Davyson B Marape
Consultant
OCTOBER 2006
TABLE OF CONTENTS
Pages
TABLE OF CONTENTS……………………………………………………..2-3
ABBREVIATIONS AND ACRONYMS…………………….……………4
PREFACE………………………………………………………………………….5
EXECUTIVE SUMMARY…………………………………………………….6-9
CHAPTER ONE : BACKGROUND……………………………………. 10-12
Introduction……………………………………………………………………………………….10-11
Studies Done for Regional Integration Budget
Support Operational Modalities ……………………………………………………….11-12
Outline of the Report…………………………………………………………………………12
CHAPTER TWO: EXPERIENCES OF SIMILAR FUNDS…….13-30
ECOWAS Fund/ ECOWAS Regional Development Fund……………………13-16
Institutional and Strategic Reform of ECOWAS Fund……………………….13-14
Project Financing………………………………………………………………………………..15
The Compensation Fund……………………………………………………………………..16
The West African Economic and Monetary Union……………………………….17-24
Operational Modalities for the Regional Integration
Support Fund……………………………………………………………………………………….20
The Compensation Fund …………………………………………………………………….20-23
The Regional Agricultural Development Fund………………………………………….23-24
The African Development Fund……………………………………………………………24-29
Project Financing………………………………………………………………………………………. 26
The Development Budget Support Lending…………………………………………….. 26-29
PTA Bank…………………………………………………………………………………………………… 29-30
CHAPTER THREE: PROPOSALS FOR THE
OPERATIONAL MODALITIES OF THE COMESA FUND……………..31-45
Resource Mobilisation………………………………………………………………………………… 31
Contributions…………………………………………………………………………………………….. 31
Other Sources of Finance…………………………………………………………………………..31-34
Budget Support/ Compensation Fund……………………………………………………… 34-37
Eligibility Criteria………………………………………………………………………………………. 35
Procedures for Accessing Compensation Fund………………………………………… 35-37
Performance Monitoring……………………………………………………………………………. 37
Infrastructure Development Fund……………………………………………………………. 37-42
Eligibility Criteria………………………………………………………………………………………..38
Lending Policies and Procedures…………………………………………………………………38-41
Repayment Terms……………………………………………………………………………………… 41
Revolving Nature of the Fund…………………………………………………………………… 42
Organisational and Management Structure……………………………………………… 42-43
The Committee……………………………………………………………………………………………42
The Manager……………………………………………………………………………………………….43
Cooperation of the Fund With Other Financial Institutions and
Organisations………………………………………………………………………………………………43-45
CHAPTER FOUR: CONCLUSION………………………………………………46-47
ANNEXES….…………………………………………………………………………………………………….48-69
REFERENCE LIST…………………………………………………………………………………………70-71
ABBREVIATIONS AND ACRONYMS
ADB African Development Bank
ADF African Development Fund
BOADWest African Development Bank
CIF Cost Insurance and Freight
COMESACommon Market for Eastern and Southern Africa
CPACountry Performance Assessment
CPIACountry Policy and Institutional Assessment
CPRCountry Portfolio Rating
DBSLDevelopment Budget Support Lending
EBIDECOWAS Bank for Investment and Development ECOWAS Economic Community for West African States
ERDFECOWAS Regional Development Fund
ERIBECOWAS Regional Investment Bank
IMInitiating Memorandum
NDPNational Development Plan
PBLPolicy Based Lending
PRSPPoverty Reduction Strategy Paper
PTAPreferential Trade Area
RIBSRegional Integration Budget Support
RISFRegional Integration Support Fund
UAUnit of Account which is equal to the SDR of the
International Monetary Fund.
UEMOAWest African Economic and Monetary Union
PREFACE
In carrying out this study, I benefited greatly from discussions I held with officials of various international organizations. In particular, I owe a debt of gratitude to ECOWAS Regional Development Fund in Lome, Togo, the West African Economic and Monetary Union in Ougadougou, Burkina Faso, the African Development Fund in Tunis, Tunisia and the COMESA Secretariat in Lusaka, Zambia.
I should point out that the views expressed in this report are not for the institutions mentioned above. In this regard, I take the responsibility for whatever errors are contained in the report.
EXECUTIVE SUMMARY
Introduction
This study has been carried out in response to the decision of the Nineteenth Meeting of the Council of Ministers. The Council decided that the COMESA Secretariat should work out operational modalities of the COMESA Fund. The study has undertaken literature review and looked at the experiences of similar Funds. In light of the experiences of similar Funds, the study makes specific proposals regarding the operational modalities of the COMESA Fund. The study also proposes the urgent need for the introduction of a community levy as a way of mobilizing the much needed financial resources for financing projects, budget support and administrative expenses of COMESA institutions.
Background
The COMESA Fund is made up of the Base Fund and the General Fund. Member states contribute to the Base Fund while the cooperating partners contribute to the General Fund, which will be leveraged by the Base Fund. The COMESA Fund is divided into two windows, one is for financing infrastructural development and the other window is for budgetary support / compensation for those member states experiencing revenue loss as a result of implementing the COMESA trade liberalisation programme. For the Fund to be operational, seven ratifications are required and to date, five member states have ratified the Protocol for the Fund.
Studies Undertaken for the Regional Integration Budget Support (RIBS) Operational Modalities
The studies which were undertaken for Regional Integration Budget Support (RIBS) proposed eligibility criteria based on stringent conventional conditionalities which are applied by development financial institutions for development budget support lending for financing economic and institutional reform programs. These studies also proposed resource allocation system based on estimated revenue loss. This study suggests that the eligibility criteria for targeted budgetary support / compensation to encourage countries to continue to implement trade liberalisation measures should be flexible, without compromising credibility of the Fund, so that all member states can be accommodated.
Experiences of Similar Funds
The study surveyed the experiences of the ECOWAS Fund/ECOWAS Regional Development Fund (ERDF), the West African Economic and Monetary Union (UEMOA) and the African Development Fund (ADF). The experiences of similar Funds in other regions have indicated that an effective resource mobilization is very important for a Fund to accomplish its objectives. It was also clear from these experiences that resource mobilization has been a great challenge to most of these Funds, and some of them did not make much progress in mobilizing resources from the International Financial Institutions and donor agencies. In this regard, the COMESA Fund should work out an effective and realistic resource mobilization strategy that will guide its efforts in undertaking this important task. It should be pointed out that ADF has been successful in mobilizing resources from the non-regional members who replenish its resources in every three years. UEMOA and ERDF have relied on their own resources generated from the community levies they charge on imports from outside their regions.
With regard to the Compensation Fund, the experience of UEMOA is a success story, having achieved a Customs Union in three and half years following the establishment of a Compensation Fund in July 1996. Allocation of resources for compensation was based on actual loss of revenue on industrial goods. The eligibility criteria for accessing funds from the Compensation Fund was flexible to accommodate all the member states of UEMOA. ADF provides development budget support for financing country – driven economic development.
The experiences of similar Funds, indicate that project financing capacity of the Fund is determined by its ability to mobilize financial resources both within and outside the region. The ECOWAS Fund’s inability to mobilize resources from within and outside the Community resulted in its limited activities in the area of infrastructural development. As a result, the ECOWAS Fund was restructured into a regional Holding Company called the ECOWAS Bank for Investment and Development (EBID) with two subsidiaries, the ECOWAS Regional Development Fund (ERDF) and the ECOWAS Regional Investment Bank (ERIB). The main purpose of ECOWAS Fund’s strategic and institutional reform was to provide the Community with a strong financial institution capable of mobilizing resources within and outside the Community for financing investment and development. UEMOA set up a Regional Integration Support Fund (RISF) in 1998 and the Commission began financing projects in 2005 with a budget of 8.3 billion CFA francs raised from the community levy. For both ERDF and RISF, the resources are targeted towards projects which benefit more than one country, contribute to the attainment of balanced development and promote rural development and special community development programmes. ADF has been successful in financing projects in forty (40) low-income African countries. In recent years, focus of ADF has been on providing support for poverty reduction and economic growth efforts in regional member countries. Allocation of resources is based on Country Performance Assessment (CPA). As a result, the resources have been channeled to countries where the policy and institutional environment are most conducive for sustainable and broad-based growth. ADF’s success in financing projects is mainly due to replenishments made by the non-regional members in every three years.
Recommendations
In light of experiences of similar Funds, the study proposes that the COMESA Fund should workout a resource mobilization strategy, focussed mainly on inviting donor agencies to become non-regional members of the Fund and the introduction of the community levy. Regarding the Budget Support /Compensation Fund, it is recommended that the eligibility criteria should be flexible, without compromising financial viability of the Fund, so that all the member states can be taken on board, thereby making it possible for a Customs Union to be attained within the agreed time frame. It is further recommended that the bulk of funds mobilised should finance COMESA priority infrastructural projects which will benefit more than one country, contribute towards balanced development and should be economically and financially viable. Based on the proposed operational mechanism, it is recommended that preparatory work for the operationalisation of the COMESA Fund should continue, particularly in the areas of crafting resource mobilization strategy, preparation of operational manuals, lending policies, operational guidelines and sensitizing member states and donor agencies regarding the operations of the Fund. As member states achieve higher levels of integration, it is suggested that COMESA Fund should broaden the scope of its operations to include compensation for areas or regions that will suffer loss as a result of the integration process, such as closure of industries in an area or region which will adversely affect its socio-economic development. The focus will be on establishing alternative productive activities in the affected region.
CHAPTER ONE
1.BACKGROUND
1.1.Introduction
The Seventh Summit of COMESA Heads of State and Government held in Addis Ababa, Ethiopia on 23 May 2002 adopted and signed the COMESA Protocol for the Fund for Cooperation, Compensation and Development (hereinafter referred to as the COMESA FUND) pursuant to article 150 of the COMESA Treaty. The COMESA Fund is a holistic instrument for tackling the special problems of underdeveloped areas and the other challenges that arise from implementation of the COMESA regional integration process. The COMESA Fund is composed of the Base Fund and the General Fund. The member states constitute the membership of the Base Fund. The cooperating partners admitted by the Committee of the Fund constitute the membership of the General Fund, which will be leveraged by the Base Fund.
The COMESA Fund is divided into two windows. One window is for infrastructural development, which is central to the entire development process. Although there is wide spread consensus that infrastructure is the key to economic growth and poverty reduction, financing it has proved rather difficult because projects are long-term and capital intensive. The COMESA Fund is expected to play a pivotal role in financing basic infrastructure, such as transport, telecommunications, and energy which will promote regional integration and reduce production costs, thereby making the member countries competitive. The second window of the COMESA Fund will be for budget support or compensation for those member states that suffer budgetary problems as a result of implementing the COMESA trade liberalization program. While in the long-run, governments might increase revenue through restructuring their fiscal program, this does not solve the immediate problem faced by governments of reducing tariffs as part of their on-going economic reform program without placing a further burden on the already strained social sectors. The budget support will, therefore, encourage countries to continue the implementation of the trade liberalization program.
The Protocol for the COMESA Fund is in the process of being ratified by member states. A total number of seven (7) ratifications are required for the Protocol to come into force. To date, five countries have ratified the Protocol. These are Ethiopia, Kenya, Mauritius, Rwanda and Sudan. Kenya has paid its contributions to the Fund. Some member states have indicated that they prefer to have operational modalities of the Fund worked out before they sign and ratify the Protocol. It was, therefore, decided by the Nineteenth Meeting of the Council of Ministers that the COMESA Secretariat should work out the operational modalities of the Fund. The terms of reference for the study are as follows;
- To suggest innovative ways of mobilizing other resources for the Fund.
- To propose the organizational and management structure of the Fund.
- Review the operational modalities of similar Funds.
- To define the terms and conditions under which the Fund will operate its lending and resource mobilization.
- Describe the general lending eligibility criteria for both budget support and infrastructure Fund.
- Elaborate on the procedures to be followed by member countries for accessing resources of the Fund.
- To indicate the linkages and cooperation of the Fund with other regional and inter-regional financial and monetary institutions and organizations.
- Elaborate on the procedures to be followed for the disbursement of the resources of the Fund.
- To propose the repayment terms.
- To define performance targets and set out rules that should be met by borrowing member countries and how they will routinely be monitored.
- To identify an array of instruments that will be used to achieve the targets.
- To make proposals for ensuring that the Fund will revolve, and
- To make any other appropriate recommendations on all aspects of the Fund.
1.2.Studies Done for REGIONAL INTEGRATION BUDGET SUPPORT (RIBS) Operational Modalities
Proposals have been made for RIBS operational modalities based on studies by two consultants, E. Ronsholt and M. Davenport. The studies propose eligibility criteria based on stringent conventional conditionalities that are applied by development financial institutions that provide funds for economic structural adjustment program. It is worthy noting that the concept of targeted budgetary support or compensation for encouraging trade liberalization differs from development budget support lending. The latter, is a lending instrument that constitute integration of external assistance into the national budget to finance country-led development frameworks and the stringent conditionalities would have been crafted to contribute to the attainment of the objectives in the national plan.
The major weakness of the proposals of the two studies is that the eligibility criteria might exclude many countries. This could mean that countries experiencing significant revenue losses might be excluded from support or compensation. This will defeat the purpose for the Fund, that is, to get all member states on board so that a Customs Union can be achieved within the agreed time frame. There is need, therefore, to ensure that the eligibility conditions contribute to the attainment of the purpose of the Fund. In this regard, the criteria should be flexible without compromising the financial credibility of the Fund. The two studies also propose allocation of resources based on estimated loss of revenue. It is suggested that the allocation system of resources for compensation should be based on actual loss of revenue, which can be verified.
1.3Outline of the Report
Chapter two of the report reviews the experiences of similar Funds in other regions while chapter three makes specific proposals regarding the operational modalities of the COMESA Fund. These proposals are based on lessons drawn from the review of the experiences of similar Funds. Chapter four consists of conclusions.
CHAPTER TWO
2.EXPERIENCES OF SIMILAR FUNDS
Before recommendations are made, it would be important to look at the experiences of similar Funds in order to draw lessons that can be useful in making specific proposals for the operational modalities of the COMESA Fund.
2.1.ECOWAS Fund / ECOWAS Regional Development Fund
The Treaty of 1975 establishing the Economic Community of West African States (ECOWAS) created the Fund for Cooperation, Compensation and Development of the Economic Community of West African States (ECOWAS Fund). The founding member states of the Fund are Benin, Burkina Faso, Cote d’lvoire, Guinea Bissau, Mali, Mauritania, Niger, Nigeria, Senegal, Gambia, Ghana, Guinea, Liberia, Sierra Leone and Togo. Cape-Verde joined in 1999 and Mauritania withdrew from the Community in 2000. The ECOWAS Fund was then created to be the community’s development financial institution with focus on financing infrastructure development and providing compensation to member states experiencing loss as a result of the integration process.
The ECOWAS Fund had an authorized capital of US$500 million, of which US$100 million was called up and fully subscribed in two equal tranches of US$50 million each in 1977 and 1988 respectively. The paid up amount stands at US$85 million. As at 31 December 2002, commitments of the Fund to the member states stood at US$125 million. As at the same date, disbursements stood at about US$95 million being 76% of total commitments. The breakdown of the ECOWAS Fund’s intervention as at 31 December 2002 was as follows, UA45 million (36%) was for roads, UA36,25 million (29%) was for telecommunications, UA16,65 million (13%) was for rural development and UA27.50 million (22%) was for industry and lines of credit.
2.1.1Institutional and Strategic Reform of ECOWAS Fund
As shown by its performance above, the ECOWAS Fund’s major weakness was its inability to mobilize funds from the international financial institutions and donor agencies, resulting in limited project financing capacity. Having observed that the ECOWAS Fund was no longer in a position to meet the major challenges of socio-economic development and private sector promotion, it was transformed on 10 December 1999 into a regional Holding Company with two subsidiaries. The Holding Company is called ECOWAS Bank for Investment and Development (EBID) with authorized share capital of US$750 million of which US$139 million (79,45%) of the called up capital of US$167 million was subscribed by member states as at 30 June, 2005. EBID and its two subsidiaries are located in Lome, Togo.