9 June 1995
on the Social Development Fund of
the Council of Europe, 1994-1995
(Rapporteur: Mr BRITO,
Portugal, Socialist Group)
The report assesses the measures that have been taken to overcome the problems which the Social Development Fund has faced in recent years and to re-establish a sound basis for its future operations. Although much has been done, there are still grounds for concern: the revised Articles of Agreement, for example, which provide the new legal basis for the Fund's activity and objectives, have still not entered into force, and the Assembly calls on those member governments that have not yet completed the ratification process to do so without delay. It is all the more important to emphasise the specific priority objectives of the Fund - aid for refugees and migrants and for populations hit by natural or ecological disasters - in order to maximise its chances of co-operating on the best terms with other international financial institutions.
The report also asks Fund member governments to consider paying up a larger proportion of subscribed capital in order to strengthen the Fund's basis of operations, notably in the countries of central and eastern Europe. More of these countries, along with some long-standing members of the Council of Europe, should join the Fund.
I. Draft recommendation
1. The Assembly recalls its Recommendation 1230 (1994) on the Social Development Fund of the Council of Europe: activities and outlook, and considers that the need to complete the Fund's reorganisation successfully as well as the increased social problems arising from population movements in Europe - notably in the countries of central and eastern Europe - call for stronger support by the Council of Europe member states for the activities of the Fund.
2. From the information which the Assembly has been given, it appears that, during 1994 and the first half of 1995, the Fund has adopted a range of measures required to overcome the problems of the past and to re-establish a sound basis for its future operations. However, the Assembly notes that this period of transition is not yet over.
3. The Assembly is concerned by the length of time it is taking four member countries - Luxembourg, the Netherlands, Portugal and Spain - to complete the ratification procedure required for the entry into force of the revised Articles of Agreement, since these provide the fundamental legal basis for the Fund's activity and objectives.
4. The Assembly welcomes the fact that two countries - Slovenia and Bulgaria - joined the Fund in 1994, but believes that renewed efforts should be made to extend its membership to other countries of central and eastern Europe in view of its potential to help them solve their social problems.
5. The Assembly notes that three countries - Belgium, Denmark and Liechtenstein -still have not subscribed to the increase in the Fund's capital decided in 1990.
6. The Assembly is concerned that the Fund's "social account", from which loans can be made at one per cent interest was frozen two years ago and that the "emergency account", allowing for zero-interest loans to be made even in non-member countries, has had little impact. In this connection, the Assembly recalls its Recommendations 1150 (1991), 1176 (1992), 1179 (1992), 1188 (1992), 1198 (1992), 1205 (1993), 1207 (1993), 1253 (1994) and 1263 (1995) and its Resolution 1049 (1994).
7. The Assembly recommends that the Committee of Ministers:
i. invite member states of the Council of Europe who are not yet members to join the Fund;
ii. invite member states of the Fund to consider paying up a larger proportion of subscribed capital in order to strengthen the Fund's basis of operations;
iii. urge those member states of the Fund that have not yet done so:
a. to ratify the revised Articles of Agreement of the Fund;
b. to subscribe to the latest increase in the Fund's capital;
c. to contribute generously to the "trust account" as soon as it is established;
iv. invite the Governing Body of the Fund:
a. to renew its efforts to extend the membership of the Fund to the countries of central and eastern Europe;
b. to review the Assembly's past recommendations and resolution listed in paragraph 6 with a view to developing, in co-operation with the competent authorities, appropriate projects and to securing the guarantees required for their funding;
c. to ensure that the Fund staff effectively enjoy the same guarantees as those provided in the Council of Europe Staff Regulations, and that any special provisions decided by the Administrative Council respect the spirit of these Regulations;
8. The Assembly asks the Committee of Ministers, in its reply to this recommendation, to bring the information provided in its reply to Recommendation 1230 (1994) up to date.
II. Explanatory memorandum
by Mr BRITO
1. Introduction 4
2. Follow-up to Recommendation 1230 (1994) 5
3. Revitalisation of the Fund 8
4. Operational activity (Governor's Report for 1994) 9
5. Conclusions 11
1. It was on 26 January 1994 that the Assembly last debated the Social Development Fund of the Council of Europe, on the basis of a report presented by Mr Eisma (Doc. 6993). The report described the reform of the Fund, through the revision of its Articles of Agreement, designed to place greater emphasis on its original purpose of helping European countries to solve social problems resulting from the presence of refugees and displaced persons, to strengthen the Council of Europe's supreme authority over the Fund and to intensify the monitoring of the Fund's functioning and operations in the wake of irregularities brought to light in the course of an internal audit.
2. As a result, the Assembly adopted Recommendation 1230 (1994), which made a number of detailed recommendations concerning the operation of the Fund and called for the fullest possible information to be given to the Assembly in future so as to allow it to make appropriate recommendations in accordance with its statutory responsibilities and democratic control function. The Assembly also adopted Order No 494 (1994), which "instructed its Committee on Migration, Refugees and Demography to monitor closely, in co-operation with other competent committees, the activities and operations of the Social Development Fund of the Council of Europe, and to report regularly to the Assembly".
3. The purpose of the present report is to bring the Assembly up to date with developments in the Fund, taking particular account of follow-up to Recommendation 1230 (1994).
2. Follow-up to Recommendation 1230 (1994)
4. The Committee of Ministers adopted its response to Recommendation 1230 (1994) on 8 April 1994 (Doc. 7071), on the basis of an opinion which it had sought from the Governing Body of the Fund. This reply calls for a number of comments.
5. The Assembly recommended that the Committee of Ministers "continue to ensure that full use is made of its powers of supervision over the Fund". Besides the fact that twelve members of the Committee of Ministers' Deputies are currently members of the Fund's Governing Body, the Committee of Ministers has agreed, for its part, to the suggestion by the Chairman of the Governing Body, Mr Romeo dalla Chiesa, "that a fixed periodical calendar be drawn up for regular meetings with both organs of the Council of Europe during which the most complete information on the Fund would be provided". Thus the Committee of Ministers heard the Chairman of the Governing Body, the Chairman of the Administrative Council and the Governor in June 1994 and the Chairman of the Governing Body on 25 January 1995 and is due to discuss the Governor's 1994 report at its meeting in June 1995. Given that the Fund's past problems resulted largely from benign neglect, it is to be hoped that the Committee of Ministers, and particularly the relevant Rapporteur Group and those members represented on the Governing Body, will interpret its supervisory powers in an active, not passive, sense.
6. The Assembly also recommended that the Governing Body "improve co-operation with the Assembly". It must be said that Mr dalla Chiesa, who is responsible for the Fund's relations with the Parliamentary Assembly and with the Committee of Ministers, has made every effort to engage in dialogue with the Assembly and to provide information requested by the competent committees, notably in a communication to the Committee on Economic Affairs and Development on 29 June 1994, in an exchange of correspondence with your Rapporteur, in an exchange of views with the Committee on Migration, Refugees and Demography on 7 April 1995, and in a meeting with the Bureaux of both the aforementioned Committees and the Social, Health and Family Affairs Committee on 27 April 1995. Your Rapporteur is of the opinion that sustained co-operation with the Governing Body at the Committee level is essential and should continue. However, given the complex and varied nature of the Fund's operation and activities, your Rapporteur recommends that the Committee on Migration, Refugees and Demography should hold regular hearings on the Social Development Fund.
7. In its Recommendation 1230 (1994), the Assembly asked that the Governing Body keep it "fully informed of the measures taken to implement the recommendations arising from the 1992 internal audit reports and of those measures seeking to establish the responsibilities involved in the irregularities observed". As Mr Eisma pointed out in his report to the Assembly, many of the measures taken to correct the aims, strengthen the monitoring and rationalise the internal structure of the Fund are incorporated in the revised Articles of Agreement of the Fund, which were due to enter into force on 1 January 1994. Unfortunately, four member countries - Luxembourg, the Netherlands, Portugal and Spain - have still not completed the ratification procedure, with the result that entry into force will be delayed for a further year or more. Although the Fund's organs have, according to the Chairman of the Governing Body, gradually implemented all the practical and operational measures provided for in the revised Articles which are not at variance with the existing Articles, it remains that the Fund's legal status, the roles and responsibilities of the various bodies, the voting rules, and the Fund's closer links with the Council of Europe will not be clarified until the revised Articles enter into force.
8. As regards the serious malfunctionings revealed in the 1992 audit reports, the administrative inquiry conducted by a senior Council of Europe official provided the basis for a thorough and comprehensive investigation by the new Governor with a view to disciplinary action against the staff members (five senior executives) directly and personally responsible, who were suspended. Four of them have appealed to the Council of Europe Administrative Tribunal.
9. As far as the irregularities committed by the former Governor and certain senior executives are concerned, the facts were transmitted to the Public Prosecutor of the Departmental Court of Paris, and a judicial inquiry is now under way. Your Rapporteur believes that justice should be left to take its course, while recalling that the Assembly has asked to be kept "fully informed of the steps taken to recover any funds misappropriated from the Fund, including its autonomous pension fund". In this connection, the Assembly should also be informed of the results of the actuarial study referred to in the Committee of Ministers' reply to Recommendation 1230 (1994), "undertaken in order to verify the financial consequences for the assets of the Autonomous Pension Fund of the changes that its operating rules have undergone since 1989, and to discover the amount of any possible shortfall at the end of the last financial year".
10. One of the main concerns in the past was the arbitrary staff management in the Fund, leading the Assembly to recommend "that the Council of Europe Staff Regulations fully apply to the staff of the Fund in accordance with the decision of the Administrative Council in 1956 and the revised Articles of Agreement". As a result of the administrative inquiry referred to above, an agreement has been signed between the Council of Europe and the Fund to give the Fund staff the protection and guarantees to which they are entitled, including the right to petition the Administrative Tribunal. Nevertheless, the full Council of Europe Staff Regulations still do not apply to the Fund, its "specific nature" apparently justifying special provisions decided by the Administrative Council. The continuing state of uncertainty over the application of these Regulations, notably in the area of recruitment procedures and contracts of employment, is causing considerable distress to the Fund's staff.
11. In view of the abuses revealed by the audits relating notably to overhead expenses, the Assembly recommended that the Administrative Council take account, in the internal management of the Fund, of the Financial Regulations in force in the Council of Europe. According to the Committee of Ministers' reply to Recommendation 1230 (1994), "the role of the Director of Administration of the Council of Europe as Financial Counsellor, for the purposes of giving a technical opinion on the Fund's administrative budget, has been confirmed".
12. In its Recommendation 1230 (1994), the Assembly recommended that the Governing Body "reconsider the practice of making "global" loans, that is loans disbursed without prior allocation to specific projects", and asked to be informed of "the results of investigations into the use of such loans as well as that of any unmonitored loans made in the past". Here the information provided in the Committee of Ministers' reply and by the Chairman of the Governing Body is reassuring but incomplete.
13. On the one hand, it is reassuring to know that the Administrative Council has adopted Resolution 1313 (1993) in which the Fund's priority fields of action and the project eligibility criteria are redefined and rules for monitoring are laid down. For example, disbursement of loans is tied to the progress of work on the project and must not take place (unless authorised by the Executive Committee of the Administrative Council) if the reports required for monitoring have not been submitted or the conditions relating to the loan have not been fulfilled.
14. On the other hand global disbursements can still be made: the loan contract must stipulate clearly all the projects approved by the Administrative Council to which the loan can be allocated. As soon as possible and within six months at the latest, the receiving country must inform the Fund of the allocation made, indicating the relevant project numbers, dates and amounts. It is to be hoped that these safeguards will prove adequate, notably in the light of the revision of Resolution 1313 (1993) approved in March 1995 and whose implications remain to be studied.
15. As regards the monitoring of global loans and of unmonitored loans made in the past, the Chairman of the Governing Body has informed your Rapporteur that the Fund's administrative organs have decided to carry out random checks on a range of projects funded between 1985 and 1993, with a view to determining the degree of completion and other matters relating to projects approved and completed as at 31 December 1993. The findings will be available within the next few months. In view of the rumours that circulated in the past about Fund loans being used for purposes other than those stipulated in the Articles of Agreement, it is to be hoped that these checks will focus on the countries allegedly involved. In any event the Assembly should be informed of the results.
16. Moreover, a review of projects approved but not yet financed (going back some ten years and amounting to some ECU 2.8 billion) has resulted in a reduction of this stock to some ECU 1 billion.
17. Mention should also be made of the recent publication of a Handbook for the preparation and monitoring of projects which provides detailed information for borrowers, guarantors and other "users" of the Fund concerning the loan procedures, including the preparation of loan requests and the strict monitoring of projects.
18. Assembly Recommendation 1230 (1994) invited the Committee of Ministers, subject to strict observance of the new rules concerning the functioning of the Fund, to encourage member states which had not yet done so to join the Fund. Two countries joined the Fund in 1994: Slovenia and Bulgaria. Contacts are continuing with the Czech Republic, Estonia, Hungary, Lithuania, Poland, Romania and Slovakia. However, efforts to promote the accession of other new members in Central and Eastern Europe appear to have been disappointing. Incentives such as the easing of financial conditions for membership may, according to the Chairman of the Governing Body, have been outweighed by other considerations, for example the interest-rate rebates, guarantees and other forms of assistance given free of charge by other international financial institutions already co-operating with these countries.
19. As regards the financial basis of the Fund, the Assembly recommended that those countries which had not yet done so should contribute to the fourth increase in the Fund's capital decided in 1990. Moreover, the Assembly recommended that the Governing Body should review the ratio of paid-up to subscribed capital, with a view to increasing the Fund's capacity to undertake operations in central and eastern Europe. On these points, according to the Chairman of the Governing Body, the Fund hopes that the payment of contributions to the capital and reserves already agreed upon will be expedited, and expects to redress certain imbalances which have become obvious in the members' participation in the subscribed capital. An increase in the subscribed capital might be considered so as to improve the balance-sheet ratios, which are of strategic importance for the Fund's rating, and bring them into line with those of other international financial institutions. In this connection the Fund expects the three countries (Belgium, Denmark and Liechtenstein) which have not yet confirmed their participation in the fourth increase in the subscribed capital to do so shortly.
20. The Assembly also called on Fund member governments to contribute generously to the social account (which allows loans to finance high social priority projects at 1% interest) and the "emergency account" (opened in 1993 for interest-free loans to meet the urgent needs of refugees and displaced persons even in non-member countries afflicted by exceptional events). According to the Chairman of the Governing Body, their impact has been very limited in spite of a contribution to the emergency account from the Netherlands for a refugee project in Slovenia and a contribution from Liechtenstein.
21. In this connection the Fund has set itself the objective for the coming months of implementing the mechanism of a "trust account" - an innovation in the revised Articles of Agreement - to replace the existing "social account" and "emergency account" in a single unified system for financing at rates of interest subsidised according to the social priority of the projects receiving loans. Such a trust account could, in addition to a proportion of the Fund's profits allocated for this purpose, receive voluntary contributions from member states, and perhaps from the Council of Europe and outside organisations for specific purposes.
22. Finally, the Assembly reiterated earlier calls for a more active information policy by the Fund. To be sure, the information resources of the Fund appear to have been strengthened. It would be desirable for the Fund to organise information seminars designed specifically for countries in central and eastern Europe.
3. Revitalisation of the Fund
23. Apart from the measures described above in connection with the follow-up to Assembly Recommendation 1230 (1994), further steps have been or are being taken to revitalise the Fund, both internally and at international level.
24. As far as the reorganisation and reform of internal structures are concerned, the Chairman of the Governing Body reports that the organisation chart has been thoroughly revised, primarily to improve operational, control and information arrangements. A completely new department has been created, the Directorate of Information Systems and Monitoring (which includes the Internal Auditing Department). The duties of the Computer, Information and Accounts Departments have been clarified and redefined, and the Directorate of Finance has been reorganised so as to ensure that the Fund's finances are reliably and properly administered.
25. This structural reorganisation was accompanied by an increase in personnel: more staff were recruited to posts in areas where inadequate staffing had led to a malfunctioning of the Fund, if not to grave irregularities. By way of example, the Projects Directorate has been reinforced by the creation of several posts of consultant-engineer so as to improve the examination and monitoring of projects; the Treasury Directorate has had added to it a new unit responsible for managing financial risks in operations; a Development Department has been set up to make known what the Fund does.
26. Along with this reorganisation work there have been considerable improvements in information resources (the Handbook for the preparation and monitoring of projects) and development of the computer system in terms not only of office equipment and accounting software but also of staff training.
27. As regards the revitalisation of the Fund at international level, the Chairman of the Governing Body reports that it has endeavoured to work towards greater co-operation with other international financial institutions. Thus it has sought a closer relationship with those of the European Union, particularly its "structural funds". This co-operation concerns mainly the European Union, the European Investment Bank (EIB) and the European Bank for Reconstruction and Development (EBRD). The immediate objective of this co-operation is: (a) to enable the Fund to benefit from these institutions' experience, means of action and forms of organisation; (b) to exchange and compare useful information; to consider in which fields joint financing is possible, particularly in the countries of central and eastern Europe; to co-ordinate the approach to the capital market. Considerable assistance has already been obtained. Concrete examples are: a promise of European Union assistance in the framework of PHARE; the considerable help received from the EIB in terms of technical assistance and in preparing a study of a sample of projects which have already received loans; the identification of projects in Slovenia and Bulgaria which could be financed in collaboration with the EIB and/or the EBRD.
28. This policy of co-operation, which will be extended in 1995 - particularly with the World Bank, the Nordic Investment Bank and other similar organisations, not only of a purely financial nature - should not only bring some operational advantages but also ensure action better adapted to the problems facing the Fund in its wider institutional role in the central and east European countries. It is also to be hoped that in this way the Fund's international specialisation will secure it recognition as the only European financial institution operating in the social field.
4. Operational activity (Governor's Report for 1994)
29. 1994 saw a reduction in the Fund's level of activity in terms of the number of projects approved and in the amount disbursed in loans. The Administrative Council approved twenty projects totalling ECU 425.9 million in 1994, as against a total of ECU 850.2 million in 1993. The downward trend was due to the combined effects of a number of factors, which can be split into two main groups:
- firstly, the approval in December 1993 of Resolution 1313 resulted in the exclusion of certain fields of action which had received funding in the past (infrastructure facilities, regional development, rural modernisation) and which accounted for an average of 47% of the total over the period 1990-93;
- secondly, the number of projects submitted was reduced as a result of the implementation of new criteria for examining projects and the stricter selection procedure for new applications formalised in the Handbook for the preparation and monitoring of projects.
30. The projects approved in 1994 were from Turkey (76.3% of the total), Greece (14.9%), Portugal (5.1%), Italy (3.1%) and Cyprus (0.6%). About half the total approved for Turkey will go to social housing construction programmes, the rest mostly to infrastructure facilities and rural modernisation projects (submitted in 1993). The Greek project involves an aid and reconstruction programme for the areas hit by flooding in autumn 1994. The Portuguese project is for the reconstruction and modernisation of hospital facilities in the Azores. Applications from Italy, down 49.7% on 1993, mostly involved social housing programmes but also aid for small and medium-sized businesses. The Cypriot project, submitted in 1993, involved the construction of a wholesale fruit and vegetable market. Finally, Germany applied to the Fund for a guarantee of ECU 79 million for the Deutsche Ausgleichsbank for a programme of housing loans designed to help Turkish workers wishing to return to their own country.
31. The projects approved in 1994 went to six different sectors: social housing (40%), rural modernisation (21%), natural disasters (14.9%), health (12.4%), infrastucture facilities (11.4%) and aid for small and medium-sized businesses (0.3%).
32. Your Rapporteur is somewhat surprised to observe that even admitting that certain project applications were submitted in 1993 before the adoption of Resolution 1313, it would appear that only 14.9% of the total loans approved in 1994 correspond to the Fund's priority objective, enshrined in Resolution 1313 and in the revised Articles of Agreement, of "aid for refugees and migrants and for populations hit by natural or ecological disasters". Moreover, not a single loan application was approved in the sector "aid for refugees and migrants", presumably because no country submitted applications designed to solve the social problems arising from their presence.
33. Turning to the financial situation of the Fund, the Governor's report records a significant decrease in the level of long-term borrowing in 1994, attributed to the downswing in the overall demand for loans resulting from the introduction of the new loan procedures and the increase and volatility in interest rates in 1994. Nevertheless, short and medium-term borrowing remained at a high level and accounted for most of the funds raised.
34. The net result for 1994 was ECU 55.1 million, almost identical to that in 1993. However, there was a significant reduction in the balance-sheet total, due mainly to the reduction in the volume of debts and in the bond portfolio and the systematic use of these liquid assets for the repayment of debts due. As concerns assets, there was a considerable fall in securities trading as a result of the introduction of comprehensive risk-limitation measures.
35. Subscribed capital at the end of 1994 was ECU 1.2 billion, 142.5 million of which had been paid up (ECU 21.6 million in payments from member states (1.8%), the remainder by transfer of reserves to capital). If the reserves of ECU 409.8 million and the result for the year are included, the Fund's own assets at the end of the year stood at ECU 1.7 billion. The Fund's capacity for action would be considerably increased were member states willing to pay over a greater proportion of subscribed capital, which would still involve relatively modest sums.
36. The ratio of long-term debt to own assets, which has an upper limit of 4, fell from 2.9 at the end of 1993 to 2.28 at the end of 1994. The ratio of loans to own assets, which has an upper limit of 6, fell from 4 to 3.44.
37. Given the tightening of risk monitoring and control procedures and the maintenance of the Fund's profit levels and financial base despite a difficult international financial situation, the rating agencies were able to confirm its ratings at the end of 1994, ie.:
- for short-term operations: A-1+ (Standard & Poor's), P-1 (Moody's);
- for long-term operations: AAA (Standard & Poor's and Japan Bond Research Institute), Aa1 (Moody's);
- for subordinated debt: AA+ (Standard & Poor's), Aa2 (Moody's).
38. Clearly, 1994 and 1995 will be characterised as years of transition in the life of the Social Development Fund, in which the conditions for its revitalisation were established. Disciplinary measures were taken, judicial proceedings were instituted and a thorough administrative overhaul was initiated which should permit the Fund to put the problems of the past behind it. It is now of the utmost importance that the revised Articles of Agreement be ratified by all the member states as a matter of top priority. This will ensure a sound framework into which new members can be integrated.
39. There is no question that the Fund is of vital importance as the Council of Europe's only financial instrument for relieving the plight of refugees and migrants and of populations hit by natural disasters. Yet, having refocused on its primary objectives and, in principle, abandoned certain sectors of activity, the Fund now seems to be searching for a new identity - a role in financing the enormous social needs of the countries of central and eastern Europe. Yet this role is elusive because the Fund cannot compete on the same terms as other major financial institutions already actively involved in the region though in other sectors than those for which the Fund has its specific vocation: the alleviation of the social problems arising from migratory movements and refugee flows. So the Fund is seeking to co-operate with them. In the view of your Rapporteur, it is therefore all the more important to emphasise the specific priority objectives of the Fund.
40. The main responsibility for ensuring that the Fund is quickly and fully capable of responding to the challenges ahead lies with its member governments. Your Rapporteur urges the members of the Assembly concerned to seek to keep these governments up to the mark, and to urge those governments of Council of Europe member states that have not joined the Fund to do so as soon as possible. There is no justification for leaving the excellent potential of the Fund untapped for the purpose of promoting greater social progress in the Council of Europe member states.
Reporting Committee: Committee on Migration, Refugees and Demography.
Committees for opinion: Committee on Economic Affairs and Development and Social, Health and Family Affairs Committee.
Budgetary implications for the Assembly: none.
Origin: Order No. 494 (1994), 26 January 1994
Draft recommendation unanimously adopted by the committee on 2 June 1995.
Members of the committee: Mrs Aguiar (Chair), Mr Cucó, Sir John Hunt (Vice-Chairmen), MM. Akselsen, Andres, Mrs Arnold, Mrs Ástgeirsdóttir, MM. Attard Montalto, Biefnot, Billing, van den Bos (Alternate: Mrs Baarveld-Schlaman), Branger, Mrs Brasseur, MM. Brennan (Alternate: Gregory), Brito, Ehrmann, Fuhrmann, Galanos (Alternate: Christodoulides), Ghesquière, Golu, Gotzev, Gross, Iuliano, Iwiński, Junghanns, Kalus, Kapsis, Kiliç, Kiratlioǧlu, Lord Kirkhill, MM. Laanoja, Lauricella, Leitner, Liapis (Alternate: Korakas), Loutfi, Mészáros, Paasilinna, Pantelejevs, Pastuszka, Mrs Robert, MM. Saudargas, Školč, Mrs Soutendijk-van Appeldoorn, Mrs Theorin, MM. Tkáč, Trojan, Vázquez.
N.B. The names of those members present at the meeting are printed in italics.
Secretaries of the committee: MM. Newman and Sich.