Community's response to the debt-relief initiative

At the express request of the Member States, the Commission has already committed itself to
participating  in  international  efforts  to  find  a  solution  to  the  ADB  arrears  by  contributing  a
total of EUR 40  million out  of  the  EUR  76 million  requested  in  immediate  payments  under
the scheme proposed by the ADB. 

In  terms  of  its  debt  to  the  European  Community,  at  31 December  2002  the  DRC  had
accumulated  arrears  of  EUR 124.2  million,  of  which  EUR 24.3  was  owed  to  the  ordinary
section  and  EUR 99.9  million  to  the  special  section;  these  figures  are  projected  to  rise  to
EUR 26.7 million and EUR 109.3 million by 31 December 2003. The breakdown by country
and by EDF as at 30 June 2003 is shown in the following table.

Projected DRC arrears as at 30 June 2003 (Special Section)

Breakdown by Member State (estimate)

Yaoundé 1

Yaoundé 2

Lomé 1

Lomé 2

Lomé 3

Total (EUR)

2 248 267.24

2 248 267.24

912 089.46

629 142.00

601 845.89

17 975.49

3 991 965.71

2 357 703.97

20 921 111.26

3 991 965.71

2 357 703.97

18 927 910.83

1 878 642.89

1 090 267.73

1 069 899.76

1 069 899.76

32 494.14

567 847.78

722 302.37

18 171.13

8 497 328.14

4 361 062.59

5 470 061.33

149 864.69

484 053.96

437 937.07

233 754.67

73 544.30

104 855.24

3 467.44

30 003 102.14

27 963 784.82

12 612 082.89

6 701 496.43

7 968 964.59

221 972.89

1 699 000.55

13 307 984.81

307 908.25

15 314 893.61

54 513.39

218 053.55

442 100.85

1 850 828.97

1 004 093.45

10 228.93

38 592.55

23 041.11

123 787.44

16 383.63

506 843.17

2 107 475.07

1 027 134.56

123 787.44

16 383.63

6 657 587.32

12 034 867.97

9 085 564.44

74 932 346.92

1 857 554.59

104 567 921.24

Germany

France

Italy

Belgium

Netherlands

Luxembourg

UK

Ireland

Denmark

Greece

Spain

Portugal

Total

As in the case of other creditors, the DRC's accumulated arrears to the European Community,
whether  they  be  on  direct  EIB  loans,  on  loans  administered  by  the  EIB  on  behalf  of  the
Commission  (loans  on  risk  capital)  or  on  those  which  the  EIB  recovers  on  behalf  of  the

3

Commission  (special  loans),  require  appropriate  treatment  and  an  agreement  between  the
national  authorities,  the  EIB  and  the  Commission,  otherwise  the  country  will  not  have
fulfilled the conditions required to reach the 'decision point'.

With regard to loans from its own resources, the EIB has already called on the Member States'
guarantees  and  obtained  authorisation  from  them  to  suspend  recovery  of  the  debt  until  31
December 2003. A longer-term solution needs to be devised by then.

With  regard  to  loans  from  EDF  resources,  the  Commission,  which  is  committed  to
maintaining  the  Community's  status  as  preferred  multilateral  creditor,  did  not  consider  it
appropriate to suggest simply cancelling or possibly rescheduling the arrears. 

Negotiations were therefore begun with the DRC Government, which agreed to use envelope
A of its 9th EDF allocation up to the amount of the arrears to the European  Community  on
special loans and risk capital at the date of the decision point. This operation will be funded
from the Community's contribution to the HIPC Initiative.

3.  Reconstruction  requirements  and  the  need  to  make  a  success  of  the  transition  to
democracy

At the Consultative Group's meeting in Paris in December 2002, the World Bank presented an
agenda for donors, which provides an initial outline of financing requirements for launching
an emergency rehabilitation and reconstruction programme. 

This  USD 1 741  million  programme  is  confined  to  the  area  under  government  control,  i.e.
only about a third of the national territory. The objective is to tackle the immediate problems
of  agriculture  and  food  security,  rehabilitation  and  reconstruction  of  basic  infrastructure,
social services and capacity building. The Consultative Group concluded that only 75% of the
requirements  presented  were  covered  by  pledges  from  the  various  donors  for  the  period
2002-2005. 

However, while careful financial management in 2002 enabled the Government to achieve a
small primary surplus, it  is highly improbable that  this can be maintained  when the  budget,
which  has  so  far  been  very  conservative,  has  to  cover  the  new  needs  arising  from  the
extension  of  Government  action  to  the  whole  of  the  country.  Moreover,  the  economy,  bled
dry and impoverished as it is by years of war, is not capable of providing a tax base sufficient
to  cover  the  new  needs  which  will  arise  over  the  next  few  years.  World  Bank  estimates
suggest that Government tax revenue will not exceed USD 900 million in 2005. While this is
2.7  times  the  figure  for  2001,  it  will  have  to  fund  a  conservative  increase  in  public
expenditure to cover new needs over the same period. 

Moreover, the estimate takes into account neither the financial implications of thoroughgoing
reform of the Congolese civil service nor the social costs of restructuring public enterprises.
Initial estimates put the social plan for the civil service alone at a possible USD 160 million.

On the political front, the setting-up of a transitional Government in Kinshasa in accordance
with  the  agreements  concluded  under  the  Inter-Congolese  Dialogue  in  Pretoria  on
6 March 2003 will lead to the holding of elections throughout the country within a maximum
of 36 months under the agreement. The elections will mark the culmination of transition, and
should establish the legitimacy of the elected Government and its institutions. This is regarded
as crucial to restoring the rule of law and consolidating peace and stability in the country and
throughout  the  Great  Lakes  region.  This  principle  was  reiterated  by  the  Council  (General
Affairs  and  External  Relations)  on  27  January  2003,  which  publicly  committed  itself  to

4

assisting  the  transition  to  free  and  transparent  elections  by  the  deadlines  laid  down  in  the
Pretoria Agreement.

A conservative estimate by the United Nations in 1996 put the costs of the electoral process at
USD 225  million.  No  new  estimate  has  been  made  since  then,  but  the  war  can  only  have
increased the costs.

4.  The  Commission's  current  resources  for  reconstruction  and  the  transition  to
democracy

Bilateral  cooperation  between  the  Community  and  the  Democratic  Republic  of  Congo  was
suspended  from  1992  to  January  2002  when  a  national  indicative  programme  costing
EUR 120 million was signed. That amount combined the existing balances from the 6th and
7th EDFs and a reduced allocation of EUR 25.7 million under the 8th EDF.

In  fact,  while  aid  was  suspended,  the  country  was  never  informed  of  the  allocation  it  was
originally expected to receive under the 8th EDF, which was some EUR 180 to 200 million.
As  a  result  of  the  needs  arising  in  other  spheres,  notably  the  HIPC  initiative,  this  was
gradually reduced to EUR 25.7 million.  Over  the  period  of  the  suspension,  the  country  was
denied  not  only  programmable  funds  but  also  access  to  stabex  and  sysmin  funds  and  the
Structural Adjustment Facility.

Its reduced allocation and the lack of performance indicators led to the programmable part of
its allocation for the 9th EDF (EUR 171 million in envelope A) being the same as that for the
7th EDF in nominal terms.

To date,  85%  of  the  NIP  signed  in  January  2002  has  been  committed  under  the  emergency
rehabilitation  and  reconstruction  programme.  Commitment  of  the  other  15%  is  planned  for
the third quarter of 2003.

The agreement reached with the DRC authorities on using EUR 105 million from envelope A
of  the  NIP  under  the  9th  EDF  to  wipe  off  the  arrears  to  the  Community  will  dramatically
reduce  the  Commission's  ability  to  tackle  the  political  imperatives  for  transition;  these
imperatives,  confirmed  by  the  Ministry  of  Foreign  Affairs,  include  support  for  holding  the
elections, demobilisation of the army and reform of the civil service.

There is no way of increasing envelope A under the 9th EDF until after the mid-term review
covering  all  ACP  countries,  which  is  scheduled  for  late  2004/mid-2005.  No  indicative
amounts for the priority operations referred to above can be set before then.

Article 7(1) of the Internal Agreement on the 9th EDF, which governs payments made to the
EIB in respect of special loans granted to the ACP States and the proceeds and income from
risk  capital  operations  undertaken  under  previous  EDFs,  stipulates  that  such  payments  are
credited  to  the  Member  States  unless  the  Council  decides,  on  a  proposal  from  the
Commission, to place them in reserve or to allocate them for other purposes.

It is therefore planned to propose that arrears paid on the debt to the Community, rather than
accruing  to  the  Member  States,  be  managed  by  the  Commission  to  finance  operations  of
benefit to the DRC in line with the guidelines adopted by the Council (General Affairs
and External Relations).

5

5. Moral hazard

Overall, the moral hazard is slight because of the multilateral context in which the operation is
proposed (the HIPC Initiative), and because of the special efforts and practical commitments
made by the DRC in order to reach the decision point.

However, there is also little moral hazard because: (1) there is no automatic link between the
operation  to  pay  the  DRC's  arrears  from  the  9th  EDF  allocation  and  the  return  of  the  sums
paid,  and  (2)  under  the  internal  agreement,  this  operation  can  only  be  undertaken  if  the
Council unanimously decides on a proposal from the Commission that it should.

In  addition,  the  Commission  has  indicated  that  the  proposed  operation  to  redirect  the
payments is a one-off, an exception to the normal administration of special loan repayments
and income from risk capital operations conducted in ACP States under the EDF.

The exception is justified on the grounds of: (1) the DRC's position as an HIPC that satisfies
the conditions set by the multilateral framework for the Initiative and is close to the decision
point at  which  it  will qualify for interim debt  relief;  (2)  the  country's  post-conflict  situation
and  the  extent  of  the  destruction  caused  by  the  conflict;  (3)  the  reduced  allocation  of
EUR 26 million  which  the  DRC  received  under  the  8th  EDF,  and  (4)  the  Council's  stated
desire to support the transition process.

Conclusion

For  the  reasons  given  above,  the  Commission  proposes  that  the  Council  adopt  the  attached
Decision.

6

Proposal for a

COUNCIL DECISION

on the reallocation to cooperation operations in the Democratic Republic of Congo of
payments made by the DRC in respect of special loans and of the proceeds and income
from risk capital operations in the DRC under the 2nd, 3rd, 4th, 5th and 6th EDFs

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community,

Having regard to the Partnership Agreement between the members of the African, Caribbean
and  Pacific  Group  of  States  of  the  one  part,  and  the  European  Community  and  its  Member
States, of the other part, signed in Cotonou on 23 June 2000,1

Having regard to the Internal Agreement of 12 September  2000 between  Representatives of
the  Governments  of  the  Member  States,  meeting  within  the  Council,  on  the  Financing  and
Administration of Community Aid under the Financial Protocol to the Partnership Agreement
between  the  African,  Caribbean  and  Pacific  States  and  the  European  Community  and  its
Member  States  signed  in  Cotonou  (Benin)  on  23  June  2000  and  the  allocation  of  financial
assistance  for  the  Overseas  Countries  and  Territories  to  which  Part  Four  of  the  EC  Treaty
applies, and in particular Article 7(1) thereof, 2

Having regard to the proposal from the Commission drafted in agreement with the European
Investment Bank,

Whereas:

(1)

(2)

(3)

In  its  conclusions  of  27  January  2003  regarding  the  Democratic  Republic  of  Congo,
the  Council  (General  Affairs  and  External  Relations)  stated  that  it  was  prepared  to
assist the transition to free and transparent elections by the deadlines laid down in the
Pretoria Agreement and reaffirmed its willingness to support the transition, as soon as
its  institutions  were  in  place,  with  projects  by  the  European  Union  and  its  Member
States  designed  in  particular  to  promote  aid  to  the  population,  the  strengthening  of
State  structures,  the  economic  reconstruction  of  the  country  and  disarmament,
demobilisation, reintegration, repatriation and resettlement (DDRRR).

The DRC received a reduced allocation of EUR 25.7 million under the 8th EDF.

The  funds  allocated  to  the  DRC  under  the  9th  EDF  are  insufficient  to  enable  the
Community to cover the cost of the commitments made by the Council in the name of
the European Union,

1

2

OJ L 317, 15.12.2000, p. 3.
OJ L 317, 15.12.2000, p. 355.

7

                                                
HAS ADOPTED THIS DECISION: 

Article 1

An additional allocation in the form of a grant equivalent to EUR 105 million shall be allotted
to the Commission for  the implementation  of operations to be conducted  in  the  Democratic
Republic  of  Congo  to  ensure  the  country's  democratic  transition  to  free  and  transparent
elections, to strengthen State structures, to contribute to the reconstruction of the country and
to set up a programme of demobilisation and reintegration of former combatants.

The amount of the additional allocation referred to in Article 1 shall constitute a ceiling.

Article 2

Article 3

The  additional  allocation  referred  to  in  Article  1  shall  be  financed  by  the  debt  service
payments  relating  to  risk  capital  and  special  loans  granted  under  the  Yaoundé  I3  and  II4
Conventions and the First5, Second6 and Third7 Lomé Conventions which are to be made to
the European Investment Bank by the Democratic Republic of Congo. 

Article 4

The Member States shall authorise the EIB to transfer the sums received from the Democratic
Republic  of  Congo  directly  to  an  account  opened  in  the  name  of  the  Commission,  after
deduction of any commission due to the  Bank  on  such operations. Any interest accruing  on
the  amount  transferred  into  the  account  will  be  capitalised.  At  the  end  of  a  period  of  four
years  from  the  date  on  which  the  account  is  opened,  the  account  will  be  closed  and  the
balance returned to the EIB, which will refund it to the Member States.

Article 5

A  maximum  amount  of  5%  of  the  additional  allocation,  after  deduction  of  any  commission
due  to  the  Bank  on  such  operations,  shall  be  intended  to  cover  the  administrative  costs  of
management of the additional allocation by the Commission.

3

4

5

6

7

Convention of Yaoundé I between the European Community and its Member States and the Associated
African and Malgache Countries, 1963 (OJ 93, 11.6.1964, p. 1431).
Convention of Yaoundé II between the European Community and its Member States and the Associated
African and Malgache Countries, 1969 (OJ L 282, 28.12.1970).
First  Lomé  Convention  between  the  European  Community  and  the  African,  Caribbean  and  Pacific
States (ACP), 1975, (OJ L 25, 30.01.1976).
Second  Lomé  Convention  between  the  European  Community  and  the  African,  Caribbean  and  Pacific
States (ACP), 1980, (OJ L 347, 22.12.1980).
Third  Lomé  Convention  between  the  European  Community  and  the  African,  Caribbean  and  Pacific
States (ACP), 1985, (OJ L 86, 31.03.1986).

8

                                                
Article 6

The  Commission  shall  implement  the  financial  resources  allocated  to  the  Democratic
Republic  of  Congo  under  the  additional  allocation  under  centralised  management  in
accordance with Article 14 of the Financial Regulation for the 9th EDF.

The  procedures  for  deciding  on  financing  from  the  additional  allocation  governed  by  this
Decision shall be those set out in Articles 24 to 27 of the Internal Agreement.

Article 7

Article 8

The  Commission  shall  be  authorised  to  approve  the  breakdown  of  the  additional  allocation
according  to  the  types  of  operation  referred  to  in  Article  1  after  consulting  the  EDF
Committee,  which  shall  give  its  opinion  in  accordance  with  Article  27  of  the  Internal
Agreement.

The  Commission  shall  be  authorised  to  approve  a  different  breakdown  of  the  allocation
without  requesting  the  EDF  Committee's  opinion  in  advance  if  the  changes  do  not  exceed
20% of the total additional allocation.

Article 9

This Decision shall enter into force on the day of its publication. It shall apply for the same
period as the Internal Agreement between representatives of the Governments of the Member
States, meeting within the Council, on the financing and administration of Community aid. 

This Decision is addressed to the Member States.

Done at Brussels, 

For the Council
The President

9