Explanatory Memorandum to COM(2023)692 - Establishing the Reform and Growth Facility for the Western Balkans - Main contents
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| dossier | COM(2023)692 - Establishing the Reform and Growth Facility for the Western Balkans. |
|---|---|
| source | COM(2023)692 |
| date | 08-11-2023 |
1. CONTEXT OF THE PROPOSAL
• Reasons for and objectives of the proposal
Insufficient socio-economic convergence between the Western Balkans and the EU has been a long-standing issue, exacerbated by the economic impact of Russia’s unprovoked and unjustified war of aggression against Ukraine and before that by the COVID-19 pandemic. The Western Balkans’ level of economic convergence in terms of GDP per capita in purchasing power standards is at between 30% and 50% of the EU average and is not progressing fast enough. It is essential for the Western Balkans, for the European Union and for the accession process that this rate of convergence accelerates. A higher level of convergence will greatly facilitate the integration of the Western Balkans into the EU.
Economic convergence is at the heart of EU membership benefits: the experience of the fifth round of EU enlargement, where some of the newer Member States have achieved income levels at 90% or more of the EU average, demonstrates the impact that economic integration and market opening arising from membership of the Single Market combined with Cohesion Policy has on economic convergence. Given the specificities of the region, progressive integration with the Single Market even prior to accession may be able to unlock some of the benefits earlier. Such progressive integration needs to be carefully prepared and should be preceded by close regional cooperation and integration as a preparatory measure.
On that basis, the Commission has developed the Growth Plan for the Western Balkans (laid out in detail in a parallel Commission Communication). It is based on four pillars:
- Enhanced economic integration with the European Union;
- Economic Integration within the Western Balkans: the Common Regional Market;
- Fundamental reforms;
- Increased financial assistance.
The present Facility will serve as the centrepiece of the Growth Plan significantly increasing financial assistance based on an ambitious reform agenda focusing on necessary socio-economic reforms coupled with fundamental reforms, including rule of law and targeted investments. It will introduce strong conditionality by establishing a payment mechanism based on achievements of these reforms. Such an approach requires an entirely new design, different from the currently available external assistance instruments.
The current financial assistance to the Western Balkans and Türkiye under the Instrument for Pre-Accession (IPA III), will continue in its current form and target the increasing alignment of national legislation and public administration to the EU acquis and EU standards with a view to future Union membership.
The new Facility will therefore complement the IPA III approach by focussing on the specific determinants for social and economic growth.
In addition, while IPA III focuses on a performance-based programming process, this new Facility will have a payment mechanism based on ex-ante conditionality, mixing in an innovative manner grants and loans, which will bring about a stronger incentive to implement key structural reforms by the Beneficiaries.
In order to fully benefit from the opportunities of the Growth Plan, each Beneficiary will prepare a Reform Agenda, which will set out the key measures each Beneficiary intends to undertake during the period 2024-2027 to accelerate socio-economic and convergence with the EU. The Reform Agenda will be consulted with, assessed and adopted by the Commission.
The Reform Agenda will be consistent with the Beneficiary’s growth strategy aligned with the enlargement path. It will bring forward key fundamental reforms identified in the accession process as well as a limited number of central socio-economic reforms identified in previous Economic Reform Programmes which will henceforward be integrated in the Reform Agendas. This will be articulated with an acceleration of relevant and connected investments under the Economic and Investment Plan for the Western Balkans, a regional reflection of the Global Gateway.
These investments will be delivered through the Western Balkans Investment Framework (WBIF), and target sectors that will function as key multipliers for socio-economic development: connectivity, including transport, energy, green and digital transitions, education and skills development. Related projects or programmes will be implemented in cooperation with international financial institutions and EU Member States development banks and will attract additional investments from them and the private sector.
The Reform and Growth Facility for the Western Balkans for the period 2024-2027 is thus complementary to IPA III. It is designed as a flexible instrument, adapted to the objective of accelerating fundamental socio-economic reforms and bringing the region closer to the EU, while ensuring predictability, transparency, and accountability of the funds.
There is the possibility for the Western Balkans to implement targeted reforms in cooperation with EU Member States under the Technical Support Instrument (TSI), as cooperation with Member States in the implementation of reforms can contribute to their accelerated accession and integration. The Commission will assess the results of the current TSI pilot project with candidate countries and potential candidates and further explore how to facilitate their participation in multi-country reform projects under the TSI.
The proposed Facility will allow the Union to match its political ambition with its financial leverage, in line with its long-term commitment vis-à-vis the Western Balkans Beneficiaries in their paths to EU accession.
The maximum resources for the implementation of the Facility will be EUR 6 billion (in current prices) for 2024-2027 for all types of support, of which up to EUR 2 billion will be in non-repayable support and EUR 4 billion in concessional loans provided by the Union. The provisioning of financial liabilities in the Common Provisioning Fund for the loans will come from the EUR 2 billion non-repayable support.
As regards the non-repayable support component, the Facility will be funded by additional resources under the Multiannual Financial Framework (MFF) Heading 6 as part of the Mid-Term Revision of the MFF. Accordingly, the proposal for an amendment of the MFF Regulation1 establishes that an additional EUR 2 billion will be made available under Heading 6 for the assistance to the Western Balkans.
The new Facility will be implemented through delivery mechanisms that have been selected to maximise fast achievement of reforms and related investments, while maintaining necessary controls and minimising the administrative burden for the Commission, Beneficiaries and other implementing partners.
The support will be provided through two delivery mechanisms: 1) Direct support to the national budgets of the Beneficiaries and 2) Support to infrastructure investments through the WBIF.
Contents
Channelling funds for capital investments through the WBIF will provide additional reassurance against fiduciary risks, given that the WBIF has well established financial control systems relying also on the pillar-assessed control standards of the implementing financial institutions. The WBIF provides a single framework of cooperation among the European Commission, Member States bilateral donors and financial institutions. All investments will be based on the ‘do no harm’ and ‘leave no one behind’ principles and will contribute to the broader objective of helping the region transition towards a green, climate-neutral, climate-resilient, digital and inclusive economy aligned with EU rules and standards.
While the two mechanisms mentioned above will absorb the bulk of the funds, a minor amount of the budget of the Instrument (corresponding to 1.5%) will be reserved for technical and administrative assistance for the implementation of the Facility, such as preparatory actions, monitoring, control, audit and evaluation activities, which are required for the management of the Facility and the achievement of its objectives, in particular studies, meetings of experts, trainings, consultations with the Beneficiary authorities, conferences, consultation of stakeholders, information and communication actions, including inclusive outreach actions, and corporate communication of the political priorities of the Union. Expenses may also cover the costs of other supporting activities such as quality control and monitoring of projects or programmes on the ground and the costs of peer counselling and experts for the assessment and implementation of reforms and investments.
Direct disbursements to the national budgets and making funds available for the submission of investment proposals for the opinion of the WBIF Operational Board will be subject to progress and fulfilment of payment conditions specified in the Beneficiaries’ Reform Agendas. Payment conditions will take the form of a set of qualitative and quantitative steps and a related timeline for disbursements linked to specific socio-economic reforms to stimulate growth, put partners on a sustainable convergence path and orientate them towards specific reforms related to fundamentals of the enlargement process including rule of law, fight against corruption and organised crime.
Macro financial stability, sound public financial management, transparency and oversight of the budget are general conditions for payments that have to be fulfilled for a release of funds. Payments will occur according to a fixed semi-annual schedule, based on duly justified requests for the release of funds submitted by the Beneficiaries and following verification by the Commission of the achievement of the relevant payment conditions. In case the payment conditions are not met, the Commission will suspend or deduct a corresponding amount from the payment.
The disbursement of the corresponding suspended funds may take place during the 12 months after the original deadline set out in the Reform Agenda, provided the payment conditions have been fulfilled. This deadline should be extended to 24 months in the first year of implementation. Otherwise, the corresponding amount may be deducted from the Beneficiary’s allocation and redistributed among the other Beneficiaries in the subsequent years.
For the funding provided to the national budgets, a multi-level system of audit and controls is proposed: first, if required, the reform of the audit and control systems of the Beneficiaries will be included as part of the reforms under the countries’ Reform Agendas; second, the Commission will be able to carry out detailed systems reviews of the national systems for budget implementation at any moment of the project cycle. Where implementation takes place through indirect management or through blending (WBIF), the Commission will rely on the control systems of pillar-assessed entities, which includes international financial institutions or EU Member States development banks in addition to its own systems.
• Consistency with existing policy provisions in the policy area
The support under this Facility will be consistent with and complementary to other forms of bilateral support for the Western Balkans provided through other EU instruments, in particular IPA III. It will build on and reinforce the current support and will allow the region to accelerate the implementation of the Economic and Investment Plan for the Western Balkans. To achieve its objectives and goals, special emphasis should be placed on sectors that are likely to function as key multipliers for social and economic development: connectivity, transport, energy, digital transitions, innovation, education and skills development.
• Consistency with other Union policies
The implementation of the Regulation will be consistent with other areas of external action and external policies (e.g. enlargement negotiations, pre-accession assistance). The Facility will complement those efforts by accelerating socio-economic convergence of the region with the EU in preparation for future Union membership.
2. LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY
• Legal basis
This proposal is based on Article 212 and Article 322 of the Treaty on the Functioning of the European Union. It is presented by the Commission in accordance with the procedure laid down in Article 294 of the Treaty on the Functioning of the European Union.
• Subsidiarity (for non-exclusive competence)
The proposed Facility is aimed at the support for the Western Balkans’ Beneficiaries to reach convergence with the European Union in the context of the enlargement policy, therefore the Union is best placed to provide such assistance. Preparing candidate countries and potential candidates for Union membership can be best addressed at Union level.
Given the scale of the assistance needed, the EU is in a unique position to deliver external assistance to the Western Balkans over the long term in a timely, coordinated and predictable manner. The EU can leverage its borrowing capacity to lend for the Western Balkans on advantageous terms, as well as to provide non-repayable support and guarantees in a multi-annual perspective.
With its presence on the ground through its Delegations, the EU can ensure comprehensive access to information on developments affecting each Beneficiary. This allows the EU to be constantly aware of new needs and circumstances and, therefore, to adapt support according to evolving needs, coordinating closely with other bilateral or multilateral donors.
• Proportionality
The proposal complies with the proportionality principle in that it does not go beyond the minimum required to achieve the stated objectives at the European level and which is necessary for that purpose.
The Facility is proposed as a targeted action to support accelerated reforms in a region that needs to catch up with the EU to ensure a smooth and mutually beneficial enlargement of the EU. Its structure is relying to the extent possible on the existing support structure (IPA III), or the same funding models (e.g. WBIF), or based on existing, but simplified instruments (performance-based instruments).
• Choice of the instrument
In accordance with Article 212 of the Treaty on the Functioning of the European Union, which sets out the ordinary legislative procedure to be used to adopt measures for implementing cooperation with third countries, the proposal takes the form of a Regulation, ensuring its uniform application, binding nature in its entirety, and direct applicability.
3. RESULTS OF EX-POST EVALUATIONS, STAKEHOLDER CONSULTATIONS AND IMPACT ASSESSMENTS
• Stakeholder consultations
A formal stakeholder consultation could not be carried out due to the urgency of preparing the proposal so that it can be adopted in a timely manner by the co-legislators to render it operational in 2024.
The EU will ensure appropriate communication and visibility around the objectives and the actions delivered within the scope of this Facility, in the Western Balkans, within the Union, and beyond.
• Impact assessment
Due to the political urgency of the proposal no impact assessment could be carried out. An analytical document in the form of a staff working document presenting the evidence behind the proposal will be prepared within three months of the initiative’s adoption.
• Fundamental rights
A precondition for granting support under the instrument is that Western Balkans Beneficiaries continue to respect effective democratic mechanisms and its institutions, including a multi-party parliamentary system, the rule of law, and to guarantee respect for human rights, including the rights of persons belonging to minorities. The commitment to reforms and the strong political will expressed by the authorities are positive signs, confirmed in the Commission’s assessment of the state of preparations of the partners for EU accession included in the Commission’s Communication on the Enlargement Package 2023.
4. BUDGETARY IMPLICATIONS
The maximum resources to be provided through the Facility will be EUR 6 billion for 2024-2027 for all types of support, of which EUR 2 billion in non-repayable support and
As regards the grants component, the Facility would be funded by the additional resources proposed under the Multiannual Financial Framework (MFF) Heading 6 as part of the Mid-Term Revision of the MFF. The amendment to the MFF Regulation foresees an additional amount of EUR 2 billion available under Heading 6 for the assistance to Western Balkans.
The loans will be provisioned in the Common Provisioning Fund at the provisioning rate of 9% and the provisioning shall be funded from EUR 2 billion proposed as part of the Mid-Term Revision of the MFF which will constitute the envelope of this Facility.
1.5% of the non-repayable support component (EUR 30 million) will be allocated to technical and administrative assistance expenditure related to the management of the Facility, including monitoring, communication, audit and evaluation.
The remaining part of the non-repayable support, as well as the loan component will be allocated based on the formula in Annex I, combining the population share of a Beneficiary over the overall population of the Western Balkans region and the average GDP per capita for the Western Balkans region over the GDP per capita of the respective Beneficiary, weighing the two factors with 60% and 40% respectively.
5. OTHER ELEMENTS
• Implementation, monitoring, evaluation and reporting
The Regulation sets out detailed provisions relating to implementation, monitoring, reporting and evaluation.
Implementation under the instrument shall take place under the forms and the implementing methods set out in the Financial Regulation.
The Commission will continuously monitor the implementation of the Facility. In full respect of the Treaties, the Commission services will work with the European External Action Service (EEAS) in the context of the implementation of the Facility to ensure the consistency of the Union’s external action. In relation to Serbia and Kosovo, the High Representative of the European Union for Foreign Affairs and Security/Vice-President of the Commission, in capacity as Facilitator of the Dialogue on Normalisation of relations between Serbia and Kosovo, will provide his/her assessment.
A monitoring system based on criteria set out by the Commission should be put in place by the Beneficiaries and they will be expected to report to the Commission annually on the implementation of their Reform Agendas. This will include reporting on the achievement and progress towards the achievement of the stated objectives of the Reform Agendas, on the improvements of their internal control systems, on their budget implementation, and on any amounts unduly paid or misused, and eventually recovered by the EU.
The Commission will provide the European Parliament, the Council and the Committee referred to in Article 27 of the Regulation with an annual assessment of the implementation of funds provided under the Facility.
The Commission will also carry out an ex-post evaluation of the Regulation.
• Detailed explanation of the specific provisions of the proposal
This Regulation establishes the Reform and Growth Facility for the Western Balkans.
Chapter I (General provisions) covers the subject matter of the Facility (Article 1), the definitions (Article 2), the general and specific objectives of the Facility (Article 3), the general principles (Article 4) and the preconditions for support (Article 5).
Chapter II sets out the financing and implementation modalities of the Facility. Article 6 sets (i) the financial envelope of the Facility in the form of non-repayable financial support and in the form of technical and administrative assistance; and (ii) the support in the form of loans. Article 7 details the forms of implementation of the Facility, i.e. direct and indirect management in accordance with the Financial Regulation. Article 8 lays down the rules of eligibility and of origin applicable to the Facility while setting that rules in award procedures may be restricted on account of the nature of an activity or when an activity affects security and public order. Article 9 covers the Facility agreement to be concluded between the Commission and the Beneficiaries laying down in particular the audit and control provisions, as well as the obligations and conditions for the disbursement of payments. Provisions for carry-overs, annual instalments and, commitment appropriations are covered in Article 10.
Chapter III (Reform Agendas) details the requirements and bases for the formulation of the Reform Agendas (Article 11) and the general principles for financing, including the payment conditions for disbursements (Article 12). Article 13 details the Reform Agendas to be submitted by the Beneficiaries, the procedure for doing so, and the elements that the Reform Agendas should contain, including reforms and investment areas to be financed by the Facility, and the systems to prevent, detect and correct irregularities, fraud, corruption and conflicts of interests, when using the funds provided under the Facility.
The Commission will proceed to assess the Reform Agendas according to the criteria laid out in Article 14, and will take an implementing decision as described in Article 15 which lays down, among others, the indicative amount of the loan support to be disbursed against the satisfactory fulfilment of the payment conditions, the time limit for such fulfilment, and the pre-financing for which Beneficiaries will be eligible. Article 16 provides for the possibility for the Commission or the Beneficiary to make a proposal to amend the Reform Agenda.
Article 17 covers the loan agreements to be concluded between the Commission and each Beneficiary, and the rules governing the borrowing by the Commission on the markets, while Article 18 sets the provisioning rate and the procedure for its review. Article 19 provides for the mechanism for financing investments under the Facility through the Western Balkans Investment Framework.
The rules for the payment of pre-financing to Beneficiaries, subject to the respect of the preconditions described in Article 5, are laid out in Article 20. Article 21 details the procedure for the disbursements upon fulfilment of both general conditions related to macro-financial stability, sound public financial management, transparency and oversight of the budget and payment conditions set out in the Reform Agendas.
Payments will take place on a semi-annual basis, following the submission by the Beneficiary of a request for the release of funds demonstrating the satisfactory fulfilment of the relevant payment conditions in the form of qualitative and quantitative steps to be undertaken. In case of a negative assessment by the Commission, a part of the amount corresponding to the payment conditions not fulfilled will be withheld. The withheld funds would only be released once the Beneficiary has duly justified, as part of the subsequent request for release of funds, that it has taken the necessary measures to ensure satisfactory fulfilment of the relevant payment conditions. Should this not be the case, the Commission may redistribute the amounts among other Beneficiaries. This Article also sets out that no amount will be paid for qualitative or quantitative steps not fulfilled by 31 December 2028 while it authorises the Commission to reduce amounts if the financial interests of the Union are affected or if the Beneficiaries are in serious breach of an obligation stemming from the agreements concluded under the Facility.
Chapter IV (Protection of the financial interests of the Union) lays out the provisions to be followed by the Commission and the Beneficiaries to ensure effective controls over the implementation of the Facility. Article 22 details the obligations to be reflected in the Facility and Loan agreements, which will include appropriate measures to prevent, detect and correct fraud, corruption, conflicts of interests and irregularities affecting the financial interests of the Union, to avoid double funding and to take legal action to recover funds that have been misappropriated, the collection of adequate data on the recipients of funds under the Facility and the rights to be granted to the Commission, the European Anti-Fraud Office (OLAF), and the European Public Prosecutor’s Office (EPPO) where applicable. This Article also entitles the Commission to reduce or recover amounts if the financial interests of the Union are affected or if the Beneficiaries are in serious breach of an obligation stemming from the agreements concluded under the Facility. Article 23 sets out the provisions for internal control systems of the Beneficiaries.
Chapter V (Monitoring, reporting and evaluation) covers the provisions for setting out the indicators and results frameworks used in the monitoring and evaluation (Article 24), and the ex-post evaluation of the Facility (Article 25).
Chapter VI (Final provisions) lays down the exercise of the delegation of powers with respect to the provisioning rate (Article 26), the comitology procedure (Article 27), the provisions on information, communication and publicity (Article 28) and on entry into force (Article 29).