Tag Archives: EU

EU finance ministers talk tough on tax evasion, but agree on little

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This week’s European Union (EU) meeting of finance ministers in Brussels for the Economic and Financial Affairs Council (ECOFIN) produced strong rhetoric about the importance of tackling tax evasion and tax fraud, but offered little in the way of concrete action. Important decisions to tackle financial secrecy were also delayed.

The ECOFIN – which is made up of EU finance and budget ministers – meets monthly and discusses many issues. This month’s meeting focussed largely on tax issues, partly spurred on by the upcoming G8 meeting, which also promises to put tax issues centre stage. The list of items covered at the meeting were impressive – savings tax reform, and a host of issues relating to tax evasion and tax fraud – but the outcomes were minimal.

Tax evasion and tax fraud

The formal agreement of the meeting – or ‘Council Conclusions’ – recognises that transparency measures today are not sufficient to be effective against tax evasion and tax fraud. The ministers highlight that “it is necessary to encourage Member States to take all necessary steps to tackle aggressive tax planning, where appropriate, which would help diminish existing distortions”.

One easy first step for EU leaders would be to end secrecy around who owns companies, trusts and other corporate vehicles.

Although the ministers support “improving the implementation and enforcement of standards of beneficial ownership information that is relevant for tax purposes”, they fail to mention the golden opportunity they have this year to make concrete progress. This year the EU is revising its Anti-Money Laundering Directive, which provides the perfect opportunity to put the real – or ‘beneficial’ – owners of companies, trusts and foundations on public record.

Today, tax evaders and other criminals can hide their identity behind a company or another legal entity, and they can easily use bank accounts to transfer their untaxed and illegally gained money. The EU can end this by requesting real owners to identify themselves and recording them in a public register.

EU finance ministers highlight the importance of “automatic exchange of information” on tax, and they note that the EU has a key role to play in “supporting and promoting the acceptance of such standards globally”, which is welcome. However, one of the few concrete actions mentioned in the Council Conclusions is that the “Presidency intends to write to the International Consortium of Investigative Journalists asking them to supply Member States through the relevant competent authorities with the names and details regarding all EU citizens on the ‘offshore leaks’ list”.

Surely the EU can think of more effective means of making sure that information is available? For instance, they welcome that automatic exchange of tax information is again on the table after five EU Member States agreed on an initiative for multilateral and automatic information exchange, also called the EU FATCA – named after the US Foreign Account Tax Compliance Act. This would be a significant first step towards increased transparency and would ease tax collectors’ jobs in the countries in question. However, while the ECOFIN recognised the global scale of tax secrecy, proposals for information exchange are so far exclusively for EU Member States and other countries from the global north. Developing countries risk being excluded. When EU leaders meet next week they should recognise the need for true multilateralism in tax matters. This is not the moment to make half-hearted reforms that only benefit the minority; the EU must throw its weight behind a multilateral solution.

Savings taxes – more delay and developing countries left out

Top of the news agenda was the much-delayed EU Savings Tax Directive. Hopes had been high that opposition in Austria and Luxembourg would be overcome. As Richard Murphy of the Tax Justice Network has said, the proposed directive “would represent very real progress in the fight against tax haven abuse because this demands real transparency on trusts and companies as well as on individuals”.  However, in the end, the ministers agreed to “revert to the matter at a forthcoming meeting”, heralding further delays.

In a comment about the disappointing outcome, Murphy said, “In the meantime the criminals are in charge in Austria and Luxembourg, and it’s right to name them as such”. Members of the European Parliament (MEP) were also disappointed about the further delay. Sven Giegold, spokesperson for economic and finance issues for the Green Group of MEPs, said:

“The shameless obstructionism by Luxembourg and Austria, which [is] continuing to block efforts to ensure proper transparency of bank accounts as part of EU action against tax avoidance, must be overcome. I call upon the heads of states to do so during their summit next week. If these two member states refuse to get out of the way of efforts to tackle tax avoidance in Europe, they must be bypassed.”

Don’t miss another opportunity: country-by-country reporting

Another step towards ending financial secrecy would be to implement country-by-country reporting of companies’ profits, sales, staffing levels, assets and tax payments. This will be a requirement for the banking sector and should be extended to all sectors. While EU Member States failed to use the Accounting Directive to take this step, the European Parliament has been more progressive. French President François Hollande has also said, “I am in favour of country-by-country accounting disclosure by quoted companies in France, whatever their sector of activity and not only in [the] extractive sector”. The Norwegian government is also supportive of the measure and recently launched a working paper suggesting full country-by-country reporting for the extractive and logging industries.

Taking these two steps towards ending corporate secrecy would not only help to curb tax evasion in the EU. These two simple measures would also help developing countries to keep and tax the billions of dollars that are being illicitly transferred from their coffers every year.

Defining tax havens?

In December 2012, the European Commission published an Action Plan to strengthen the fight against tax fraud and tax evasion (see Eurodad’s analysis). The Action Plan recommends that the EU should develop a set of criteria that would help produce a ‘black list’ of tax havens, or – in EU language – “to encourage third countries to apply minimum standards of good governance in tax matters”.

While France has expressed support for developing EU criteria and a blacklist of “non-cooperative jurisdictions”, this is a sensitive area because explicit criteria would also shed light on EU Member States with harmful tax practices, although the blacklist would only apply to non-EU countries. In a letter to the President of the European Council, Herman Van Rompuy Eurodad, Oxfam and 26 other NGOs encourage the EU to agree on a common binding definition of tax havens and effective non-compliance sanctions. “Unlike previous failed attempts, these criteria must be binding and comprehensive, combining as a minimum, features of secrecy of banks and legal entities, non-cooperation and harmful tax measures,” the letter states.

EU finance ministers this week decided to postpone the discussion and “invite consideration of whether developing a European list of third country non-cooperative jurisdictions is appropriate”. They also referred to ongoing work at the Organisation for Economic Co-operation and Development (OECD). While this keeps the item on the table, the link to the OECD is worrying because the OECD’s process of identifying tax havens has so far produced few results. While the indicators are going in the right direction, the OECD’s blacklist so far suggests there are no tax havens in the world.

So while it is positive that EU finance ministers are recognising the urgency of cracking down on tax havens and harmful tax practices by companies and governments, we need real political action to stop tax evasion. We need politicians to change laws, and to sanction misbehaviour. When meeting in Brussels next week, EU heads of states should therefore take the challenge from the 28 non-governmental organisations and agree on concrete measures including:

  • multilateral automatic information exchange;
  • disclosure of beneficial owners through public registries;
  • country-by-country reporting for transnational corporations in all sectors;
  • and a common binding definition of tax havens and effective non-compliance sanctions.

See more on what the EU should do to respond to tax scandals.

Negative outlook for development cooperation

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By Jeroen Kwakkenbos

The latest figures from the Organisation for Economic Co-operation and Development (OECD) on donor official development assistance (ODA) have been released. For the most part, the Development Assistance Committee figures do not make for very positive reading.

The majority of donors, particularly the largest by volume, have reduced their contributions to development assistance by $ 5.4 billion – from $ 133.7 billion to $ 128.3 billion between 2011 and 2012. In the European Union, the share of combined gross national income (GNI) to ODA fell from 0.44% to 0.42%, representing an overall drop of 7.3% in total ODA compared to 2011.

The poorest countries are hit particularly hard, with bilateral support to Least Developed Countries dropping by 12.8% or $ 26 billion. The OECD, the European Commission and civil society groups are calling for donors to meet their international commitments, which they have publicly reaffirmed time and time again. 

Aid effectiveness still an issue

Very little recent data on the effectiveness of development cooperation exists, as no comprehensive monitoring has been conducted since the Paris Monitoring Survey 2011. However, data on contract awards does exist and reveals a bleak picture.   

The OECD 2012 report on untying aid notes that many countries have officially untied aid, but the “very high shares of procurement that continue to go to enterprises in donor countries raises concerns about how untied some of that aid really is”. So, while aid may be untied de jure, it may not be untied de facto. The figures on contract awards unveil that much aid flows to donor country businesses rather than contributing to local economic development in recipient countries.

Incorporating private finance through leveraging and Public Private Partnerships (PPPs) has become commonplace in discussions surrounding aid effectiveness, particularly in terms of how to ‘crowd in’ investment in a manner that is pro-development. As Eurodad has pointed out, these types of financial flows are problematic for a variety of reasons, ranging from whether they are fit for purpose to measuring impact. Furthermore it is unclear whether they would provide real development additionality or would detract financing from gaps in the public sector. Further problems are related to transparency, accountability and the fact that the majority of the beneficiaries of these flows are firms based in OECD countries and tax havens.

Aid figures still inflated 

Not all the gains were positive. Austria saw an increase of 6.1%, primarily due to debt relief in sub-Saharan Africa. However, while debt relief is positive, civil society groups such as ActionAid and Aidwatch have argued for some time now that it should be additional and should not be counted towards ODA. Furthermore, as Aidwatch has repeatedly pointed out, the reported figures should not be taken at face value as they are inflated by other means such as including student and refugee costs. According to AidWatch, “[a]t least € 7.35 billion (14%) of EU aid was inflated aid in 2011”.

Several donors have expressed an interest in opening the ODA definition to include a variety of other financial flows outlined in a European Centre for Development Policy Management paper commissioned by the German and Dutch governments. This initiative was further spelled out in an OECD DAC discussion paper prepared before the high-level meeting held in London on December 4-5 in 2012. This paper notes that “the ODA concept may need to be re-examined in the light of two somewhat opposing critiques: first, that it is too broad, allowing the inclusion of items that do not involve cross-border transfers of resources and budgetary effort; second, that it is not broad enough, omitting or undercounting some official and effective efforts in favour of development.”

While DAC members have agreed not to open the ODA definition before 2015, a workplan is being developed that will explore new ways of incorporating cross-border flows such as climate finance and peacekeeping. There is also further pressure to represent ‘ODA neutral flows’ from Development Finance Institutions and other investment tools that focus on concessional lending rather than grants.

Overall, the DAC presents a mixed picture, which is mainly negative. Within Europe, most of the gains made in good faith were small compared to overall losses. Though the proportion of aid in government budgets is tiny, the economic crisis is frequently stated as a key reason for aid cuts. However, examples such as those of the UK show that it is possible to scale up ODA in difficult times when the right political priorities are set. Instead, many donors are looking for ways to increase their figures without scaling up commitments. Civil society watchdogs will have to keep a close eye on the discussions surrounding ODA to ensure that donors meet their commitments fairly and not by including dodgy financial flows that may or may not have a positive development impact.

A tsunami of truth exposes the need for tax justice

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By Tove Maria Ryding

While our ministers have been delivering speeches about the importance of a healthy financial system, transparency and global tax justice, it seems an international group of financial experts, bankers, lawyers and middlemen have been busy racking their brains to solve the riddle: “How do you make trillions of dollars disappear into thin air?”

They’ve come up with a lot more than the good old “stuff your money in your mattress”. In fact, when it comes to doing magic tricks with money, the financial industry has proven to be a regular group of Harry Potters.

Golden opportunity to fix flawed EU regulation

It has long been known that companies and other legal structures that are anonymously owned and controlled are a key mechanism used to launder money and hide fortunes in tax havens. Despite this, the political leadership and will to take action has so far been limited, even though the EU’s Anti-Money Laundering Directive – a key directive and an opportunity to close the loopholes that make financial secrecy and illicit financial flows possible – was opened up for revision some months ago. But the political opportunity is still there and the directive review provides the key moment to ensure public registries of the real owners of companies, trusts and foundations. Armed with this information, governments, researchers, media and citizens will gain insights into our financial system through public registries, instead of through scandal stories on the front page of the world’s newspapers.

A flood of secrets

Scandal stories were exactly what started hitting the newspapers all over the world last week, revealing very intimate details about the magic tricks up the sleeves of the financial industry, as well as the identity of the people who used them to hide their secret money. After digging through more than two million leaked documents, summarising up to 260 gigabytes of information concerning more than 170 countries globally, the International Consortium of Investigative Journalists (ICIJ) has documented the artificial shell companies tied together in structures designed to confuse, mislead and create a dead end for anyone searching for the truth.

This global financial scandal, which quickly got nicknamed ‘offshore leaks’, includes details about how major European banks, including the French banks PNB Paribas and Crédit Agricole, as well as Germany’s largest bank, Deutsche Bank, have been setting up shell companies in offshore tax havens to offer clients financial secrecy and low or no taxes. The same is true for several Swiss banks and more than 100 Swiss lawyers.

In France, the former campaign treasurer of French President François Hollande, Jean-Jacques Augier, was one of the individuals revealed as an investor in offshore business in the Cayman Islands. In the UK, The Guardian has launched a so far unsuccessful search for an unknown woman who, as the official director of more than 1,200 companies, is apparently running what would have to be one of world’s biggest business empires. And in crisis-hit Greece, journalists found more than 100 Greek-owned offshore companies that the Greek authorities had never heard of.

Outside Europe, many more outrageous facts were published, involving convicted criminals, high-level ministers and even heads of state all over the world.

The state of the offshore world shouldn’t come as a surprise to anyone. For years, broad coalitions of non-governmental organisations (NGOs), including Eurodad, have been pointing out this problem and explaining the technicalities of the tax dodging world as well as the extremely negative impacts it is having on the world’s poorest. We have been calling for political action to stop it but the response from governments has been very limited and insufficient. However, this often very technical discussion has now been brought to life as rich people’s dirty laundry is suddenly spilling out through newspaper headlines.

ICIJ has made it clear that much of the exposed activity (although far from all) is in fact legal. But that is actually one of the central points in the discussions about the EU’s Anti-Money Laundering Directive: should tax crimes be included on the list of crimes that qualify as money laundering offences? So far, this proposal has not received support from EU member states. However, as the stories about how the mega-rich are violating our tax laws and hiding their billions continue to pour out, it’s clear that public patience is running out and the call for consequences is growing.

Governments feeling the heat

Responding to the offshore leaks, French President François Hollande yesterday called for “eradication” of the world’s tax havens. Together with the Belgians,  Germans and several other governments, the French have also demanded access to the leaked data. This, however, only raises the obvious counter-question:

Why haven’t you governments collected this information yourselves?

Other governments are also feeling the pressure. In Luxembourg, which has otherwise been known to resist EU initiatives on increased transparency, the government has now expressed a willingness to strengthen the EU exchange of bank information. The rumour about increased financial transparency seems to be causing nervousness among rich tax evaders. For example, the Danish paper Politiken reports Danes urgently withdrawing their fortunes from Luxembourgian banks and driving off with the cash in the back of a car. The European Commission responded to the message from Luxembourg by asking Austria to follow their example – a request that has clearly turned up the heat on the Austrian government.

Also the private sector seems to be responding the growing pressure. In Switzerland, several banks have now given German customers an ultimatum: Prove to us you’re not evading taxes, or find yourself another bank.

In Denmark, the government has offered a 60% reduction in fines, no jail time and full discretion for all tax evaders who confess to the authorities before 30 June 2013 – an offer that many wealthy Danes are expected to make use of.

Meanwhile, in the UK, the fact that a major part of the documented activities have centred around British overseas territories (such as the British Virgin Islands and Cayman Islands) has raised questions about the role of the UK government, which is otherwise known for its progressive rhetoric on action against financial secrecy.

Another tragic chapter in the global financial system

‘Offshore leaks’ also adds another scary twist to the financial crisis, which has already become a Greek tragedy, in more than one sense of the word. After learning how bad practices and irresponsible behaviour in the financial industry served as the fuel that kicked off the global financial crisis, citizens all over the world have seen their hard-earned tax money being channelled into political packages to bail out our banks. Meanwhile the global economy keeps on spinning downwards. Many ordinary people have already had to pay for the crisis with their jobs and their homes. And in the world’s poorest countries, the financial crisis is the key argument presented to explain why the amount of official development assistance keeps dropping.

But this is where offshore leaks enter the stage, shining the spotlight on a very sad fact. While the rest of the world is struggling, members of the very same banking sector that was bailed out with our tax money has teamed up with a global web of lawyers, accountants and middlemen to help the world’s mega-rich, corrupt politicians and other criminals hide away their billions of dollars from tax authorities and, in some instances, prosecutors.

It is a relief to hear governments express a will to take strong action and solve these problems. However, it’s now crucial to remind our governments that time is of the essence. The more time we leave for tax evaders to come up with new and even dodgier ways of hiding their billions, the longer this sad chapter in the history of our financial system will continue. In this case, time really is money – and now is the time for global transparency and tax justice.

Support to private sector development: is the EU doing the right thing?

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It is always good to draw lessons that allow us to improve current and future strategies by evaluating past actions. In this regard, the report ‘Evaluation of the European Union’s support to private sector development in third countries’ is important to help our understanding of best practice and lessons learned. In line with Eurodad concerns, the report highlights some key failures in EU support to private sector development (PSD), particularly regarding implementation, added value, impacts and monitoring and evaluation. However, it overstates the role of blending mechanisms as the key added value of European Commission (EC) aid when there are still clear problems in evaluating their impacts.

This evaluation is broad in its coverage, as it includes “all support provided during the period 2004-2010 in all regions where the Commission support was implemented”. In terms of the funds, it includes important instruments, such as the European Development Fund (EDF), the Development Cooperation Instrument (DCI) and the EC’s budget support programmes. On the whole, it concerns a total of €2.4 billion of direct support to the private sector by the EC over the period covered.

How does EU support to PSD work?

According to the evaluation, the EU “is now equipped to address quite comprehensively the range of PSD needs in the different regions,” due to the wide array of mechanisms at its disposal, such as bilateral support, regional and centralised programmes and regional blending facilities. However, the evaluation concludes that “there is little evidence of a structured EU approach to exploiting the potential and complementarities of the set of support mechanisms and aid modalities at country level in support of the private sector”.

As Eurodad has recently pointed out, access to finance, particularly for small and medium-sized enterprises (SMEs), is often seen as a key constraint in many developing countries. However, the EC is still struggling with how to deliver aid money to this sector: although access to finance was the second largest area of EC direct support over the evaluation period, “Commission activities were not based on strong diagnostic approaches, and there is some evidence to suggest that the relevance of these particular activities suffered as a result”.

According to the evaluation, the impact of EC activities was mixed: “some activities at macro-level, including institutional and regulatory reform, showed positive impact, but others less so; at meso-level, significant capacity building support was given to financial intermediaries; but little evidence was found of improved access to finance by SMEs”. This casts doubts on whether these public resources are targeted in the right way to the sector most in need.

What is the EC’s real added value?

The evaluation looks at different types of EC value added. There are two important things to mention here.

First, controversially, the evaluation concludes that “a key value added provided by the Commission was that its grant money could be blended with loans.” The reason for stressing blending mechanisms lies on the assumption that the EC can leverage investment provided by international institutions and even private actors. However, this conclusion does not consider that leveraging entails big challenges, some of them in terms of assessing financial and development additionality of the public resources.

Second, the evaluation attempts to address the financial additionality by analysing “whether the EC was not displacing other players when providing such support, in the first place the beneficiaries themselves”. Once again, this point relates to Eurodad and others’ concern about using scarce official development assistance (ODA) to ‘crowd out’ or replicate existing sources of finance and to worries about using ODA to subsidise private sector activities.

Given the relevance of the issue, its conclusion is surprising: “Commission documents provide little information on the importance of avoiding support that could also be provided by the beneficiaries.” The appendix also mentions that “most reports did not address the extent to which beneficiaries could or could not implement a programme without the Commission’s support.” This lack of clarity indicates that the EC’s private sector interventions potentially do not have any clear additionality, either in terms of finance or in terms of development impact on the local economy of developing countries.

What about coordination, impacts and monitoring?

The evaluation also draws conclusions about key issues, such as coordination of EU instruments, impacts and monitoring and evaluation. Its conclusion rightly points out some of the major problems already highlighted by Eurodad and our partners. Here are some quotes to illustrate these points:

• On the architecture of aid: “Most support mechanisms had their own logic and mode of operation, with little internal coordination. The portfolio of PSD support in a country often stemmed from a juxtaposition of activities rather than from a structured PSD strategy with logical sequencing and distribution.”
• On maximisation of impact: “The EU’s PSD support in the different countries responded to needs but was generally not part of a strategy aiming at maximising the EU’s impact through clear prioritisation, a focus on value added, and on synergies with other actors and activities.”
• On Monitoring and Evaluation: “The EU carried out a wide range of monitoring and evaluation activities… Nevertheless, it remained difficult to obtain a clear and complete picture of the observed results, notably because of weaknesses in terms of monitoring and evaluation.”

Key recommendations and next steps

In a nutshell, the evaluation recommends that “the EU should continue to be a provider of a wide range of different types of private sector development support”. This broad statement gives the authors the opportunity to recommend, among other things, that “adopting a ‘generalist’ approach should not preclude the Commission from making sure that the conditions for maximising the impact of its PSD support are fulfilled, notably through diagnoses, prioritization, coordination between EU support mechanisms and appropriate M&E practices”.

The results of the evaluation will be officially presented on 22 April during a seminar aimed at a large audience, including member states representatives, European institutions and embassies of the countries where case studies were undertaken. So far, civil society organisations have not received an invitation to this event. We certainly look forward to discussing the findings of this evaluation with all relevant stakeholders.

Reaction to EU agreement on transparency of extractive industries

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BRUSSELS, 9 April. Today the European Commission, the European Parliament and the Council of the EU agreed a compromise text on transparency of extractive industries. The text will be adopted by the Parliament and the Council in the coming months. 

If passed, this law will oblige EU-listed and non-listed big oil, gas, mining firms and the logging industry to declare payments they make in resource-rich nations. 

In response to today’s developments,

Catherine Olier, Oxfam’s EU development expert, said: 

“It’s excellent news that the EU is moving towards a law that will help ordinary people harness the natural resource wealth of their countries to be lifted out of poverty. But EU politicians today could have taken a bolder stance against tax evasion and corruption by including other sectors such as telecommunications or construction. Strikingly, poor countries lose more to tax dodging than they receive in aid each year.”   

Øygunn Sundsbø Brynildsen, senior policy officer at Eurodad, the European Network on Debt and Development, said:

“Despite today’s promising progress, there is still a long way to go to have EU legislation that properly fights tax dodging. While it is very important to know how much companies pay to governments, this figure alone does not give a clear picture of whether they pay their fair share of taxes. Multinationals will continue plundering developing countries until they are obliged to report information such as sales volumes, assets, staffing and profits. The currently negotiated EU banking sector reform is an example to follow in this regard.”

Although welcoming the Directive, Oxfam and Eurodad have mixed feelings about the deal: 

POSITIVE 

We strongly welcome the proposal because it is a huge step in the fight against corruption. If the legislation is finally adopted by the EU: 

  • It will help citizens in resource-rich countries like Nigeria and the Democratic Republic of Congo to hold governments to account for their use of natural resource revenues and make sure that these benefit the many and not just the few. 
  • It will oblige companies in the extractive and forestry sectors to disclose the payments they make to governments in all countries at project level - as opposed to reporting at government level only- and without any exemptions. The latter has been a contentious issue in negotiations as companies claimed that in some countries they would have to break national criminal laws which prohibit the disclosure of such information. However, such laws do not exist and companies couldn’t come up with any examples and EU member states finally agreed to remove that exemption which would have been a massive loophole. 

NEGATIVE 

 On the other hand, the proposal failed to: 

  • Include other sectors beyond extractive and forestry such as telecommunications and construction which would widen corporate accountability and help both developing countries and EU member states better combat tax evasion and avoidance. In October 2012 the European Parliament’s Legal Affairs committee voted in favour of expanding the reporting requirements to the telecommunications, construction and banking sector. 
  • Require companies to report on additional financing information such as production or sales volumes, numbers of employees and profits. Such basic accounting information that are already available to companies would allow to identify potential cases of tax dodging. 

For more information and comments, contact:

Oxfam: Angela Corbalan on + 32 (0) 473 56 22 60 or angela.corbalan@oxfaminternational.org

Eurodad: Øygunn Sundsbø Brynildsen on + 32 (0) 2894 46 44 or obrynildsen@eurodad.org

US food aid revolution: rumour or reality?

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On 27 February, 11 humanitarian organisations released a joint statement welcoming the Obama administration’s proposal for US food aid reform, which recommends a shift to local and regional procurement of US food assistance.

According to the Center for Global Development, the “proposal would restructure funding for PL480 – more commonly known as food for peace – and shift some or all of the food aid budget to cash that could be used flexibly to provide assistance in ways that reduce costs and speed the delivery of food aid”.

The joint statement focuses on two aspects of the US food aid programme:

  • reliance on ‘in-kind’ food and shipments from US suppliers, where food is directly delivered to developing countries;
  • monetisation, where aid agencies are forced to sell off US food in developing country markets to finance development projects.

The statement stresses the importance of using local and regional procurement as part of the food aid toolbox, as well as the inefficiency of the monetisation procedure. This position is in line with Eurodad research, which assesses the boomerang effect of aid – that sees the majority of money coming back to donors rather than reaching developing countries. Purchasing from firms from donor countries is the least effective form of procurement. It deprives developing countries of receiving the full potential of aid as a driver for long-term development projects and undermines the recipient countries’ ownership of the development process.

The independent evaluation report of the US Department of Agriculture’s local and regional food aid procurement pilot project highlights the fact that “local and regional procurement is a triple win: providing considerable cost savings, faster humanitarian response, and support for the local farmers and agricultural markets that are the key to providing long-term global food security”. In line with this, recent Eurodad research notes that, when procurement is locally sourced through country procurement systems, aid can have a double dividend – contributing to the development of smallholder farms and to the eradication of poverty. Smart procurement can improve access to markets, increase cooperation among farmers, diversify and improve the quality of crops, protect producers from external and unpredictable shocks, help farmers to access finance and invest in their land. Moreover, it can contribute to increasing people’s purchasing power, for instance by creating jobs and improving living standards.

This research also points out that the US is one of the world’s largest providers of global food aid, accounting for 60%, together with Japan. US food aid is still tied aid, relying on ‘in kind’ food and shipments from US suppliers. The US uses its programme as ‘corporate welfare’ for its agribusiness companies, undermining local farmers in developing countries and reducing food aid effectiveness. Eurodad has highlighted that less than 2% of US aid to Haiti supports local firms and pointed out how aid can have a double dividend if locally sourced.

The US is not the only black sheep. Despite international commitments, donors continue to tie their aid formally or informally. Eurodad research shows that two thirds of contracts awarded by bilateral donors still go to firms from Organisation for Economic Co-operation Development (OECD) countries and donors continue to have a strong influence on designing procurement reforms, undermining the opportunities for local firms to win contracts.

Changes in the international mindset are already underway. The World Bank and the EU are currently reviewing their procurement policies and civil society groups are pushing forward the issues of domestic preferences and the use of developing countries’ procurement systems. These changes are critical to achieving concrete reforms that promote aid effectiveness and local economic development. 

The European Parliament secures bank transparency

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Members of the European Parliament (MEPs) secured a big step towards the financial transparency needed to combat tax dodging last week when they made EU Finance Ministers agree on country-by-country reporting for EU banks from 2014. This represents a major victory after years of campaigning by Eurodad members and allies. The deal under the EU’s Capital Requirement Directive is timely and it can – and should – influence the final agreement on the Accounting Directive, where country-by-country reporting is still on the table.

MEPs requested urgent action on this issue in an open letter to EU Finance Ministers, and their persistence paid off. “The European Parliament is on a roll, enjoying its most influential week since the Lisbon Treaty gave it ‘co-decision’ authority over EU laws,” wrote the Financial Times.

Under the Capital Requirement Directive (CRD IV), the EU will require banks to disclose profits made, taxes paid and subsidies received, as well as turnover and number of employees for each country where they operate. This information will be included in the banks’ audited annual reports. From 2014, the information will be disclosed to the European Commission (EC). From 2015, the data will be made public, unless the EC finds significant economic disadvantages when carrying out an impact assessment, in which case they can propose a delay.

Last week’s agreement is referred to as a ‘political agreement’ that has to be approved by EU Member States and by the whole European Parliament, where a vote is expected in mid April.

Towards full country-by-country reporting

Thanks to strong pressure from civil society organisations, including Eurodad and our members, EU lawmakers have discussed country-by-country reporting extensively over the last year in negotiations over the Accounting Directive.

Importantly, the deal made under the CRD IV goes further than the provisional agreements of the Accounting Directive in requiring disclosure of financial data. Whereas the Accounting Directive will require disclosure of tax payments to governments, the CRD IV will require disclosure of profits made, taxes paid and subsidies received on a country-by-country basis, as well as turnover and number of employees. This is crucial. Knowing how much tax a company pays to the government in each country is good, but it does not reveal where real activity takes place and hence where value is made. This is basic information required to determine whether a company is paying its fair share of taxes. Country level disclosure of financial data is key to revealing tax dodging practices, which cost developing countries hundreds of billions of dollars every year.

In addition, the CRD IV requires data to be published in the banks’ annual reports. This means the data will be audited, which is not the case under the Accounting Directive.

Spill-over ensuring coherence?

Coherence in EU law will require the CRD IV agreement to spill over into the final negotiations of the Accounting Directive. At a very minimum, the new agreement should convince EU Member States that the review clause of the Accounting Directive must include country-by-country reporting

  • beyond logging and extractive industries, and
  • beyond payments to governments.

This would mean that the questions will be up for new discussions in the legislative review.

Investment figures demonstrate why extending the requirement beyond extractive and logging industries is important. In 2010, green field investments (start-ups) in the five sectors proposed by the European Parliament for inclusion in the Accounting Directive were worth $235bn: the biggest sector was extractive and logging industries with $76bn; followed by communications ($72bn); the financial and banking industries ($46bn); and construction ($41bn). On average, 63% of these flows targeted developing countries.

When voting on the Accounting Directive, MEPs suggested that payments to governments should be disclosed at country level in the banking, construction and telecommunication sectors, in addition to extractive and logging sectors. Member States have been dragging their feet, and the final agreement may not reflect the MEPs’ sensible suggestions.

MEPs deserve congratulations for securing fast action on bank transparency. Now Member States are under pressure to act coherently and extend these transparency requirements to other sectors when finalising the details of the Accounting Directive.

EU blending platform: must listen to Parliament and CSOs’ concerns

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By Maria José Romero

The European Commission (EC) is pushing ahead with its plan to increasingly ‘blend’ development aid with private finance, despite the fact that the Commission’s commitment to development seems weak and civil society groups and other important stakeholders are excluded from the process. 

In mid-December the EC set up an EU Platform for Blending in External Cooperation, which aims to “provide recommendations and guidance on the use of blending in the external cooperation of the European Union.” In practice this includes “a review of the existing blending mechanisms and the development of a common results based framework to measure impact.” These are both valuable tasks but Eurodad has followed the “blending” agenda closely, and it seems that they might not consider all the essential inputs or draw the right conclusions.

The process towards an EU blending platform

The EC “Agenda for Change” policy paper recommended new ways of using private finance to promote development, to reduce the burden on the public purse.  According to this document, supported by the Council in May 2012, “the EU will further develop blending mechanisms to boost financial resources for development,” a process that “should be supported by an EU platform for Cooperation and Development incorporating the Commission, Member States and European financial institutions.”

In the process of setting up such a platform the EC commissioned a Group of Experts, composed of EU Member States, the External Action Service, the European Investment Bank (EIB) and the European Parliament as an observer, to develop its proposal. In March last year, a public consultation was opened to gather different stakeholders’ views. Eurodad, Counter Balance and Green Alternative Georgia submitted a joint contribution which points out some concerns regarding the purpose and added value of the proposed platform and how blending mechanisms have been implemented. In particular,

  • the risk of financial incentives outweighing development principles;
  • insufficient attention to transparency and accountability;
  • unclear monitoring and evaluation methods;
  • opportunity costs may be high, but are not carefully considered; and
  • debt risks for developing countries of increasing lending.

As a result, there is now a new “EU Platform for Blending in External Cooperation,” where the word “development” is not even in the title anymore, perhaps because the initial title seemed to be broader and more ambitious, particularly in the current context of scarce public resources.

EU blending facilities: What is the best way to assess them?

Since 2007, the EC has set up eight regional blending facilities to link EU budget grants with loans from public finance institutions (i.e. international, regional and European bilateral public financial institutions) or commercial loans and investments from the private sector. Currently, they cover Africa, Latin America and the Caribbean, the EU-neighborhood region and Asia; so all areas covered by EU external cooperation. So far the allocation of funds has been limited, with €1.5 billion of grants from the EU budget and over 320 operations financed for the eight facilities. However, the EU’s rhetoric indicates that blending mechanisms will be used more extensively in the near future.

According to the EC statement, “the new EU Platform will act as a major forum to build on the successful experience so far in this area and look at how to improve the quality and efficiency of blending mechanisms.” The practical work will be taken forward by “technical groups including the European Commission, the EIB, other European bilateral and multilateral finance institutions and those finance institutions which participate in the EU blending mechanisms.” It is worth noting that civil society organisations are not directly involved in the work of the platform and so far there is no clear mechanism to include their concerns and expertise in the planned review.

In late October 2012, the European Parliament issued its own resolution on the future of EU development policy insisting that the implications of the blending platform need to be more carefully thought through, with parliament’s involvement. The EP resolution calls on the EC “to provide clear information on how this mechanism serves the purpose of a development policy based on ODA criteria and how the power of scrutiny of Parliament will be exercised.” This resolution is a welcome step, and confirms Eurodad and others’ concerns.

Additionally, some civil society organisations, such as ALOP, APRODEV and CEE Bankwatch, among others, are also investigating the actual facilities and projects financed to draw lessons about their impacts. Their main conclusions are in line with Eurodad concerns: “sustainable development and poverty reduction objectives are overshadowed by EU geopolitical and corporate interests.” Thus, “greater transparency in project selection criteria and accountability to civil society needs to be established.”

If the EC and platform members are committed to taking forward a comprehensive review of the existing facilities, inputs from the European Parliament and CSOs should be considered thoroughly throughout the process. If not, they will run the risk of undermining the legitimacy and effectiveness of the process.

European Parliament resolution on the EU “Agenda for change”: a welcome step

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Last week the European Parliament passed a resolution setting out its stance on the EC Communication on “Increasing the impact of EU Development Policy: an Agenda for Change”. The resolution on the future of EU development policy (rapporteur: Charles Goerens – ALDE) was passed with the overwhelming support of 540 votes in favour, 36 against and 65 abstentions. Despite having only general remarks on aid (ODA), the Financial Transactions Tax (FTT) and innovative financing, the resolution  insists that the implications of the proposed blending platform, which includes the mixing of public with private funds, need to be more carefully thought through, with parliament’s involvement.

ODA, FTT and innovative financing

The EP resolution points out that ODA “has to remain the backbone of the European development cooperation policy aiming at eradicating poverty”. This has a clear implication in relation to innovative sources of development financing, as for the EP “they must be additional, must be used on the basis of a pro-poor approach, and cannot be used to replace ODA in any circumstances”.

The Parliament “encourages the Council to take action on the Commission’s proposal for a well-designed, effective financial transaction tax designed to raise revenue in order to meet inclusive global development priorities”. It is worth mentioning that the October European Council meeting of development ministers ignored the Commission proposal on the issue.

On the role of the private sector

The EP resolution “demands that any support provided to the private sector in the form of ODA come within the framework of the national plans and/or strategies of the partner countries,” and that these monies should be focused on “the development of human resources, decent work, the sustainable management of natural resources and the development of high-quality inclusive public services for the benefit of the population.” This statement is very much in line with Eurodad’s stance on the issue.

Eurodad research shows that the majority of aid flows through the private sector in the form of procurement contracts for goods and services, and that the vast majority of this goes to rich country firms. Furthermore, the proposed use of aid to leverage private sector investments may detract from much-needed public sector investments, which still face huge financing gaps. In addition the EP resolution advocates for “safeguards to ensure that private companies respect human rights, offer decent jobs and pay their taxes in the countries where they operate”.

On leveraging private finance through a blending mechanism

In response to the EC suggested blending mechanism, “proposed to mix public grants with financial institutions’ loans and other risk-sharing mechanisms”, the EP resolution call on the EC “to provide clear information on how this mechanism serves the purpose of a development policy based on ODA criteria and how the power of scrutiny of Parliament will be exercised.” This is a welcome step, since it supports Eurodad and partners concerns in relation to the purpose and added value of the blending mechanism and to the way blending has been articulated. According to the EP resolution, the blending mechanism “should have no objective besides that of poverty reduction and the fight against inequality,” while there is also a need to promote better redistribution.

Specifically, Eurodad and partners submission to the EC consultation on the proposed EU Platform for External Cooperation and Development pointed out that there are a number of issues that deserve further consideration, including:

-    the risk of financial incentives outweighing development principles;
-    insufficient attention to transparency and accountability;
-    unclear monitoring and evaluation methods;
-    opportunity costs may be high, but are not carefully considered; and
-    debt risks for developing countries.

Finally, the EP warns against the “exclusive attention to economic growth and excessive confidence in the effects of automatic redistribution of development in the private sector” which could lead to unbalanced and non-inclusive growth without having a real impact on poverty reduction. In this regard, the EP also calls on the EU “to reconsider this policy in favour of sustainable development policies including trade, redistribution of wealth and social justice.”

European Parliament: procurement policies and illicit flows vital to policy coherence for development

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On 25 October the European Parliament voted through a resolution calling for better alignment of all EU policites to development objectives. The resolution, led by MEP Birgit Schnieber-Jastram (EPP, DE) was passed with the overwhelming support of 561 votes in favour and only 47 against and 51 abstentions. The European Parliament explicitly supports key demands of Eurodad and our members on tax and sustainable procurement, building pressure on EU institutions and governments to improve EU development cooperation and to increase developing countries’ policy space to promote nationally owned development policies.

In a blow to the Commissions controversial Agenda for change policy paper, the parliament explicitly states that “the European Consensus on Development … remains the doctrinal framework for the EU’s development policy, and that any attempt to revise or replace it in the context of the ‘Agenda for Change’ should involve the institutions that permitted its creation.” It adds that the whole concept “is not merely a technical issue, but primarily a political responsibility, and that Parliament …. has a key responsibility for translating the commitment into concrete policies.” 

Sustainable procurement

As public procurement accounts for 19% of world GDP, the resolution recognises the huge potential that public procurement has “to be a tool of implementing sustainable government policies both in the EU and in its ODA recipient countries.”

Procurement ranks highly thoughout the document, which includes some of the key asks of Eurodad and allies, including fair trade groups, regarding the revision of the public procurement directive. According to the resolution, “public procurement should be effectively used to achieve the overall EU objectives of sustainable development and, therefore, that the future of public procurement directives should enable sustainability criteria to be integrated throughout the process.”

Also in line with Eurodad demands, the resolution calls for giving “contracting authorities the policy space to make informed pro-development procurement choices.” This reference is timely, given the current discussion surrounding the reciprocity regulation put forward by the European Commission that promotes the liberalisation of  procurement markets in developing countries.

Tax and development

The resolution explicitly mentions the negative impact of illicit financial flows in mobilising domestic resources in developing countries and consequently in promoting sustainable development policies. At the same time, the resolution supports Eurodad’s call for greater financial transparency, arguing that “it is essential for supporting revenue mobilisation and combating tax evasion.”

The resolution also demands that “the current reform of the EU Accounting and Transparency Directives should include a requirement for extractive and timber companies to disclose payments made governments on a project-by-project basis, with reporting thresholds that reflect the size of the payments from the perspective of poorer communities.” Although this not as ambitious as hoped for, and does not include the crucial need for the framework to be expanded to country by country reporting, it is important that the parliament explicitly recognises the relevance of fighting against capital flight in the light of policy coherence for development.