ACP-EU JOINT PARLIAMENTARY ASSEMBLY

Notice to Members

Members will find attached the draft executive summary of the study on "The CARIFORUM-EU Economic Partnership Agreement (EPA): the development component" commissioned by the Development Committee from ODI / ECDPM

The co-secretariat

09.02.2009

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The CARIFORUM-EU Economic Partnership Agreement (EPA): the development component Draft Executive Summary Nick Highton, Jane Kennan, Mareike Meyn and Christopher Stevens ODI Sanoussi Bilal, Corinna Braun-Munzinger, Dan Lui and Jeske van Seters ECDPM together with Collette Campbell and John Rapley CaPRI

07 February 2009

Corresponding email address [email protected]

Overseas Development Institute 111 Westminster Bridge Road, London SE1 7JD, United Kingdom Tel.: +44 (0)20 7922 0300 Fax: +44 (0)20 7922 0399 www.odi.org.uk

European Centre for Development Policy Management Onze Lieve Vrouweplein 21 6211 HE Maastricht, The Netherlands Tel: +31 (0)43 3502 900 Fax: +31 (0)43 3502 902 www.ecdpm.org

Executive Summary The CARIFORUM-EC Economic Partnership Agreement (EPA) is the only comprehensive EPA negotiated so far and was signed by all parties (except Haiti) in October 2008. Although there are detailed provisions on development cooperation in every Chapter there remains dispute over their adequacy with critics arguing that neither countries’ needs nor the availability and delivery of funds have yet been established clearly. This report addresses this controversy by identifying, on the one hand, the financial costs of dealing with the adjustment and implementation costs of the EPA (focussing on Barbados, Guyana, and Suriname) and, on the other, the financial resources made available already by the European Commission (EC) and the Member States and those that will be made available in future. It discusses the challenges of delivering aid and the efforts that the region has already undertaken to coordinate EPA-related funding activities. On the basis of this evidence it assesses the adequacy of the development chapter of the EPA and recommends how to enhance its effective implementation. Identification of needs Types of effect The EPA will produce effects in three areas, all of which may require development support. The first is the effect on CARIFORUM exports: improved access to the European (or regional) market will create opportunities for exports of goods and services. Development assistance may be needed to help countries take advantage of these opportunities and to attract new investment on the basis of the EPA commitments. We call this ‘the export effect’. The second is in adjusting to increased imports from the EU: liberalisation will benefit consumers but some CARIFORUM enterprises and social groups will face increased competition and will need support to assist them to adapt. Technical and financial assistance will also be needed to implement the many new obligations that the EPA imposes. We call this ‘the adjustment effect’. The third is the effect on CARIFORUM Government revenue: liberalisation will reduce tariff revenue and will require governments to tap other sources of revenue. This will be a substantial technical, administrative and political challenge requiring development support to help set up new tax collection systems, to fill part of any funding deficit during the period when these new systems are becoming operational, and to protect vulnerable groups from any decline in government expenditure. We call this ‘the revenue effect’. Early impact on the focus states We focus on the early impact of each effect, which is the best point of reference for development support. Over the full implementation period of the EPA all countries in the region will need substantial assistance in many areas – but since this will last for 25 years there is sufficient time to agree the details of what is needed in the middle and end phases. But the first phase has already begun – and if development support is not already organised or in the pipeline it may arrive too late to be of help. Given the diversity of needs over the region we focus on those of three states: Barbados, Guyana and Suriname. It is not yet clear how far CARIFORUM states will be able to increase exports as a result of the duty- and quota-free (DFQF) provisions of the EPA since this will depend on whether demand increases for items that the region can produce competitively (now or in future with investment). The study identifies as the most likely candidates for Barbados, Guyana and Suriname bananas, rice and sugar. There could also be scope to increase exports of processed foods (especially those

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containing sugar) but this will depend largely on how far the current rules of origin are amended during the continuing negotiations. All three of the focus countries have some high tariffs (40% or more) that must be removed soon under the EPA and Barbados also has some specific duties. Despite this, the short-term impact of the EPA is likely not to be as sharp as might be imagined because countries have tended to liberalise first goods that they do not import much from the EU (either because the EU cannot supply them competitively or because they are not consumed locally). The study concludes that the sectors likely to experience the most substantial effects of early liberalisation include fruit and vegetable products and vegetable fats/oils, processed food products and textiles and garments. It recommends as an urgent priority market research in these sectors to determine how far this will increase competition for local producers. Whilst the ‘adjustment effect’ may take time to be felt in full, the impact of the ‘revenue effect’ will be felt much more quickly. In all three countries the removal of many low and some medium tariffs in the months preceding and immediately after EPA signature means that there is an immediate ‘spike’ of revenue loss. Together with continuing annual falls (albeit at lower levels) this means that by 2013 the losses in annual revenue will already have reached for Barbados between €2 and €6 million, for Suriname some €3 million and for Guyana between €0.5 and €2 million. These figures do not include the elimination of additional taxes levied on imports, such as customs charges and environmental duties which have to be removed within 10 years. Identification of the available resources The availability of adequate financial resources to cover these needs has been a concern throughout the negotiations. While binding commitments on the provision of specific amounts of assistance do not appear within the main EPA text, a Joint Declaration is annexed which reaffirms the commitments of the EC and the EU member states. The EU as a whole had been an important supporter of trade and regional integration in the Caribbean. The EC has contributed significant amounts through the Regional Indicative Programmes (RIP) of the European Development Fund (EDF), supplemented by sector-specific programmes, for example for the sugar and rum industries. Among the most relevant lessons to be learnt from this experience are the length of time it takes to programme and disburse RIP allocations, though the provisions of the EDF. Regional funding has also been supported by EC and member state activities at the national level, although difficulties in defining what is counted as past Aid for Trade prevent giving clear figures. The EC has made €133m available for regional integration and EPA implementation support under the RIP for the period 2008-2013. This is expected to be complemented by resources from EU member states as part of the commitment to provide ‘regional packages’ under the 2007 EU Aid for Trade strategy. So far, significant contributions at the regional level have been announced by DfID (€21m), and Germany (€7m), with Spain and France also expected to contribute. Additionally, Aid for Trade commitments are expected at the national level, from both the EC (through the EDF) and the EU member states. Further funds may be committed as needs are elaborated and regional packages further developed, but there appears also to be a risk that donors retrench their aid budgets in the light of the economic crisis, with some EU member states doing so already. The EDF is expected to continue for the period 2014-2020 but because the size of the next RIP and NIPs is yet to be determined it is too early to say whether adequate amounts will be directed to EPA implementation and support. There is also uncertainty about the availability of EC funding after the expiry of the Cotonou Agreement in 2020. Beyond funding levels, there are crucial questions regarding the accessibility, timeliness, coordination and prioritisation of resources: the issue of whether support is adequate also

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pertains to how resources are spent, both in terms of concrete projects/programmes and in terms of delivery mechanisms. Mode of delivery In addition to funding levels there are crucial questions regarding the mode of delivery: accessibility, timeliness, coordination and prioritisation of resources in terms both of the projects/programmes supported and the delivery mechanisms. The multiplicity of donors and the complexity of aid programmes and objectives make it important to coordinate activities to avoid duplication and increase aid effectiveness according to the principles of the Paris Declaration. If aid is increased to support the EPA, this need will be even greater. The Caribbean receives high levels of external aid per capita which supplement domestic revenues and capital market borrowing. Stand-alone aid projects are prevalent in the region, many of them appearing to be more appropriate for larger governments with greater capacity. Other projects tend to be too narrowly targeted, leading to a plethora of weakly coordinated interventions. There is a low incidence of donor integration behind priorities identified and articulated by the recipient countries. Making aid to the region more effective will require partner countries to exercise strong leadership and donors to give centrality to country development plans. Donors need to improve their harmonisation of aid delivery, reduce transaction costs imposed on governments, and respect country ownership of aid priorities. The experience of past development assistance in the Caribbean suggests that effective projects need be of moderate size, of short duration, and have well-defined objectives. Development agencies need to be conscious of the impact that their projects have on government policies and must be ready to provide relevant technical advice and support on policy issues before launching into new programmes. Some of the countries in the region have rather limited aid absorption capacities and require accompanying support for institutional strengthening and public financial management if Aid for Trade is to be effective. How can the development impact be enhanced? The EPA provisions on development cooperation mirror the challenges that the EPA poses for the region. However, since he EPA does not make any binding commitments on new funds, it is not possible to assess whether or not adequate level of aid will be provided. What is possible to identify the areas in which support will be needed. Adjusting to the EPA Development support is needed to take full advantage of DFQF for goods and the new openings for services exports. Production may need to be expanded, upgraded and diversified. Whilst the EPA may foster new private investment, this process is likely also to need public support. Approaches and lessons from previous and existing sectoral support programmes for the rice, sugar and banana sectors could be adapted to support ‘new’ sectors. The RSP of the 10th EDF also supports the objective to improve regional competitiveness. Whilst implementation will be at the national level it requires regional exchange and coordination so as to establish cases of best practice. Several national country strategy papers of the 10th EDF address international competitiveness as a focal area. Moreover, support for private sector development and productive capacity building will remain a priority for the EU member states (which will make known the details of their bilateral contributions in the next few months). Reducing tariffs may make some producers more competitive (especially if the imports are production inputs) but others will face increased competition. They will need assistance to become more competitive or, if this is not possible, to shift into alternative activities. Now that the details of the EPA are known, it is a high priority to identify accurately the socio-economic groups that will be most affected – a task that has not been possible until now. AP100.454

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It is certain that the EPA will lead to a fall in trade taxes so accurate assessment of the revenue effect is another very high priority. This is a task that the CARIFORUM states must lead since they do not publish details of the actual revenue that they collect on imports from the EU (making it impossible for outsiders to do more than make educated guesses). Countries must determine how far they need support (to offset shortfalls in revenue collection and to establish new systems). Implementing the EPA The EPA contains a bewildering array of new legal, procedural and administrative requirements, the implications of which will take some time fully to assess. Laws will need to be changed and regulations amended. Details of the new rules on services and investment vary substantially between the countries and will require extensive country and sector-specific analysis. Despite the uncertainty on the detail it is clear that during the period to about 2018 (when deep cuts in tariffs on imports from the EU start to take effect) the main impact of the EPA will be in these areas of implementation and institutional/administrative reform as well as on intra-regional trade and government revenue. The effects will be different (perhaps very different) in each country. Establishing accurately at a national level the extent of these early EPA changes is the highest priority. Needs assessments are currently on-going led by the Regional Preparatory Task Force and the region. Countries are reflecting on the coherent strategies needed to implement Aid for Trade and will follow this by the identification of concrete projects. In addition, new delivery mechanisms are being established that – designed in the right way – may contribute to making funds more accessible and may find better ways to target actors in the private sector. European and ACP policymakers have an important role to play in firstly ensuring that timely and adequate resources are made available both now and in the future for EPA support, and secondly for monitoring the delivery of resources and the implementation of the Agreement to ensure that technical and financial assistance is delivering the intended results.

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