GREEN PAPER

on relations between the European Union and the ACP countries on the eve of the 21st century

Challenges and options for a new partnership

EUROPEAN COMMISSION, DIRECTORATE-GENERAL VIII/1
Brussels, 20 November 1996

CHAPTER V. OPTIONS FOR A NEW EU COOPERATION POLICY WITH THE ACP STATES

A. The socio-economic dimension
B. The institutional dimension
C. Trade and investment

CHAPTER VI. OPTIONS FOR A NEW PRACTICE IN THE FIELD OF FINANCIAL AND TECHNICAL COOPERATION

A. A single source of funds or multiple smaller sources?
B. Should aid be granted according to need or according to merit?
C. Types of aid
D. Co-management, EU-only management or autonomous management by recipients themselves?

CHAPTER V. OPTIONS FOR A NEW EU COOPERATION POLICY WITH THE ACP STATES

The year 2000 deadline does not herald a rethink on all the components of cooperation policy implemented thus far. Indeed, many of the policy guidelines developed over the years, particularly those adopted more recently, require both consolidation and, in certain cases, further development. Cooperation policy is constantly evolving and new approaches are gradually being introduced in a number of areas. Their significance should be recognized.

In line with these recent guidelines and in view of the overall objectives enshrined in the Treaty for Community development cooperation policy, the experience of the Lomé Convention and the analysis of the ACP states' handicaps and potential, cooperation between the EU and the ACP states in future must involve supporting their efforts to achieve the political, economic and social conditions for sustainable development. Improvements to the competitiveness of ACP economies, which are essential to boosting employment and raising the overall standard of living, can be fostered by a variety of measures both in the field of foreign policy - promoting the development and diversification of economic and trade relations - and domestic policy - to improve supply capacity. Given the above, the EU's cooperation policy with the ACP countries could be restructured around three core areas.

• the social and economic dimension Poverty alleviation is at the heart of many of the EU's financial cooperation initiatives. Several of the ACP states are counted among the world's poorest and, if the conditions that lead to stagnation and marginalization are to be overcome, a range of sectoral and general policies is required. A variety of options can be considered to extend the EU's scope for action so as to foster economic growth and investment, promote private sector and social development and reduce poverty;
• the institutional dimension and the public sector The way in which a state performs its duties and the factors of good governance, policy and economic management are often crucial to ensuring the conditions of development in many ACP countries. In addition to their intrinsic political dimension, which would justify stepping up ACP-EU political dialogue as mentioned in Chapter IV.B, such problems also entail significant "technical" aspects which need to be addressed in the cooperation framework. A broad consensus exists on the need to support institutional reform and build capacity as part of any cooperation policy and there is no doubt that the EU is already active in that respect. However, it might consider stepping up support for reform of the institutional and legal framework and improving public service capacity: indeed the latter is an area that is likely to exert a considerable influence as, in many ACP countries, it is directly implicated in the management of much of the aid and often determines both its impact and viability;
• trade and investment The Lomé trade arrangement, with its focus on tariff and quota preferences, has been insufficient for the ACP countries, in contrast with the much better performance of the LDC group, to preserve, least so to improve, their participation in the world markets of goods, services and capital. Tariff advantages are, thus, neither a sufficient nor a necessary condition for good export and growth performance. Supply-side factors, in particular good governance and sound macro and microeconomic policies, notably stable, secure and efficient internal trade and investment policies, are determinant factors, more so than unilateral tariff preferences, in achieving high rates of export and economic growth. It is vital, in the light of the limited impact of the "Lomé preferences", the likely erosion of preferential margins and the need to adopt measures compatible with the new WTO rules, to study carefully the various options facing the EU and the ACP states when deciding the new trade arrangements. The goal is to enable the ACP countries to be more involved in international trade and economic relations and to help them reap greater benefit from the development opportunities such relations can offer and avert the threat of increasing marginalization.

An acquis communautaire exists to a varying extent in respect of each of the above-mentioned core areas for cooperation. The following sections give an overview of the acquis, referring to the Council texts deemed most important in the areas concerned. However, further options should also be considered either for necessary institutional reasons - as in the case of the trade measures - or for purposes of enhancing, strengthening and ultimately increasing the effectiveness of the EU's involvement in line with the goals it is pursuing through its development cooperation policy.

A. The socio-economic dimension

The analysis set out in Chapters I and III has underlined how the conditions of economic and social development are undergoing a complete sea-change both at international level and within the ACP countries, where the call for democratization and greater private sector and civil society involvement is being made with increasing stridency. Now committed to the market economy and opening up trade, most ACP countries are endeavouring to create conditions more conducive to the development of the private sector and recognize the beneficial effects of foreign investment. Some have undertaken economic reforms to that effect with varying degrees of success. However, private investors are still reticent and only a few countries and sectors have registered significant foreign investment. Nevertheless, prospects for growth have improved in many countries though without any significant reduction in the incidence of poverty. One of the main conclusions was the importance of making reform policy more credible so as to bring the expected positive results earlier while reducing the element of risk and instability inherent in the economic environment. The essential institutional and economic reforms must go hand in hand with a profound transformation in the workings of society, which inevitably implies long and gradual processes.

The ACP countries need to accelerate their economic growth. However, the leeway for improving the impact of growth on the reduction of poverty is large too. Maximum participation in the economy, access to productive resources (land, capital and credit, training, information) and basic social services (education, health, nutrition, drinking water), improving the social and economic situation of women and young people - these are just some of the essential and complementary elements which make up any strategy to alleviate poverty and which belong first and foremost to domestic economic and social policy. The role of cooperation is to encourage the necessary political change and to support endeavour by means of technical and financial assistance. Measures to alleviate poverty cannot really be effective or have a lasting impact without the commitment and clear willingness of the recipient country.

The concept of sustainable development and the pivotal nature of social and human development have been extensively debated on the international scene in recent years. At the major international conferences of Rio, Cairo, Copenhagen, Beijing and Rome, a large number of countries adopted common values and principles and identified priority objectives. Thus the broad strategic outline and the main guidelines of economic and social policy have been sketched out. Meanwhile, Europe clearly has its own bench-marks: the EU's cooperation relations reflect its concept of economic and social development, which is itself the product of the diversity of Member States' experience. It only remains for the EU therefore to find the most effective means to encourage implementation of these strategies and adherence with the principles stated.

The discussion of the socio-economic situation in the ACP countries has also highlighted increasing differences between them. The idea of a cooperation policy tailored to circumstances merits consideration by the EU, allowing countries or groups of countries, as they proceed gradually along the path of stabilization and reform, to progress from a policy based on support for the reform process to a wider relationship embracing new areas of cooperation and different forms of partnership, similar to what the EU has proposed in other developing regions (more advanced economic cooperation, scientific and technical cooperation, etc.).

The options for support of socioeconomic development must therefore be assessed in that perspective: not only do different strategic priorities need to be adopted for each country, but the areas of cooperation can differ from one country to the next.

The options can be grouped together under two priority themes geared to the same objective, i.e. preventing marginalization: integrating the ACP states into the world economic system and integrating the poor into economic and social life.

1. Stimulating economic growth through competitiveness and private-sector development

Many of the EU's current cooperation policies are angled towards promoting faster growth and higher private investment in ACP countries, with a wider integration through trade and investment into the world economy. These include financial and technical support for structural adjustment reforms, sectoral support in infrastructure, agriculture, industry, services and human resource development, and direct support for the private sector through the promotion of enterprise development, investments, trade development and the financial and technical support provided by the EIB and CDI. A vigorous private sector is essential if living standards and opportunities are to be continuously and sustainably improved.

The issue for the EU, given the modest rates of growth achieved in many partner countries in the past, is what more it can do to promote faster economic growth, increased competitiveness of ACP enterprises, better export performance and higher levels of private investment, and what new policies and approaches it might adopt.

There are several options for making future assistance more effective:

(a) More systematic and comprehensive support for private sector development

The expected positive response of the private sector to economic reforms has been weak and slow in a number of countries, particularly in sub-Saharan Africa. The reforms have often failed to inspire confidence, and to produce the expected results, and consequently to reduce to reasonable levels the costs and risks facing investors. Experience in recent years shows that countries which demonstrate a credible commitment to sound economic policies and reforms and which present a transparently fair and favourable environment for enterprise are also successful in attracting investment, creating jobs and innovative firms, raising their export earnings and achieving sustained economic growth. The tasks ahead are, therefore: (i) to convince the public authorities and the private sector that reforms are genuine and permanent, and that there will be stable and predictable economic policies; (ii) to tackle the policies and institutions which are still the causes of high costs, low productivity and uncompetitiveness; (iii) to strengthen financial systems and institutions so the private sector can invest more and has better access to financial services; (iv) to develop economic infrastructure and (v) to build private-sector capacity to manage businesses, train employees, develop and market products, and achieve efficiency gains.

In assisting in these tasks the EU has a number of options for developing its own action:

Confidence Building The EU can insist that economic reforms it supports as well as the assistance it supplies to promote the productive sectors of the economy are designed in the knowledge that they will serve the overall development purposes of ACP countries and in particular those of the private sector. After consultation with the population they need to be properly explained to key non-governmental stakeholders.

It can provide resources to help partner governments streamline their relations with the private sector, to improve lines of communications with it, to consult with it about its policy intentions, and to listen to its grievances and policy proposals. Some ACP countries already have government-private sector consultative fora which play a valuable role in confidence building, so long as they are adequately resourced. In this context, the strengthening of professional organizations and chambers of commerce is crucial, so as to perform properly their advocacy role and provide useful services to enterprises.

Policy and Institutional Environment The EU can assist partner governments with further administrative and institutional reforms - including reforms in tax administration - and reinforce the rule of law and the administration of justice as they affect businesses. It can help governments to identify those regulatory and administrative practices which are nugatory and which cause delays, inhibit investment and employment creation, and add unnecessarily to the costs and risks of carrying on normal business.

It can make a more vigorous technical contribution to planning and implementing the privatization of public enterprises (see sub-section under point b, below), and join partner governments in the search for imaginative and sustainable solutions to infrastructural deficiencies which hinder the private sector.

It can support the introduction of policies, rules and practices governing competition, consumer protection and the regulation of monopolies, research and information, technology transfers, which complement economic reforms and privatization.

Financial Systems and Institutions The EU can do more to support local capital markets and to improve enterprises' access to financial services. It can provide technical advisory services and financial support for the restructuring of weak financial institutions and for the strengthening of the legal and regulatory framework in which new, soundly-based, financial services can be established to serve the needs of business, small enterprise, farmers and savers. Particular attention must be given to issues like (i) strengthening domestic capital formation, (ii) supporting diversification of financial institutions and services and (iii) the improvement of payment systems and networks.

Private Sector Resources and Capabilities The EDF directly supports private enterprise through national indicative programmes, through enterprise and trade development and through the action of the European Investment Bank (EIB) and the Centre for the Development of Industry (CDI). The CDI has recently up-dated its portfolio of instruments in the light of the positive experience of the European Community Investment Partners (ECIP) scheme operating in the ALA and Mediterranean countries and in South Africa.

Financial and technical support to micro-, small and medium-sized enterprises and industrial craft undertakings comes through the EU’s country programmes in the form of credit lines, guarantee funds, advisory services, training and technological assistance. These programmes have proved their worth and should probably be allowed to develop further (in particular by means of appropriate funding). The EIB also has been a major player in providing loans and risk capital. The EU also supports larger enterprises through its industrial investment and trade development actions.

The Commission, in collaboration with the CDI, could enlarge the scope of its assistance by financing consultancy and advisory services - both local and external - for use, on a cost-sharing basis, by indigenous entrepreneurs seeking to develop their businesses. It could also do more to increase the capabilities of local business and professional associations to provide capacity-building services to their members.

The EIB also provides loans and risk capital, subsidised from EDF resources, to larger private sector projects in infrastructure, industry, mining and commercial agriculture. A share of its resources are on-lent through local financial intermediaries to private small and medium-size enterprises.

One option for increasing support to formal enterprises would be to direct more EDF resources to the Commission and the EIB, in line with the role of both institutions and to satisfy the growing demands of private operations in ACP countries. In addition, EDF funds could also be made competitively available to other EU-based development finance institutions (e.g. the EDFI institutions), some of which are actively engaged in developing innovative financial services for the private sector in ACP countries. The longer term goal, however, must be to encourage the growth of local and regional capital markets, and for the larger and better established enterprises in ACP countries to finance their development from the market sources, and not from official credits. In this context, the development of local savings and its channelling to productive investments is crucial.

The CDI has been the main instrument in the Lomé Convention for providing technical advisory services to the SMI sector - especially in project preparation and appraisal, and in arranging financing and partnerships. It has local antennas in many ACP markets, and is well placed to play a brokerage role between new and expanding enterprises on the one hand, and financial, technological and managerial know-how on the other.

A promising option for the future would be for the Commission, as part of a policy of increasing the provision of demand-led, new technologies and advisory services for the private sector in ACP countries, to encourage the CDI, along with other potential service providers in the EU and partner countries, to expand its capabilities to assist enterprises on a cost-sharing basis.

Investment Promotion The Lomé Convention has long recognised the importance of foreign direct investment for the growth and competitiveness of ACP economies. The Commission provides technical assistance in elaborating investment codes and investment protection laws and regulations, and for governments' investment promotion initiatives. It has sponsored sectoral investment and partnership forums to acquaint potential external investors with opportunities and to promote partnerships. These activities are a useful complement to reforms and confidence-building measures which improve the enabling environment for private sector development.

Efforts to provide an attractive "shop window" for investment opportunities in countries which offer a satisfactory policy and institutional environment for investors should doubtless continue. Options for action on investment protection are further considered in Section C of this chapter.

In proceeding with this agenda the EU would have to be sensitive, empirical, and pragmatic about what the real priorities and the felt needs of stakeholders are, country-by-country. It should be selective and carefully targeted in its choice of programme. In its approach to private sector development the EU should nevertheless be coherent and well coordinated with other actors - local and external - who are pursuing the same objectives. Where private sector development and support for greater competitiveness feature prominently in its cooperation strategies it should, in collaboration with other stakeholders, seek to elaborate private sector development strategies which lend a sense of purpose to individual programmes and projects.

Possible changes in the instruments of cooperation to support an enlarged and refocused policy for encouraging the private sector are discussed in Chapter VI.A below. One approach is to consider, in suitable cases, earmarking a portion of programmable country assistance for the support of private sector development - both through actions to ameliorate the policy and institutional environment and through measures of direct support for enterprises. The private sector could be invited to participate in defining priorities for the use of this envelope of resources.

(b) Supporting public-enterprise restructuring and privatization programmes

Privatization is often one component of the reform measures designed to relaunch investment, create a more competitive environment and build more flexible and diverse economic structures. However, privatization is not a solution per se and it should be possible to adopt a case-by-case approach. The programmes are often complex and difficult to carry out, demanding substantial analytical and administrative capabilities. Technical assistance, in particular in the evaluation of the various options (restructuring, reform of the economic apparatus, etc.) and backup for any social plans required, may provide one possible solution.

With its ability to mobilize the expertise developed by Member States and exploit the experience it has gained across the globe, the EU is well placed to support privatization programmes. Consideration could be given to developing this type of aid in countries where privatization would clearly help attract new private investors and contribute to gains in competitiveness.

(c) Continuing and stepping up support for regional integration

Since the first Lomé Convention, the Community has supported various forms of regional cooperation. In terms of funding, the focal areas have been: transport and communication infrastructure, environment, animal disease control and training. Progressively support has been unified under the general objective of strengthening economic integration. The underlying view is that for the ACP countries regional economic integration is an indispensable step towards their successful integration into the world economy. At the same time the EU has been drawing attention to the negative effects of formulating and implementing economic reform programmes in a purely national context. By now the need to take into account the "regional dimension of adjustment" is generally recognised.

Over the past few years the EU has actively supported several regional organizations, particularly the newly created UEMOA (West Africa) and the newly transformed and enlarged SADC (Southern Africa). Together with three other co-sponsors (African Development Bank, IMF and World Bank), the EU is supporting the Cross-Border Initiative in Eastern and Southern Africa and the Indian Ocean, in which 14 countries are actively participating.

Two important aspects of the CBI should be stressed: involvement of the private sector and coherence of the national and regional policy agenda.

Through its regional indicative programmes the EU supports infrastructural, environmental, health and other initiatives which are of interest to more than one country and which are best conceived and implemented on a regional basis.

In order to improve past performance it is necessary to put support for regional economic integration into a coherent strategy. Taking into account the EU's recent experience, such a strategy should have the following basic components:

1. capacity building (including technical assistance, training and endogenous research) on the subject of regional economic integration both at the level of regional institutions and national governments;
2. assistance to the private sector to facilitate restructuring in the larger regional and world market. This would also include improvements in the financial sector to facilitate and secure payments;
3. support for governments committed to implementing regional integration to cope with transitional effects on budgetary resources (balance of payments or budgetary support, complementary to and fully consistent with national economic adjustment support).

The instruments that are presently available are well suited to supporting such a coherent strategy.

There is another novel way for the EU to promote regional economic integration that needs to be further explored, i.e. through its trade policy. The EU is presently involved in negotiations to achieve a Free Trade Area (FTA) with several (groupings of) developing countries. Because of the influence of the EU in trade matters, the provisions of such FTAs will affect the integration of developing countries into the world economy. There is an opportunity to use these provisions in a way that fosters more regional economic coherence of the developing countries. According to the Commission and Council conclusions of June 1995 on Free Trade Areas, these arrangements should comply with the relevant WTO provisions, and take into account the implications for the Union's common policies and for its main trading partners.

(d) stepping up trade development support measures

Trade development is a specific arm of a more comprehensive policy which focuses on competitiveness and private sector development. In addition to the instruments peculiar to trade and investment regimes, which will be discussed below in Section C, there is also a wide range of cooperation initiatives to assist trade development. This dimension was introduced into the Lomé Convention when it was revised in 1995 and the EU undertook to develop this area of cooperation around a variety of support programmes: integrated trade development programmes at national or regional level, multiannual support programmes for trade organizations involving both ACP and European operators, programmes to assist enterprises in specific sectors and programmes to support the development of infrastructure and trade-related services (transport and communications, financial and other intermediaries, chambers of commerce, etc.).

Given the fact that the new challenges posed by globalization and competitive forces will create changes in the basic parameters of international trade the EU ought therefore to strengthen and intensify its commitments to supporting ACP States in their efforts to capture the potential benefits arising from new trade opportunities.

Increased emphasis should be placed on targeting of the private sector with concentration on that support being client-driven and participatory. Priority should be given to the creation of international partnership networks, investment promotion, and development of support service industries and institutions.

Greater emphasis should be given to strengthening mechanisms for the enhancement of networks between European and ACP private sectors.

Furthermore in recognition of the revolution in global information technology that will be a feature of the next millennium the EU should intensify its support to ACP States in gaining access to the hard- and software associated with it and in facilitating its optimum utilization.

(e) supporting the development of scientific and technical expertise as a strategic component of sustainable development

The rapid development of more and more complex technologies, notably in the health, food and communications fields, and the widening scientific and technological gulf between the majority of ACP states and the industrial world should justify special attention to this area by the EU. Although this dimension features in the Lomé Convention, it has not as yet given rise to any coherent or sustainable plan of action.

In view of the Community's experience, the EU is in a good position to build up scientific and technological partnerships involving government R&D institutes and private enterprises in the sectors concerned from both hemispheres. Such initiatives should be founded on dialogue with the ACP countries on the R&D issue, in particular on a regional basis, with the aim of encouraging them to upgrade their regulatory frameworks (intellectual property rights, movement of goods and persons, investment code, etc.) and helping them to provide the budgetary backup required for a policy to develop research/industry partnerships.

(f) helping the ACP states prepare for ongoing developments in the information field

Progress towards the information society concerns not only advanced or emerging economies but also those economies and societies which are, or wish to be, open to the outside world. As the participants at the recent conference in Midrand recognized, these changes must form part of a shared vision of the future associating the industrialized and developing worlds. In the conclusions of its Chair, the Conference also highlighted national responsibility and the unique role to be played by the private sector.

The initial stage depends on improvements to telecommunications services which, together, with water and electricity, are used by every branch of the economy.

This field is an especially attractive one for the private sector in view of its potential for growth (all ACP countries are under-equipped) and the recent emergence of new technologies which provide a more flexible response to the requirements of countries like the ACP group, e.g. satellite transmissions, mobile and stationary cellular telephones. The European experience of transition is sufficiently rich and varied to offer tailor-made aid tailored to countries that so wish.

There is also the development of new services, such as the Internet, which is already accessible in many countries and represents a genuine opportunity for its users, researchers, university students or entrepreneurs to participate in networks exchanging information worldwide.

At a subsequent stage telematics applications, e.g. in fields such as health, education, research networks as well as electronic trading, may help solve certain problems in ACP countries. These initiatives will be all the more effective for pilot projects to prepare those concerned and involve them in decisions on the content and use of applications.

Community models, of which the home shopping experiment is a good example, can thus take the place of the largely individualized applications developed in advanced economies.

(g) monetary cooperation

In many ACP countries political and economic instability is a major impediment to increasing investment and accelerating growth. A stable monetary and financial background is a prerequisite of an economic policy designed to achieve balanced and sustainable growth. This implies not only the existence of effective and independent institutions, the implementation of a monetary and exchange policy geared to stability and sustainable budgetary policies but also an extension of the banking system's role in the distribution of savings.

Europe could support the ACP countries' efforts to modernize and adapt in these areas. The priority goals would be consolidation of institutions and modernization of procedures for managing monetary and budgetary policy, development of the banking system, establishment of current convertibility and the progressive liberalization of the movement of capital taking account of the degree of development and macroeconomic stability achieved. The Union should continue to encourage regional cooperation in macroeconomic and monetary policy.

Monetary Union and the introduction of the euro will open up new opportunities for ACP countries, especially those for whom the EU is the principal trading partner. The credibility and effectiveness of their monetary policies would be increased if they decided to gear their exchange policies to a stable currency, taking account of the need to maintain the competitiveness of their economies. Selecting a single external reference standard would also contribute to more stable bilateral exchange rates between these countries. This would not only assist in economic and trade relations between them but also in the implementation of regional integration projects.

These various elements will help lay the foundations for a gradual stepping-up of cooperation in the macroeconomic and monetary field between the EU and the ACP states.

(h) EU support initiative to ease the foreign debt burden

In the light of the enormity of the foreign debt problem facing many ACP countries, it is hard for the Community to turn a blind eye to international initiatives in this area. Community financial cooperation, which almost exclusively takes the form of grants, does not have the effect of increasing debt. Nevertheless, the Community could act both as creditor and donor by developing support mechanisms and instruments to ease the burden of debt holding back ACP countries in their pursuit of adjustment and reform programmes.

2. Boosting employment and support for social policies in the framework of poverty alleviation measures

The EU has strong grounds for focusing its ACP cooperation effort on the goal of poverty alleviation: not only would this give priority to a problem which is assuming alarming proportions in many ACP countries and resulting in a series of interdependencies having an adverse effect on Europe in terms of migratory pressure and various security-related issues, but it would also put into practice the external aspect of one of the founding principles of the Union - social progress - a recurring theme in the Treaty and in the Protocol on Social Policy, which appears in various forms (employment, education and training, equality for women, etc.) in Community policies.

Poverty alleviation is already a priority theme of the current cooperation policy and has been further developed in recent years by some new guidelines:

• in the implementation of structural adjustment support in the ACP countries and in the use of counterpart funds, priority is given to expenditure in social sectors;
• a resolution on measures to combat poverty adopted in 1993 laid down a series of principles to take greater account of that objective in the Union's cooperation policies. The adopted approach highlights the need to include the objective of poverty alleviation in all domestic policies conducted in developing countries and in all cooperation activities and also includes the possibility of measures targeted at poor sections of the population;
• the accent on the role of women is a key factor in any strategy to alleviate poverty. By taking a wider look at the issue of the contribution of women, the resolution on this subject adopted in November 1995 is to a large extent complementary to the 1993 resolution on poverty;
• Community action in the social sectors makes a substantial contribution in this direction, in particular since the adoption of the recent resolutions on health and on education and training, which give the clearest priority to basic health care and to primary education and training, thereby benefiting the poorest communities more;
• the recent changes in food aid and in particular the stress put on food security aid and the problem of access to foodstuffs (e.g. by preserving local food traditions and produce) constitute another important element of action against poverty;
• the areas in question (health, education, food security and women and development) are also priority areas for stepping up coordination between the Member States and the Community both at operational level and in policy-making;
• another important factor in the poverty issue is the preservation of the environment both in rural areas (problems of soil degradation, sustainable exploitation of natural resources) and in towns where acute problems of sanitation and infrastructure are being more frequently encountered against a backdrop of sharply increasing urbanization in the ACP countries. The extent to which poverty and the environment are linked was widely acknowledged at the Earth Summit.

Environmental concerns are increasingly permeating Community cooperation policies through the systematic use of impact studies and specially tailored programmes;

• finally, a range of other cooperation measures exists to help alleviate poverty: action in the rural development sector, vocational training, micro-projects and measures to assist the development of private enterprise, often helpful in promoting job creation, cofinancing through NGOs, support for population policy or even consumer policy.

These policy guidelines must clearly be retained and confirmed. In future, however, the EU and its ACP partners must decide to what extent and how the impact of Community cooperation on poverty alleviation could be improved.

In view of the diverse nature of poverty in the ACP states, it is absolutely essential to maintain a broad approach involving a vast array of measures. Nevertheless, the EU could propose a more strategic approach to its partners in two areas:

(a) access to productive resources, employment and human resource development The pace of job creation depends on a set of conditions which can be directly or indirectly influenced by a wide range of measures or general or sectoral policies. The EU can support such policies through:

• aid to improve capacity to analyse and formulate policies to promote productive employment;
• support for reforms designed to improve access to productive resources, notably in the fields of education and vocational training, access to credit, home and land ownership. This type of aid could exert a considerable influence by helping to improve living conditions through better access to revenue-generating activities;
• support for labour market policies designed to build-up an able, mobile and motivated workforce;

(b) support for social policies Already committed on a wide scale to cooperation activities in the social sectors, the EU is endeavouring to increase the impact of the aid it provides by a more comprehensive sectoral approach, gradually abandoning the project-based approach. This trend could be intensified by means of:

• in-depth and continuous dialogue on social policy with a view to formulating a broad strategy and priorities and studying the links - often complementary, but occasionally conflicting - between the economic and the social objectives;
• financial aid geared in particular to the financing of current expenditure in the above sectors in close association with macroeconomic dialogue and structural adjustment processes.

The ongoing debate in the international community about the 20/20 concept has highlighted the interest of mutual undertakings between beneficiaries and donors to promote social development. While recognizing the relevance of the principle of mutual undertakings, the EU prefers a more comprehensive and detailed approach on account of the nature of its policies.

Under the future ACP-EU partnership, assuming that aid is more selective and linked to assessment of "good governance", one criterion could be how much effort is invested in social and other policies designed to improve access to productive resources and boost employment.

3. Integrating protection of the environment in the development process

One of the central insights provided by the theory and practice of sustainable development is that effective environmental action cannot be conceived as an afterthought to unchanged social and economic policies. Rather environmental concerns must be integrated into the design, implementation and evaluation of all policies, programs and projects.

While the Community has a long-standing array of policy declarations on environmental management, it still lacks a clear strategy and a sense of purpose to make it operationally viable. Looking at growing consensus emerging from the Rio process, there appear to be 4 priorities for development cooperation:

• meeting needs and alleviating poverty. While the cause and effect relationship between poverty and environmental degradation are complex, both poverty and pollution can be seen as the result of social and economic forces that tend to externalize human and environmental costs into current and future generations.
• harnessing market forces to reflect environmental costs and benefits. Agenda 21 is rooted in the recognition that markets need to progressively internalize social and environmental costs, so that prices 'tell the ecological truth'.
• integrating environment objectives in overall policy formulation and in management systems, so that environmental protection becomes and integral part of the development process and not an isolated objective. This requires strengthening environmental capacities and taking a participatory approach.
• 'greening' the investment portfolio, by assessing environmental impact through the project cycle and by financing priority investments in environmental conservation and pollution abatement.
• Certain topics merit special attention:
• for many ACP countries the problem of the quantity and quality of water resources is reaching critical proportions in both urban and rural areas. The relationship between water, population pressure and soil degradation is assuming crucial importance;
• deforestation is becoming a major problem in numerous countries with repercussions not only at local level but globally too insofar as it affects biodiversity;
• ACP island states are particularly exposed to the potential dangers linked to climate change, especially the increasing frequency of violent storms. In sub-Saharan Africa too, there is the danger from the worsening drought problem;
• support is required to build up the ACP countries' capacity in environmental policy, both as regards formulation and implementation, especially in relation to the follow-up of international conventions that have been ratified or are in the pipeline.

B. The institutional dimension

Chapter III's analysis of socio-economic and political developments in the ACP countries highlights the shortcomings of the state and the seriousness of problems of governance. These problems are hindering development in a number of countries, delaying structural adjustment programmes (or preventing them from being completed) and aggravating instability and the "trust gap" which jeopardizes investment and the legitimacy of development aid. This analysis has also demonstrated the need to restore or bolster the rule of law in order to create the basic preconditions for development and reducing inequality and poverty. The Fourth Lomé Convention, as revised in 1995, recognises these factors as fundamental.

The European Union has so far not come up with a firm policy regarding government and legal reform, improving capacity to analyse and formulate development policy or strengthening those institutions active in civil society which are capable of counterbalancing the authorities. Community action to back institutions and good governance has focused on encouraging democratic elections, providing technical assistance to help with development projects and programmes and providing targeted financial assistance to help with or offset the effects of some reforms. However, recent years have seen greater focus on the institutional backdrop as a whole rather than the agency or institution responsible for a particular project. Structural-adjustment and sectoral-policy support have encouraged this change in focus, which has enabled the Community to be more active in improving the policy environment (in individual sectors and in general). This approach is destined to become more common, especially as evaluation studies have shown that institutional matters will have to be considered as a matter of course and in greater depth if Community cooperation is to be made more efficient.

Are there not grounds for going beyond such detail changes, however, which are, after all, perfectly compatible with current policy. In the new international economic and political climate, the state is becoming a structure which is seen as responsible for laying the groundwork for sustainable and equitable development. Under these circumstances, should there not be a rethink of this dimension of ACP-EU relations, and should the EU itself not be giving more strategic backing to the political and social transition which is needed?

Change in a country's institutions is basically a political process. No reform can succeed unless it has support on the ground, and there will always be many obstacles (because it affects the power structure and will inevitably meet with resistance). Institutional development consequently has two complementary sides: a political side and a more "technical" side.

In this situation, should the EU play a more active role in institutional development and become involved in the dialogue with other donors on such matters? And how can it set about playing such a role?

1. There are compelling reasons for the EU to step up its activities in this area, give them greater priority and indeed make them a major plank of its relations with the ACP countries:

• The ACP countries themselves are now having to redefine their concept of the functions of the state and improve the way the state fulfils those functions. The aim is to serve the general interest. The political motivation behind the EU's activity in this area has no overtones of national interest: the EU has no prototype to force on other countries, and the Member States organize their own social and political systems in a variety of different ways.
• The fact that respect for human rights and fundamental freedoms and the application of democratic principles are deemed essential by the Union. Because there have been problems with the current policies for backing democratization (see Chapter III), a less formalistic and more constructive approach needs to be adopted.
• The efficiency and impact of Community aid are closely related to these institutional questions. Most Community aid in the economic and social fields would be improved by more decisive action on institutional development. As evaluation studies have shown, the impact and viability of Community aid programmes are often adversely affected by too little account being taken of the limitations and obstacles connected with the institutional setting. If the EU backs economic reform, it should in its own interest and in the interests of efficiency, tackle the related institutional matters. If adjustment policies are to succeed in the ACP countries, there must be a predictable legal framework, transparent decision-making and administrative and budgetary management procedures, and good public services.

The partnership that the EU is seeking to develop with the ACP countries is an appropriate setting in which to tackle institutional development issues because it allows the countries involved to take primary responsibility for reform and allows the EU to provide technical, financial and policy support on the basis of reciprocal medium-term commitments.

Furthermore, the experience of reform which the Union has gained from the process of European integration gives it a special know-how.

2. From the points of view of content and procedure, there are three complementary lines of action which could be contemplated to further the EU's capacity- and institution-building efforts:

• The EU could re-examine ways of mobilizing local and Community expertise for transfers of know-how between Europe and the ACP countries. The establishment of a specialist network for analysis and technical assistance would provide ongoing support over sufficiently long periods of time and build up genuine experience and know-how.
• The EU could specialize in particular fields, depending on the "added value" it was able to contribute relative to other donors (bilateral or multilateral). A number of fields may be identified within the EU's main spheres of action:
  1. promoting respect for human rights;
  2. assistance for regional organizations;
  3. restructuring of public services (in consultation with those immediately involved), improving capacity to analyse and formulate economic and social policy, preparing reform, helping to decentralise the civil service;
  4. managing budgets (in conjunction with support for structural adjustment);
  5. developing certain capabilities needed to cope with the operation of a market economy (business law, consumer-protection law and consumer associations, investor protection, preservation of the environment, competition rules, etc.);
  6. decentralized cooperation, as a way of adding to (not supplanting) assistance for the public sector, in order to improve interaction between the public and private sectors and to bring what the EU does closer to those active in civil society;
  7. strengthening parliamentary institutions to promote policy transparency and sound management of public affairs.
• The EU could use new aid practices to try and reduce negative effects on local capacity-building.

The advantages of using more local expertise have already been recognized in the Lomé Convention, but more fundamental changes need to be contemplated. In certain situations, and for a limited time, some substitutions will probably be inevitable, but a clear political signal backing a change of approach and a reduction of the adverse effects of aid on local institutional and administrative capacity-building will probably give rise to a number of changes (simplification of procedures, reduction of the range of instruments and abandoning of the project-based approach). This would constitute a strategy realignment because local capacity-building is destined to become one of the main influences on the choice of practical arrangements for aid. The different options in this connection are discussed in Chapter VI.

C. Trade and investment

Suitable integration of the ACP group into the global economy, and in particular the definition of its proper place in the evolving external economic relations network of the EU, as a major dimension of their integration into the world economy, constitutes the challenge for new ACP-EU relations post-2000. relations. Failure to devise an appropriate framework may result in the breaking up of the ACP group, the drifting away of some ACP regions and countries from the present link with the EU, and further marginalization of the poorest ACP countries.

Trade arrangements.

Many options are possible for a future ACP-EU trade relationship after the year 2000. These options should, in theory, allow the ACP countries to accommodate their preferred integration strategies. These options should also be reviewed in respect of the dimensions of the partnership principle underpinning the ACP-EU trade relationship:

1. Single trade arrangement versus multiple trade arrangements
2. Differentiated versus generalized
3. Reciprocal versus non reciprocal
4. Contractual (providing long-term security, bilateral or multilateral) versus unilateral (at EU political discretion).

As the principle of partnership carries a major political value for the ACP countries as well as for EU members, the different options considered would have to be assessed in the light of their impact on that principle: Would they undermine it or reinvigorate it? Would they narrow it down or broaden it? These are important political considerations to take into account when assessing the different options; the technical constraints relating in particular to the negotiation of free trade should also be considered (see Box 5 for a discussion of the trade options).

The menu which could be offered for consideration of the ACP countries could be composed of the following items:

1. "Status quo". Preservation of the current non-reciprocal, differentiated (in respect of other LDCs), contractual, uniform scheme focusing on strict market access terms. An "enhanced status quo" variant could involve improvements in market access, together with relaxation of rules and procedures, agreements on trade-related matters (standards, environment, competition policy, intellectual property, etc) and an agreement on services. Another variant would restrict this option only to the least advanced ACP countries, proposing to the more advanced group any of the options below according to their wishes or capabilities. Finally, an element of reciprocity could be introduced into this option by requiring all ACP countries to submit and bind a tariff schedule offer to the GATT.
2. "Integration into the GSP". This option consists in removing the trade package from the Lomé Convention, which will be reduced to an aid package. The least-developed ACP (LLDC-ACP) countries would be grouped with the least developed non-ACP countries, while the more advanced ACP countries would graduate into the normal scheme. To avoid too drastic a loss of preferences for the LLDC-ACP, the general preferences granted to the least-developed countries could be upgraded to reach parity with the level of Lomé horizontal preferences. Being a unilateral policy of the EU, the concessions granted would not be the object of negotiation with the ACP countries. Nothing could be asked from them in exchange. Alternatively, the EU-LLDC preferential arrangement could be embedded into a multilateral (possibly GATT-bound) preferential arrangement for LLDCs.
3. "Uniform reciprocity". Require all ACP countries to extend reciprocity (consistent with WTO rules), after a common transitional period, to EU exports. As a variant, allow for different transitional periods for the LLDC-ACP countries on one side, and for the more advanced ACP countries on the other. As an enhanced variant, this option could also involve agreements on trade-related areas, and an agreement on services. It would also entail full integration of the ACP countries into the WTO framework.
4. "Differentiated reciprocity". Variable geometry reciprocity (consistent with WTO rules) with the EU on one side, and with homogenous regional groups of ACP countries, or with single ACP countries on the other side, on the model of North-South regional trading arrangements. As an enhanced variant, this option would also involve agreements on trade related areas and an agreement on services, and full integration into the WTO framework. Another variant would envisage regional trade arrangements between the EU, on one side, and a regional integration area made up of ACP and non-ACP countries.

Finally, two additional options combining the four options reviewed above may also be considered:

5. "Differentiation under a single framework". This option would encompass options (i), to (iv) as items of a single menu for the EU and the ACP to choose from, depending on levels of development, perceived needs and the will of the ACP to deepen the relationship, political conditions and the level of reciprocity the ACP were willing to grant to the EU. It would maintain, for all ACP countries, the contractual character of the present relationship but might require major modifications to certain horizontal preferences of the current relationship (commodity protocols and agricultural preferences), notably as regards country eligibility.

This option would contemplate a set of trading arrangements organised in four tiers:

1. Region-to-Region FTAs, along the model of option (iv);
2. Bilateral FTA, same as option (iv) but with willing single ACP countries which are outside any regional integration process and are large and capable enough (examples: Nigeria, Zaire), and provided that political conditions are right;
3. Non-reciprocal preferences, maintained for the least-developed ACP countries (established unilaterally or within a multilateral framework), those whose per-capita income lies below an internationally recognised level, and are outside any regional integration process falling under option a) above;
4. Graduation into GSP, in respect of the horizontal, non-reciprocal preferences, dealing with those ACP countries not willing to come under options (a) or (b), but showing a level of development which would make them ineligible for option (c); "graduate" ACP countries could, perhaps, maintain the preferences under the commodity protocol, but only for a transitional period (a waiver could be required in this case).

Within this framework, the ACP countries would be able, in agreement with the EU, to select the trade option that best fitted the integration strategy chosen and their needs and capabilities. However, issues of trade and investment diversion effects among groups of ACP countries will be unavoidable as the pattern of preferences and the pull on FDI will vary for each group according to the option selected.

This framework option would preserve the integrity of the existing Lomé Convention but would allow for reciprocity, differentiation and graduation considerations to be added as additional basic dimensions of the partnership principle. They would work as inside dynamic elements pulling individual ACP countries from a given stage of the relationship into higher stages, as their individual conditions, and their wishes, allowed. In respect of WTO compatibility, this single framework would most likely have to be joined by a request for an Article XXIV.10 derogation (i.e. derogation in respect of the minimum compatibility conditions for FTAs).

6. "Differentiation leading to a variety of arrangements". In this scheme the alternatives (i) to (iv) lead naturally to a variety of trading arrangements, possibly coexisting with a single aid package. The integrity of the Lomé Convention is obviously the first casualty of this approach. Contractuality and security, and certainly the strength and scope of the partnership principle, will vary between arrangements, and the current level of preferences will likely be eroded for some groups of ACP countries or enhanced for other groups according to the option chosen.

This multiple framework will be quite incompatible with the preservation of the benefits provided under the commodity protocols as well as with the horizontal scheme of agricultural preferences. Issues of unequal treatment and of deflection of trade and investment between groups of ACP countries will become even more serious than under the single framework option above.

The advantages and disadvantages associated with each option, as discussed throughout this note, will accordingly apply to the group of ACP countries covered by each. In respect of compatibility with the WTO, an Article XXV.5 waiver would have to be requested for the non-preferential scheme for the least advanced ACP countries. This may be easier to obtain.

Whichever option chosen, it should be remembered that the EU has embarked on harmonizing the rules of origin used in preferential trade arrangements.

Investment Protection and Promotion

Under the provisions of the fourth Lomé Convention, ACP countries have undertaken to accord fair and equitable treatment to private investors, to create and maintain a predictable and secure investment climate, to improve the business environment, and to foster a legal, administrative and incentive framework conducive to the emergence and development of dynamic private sector enterprises (Article 258(c) to (g)). Countries have striven, individually, to implement these objectives, but not always with the desired result of a revival of private sector investment. Investors still hesitate. The business environment and the policy and institutional context do not yet always inspire sufficient confidence.

Countries will continue, domestically, to implement confidence-building measures. However the transparency and predictability of these measures can be enhanced if they are seen to be related to a common, well-understood and internationally-accepted framework of rights and obligations. In 1992 the EU proposed for the consideration of ACP countries a set of Investment Protection Principles, covering, inter alia, national treatment, the most favoured nation principle, fair and equitable treatment, the full protection of law, compensation for expropriation and remittance of earnings and capital. The draft Principles gave textual effect to the objectives of the Convention. They have not, however, been widely discussed or implemented. Since 1992 there have been extensive discussions in the OECD on the proposed Multilateral Agreement on Investment which sets out a more ambitious and comprehensive framework for the protection of investors.

The issue of investment protection standards has now been taken up in the WTO where negotiations on principles acceptable to a wider spectrum of countries are soon to commence. If these negotiations lead to agreement on transparent and enforceable principles, investors and capital markets are likely to be attracted by the lower risk of investing in countries which agree to abide by them.

An option for ACP countries wishing to accelerate the revival of investor confidence would be to adopt and apply an internationally recognised standard of investor protection having the force of law. The EU would naturally be open to requests for assistance in building capacity for introducing this in those countries which chose to adopt it. The larger the number of ACP countries which feel able to subscribe to the standard, the greater the confidence of international investors in the ACP countries as a group will be, and the more the ACP countries will feel that they are a group.

Options for ACP countries wishing to revive investor confidence through more credible investment protection are to:

1. Pursue current policies of concluding bilateral investment protection agreements with countries of the EU and the home countries of other foreign investors. These agreements cover the basics of compensation for expropriation, but are otherwise limited in scope, offering little redress against discriminatory or discretionary decisions by host country governments. They have not been conspicuously successful in attracting new investment, particularly in Africa.
2. Enter into regional investment protection arrangements. One example to follow might be the UEMOA, whose members are introducing a common investment code, common trade law and common investment protection standards. With regional arrangements it should be relatively easy to police compatibility with rules and undertakings, and judicial redress should be relatively accessible for aggrieved investors. Successful regional arrangements might be extendable to other interested ACP states, thus creating an acknowledged ACP standard of practice.
3. Subscribe to an internationally recognised standard of investor protection - based perhaps on principles agreed in the WTO. The advantage for ACPs of adopting international norms of investment protection lies in their greater visibility and familiarity to investors,and thus in their greater confidence-building effect.

However, as there is at present no internationally agreed model, the most advantageous option for ACP countries, in the interim, is likely to be to collaborate - with EU support- in regional arrangements which satisfy the basic principles outlined above. In their longer term interest the EU and ACP countries should simultaneously work together towards agreement on a wider international standard.

CHAPTER VI. OPTIONS FOR A NEW PRACTICE IN THE FIELD OF FINANCIAL AND TECHNICAL COOPERATION

There are three considerations which militate in favour of a fundamental revision of the practical methods of providing financial and technical assistance: 

1. the move towards a partnership based on reciprocal rights and obligations and a more explicit allocation of the partners' responsibilities, 
2. the need to alter Community assistance to take more account of the fact that some ACP countries have reached a substantially more advanced stage of development than others and 
3. the need to reconcile the predictability of accumulated aid practice with the requirement for better-tailored and more efficient aid.

These aims mean that a new thinking will have to be developed in connection with aid instruments, that the nature of support activities will have to be changed, and that a new way of managing resources will have to be promoted. In addition, the Commission is recommending, as it has done in the past and as the European Parliament has long been urging, that the European Development Fund (EDF) be incorporated into the budget to help rationalize the Community's activities outside its borders and to improve their cohesion and transparency.

A. A single source of funds or multiple smaller sources?

One of the most common criticisms levelled at assistance under the Lomé Convention has been the large number of instruments which have been set up over the years and adapted as one negotiating exercise succeeded the next. Cooperation with the ACP countries is now overburdened with instruments which are tailored to predetermined uses and are increasingly difficult to run in a coherent way.

Drawing up strategy papers for each country doubtless reduces the risks of lack of cohesion, but the use of a multiplicity of instruments which all have different purposes, procedures and methods of operation inevitably makes the EU's policy for each individual country less transparent. Despite the substantial effort the Community has put into information, the complexity of the system often impedes access to the various financing and technical assistance facilities, particularly for those active in civil society.

EDF instruments and the range of specially-targeted budget headings also tend to make the implementation of policy guidelines rather rigid. As the situation currently stands. it is impossible to reorient or adapt aid policy within a reasonable space of time, but this is just what is increasingly called for. This is because economic and political circumstances can change fast, and we have to be able to react to new concerns connected with policy initiatives, respond to public opinion in the ACP countries or in Europe, or give effect to the findings of evaluations in the interests of increasing the efficiency and impact of cooperation.

Under these circumstances, is there any justification for keeping a range of special instruments, or should there be a radical change of direction focusing on the setting of overall allocations of funds allowing aid to be administered in a more flexible way which can cope with needs which are more and more changing and divergent?

There are three possible options:

1. Maintaining the current division of allocations

Though this is an option, it carries all the disadvantages described above and will not encourage relations between donor and recipients to move in a direction of independence and responsibility.

2. Gathering all aid operations under the umbrella of a single source of funds

This would provide a maximum of flexibility in the organization and subsequent development of financial assistance.

3. Creating two or three separate allocations

These would group together activities of the same nature:

• One allocation would be set aside to fund long-term assistance for the public sector. This indicative overall allocation would be used (depending on needs and on the outcome of an assessment of the most appropriate action) to support sectoral policies or institutional reform, to provide budget assistance or to fund more one-off activities;
• A second allocation would be used for resources to cope with emergencies, which by their very nature are not foreseeable, and for all very short-term measures.
• A third allocation might be needed for direct assistance to non-governmental agents, the private sector, associations, consumer organizations, NGOs, etc. such operations need different administrative arrangements (though EU eligibility criteria must always be adhered to).

The clear distinction between short-term and long-term operations would help to make Community action more visible by preventing the confusion which can be caused by instruments like Stabex and the food-aid arrangements, which both have an "emergency" component and a component providing assistance with more long-term aims.

A move in this direction would make Community aid policy more flexible, cohesive and transparent. The ability to alter and adapt aid policy for a given country or group of countries is also, however, connected with programming arrangements. These are dealt with in Chapter VI.B.

B. Should aid be granted according to need or according to merit?

Resources for programmable aid are currently according to the needs of each country relative to the needs of others, human development indicators, the size of the country, geographical considerations (such as the country being an island or being landlocked). Resources for non-programmable aid (support for structural adjustment programmes, arrangements to make up for loss of export earnings, etc.) are governed by separate criteria.

The automatic nature of the allocation of programmable resources has already been substantially modified (this was done during the mid-term review of the Lomé Convention). Allocation is now in two tranches. The first is 70% of programmable resources and is intended to allow the allocation of resources to be reviewed in the light of the degree to which the recipient countries' undertakings (especially as regards sectoral policy) have been adhered to, the general consistency of the government's development policy, plus any unforeseen outside events.

The new system of allocation by tranches thus introduces a new qualitative criterion by which the aid for each country can be adjusted according to its government's general and sectoral policy performance. This development translates into action the EU's greater requirements for efficiency and a new concept of partnership based on reciprocal undertakings, foreign aid being used to back domestic reform.

The EU should continue to act along these lines. However, the fact that programming over several years has the advantage of giving developing countries a predictable flow of outside financing and of requiring at least a basic level of strategy framework means that there are grounds for keeping a system of multiannual programming. A number of options, which will have to reconcile flexibility and predictability, efficiency and responsibility, should therefore be considered.

Two questions arise: what should determine how programmable resources are allocated among the ACP countries? How can programming be reworked to restore flexibility to aid policy?

The growing gap between different categories of ACP country (between the poorest and those which have more resources to devote to development, and between those which are still in the grip of serious political and social problems and those which have embarked on economic and social reform and progress) makes this issue all the more important.

- Combine incentives and development indicators

The substantial importance attached to the conduct of domestic policy and the incentive-based approach which the EU is seeking to promote through its aid policy suggest that the concept of "need" (which dictates remedial action) be supplemented by the concept of "good management", which would take account of how the state and local authorities assumed their responsibilities. This would mean that performance criteria for political and economic life would come into play alongside social and economic indicators and levels of poverty. This option would entail establishing "governance" criteria which were accepted by the partners. As in the case of conditionality (dealt with in section C below), it seems preferable to have an assessment of general policy rather than very specific criteria, and historical, political and institutional considerations should not be divorced from social and economic considerations. Whatever the criteria, they should be able to be agreed by the parties in advance in order to prevent arbitrariness.

This option would inevitably make aid more selective. It would enable the EU to focus its efforts on the poorest countries and the countries where the impact of its operations is likely to be the greatest.

- Introduce ongoing programming

Introducing incentive-based criteria for granting aid would bring a change in the contractual nature of ACP-EU relations. There would be no point in adopting performance criteria while keeping five-year fixed allocations: standards of governance can change very rapidly (i.e. improve or deteriorate). This option would also be more compatible with a financing arrangement which differed from the EDF (in which the Member States establish their contributions in advance). Budget arrangements which allowed multiannual programming of expenditure in tandem with greater flexibility would undoubtedly be more appropriate.

However, predictability of flows could be preserved by adopting ongoing programming covering three, four or five years with regular (yearly, for instance) reviews. This method has been adopted for the Euro-Med partnership, for example. It reconciles the goals of predictability and flexibility against the background of a "contract" between donor and recipient which centres on a requirement for efficiency.

C. Types of aid

The critical appraisal in Chapter II of cooperation past and present is based mainly on the findings of recent evaluations and throws up a number of operational pointers. It highlights the value of increasing the sectoral emphasis and support for reform, of formulating long-term strategies to improve institutional frameworks and local capacity to devise economic and social policies, and of restricting project aid to very specific, reform-linked operations.

Given the intention of sharing out responsibilities more equitably, encouraging ACP governments to implement sustainable development policies, reduce instability and define their own development strategies, the best way forward might be to channel Community aid in a lump sum to national budgets instead of financing sets of individual projects. This could of course only be done if economic and social performance criteria were used to decide how much aid should be given and only those countries with a proven ability to manage resources would be eligible.

The evaluations also suggest that the Stabex and Sysmin systems need to be abolished or at least amended. The idea of compensation itself is not being challenged since there are good reasons why special aid packages should be available to keep macroeconomic management on track and reduce the risks faced by some exporters, particularly those in the agricultural sector. Stabex and Sysmin are also increasingly being used to support economic and institutional reform in the affected sectors. However, the automatic triggering of these types of instrument is making them less relevant.

Recent developments in the world economy have increased the supply of investible resources seeking profitable placement in developing countries, and have increased the number of developing countries offering good investment opportunities to investors. Successful developing countries receive their external financing and external professional and technical support essentially on market terms. It seems reasonable for the EC to wish, post Lomé, to concentrate its grants on assisting countries which are poorest and least favourably placed to attract foreign direct and portfolio investment. The EU could therefore think about a new instrument to make it easier for ACP countries to gain access to capital markets.

The whole issue of the type of aid to be provided by the EU prompts a number of questions:

Should support for macroeconomic reform and sectoral policies be stepped up?

Should project aid be phased out in favour of direct budget aid?

Should the EU carry on with its export earnings compensation mechanisms?

What type of conditionality should the EU envisage?

Should the EU think about new ways of facilitating ACP access to private capital, be it in the form of direct investment, project financing or government loans?

- Towards direct budget aid.

The EU could think about a switch to direct budgetary aid for ACP countries. This would work well with the structural adjustment support facility, which still plays a big part in improving the budget planning and management in the countries concerned.

In this case, the disparate macroeconomic support instruments could be combined into a single package of direct budget aid linked to an appropriate macroeconomic framework. There are two arguments for this:

• it would be a sign of a mature relationship between the EU and ACP countries, based on trust in which responsibility for managing development resources lay with national authorities;
• unlike project aid, budget aid does not knock the allocation of expenditure out of kilter.

Flawed budgetary management and opaque spending decisions constitute the main barriers to any move towards budget assistance and mean some minimum attendant conditions would have to be imposed. The switch would therefore be seen as a process, marking a stage in the development of local capacities and providing an opportunity for much more effective cooperation.

- From support for structural adjustment to support for sectoral policies.

As explained earlier, the EU-backed reforms under way in the ACP countries are a long-term process, especially the institutional reforms. In a rapidly changing world that demands the constant reworking and reappraisal of economic policies and social systems, adjustment itself becomes a permanent process in every country. Within the process, however, different stages can be singled out, in particular the move from an initial phase of structural reforms concerned with the general running of the economy and public sector to a complementary stage centred on more specific sectoral aspects.

As reforms progress, the EU will have to be able to redirect its aid towards sectoral and institutional support if it is to respond appropriately to the priorities of the moment.

Community support for reforms could therefore be tailored to whatever stage of structural adjustment a particular country is at. This means that within a given set of conditions, direct budget aid could be explicitly targeted towards reforms in specific sectors.

- Retaining compensation for export earnings

In order to compensate for sharp drops in export earnings, the EU could consider giving extra support for individual sectors on top of the total aid package for the country in question. Depending on whether the export difficulties were structural or cyclical, the extra funding could be allocated as sectoral support or macroeconomic assistance.

- Reforming conditionality

Conditionality is another vital issue in any discussion on the type of aid to be given. Explicitly or implicitly, every cooperation programme has some form of conditionality. It implies a certain degree of aid selectivity and is designed to encourage recipient countries to modify their policies or carry out certain reforms. The conditions imposed may concern the kinds of results that are expected or the means to be targeted at an objective. Given the experimental nature of many reforms, particularly those of an institutional type, an approach based on a searching appraisal of the overall impact of a government's policies seems far preferable to just imposing highly specific conditions.

As part of the Special Programme for Africa, the Commission has presented other donors with new proposals for structural adjustment conditions. This new approach would aim to:

• encourage recipient countries to internalize reforms;
• apply realistic conditions which take due account of the political and administrative context;
• make a full assessment of what has been achieved in terms of sustainable development rather than making do with a partial appraisal of a few specific indicators. Such an assessment should be carried out in conjunction with all other donors.

This comprehensive coordinated approach should also prevent any "stop and go" in aid payments.

It would also avoid the drawbacks of current practice and change the donor-recipient relationship into more of a partnership based on reciprocal undertakings designed to achieve long-term goals.

- Access to capital for investment

At present Lomé uses a variety of instruments to help countries find the capital necessary for investment: EDF grants, venture capital also funded by the EDF and some lending from the own resources of the European Investment Bank.

With a view to increasing availability of sources of finance at the prime market rate for investment, in particular infrastructure, a first option would be greater access to EIB lending. As part of the proposed budgetization of the EDF, EIB lending to ACP countries could then be subject to the same modalities that apply to lending in other third countries (in particular with respect to provisioning of the Guarantee Fund for external actions).

A further option to be explored could be to adapt present instruments to encourage greater access to private sources of finance. For example, partial guarantees (possibly via the EIB) are an instrument already used with some success by several multilateral agencies in mobilizing long-term market finance to cover part or all of the political and/or commercial risk.

The application of these options as part of post-Lomé cooperation requires further study and consultation. Most of the better-off ACP countries have already established some track-record for sovereign credit-worthiness and would probably see little advantage in external guarantees for their sovereign borrowing. On the other hand they may find the idea of guarantees, eg for privately-financed large infrastructure projects, very attractive because of the many contractual risks which continue to inhibit the market financing of such projects and because of the importance of infrastructure in sustaining economic expansion.

Providing guarantees or market-financed lending through the EIB could be advantageous both for both the creditworthy, or nearly creditworthy, countries and for the poorer ACP countries. The former should receive more external financing from the markets, and their credit ratings should, over time improve - giving them access to more and cheaper financing in future. Less well-off countries might expect to receive a higher share of available EDF grants as better-off countries' need for official financing reduces.

D. Co-management, EU-only management or autonomous management by recipients themselves?

The current Lomé system whereby commitment decisions on cooperation activities and expenditure monitoring are both jointly managed has shown its limits. In practical terms, the frequent to-ing and fro-ing between national and chief (i.e. Community) authorizing officers is time-consuming and so makes aid less effective. The system also makes it difficult to co-finance operations with other donors.

In operational terms, co-management does little to encourage recipients to take responsibility for the development programmes and reforms supported by the EU even though all Community evaluation studies have concluded that this is vital if aid is to be effective. The gradual shift away from infrastructure-based aid towards support for socio-economic policies and institutional reform makes it all the more necessary.

Joint aid management therefore has to be reviewed. What alternatives would provide the reliable system needed for managing Community aid while encouraging recipients to take more responsibility, itself a prerequisite for more effective cooperation?

A phased and individualized approach should be adopted in which the degree of responsibility for administrative and financial management of the aid grows as good governance improves in the recipient state.

The aim would be to give beneficiaries steadily more responsibility for managing programmes, justifying and monitoring expenditure and assessing the economic and social impact of assistance. The best way of doing this would be through direct budget aid.

In countries where institutional and administrative conditions would rule out this approach in the short-term, the EU would take sole management responsibility but would simultaneously help strengthen the local skills needed to take over responsibility. It would be best not to set up specific units but to work within existing local structures.

Here too, the type of management appropriate in each case would be decided on the basis of a number of criteria and would depend upon the quality of ACP-EU dialogue, the willingness of recipient countries to match additional Community funds with a contribution of their own and the existence of units or machinery for coordinating foreign aid.

This issue, like many other aspects of ACP-EU relations raised in this Green Paper, will have to be addressed through a case-by-case approach tailored to individual countries or groups of countries. The chosen system will have to be seen as evolutionary, with management tasks gradually passing into the hands of all ACP beneficiary countries as administration gets better.

Generally speaking, any potential changes in the way resources are managed should aim to redirect day-to-day consultation and dialogue on cooperation towards substantive issues, and the conditions which affect the impact of programmes and determine the contribution they make to sustainable development in the country concerned. This is one area in which both EU and ACP partners can demonstrate their sense of responsibility to their respective electorates.

FOLLOW-UP TO THE GREEN PAPER

The Green Paper is one stage in the consultation process launched by the Commission on the future of ACP-EU relations and in the related debate between all those bodies involved in development. It aims to raise awareness of the need for an effective EU cooperation policy towards ACP countries and sets out the main issues on which the Union will have to decide before starting negotiations with the ACP. The Paper does not claim to be authoritative or exhaustive, it simply outlines a number of different ways forward.

In publishing the Paper, the Commission is inviting all those concerned to examine the options and arguments presented and to give their reactions and suggestions. The Commission will continue to stimulate the debate through meetings and seminars. Feedback can also be sent in writing to the Directorate General for Development.

In accordance with the institutional provisions, the Commission will formulate detailed proposals for renewing the framework for ACP-EU relations during the second half of next year.

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