EXECUTIVE COUNCIL
CONFIDENTIAL
Title: European Union EDF 10 Funding
Paper No: 73/13
Date: 24 th April 2013
Report of: Head of Policy
1. Purpose
1.1 To seek Honourable Members approval of the Single Programming Document (SPD) setting out how funding under the 10 th European Development Fund (EDF10) will be used.
2. Recommendations
2.1 It is recommended that Honourable Members:
• Approve the 10 th EDF SPD; and • Approve the formal submission of the document to the European Commission.
3. Summary of Financial Implications
3.1 None. All EDF funding to be received is already included in the FIG budget, though will need to be re-profiled.
4. Background
4.1 The Falkland Islands have been assigned €4.13m (c£3.5m) under the 10 th round of the European Development Fund (EDF). The EDF is an extra-budgetary fund funded by EU Member States specifically to fund economic and social development programmes in Overseas Countries and Territories (OCTs). The Falkland Islands have previously received EDF funds in the 9 th EDF between 2006 and 2009.
4.2 In order to be able to draw down these funds we are required to submit a Single Programming Document (SPD) to the European Commission. The SPD summarises the current social and economic conditions of the Islands and identifies how funding shall be utilised.
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4.3 The document attached is the latest iteration of the SPD following protracted discussions with the European Commission. The process began in 2009 with several iterations of the SPD having been prepared – none of which met with the Commission’s approval. Progress was later delayed due to staff changes in FIG and was re-started in 2012.
4.4 In order to expedite the process, the EU commissioned consultants (Transtec) to work with the Policy Unit in preparing the SPD. The consultants visited the Islands in April 2012 as part of a fact-finding mission. The collaboration has resulted in the final SPD attached to this paper.
4.5 The document has gone through several iterations following feedback from FIG and the EU Commission. It was intended that the document would be submitted for formal approval in December 2012, however the EU Commission chose to delay the process by 3 months as they re-considered the mode of funding that would be permissible.
5. 10 th EDF SPD
5.1 The structure and content of the SPD reflects the EU’s requirements, and the document contains terminology and phrasing familiar to those in Brussels but which is perhaps not always the most accessible to others. This is an unfortunate necessity of the process. The SPD is in two parts: • Part A presents an overview of the Falkland Islands, the economy, society and the institutional processes within FIG; • Part B details how funding from the 10 th EDF will be utilised, and the performance criteria that will be used to assess progress.
5.2 In line with the Commission’s eligibility requirements for support under the 10 th EDF, the programme is targeted on achieving sustainable growth through diversification and rural development (consistent with the Islands Plan and Economic Development Strategy).
5.3 The budget modality will be a Good Governance Development Contract (GGDC), which is a new form of support broadly equivalent to General Budget Support (GBS) that was the basis of funding received under the 9 th EDF.
5.4 The SPD details the specific areas to which funds will be allocated and against which progress will be assessed in releasing funding. It is important to note that the programme contains both fixed and variable tranches of funding:
2 • An initial fixed tranche of €1.03m (£0.875m 1), based on establishing eligibility (following a disbursement process during which we will be provided with further assistance from the consultants retained by the Commission); • Three variable tranches of €1.0million (£0.85m) in 2013/14, 2014/15 and 2015/16. Within these variable tranches: ‹ Fulfilment of general eligibility criteria will trigger release of 60% of the funds; ‹ The fulfilment of specific conditions will trigger release of the remaining 40%. The SPD contains a range of indicators against which progress will be assessed – related to tourism development, rural development, and completion of the current immigration review ( Note : the indicator only relates to completing the review and does not pre-suppose that any of its recommendations will be adopted as that can only be determined by ExCo once the review is complete i.e. it is an indicator of process, not final outcome. The same is true of the indicator related to airlinks – this will be achieved as long as the stated process is completed, regardless of the final decision on whether or not to progress with a new airlink which cannot be predicted at the current time. This was a deliberate measure to avoid making commitments to outcomes which have yet to receive ExCo approval). • In 2015/16, a tranche of €0.1million (£0.085m) will be released to fund an evaluation of the 10th EDF programme.
6. Financial Implications
6.1 The financial implications are positive in that approval of the SPD will ultimately lead to release of the €4.13million (subject to signing a Financing Agreement and completing the necessary disbursement requests in due course).
6.2 As noted above funding will be released in four tranches
2012/13 2013/14 2014/15 2015/16 Total EDF Disbursements (€m) 1.03 1.0 1.0 1.1 4.13 Estimate in £m2 0.875 0.85 0.85 0.935 3.51
6.3 As detailed in Appendix IX of the SPD, this funding is allocated to already agreed budgetary items throughout the funding period. In this sense the 10 th EDF is contributing towards agreed policy objectives and strategies and should not be viewed as separate funding for new projects and initiatives.
1 Note: All figures in £ sterling are shown at the exchange rate of 04/04/2013. Actual amounts may vary depending on the prevailing exchange rate when funds are received. 2 Note: All figures in £ sterling are shown at the exchange rate of 04/04/2013. Actual amounts may vary depending on the prevailing exchange rate when funds are received.
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7. Legal Implications
7.1 None arising directly from this paper.
8. Human Resources Implications
8.1 None. There will be future demands on the Policy Unit to prepare progress reports and provide evidence in support of funding disbursements however this is manageable within the existing establishment.
4
Single Programming Document of Falkland Islands
10 th European Development Fund
5 Final, April 2013
Table of Contents LIST OF ABBREVIATIONS ...... 8 EXCHANGE RATES /C URRENCIES ...... 9 PART A: COOPERATION STRATEGY 10
Executive Summary 10
Chapter 1: EU – Falkland Islands Cooperation Objectives 13
Chapter 2: Assessment of the Political, Economic, Social and Environmental Situation 15
2.1 INSTITUTIONAL AND POLITICAL SITUATION ...... 15 2.2 ECONOMIC SITUATION ...... 15 2.3 EXTERNAL ENVIRONMENT AND REGIONAL INTEGRATION ...... 20 2.4 SOCIAL SITUATION ...... 21 2.5 HEALTH , EDUCATION AND SOCIAL SERVICES ...... 21 2.6 ENVIRONMENT ...... 22 Chapter 3: Policy Agenda of the OCT 25
Chapter 4: Assessment of past and on-going cooperation between the Falklands and the European Union 31
Chapter 5: Response Strategy 34
Part B: Action Fiche, Falkland Islands (UK Overseas Territory) 36
6. Territorial Programme Falkland Islands 36
6.1. IDENTIFICATION ...... 36 6.2. RATIONALE AND COUNTRY CONTEXT ...... 36 6.2.1. Country Context ...... 37 6.2.2. Eligibility for budget support ...... 39 6.2.3. Lessons learnt ...... 44 6.2.4. Complementary Actions ...... 44 6.2.5. Risk Management Framework ...... 44 6.3. DESCRIPTION OF THE BUDGET SUPPORT CONTRACT ...... 47 6.3.1. Objectives ...... 47 6.3.2. Expected results ...... 48 6.3.3. Rationale for the amounts allocated for budget support ...... 49 6.3.4. Main activities ...... 49 6.3.5. Donor coordination ...... 49 6.3.6. Stakeholders ...... 49 6.3.7. Conclusion on the balance between risks (6.2.5) and expected benefits/results (6.3.2) 50 6.4. DESIGN AND IMPLEMENTATION ISSUES ...... 51
6 6.4.1. Budget and calendar ...... 51 6.4.2. Procurement and grants award procedures ...... 52 6.4.3. Criteria for disbursement ...... 52 6.4.4. Performance monitoring ...... 53 6.4.5. Evaluation and audit...... 53 6.4.6. Communication and visibility ...... 54 Appendices 55
APPENDIX I. BUDGET TABLE ...... 56 APPENDIX II: SUMMARY COUNTRY DATA – FALKLAND ISLANDS ...... 57 APPENDIX III: FALKLAND ISLANDS MAP ...... - 59 - APPENDIX IV: FALKLAND ISLANDS ’ GOVERNMENT STRUCTURE (J ULY 2012) ...... - 60 - APPENDIX V: LIST OF KEY DOCUMENTS ...... 61 APPENDIX VI: BUDGET DOCUMENTATION , REVENUE & EXPENDITURE AND BALANCE SHEET ...... 62 APPENDIX VII: EIGHT KEY AREAS OF ASSESSMENT ...... - 67 - APPENDIX VIII: PERFORMANCE CRITERIA AND INDICATORS ...... - 72 - APPENDIX X: ENVIRONMENTAL PROFILE ...... - 81 - APPENDIX XI: EXECUTIVE SUMMARY OF RURAL DEVELOPMENT STRATEGY ...... 83 APPENDIX XII: TOURISM DEVELOPMENT STRATEGY ...... 88
7 1.1 List Of Abbreviations Camp Rural areas of the Falkland Islands ACAP Agreement on the Conservation of Albatross & Petrels DCI Development Co-operation Financial Instrument DEFRA Department for Environment, Food and Rural Affairs DEVCO Directorate General Development and Co-operation EDF European Development Fund EDS Economic Development Strategy ExCo Executive Council FIDC Falkland Islands Development Corporation FIPASS Falklands Interim Port and Storage System FITB Falkland Islands Tourist Board GBSP General Budget Support Programme GGDC Good Governance Development Contract GDP Gross Domestic Product GFS Government Finance Statistics (international standard) GNI Gross National Income IUCN International Union for Conservation of Nature KEMH King Edward VII Memorial Hospital MLAs Members of Legislative Assembly MPA Mount Pleasant Airport MTFP Medium Term Financial Plan OAD Council Decisions on the Association of the Overseas Territories and Countries OCT Overseas Country and Territory OCTA Overseas Countries and Territories Association OECD Organisation of Economic Co-operation and Development OJ Official Journal of the European Union PFM Public Financial Management ROM Results-oriented monitoring evaluation system SAERI South Atlantic Environmental Research Institute SPD Single Programming Document TFEU Treaty on the Functioning of the European Union UKOT United Kingdom Overseas Territory UKOTA UK Overseas Territories Association
8 1.2 Exchange Rates/Currencies
Throughout the document original data provided in GBP has been converted to euro (EUR) for ease of reference and comparison across countries. The exchange rate used was the official EU rate for the month of February 2013, namely EUR 1 = GBP 0.8583. The same rate has also been used to convert time series data. Source: ec.europa.eu/budget/contracts_grants/info_contracts/inforeuro/inforeuro_en.cfm
9 2 PART A: COOPERATION STRATEGY 3 Executive Summary The Falkland Islands are situated in the South Atlantic, some 650 kilometres from the South American mainland. The archipelago consists of two main Islands (East and West Falkland) and 778 smaller islands, with a total land area of approximately 12,000 square kilometres. The resident population, including civilian contractors working at the Mount Pleasant Airbase, is just under 3000 3. The islands currently enjoy a prosperous open economy, providing a high level of social and educational services and, as a consequence, a high degree of social cohesion. The Falkland Islands Government’s comprehensive development plan (Islands Plan 2012 - 2017 4) sets out a clear policy agenda and describes major economic and social policy initiatives, which aim to provide a secure and prosperous future. The Islands Plan covers the principal areas of the Falkland Islands Government development agenda, covering both social and economic issues. It was formally approved by the elected Legislative Assembly of the Falkland Islands following extensive public consultation. This took the form of extensive press publicity (e.g. through the local weekly newspaper, Penguin News), public meetings in several places with Members of the Legislative Assembly (MLAs), including in Stanley itself, with feedback from these meetings reported back to the Legislative Assembly for the final discussion and approval. Most of this consultation occurred during 2011. There are two major challenges where EU support under the 10 th EDF Programme will be invaluable in achieving key goals of the Islands Plan. The first is to promote sustainable growth through economic diversification, fostering both greater local involvement in existing industries and the development/expansion of new ones, and focusing particularly on tourism. This challenge is already being addressed through the Tourism Development Strategy 5 and EU support is requested to contribute to achieving the aims of the strategy. The second is the issue of halting, and hopefully reversing, the economic and social decline of the rural areas of the Falkland Islands (known locally as ‘Camp’), largely due to internal migration from Camp to Stanley. This challenge is also already being addressed in the Islands’ Rural Development Strategy 6, and EU support is requested to contribute to achieving the aims of this strategy. These two key areas are significantly interdependent and fit well with the broader goal in the Islands Plan of promoting export development and capacity building. For example, funding for agricultural pasture improvements enhances export values (meat and wool), makes the rural economy more sustainable.
3 Falkland Islands Census 2012: Headline Results , Policy Unit, Stanley: Falkland Islands Government, September 2012. Excluding civilian contractors the population is a little less than 2,500. These figures exclude serving military personnel. 4 The Islands Plan 2012-2017 , Stanley: Falkland Islands Government, 2012 5 Tourism Development Strategy , Falkland Islands Government, May 2011 6 Rural Development Strategy 2012-2017 , Stanley: Falkland Islands Government, 2012
10 The Falkland Islands export sector, including the tourism sector (income from which is conventionally treated as an export of tourism services), is the principal area of economic development considered capable of generating sustained economic growth, though the Islands Plan does envisage some expansion of import- substituting local production too. In outline, the purpose of the EU support and the Falkland Islands Government’s complementary funding is to implement the sustainable development and the economic diversification component of the Islands Plan 2012-2017, with particular emphasis on the following: 1. Sustainable Growth through Economic Diversification – The key focus is on tourism development for both stay over and cruise ship visitors, but the Islands Plan also envisages support for onshore fisheries and seafood related industries and funding for improved business skills and to encourage more start-ups. 2. Rural Development (Camp 7) – EU support shall contribute to developing and improving the returns from agricultural production through pasture and livestock improvement for both wool and meat exports, and through other specific measures to increase productivity in rural businesses. The chosen implementation modality for EU support to the Falklands under the 10 th EDF Programme is a Good Governance and Development Contract (GGDC). The proposed financial allocation, both from 10 th EDF funds (EUR 4.13 million) and from the Falkland Islands Government (EUR 6.92 million), is summarised in the table below:
EDF 10 Base and Performance Tranches for Falkland Islands Budget Support Programme and contributions from Falkland Islands Government (EUR million)
Fiscal Year 2012/13 2013/14 2014/15 2015/16 Total
Type of Tranche
Base tranche 1.03 0 0 0 1.03
Performance 0 1.0 1.0 1.0 3.0 tranche
Evaluation & 0 0 0 0.1 0.1 Monitoring
Total (EDF10) 1.03 1.0 1.0 1.1 4.13
7 Camp is the term used on the Falkland Islands to refer to everywhere outside Stanley. Since other settlements are extremely small, it mostly refers to the rural areas.
11 Falkland Gov’t 1.73 1.79 1.71 1.69 6.92 Contributions 8
Note : Figures in the last row are also in EUR million. they are taken from Appendix IX which sets out the Falkland Islands Government planned spending on diversification activities. The Appendix IX table is mostly in £ sterling, but the last row, converted to Euros, gives the figures shown above.
8 A breakdown of Falkland Islands Government contributions is contained at Appendix IX.
12 4 Chapter 1: EU – Falkland Islands Cooperation Objectives In accordance with Article 198 of the Treaty on the Functioning of the European Union (TFEU), the purpose of the association between the European Union and the Overseas Countries and Territories shall be ‘to promote the economic and social development of the countries and territories and to establish close economic relations between them and the Union as a whole’ . These objectives have been confirmed and further developed in successive Council Decisions on the association of the overseas countries and territories (OAD) with the European Community. The Decision currently in force is Decision 2001/822/EC of the Council of 27 November 2001 on the association of the Overseas Countries and Territories (OCTs) with the European Community 9. This Decision was amended by Decision 2007/249/EC 10 .
Support for the Falkland Islands under 10 th EDF is governed by the OAD above, as amended. As regards support for rural development and tourism, these are covered by Articles 11 (parts (a) and (d)), and 13 (part 10).
According to Article 4(3) of Implementing Regulation No 2304/2002 11 EU, support to OCTs is in principle given in the form of budget support, aside from exceptional and duly justified cases. The Falkland Islands fulfil all the necessary eligibility conditions for budget support, namely:
1. The existence of a territorial development plan which has been adopted and is in the course of implementation;
2. A stable macro-economic framework; and
3. A credible programme of public finance management. Fuller details and justification are provided below, and in Part B of this report.
4. A high degree of openness and transparency in government operations.
The overarching document concerning longer-term economic development of the Falkland Islands is the Economic Development Strategy (EDS). Within that broad framework, the basis for operational planning on the islands is the Islands Plan 2012-17. This is the policy expression of overall objectives of the Falkland Islands’ legislature and is updated every one to two years when elected Members deem appropriate. EU aid to the Falkland Islands aims to support the implementation of the 2012-2017 Islands Plan, notably those sections of the Plan concerned with rural development/agriculture and tourism. These key sections are in turn supported by the current Rural Development
9 OJ L 314, 30.11.2001, p. 1. 10 OJ L 109, 26.4.2007, p. 33 11 Commission Regulation (EC) of 20 December 2002 implementing Council Decision 2001/822/EC on the association of the overseas countries and territories with the European Community (OJ L 348, 21.12.2002), as amended by Commission Regulation (EC) No 1424/2007 of 4 December 2007 amending Regulation (EC) No 2304/2002 implementing Council Decision 2001/822/EC on the association of the overseas countries and territories with the European Community and allocating the indicative amounts under the 10th European Development Fund (OJ L 317, 5.12.2007).
13 Strategy and Tourism Development Strategy papers. As noted above, these areas fall within the scope of what can legitimately be supported according to the terms of the current OAD.
14 5 Chapter 2: Assessment of the Political, Economic, Social and Environmental Situation
5.1 2.1 Institutional and Political Situation The Falkland Islands are governed under the Falkland Islands Constitution, which came into force on 1 st January 2009. Under its terms, eight Legislative Assembly Members (MLAs), five from Stanley and three from Camp 12 , are elected every four years. Each year the Legislative Assembly members elect three of their colleagues to stand as members of the Executive Council (ExCo). ExCo meetings are held monthly, the Council advises the Governor. The Governor is the representative of Her Majesty the Queen on the Falkland Islands, and under the Constitution he must sign all legislation to indicate his assent to it, before it comes into effect; he has the power to reject or cancel any legislation he considers contrary to the Constitution, though this has never arisen in practice. The Governor is required to consult the British military authorities where defence matters are concerned. As regards the budget and financial matters, the Governor cannot reject a properly formulated budget that has ExCo and Legislative Assembly approval, but he does appoint the external auditors.
Defence and foreign affairs remain the ultimate responsibility of the British Government, although in all other areas of policy and public administration the Falkland Islands, for all practical purposes, are self-governing on a day-to-day basis.
A stable system of government 13 , strong supporting institutions and a long tradition of good governance in the Falklands, provide a secure basis for creating a business environment that encourages investment and entrepreneurial activities by the private sector.
5.2 2.2 Economic situation With virtually full employment, and GDP growth over the past decade that has averaged about 4% per annum (in nominal terms, equivalent to about 2.5% per annum growth in real terms), albeit with some significant fluctuations linked to the Islands’ varying revenues from issuing fishing licenses, the Falklands economy has been performing quite well. Tables 1 and 2 below exhibit these tendencies more clearly.
Like all very small economies, the Falkland Islands are highly open. There are few tariffs in place though there are still some quotas on fish exports from the Falkland Islands imposed by the EU. It has been proposed by the Falkland Islands Government to eliminate these, along with crewing restrictions on fishing vessels. These points are acknowledged in the new draft OAD 14 , which still awaits discussion and approval by all Member States. Otherwise the Islands enjoy good access to EU markets. For meat and
12 Camp is the generic name for the rural areas of the Falkland Islands outside the capital, Port Stanley. 13 The structure and institutions of the Falkland Islands political and government system as of July 2012 are shown in Appendix IV to this document. 14 See ‘Proposal for a Council Decision on the association of the overseas countries and territories with the European Union’, COM (2012) 362 final, Brussels: European Commission, July 2012.
15 other agricultural products, the latter has required the Islands to comply with the relevant EU standards, as the abattoir does.
16 Table 1. Falkland Islands GDP and GDP Growth, 1998-2010
Year\Ite Nominal GDP Nominal Real GDP Real GDP Real Real GDP m GDP (excl. (excl. fish) GDP growth fish) growth (%) (excl. (%) fish)
1998 88.5 (76.0) 36.0 (30.9) 88.5 (76.0) 36.0 (30.9) - -
1999 88.4 (75.9) 40.8 (35.0) 84.9 (72.9) 39.6 (34.0) -4 10
2000 91.2 (78.3) 42.3 (36.3) 118.4 (101.6) 39.6 (34.0) 39 0
2001 71.9 (61.7) 42.1 (36.1) 112.0 (96.1) 39.3 (33.7) -5 -1
2002 74.0 (63.5) 45.0 (38.6) 83.0 (71.2) 42.1 (36.1) -26 7
2003 112.7 (96.7) 48.4 (41.5) 117.6 (100.9) 44.7 (38.4) 42 6
2004 103.3 (88.7) 49.2(42.2) 93.4 (80.2) 42.8 (36.7) -21 -4
2005 129.0 (110.7) 50.7 (43.5) 131.2 (112.6) 42.3 (36.3) 40 -1
2006 93.9 (80.6) 53.6 (46.0) 120.0 (102.7) 43.6 (37.4) -9 3
2007 122.6 (105.2) 64.0 (54.9) 127.9 (109.8) 50.0 (42.9) 7 15
2008 145.1 (124.5) 69.0 (59.2) 138.1 (118.5) 49.2 (42.2) 8 -2
2009 112.2 (96.3) 66.9 (57.4) 119.0 (102.1) 49.5 (42.5) -14 1
2010 166.0 (142.5) 66.5 (57.1) 156.5 (134.3) 47.2 (40.5) 32 -4 Source : Policy Unit, Falkland Islands Government, June 2012 Notes . 1. Real and nominal GDP are the same in 1998. 2. Columns 1-4, first figure is EUR millions, second (in brackets) is GBP millions. Given the small size of the economy, it is not economically viable for the Falkland Islands to produce a wide range of goods and services for themselves. Instead, to support a diversified and high consumption level for the residents, most of the Islands’ consumer goods are imported. However, the Islands Plan does envisage some development of local production to replace some imports, as an element in the broader diversification strategy. In any event, it is vital for the Islands to have a strong exporting business to enable them to pay for these and other imports. In value terms, exports largely consist of fish (incl. squid) sold to the EU and Far Eastern markets, mostly Japan. While much less important in value terms, other agricultural output such as wool and meat is also exported and these items are of good quality and growing in importance. According to 2011 data on imports by place of loading (the only available data), imports mostly originate in the UK (EUR 36.1 million (£31 million) out of EUR 39.6 million (£34 million)), with Uruguay and
17 Chile next (EUR 1.5 million (£1.3 million) and EUR 2.3 million (£2.0 million), respectively), and very little from the rest of the EU 15 and elsewhere.
Table 2. Falkland Islands Fishing Licence Revenues
1994 1995 1996 1997 1998 1999
29.9 (25.7) 23.7 (20.3) 25.6 (22.0) 24.8 (21.3) 22.8 (19.6) 23.5 (20.2)
2000 2001 2002 2003 2004 2005
28.9 (24.8) 32.3 (27.7) 31.0 (26.6) 23.9 (20.5) 13.9 (11.9) 12.3 (10.6)
2006 2007 2008 2009 2010 2011
16.8 (14.4) 17.9 (15.4) 17.8 (15.3) 12.7 (10.9) 13.4 (11.5) 23.3 (20.0) Source : Fishery Statistics vol.16, Falkland Islands Fisheries Department, 2012 Note : Rows 2, 4 and 6, first figure is EUR millions, second (in brackets) is GBP millions
Given its importance for the economy, contributing around 60% of the GDP (and a lesser fraction of gross national income), a brief outline of the fishing industry is provided here. Producing about 200,000 tonnes annually, squid normally account for about 75% of the catch. Squid are mostly fished by specialist trawlers registered in the Far East (largely Japan) or by trawlers registered in Stanley (Falkland Islands), jointly owned by Falklands and European companies; 20 trawlers are registered in Stanley. For the government, fisheries licence revenue is a major component of government revenue (see below), with 170 to 225 licenses issued each year by the Fisheries Department. For the wider economy, fisheries employment and income from the catch are also important.
In 2009, the Falkland Islands experienced a bad year for fishing revenues and had to cope with declining world market prices for wool. Since then, fishing revenues have largely recovered and appear to be set on a more stable trajectory, while the wool price has also recovered. Hence the outlook for non-fish food and agricultural exports now seems far more promising, which is important for the Islands’ goals of achieving greater diversification of the economy and stabilising the rural economy (Camp).
The current world financial crisis and recession seems to have had at worst a mild impact upon most aspects of the Falkland Islands economy, with the notable exception of cruise ship tourism. The combination of recession and restrictions on the use of heavy oil in Antarctic waters 16 , are estimated to have cut visitor numbers (nearly all day visitors from cruise ships) from 60,000 annually to about 35,000. As a result, spending by these visitors has fallen back, though the detailed GDP data (broken down by production sector) show that demand for hotel and restaurant services has been largely static in
15 For trade data between the EU and the Falklands up to 2011, see ‘Falkland Islands: EU Bilateral Trade and Trade with the World’, EU-DG Trade, March 2012 16 These restrictions came into effect in 2011, but they had been under discussion by the International Maritime Organization since 2005.
18 recent years, at least to 2010 (the last year where data are available), while demand for other services has either grown a little or also remained static. Some of this has been the result of additional spending by oil exploration workers, partly offsetting the decline in tourist numbers. Hence at worst, after a modest decline in 2008 and 2009, it is likely that income from tourism and other visitors has continued to grow slowly.
In moving forward, the Falkland Islands have to deal with a number of significant challenges, summarised as follows:
• Maintaining, and perhaps accelerating the trend of economic growth, while diversifying the economy and developing exports (Diversification is in line with key elements of the Islands Plan, and is central to the EDF funding allocated to the Falklands. How best to achieve it is outlined further below);
• Managing public spending and revenues both to maintain balance or a modest surplus, and to sustain the public services, especially health, education and social services, at a level and quality that Falkland Islanders have come to expect;
• Managing the Islands labour force. At present almost 20% of the workforce consists of contract workers, mostly from the UK, Chile and St Helena. Further growth will likely require additional workers, and this may entail some re-thinking by the Falkland Islands Government of its policies regarding immigration and property ownership. These are sensitive issues that require careful handling.
• On the horizon is the issue of oil exploration and future production in the waters around the Falkland Islands. A round of oil exploration was performed in the late 1990s, but all wells were plugged and deserted, though trace amounts of oil and gas were discovered. A new round of exploratory drilling was started in early 2010 and economically recoverable quantities of oil have been discovered in the Sea Lion field. Talks with potential investment partners reached agreement in July 2012 on substantial investment to develop oil production, though commercial production of oil is unlikely much before 2017. Both on shore and off shore investment will be needed before then to prepare the economy for this major new development opportunity.
o Hence in the very near future, the Government needs to consider what oil supply support services could reasonably be delivered from the Falklands, and how such activity might over time affect the local community and other economic sectors on the Islands;
o The Falkland Islands Government also needs to continue supporting a modest pace of exploration activity, by issuing the necessary exploration licences, to clarify what and how much oil is really available in Falklands waters.
o To the extent possible, and with support from the UK Government, the Government needs in due course to find ways of reassuring potential investors that settled conditions will prevail around the Islands, despite Argentina’s publicly stated opposition to oil and gas developments around the Falklands.
19 5.3 2.3 External Environment and Regional Integration Falkland Islands’ regional integration is affected by the relations between Argentina and the Islands. For example, in the context of the South Atlantic Fisheries Commission (SAFC), which was founded in 1990 to oversee the management of fish stocks and fishing activity and to undertake data collection, cooperation among the three original contracting parties (UK, Argentina, and Falkland Islands) has since 2005 been seriously affected.
Other issues concern the restriction of scheduled flights in and out of the islands to Chile to a single weekly flight in each direction. Other flights that may be arranged are not normally permitted to overfly Argentina. While these restrictions do not prevent cruise vessels from using the islands as a pick-up or drop-off point for tourists, who can then use the flights to and from Santiago, they do constrain access to the islands for land-based tourists. Expansion of land-based tourism is a key goal of the Tourism Development Strategy, and would bring significant economic benefits to the hospitality and travel industry.
Despite the above mentioned issues, the Falkland Islands’ trade with South America has been increasing in recent years, with circa EUR 4.76 million of imports from this region in 2008, up from circa EUR 3.3 million 5 years earlier. Imports from Chile, for instance, are an important source of fresh produce for the Falkland Islands. But this is still only a small fraction of the Falkland Islands’ trade, though, since in 2011 Eurostat reports EU27 exports to the Falklands of EUR 121 million and imports from the Falklands of EUR 112 million. Ideally the Falkland Islands would like to see their trade with South American countries expand significantly, since such regional links are highly valued. For the moment, significant regional economic integration with South America, beyond limited communications and transport, is restricted.
Besides trade, there are many other areas where the Falkland Islands have been and are actively exploring links with South America. For instance, discussions have been held with a Chilean University to increase sporting and educational links between the Islands and the South America region; and there have also been useful exchanges with Uruguayan farmers. The Falkland Islands also have close social ties with another Overseas Territory, namely St Helena (including its dependency, Ascension Island), due to significant migration of workers from these islands to the Falklands 17 . Deeper regional integration and inter-working is challenging, due to the limited transport links, and the lack of capacity within both the private and public sectors in the islands.
From the EU perspective, the fact that the Falkland Islands are both isolated and not part of any regional cooperation arrangements makes regional integration and cooperation more challenging.
17 The initial report on the 2012 census, published by the Policy Unit of the Falkland Islands Government in September 2012, showed that 10.4% of the population were of St Helena origin compared to 13.1% in 2006; in contrast, the share of Chileans in the population had risen from 5.4% in 2006 to 6.4% in 2012.
20 5.4 2.4 Social Situation The Falkland Islands population is literate, well housed and nourished and generally healthy. Disparities between the household incomes and opportunities available to people living in Stanley and in Camp (rural areas) are still sometimes a sensitive issue. However, education, communication, health and transport initiatives, designed to mitigate the effects of distance and remoteness, have proved helpful.
Social assistance is available to all Falkland Islanders who need it (see the next section, Chapter 2.5). The specific challenges faced in this area mostly revolve around the practical problems of providing greater access to social development services such as universal broadband access, transport facilities to remote outlying farms, and the provision of education to all.
5.5 2.5 Health, Education and Social Services Schooling is free of charge and compulsory for all children and young people in the Islands up to age 16. The Falkland Islands Government provides staff, equipment and supplies for education throughout the Islands. There is a primary and a secondary school in Stanley; in the rural areas younger children either attend small settlement schools or are visited by travelling teachers, supported by the Camp Education Unit based in Stanley. Students who receive good enough grades in their GCSE exams at the Falkland Islands Community School, Stanley, are fully funded by the Government to undertake further study in England for post-GCSE qualifications (i.e. for young people aged 16+). With, currently, 162 pupils spread across the five years of study (from age 12 to age 16), about 40% of each cohort remains in the islands and seeks employment at age 16; given the state of the labour market, almost all are able to find well-paying jobs. The remaining 60% go forward to more advanced study at colleges in the UK. Of these, around 8 per year eventually go on to university courses, generally in the UK; this represents about 30- 40% of their cohort 18 .
The challenges in the area of education lie in the small numbers of children coming through the system per year, making critical mass difficult to achieve, especially at the more advanced and specialised stages of study. The remoteness of the islands makes social and cultural learning and exchanges relatively difficult and expensive, though the Government strives to make opportunities available to its young people and provides generous funding. All suitably qualified students have the opportunity to attend Tertiary Education overseas, normally in the UK, fully funded by the Falkland Islands Government.
The Falklands Islands Government Health Service is responsible for the provision of all preventive and curative medical services in the Islands. There is a small modern hospital in Stanley, the King Edward VII Memorial Hospital (KEMH).
18 Personal communication from Assistant Director of Education, October 30 th 2012.
21 KEMH has 27 beds, including two intensive-care beds, an isolation unit, a maternity bed and a small Accident and Emergency section. Some specialist services are provided by consultants visiting from the UK. In medical emergencies, and depending on the nature of the problem, patients can be air-lifted to the UK or, occasionally, to South America (Santiago, Chile; or Montevideo, Uruguay). Though concerns are sometimes expressed over rising health costs and rising expectations of the population for ever more sophisticated health care, these costs are currently well managed within the Falkland Islands Government annual budgetary process, with total health care costs estimated at EUR 7.2 million (£6.2 million) in 2010/11, rising to EUR 8.3 million (£7.1 million) in 2012/13, then falling gradually to EUR 7.6 million (£6.5 million) by 2016/17. Within that, the costs of health care outside the Islands are expected to remain static at about EUR 1.4 million (£1.2 million) through to 2016/17 19 .
The Falkland Islands Government provides social assistance to people in need. Based on assistance guidelines, need is assessed on a case-by-case basis by the Social Services Section of the Department of Health and Social Services. The Government has also recently approved the implementation of a means tested programme to provide financial support to low earners and is in the process of implementing a National Minimum Wage.
All of the social, health and education services provided within the Islands and delivered to Falkland Islands residents outside of the Islands are fully funded by the Falkland Islands Government. No services receive or require any subsidy from the UK Government. The Government has recently been examining measures such as a universal tax credit, a minimum wage, and child care support as part of its on-going reviews of all areas of social policy. Detailed proposals about this were submitted to ExCo for their October 2012 meeting. Tax credits and childcare support were approved and came into effect from January 2013.
5.6 2.6 Environment The environment of the Falkland Islands is relatively unspoilt and also unstudied. This is especially true of the shallow marine coastline. Aside from fish and marine mammals, the islands have a surprising number of native and endemic species of birds and plants. The Islands are home to breeding colonies of five species of penguin. Invasive plants and non-native species such as rats create difficult breeding conditions for many birds, though islands free of these introduced species offer ideal conditions. The Falkland Islands Government actively manages invasive species to limit their spread and eradicate them from some areas where this is feasible. Their efforts were aided by an EU funded project (part of the 9 th EDF), the South Atlantic Invasive Species Project, that ran from 2006 to 2009. This project gave rise to a strategy paper for the South Atlantic, published in 2010 20 .
19 See Budget Book 2012/13, Approved Estimates of Revenue & Expenditure for the Financial Year 2012/13 , Stanley: Falkland Islands Government, June 2012, pp.48 and 49. 20 Clare Shine and Clare Stringer, South Atlantic Invasive Species: Strategy and Action Plan, Royal Society for the Protection of Birds, October 2010
22 The Falkland Islands Government treats conservation and sustainable environmental development as a high priority in its policy agenda 21 . Future onshore and offshore activities related to the Islands’ economic growth and development will therefore be subject to strict environmental impact assessments and development controls to avoid, remedy, or mitigate any potential adverse effects on the natural environment. Over the years, the Falkland Islands Government has adopted a number of domestic Ordinances (Laws) governing the sustainable use of natural resources and providing for remediation when damage to the land or sea occurs. Some of these are specifically dedicated to the Conservation of Wildlife and nature, along with specific endangered species that breed in the islands. Legislation has also been strengthened with regard to oil exploration and potential production, with that work currently on-going in the waters surrounding the islands.
In addition, the Falkland Islands Government has signed up to a number of international environmental agreements. This commitment obliges the Falkland Islands Government to fulfil the objectives of each agreement. Of these, the principal ones are as follows:
• The Convention on the Conservation of Migratory Species of Wild Animals – to protect and conserve terrestrial, marine and avian migratory species throughout their range across international boundaries;
• The Agreement on the Conservation of Albatross & Petrels (ACAP) – requires countries to produce an action plan that addresses all threats relevant to albatrosses and petrels;
• The Kyoto Protocol – countries that ratify this protocol must commit to reducing their emissions of carbon dioxide and five other greenhouse gases; however, for the Falkland Islands there are no binding targets, and the Islands are in any case pursuing a ‘green’ energy policy, with an increasing share of Stanley’s electricity supply generated by wind power. This share was already 20% in 2006, based on three wind turbines; since then, three more have been completed, together with flywheels to store some of the power, and the share of wind power is now approaching 40%.
In order to promote more environmental research on the Falkland Islands and South Georgia, and to retain more of the benefits of such research on the Islands, the Executive Council approved in December 2011 the first phase of funding to establish the South Atlantic Environmental Research Institute (SAERI) in the Falklands 22 .
The UK Government supports sound environmental management in the Overseas Territories, and this support includes liaison with the Falkland Islands Government and with non-governmental organisations in the Falklands 23 . According to the UK
21 See Falkland Islands Biodiversity Strategy 2008-2018 , Stanley: Falkland Islands Government, December 2008; and The Islands Plan 2012-2017 , Stanley: Falkland Islands Government, 2012 22 ‘Establishing a South Atlantic Environmental Research Institute (SAERI) in the Falkland Islands’, Paper 264/11, Stanley: Executive Council, December 2011 23 The Environment in the United Kingdom’s Overseas Territories: UK Government and Civil Society Support , PB 13686, London: DEFRA, January 2012
23 Department of Environment, Food and Rural Affairs (DEFRA) report referenced below, this support has two principal objectives, namely: 1. To engage with the UK Overseas Territories (UKOTs), and provide technical advice and direct support, to secure a healthy and properly functioning natural environment; ensuring the value of this natural resource guides decision making by Government, business and communities. And; 2. To accurately represent the needs and concerns of the UKOTs at international and regional meetings on environmental issues. Modest UK Government funding is available to help the UKOTs, including the Falkland Islands, develop environmental work in line with these objectives. The funding comes through several streams, such as the Darwin Initiative (EUR 8.7 million (£7.5 million) of funding in current round), the Flagship Species Fund (about EUR 116,000 (£100,000) spent in 2012), and several others.
24 6 Chapter 3: Policy Agenda of the OCT The Falkland Islands’ policy framework, which cascades down as a hierarchy from overall goals to specific annual plans and targets, is illustrated below in Figure 1. The cascading down of the policy framework is mirrored by institutional responsibilities where, overall, the Islands’ Plan is essentially the policy expression of the Legislative Assembly and where the EDS was developed and co-ordinated by the Policy Unit in wide consultation with stakeholders in the public and private sector before being approved by the Legislative Assembly.
Figure 1: Falkland Islands Hierarchy of Economic Planning
In similar manner, the sector strategies were developed between the Policy Unit and the government departments or statutory bodies responsible for implementation. Finally the annual action plans are the responsibility of the relevant departments and statutory bodies in consultation with various stakeholders and based on agreed funding from the budget. These agreements are made in negotiations with the Treasury and this ensures that the EDS is synchronised with the Medium Term Financial Plan (MTFP).
It is clear that the evolving policy framework is facilitating the specification of general priorities and more specific objectives into action plans that lay out costed programmes over a specified time period covering responsibilities and targets. Despite the small size of the government administration, the policy framework is increasingly clear and
25 coherent. It is tied in well to the annual budget framework, which is discussed below. At the same time, increasing experience in the use of detailed and practical action plans 24 is gradually leading to the greater use of performance indicators to measure results.
The Falkland Islands overall policy agenda and development strategy are detailed in the comprehensive policy and planning document called the Islands Plan. The Islands Plan (2012-2017), which is updated every one-two years in the light of achieved results and changing circumstances facing the Falkland Islands, seeks to protect and improve the quality of life of Falkland Islands people and community. The recently updated version of the Plan is based on eleven key policy areas, some of which are essentially political statements or objectives. Those Plan areas that are amenable to quantification are given effect at departmental and sectoral levels through specific policy documents and business plans. Progress is measured periodically – at least once or twice each year, sometimes quarterly – and is compared to the Plan objectives. Appropriate remedial action is taken if there is found to be significant under-performance not justified by special circumstances.
Of the eleven key areas, as described by the Falkland Islands Government in the Islands Plan (2012-2017), three are especially relevant to economic development, the focus of this report. These are (using the numbering from the Plan) as follows:
2. Economic Development We see achieving sustainable economic growth as a key priority. Working in partnership with business organisations, we have produced an EDS, which sets out our plans to achieve this. They focus on growing existing businesses and sectors, exploring areas of potential diversification and ensuring the best possible business environment.
3. Balanced Budget We aim to retain the balanced operational budget we exceeded in 2011/12.
8. Employment and Immigration We see ensuring fair and equal treatment in the work place and pay protection for low paid workers as a key priority and we will continue to seek improvements in the law here. We also wish to ensure that immigration policy is reviewed to provide an effective balance between ensuring a high-quality supply of labour, skills and investment to grow the economy and the cohesion of the community. We wish our immigration controls to be fair and efficient.
The success of the economic development policy area (area 2 under the Islands Plan) is crucial to the other areas and consists of 9 key actions, namely:
• Implementing a bold new Tourism Strategy to resurrect cruise passenger exchanges and grow tourism markets in North America, the UK and North West Europe. This requires significant improvements to our tourism product;
24 An Oil Readiness Action Plan has been prepared, and was approved by ExCo in late 2012.
26 • Implementing a new Rural Development Strategy to encourage a well-populated, economically and socially sustainable community in Camp;
• Reviewing options for shipping, fish transportation and bunkering provision to maximise the economic benefits to the Falkland Islands;
• Maximising the opportunities for local businesses and people to benefit from current oil and gas exploration activity and any future exploration, development or production activity;
• Looking to develop new industries in areas such as science, offshore financial services, renewable energy and aquaculture;
• Working with the MoD (Ministry of Defence) and businesses to localise contracts and employment for non-military functions at MPA (Mount Pleasant);
• Supporting the development of meat exportation, including significant growth of meat supplies from farms;
• Strengthening the business environment through measures such as an economic council, improved provision of finance, infrastructure improvements, fiscal incentives, overseas trade promotion, and monopolies regulation;
• Implementing changes to the Board of FIDC (Falkland Islands Development Corporation) and to its relationship with Government to create a more autonomous organisation with greater strategic focus.
By focusing particularly on the first two important actions, namely implementing the new Tourism Development Strategy and the new Rural Development Strategy, but also by taking into account the others, the Falkland Islands Government is seeking to develop the economy whilst protecting its traditional way of life. In doing so, the Government is seeking to help the economy grow both more sustainably and at a somewhat faster rate than hitherto. The thrust of its actions is summed up as follows: 1. Sustainable economic growth through economic diversification . With around 60% of GDP currently coming from the fishing industry, a sector known to be rather volatile, future income levels in the Falklands could be both higher and more secure if economic activities were more diversified. As envisaged, effective diversification could come through tourism 25 (currently only about 5% of GDP, but with substantial potential given the unique features of the Islands), the development of onshore fisheries (most of the activity in this sector is at present offshore), localising services to the UK’s Mount Pleasant military base, and generally encouraging new firm start- ups to raise the private sector’s share of the economy. The latter will entail some investment in SME skills and export focus, possibly also some targeted training and education.
25 See Tourism Development Strategy , 2011
27 2. Rural development , aiming to reverse the decline in the Camp economy, whilst at the same time contributing to diversification and to increased exports. The need is to maintain and encourage a well-populated, economically and socially sustainable community, which is integrated with the Falkland Islands national economy. This is both a political and economic priority as the population of the rural areas has declined significantly over the past decade. Stemming that decline is a first step. Developing the rural areas to become an economic contributor to reducing the Islands’ overall dependence on fisheries would be a second step. The new rural development strategy, and the work-plan for 2012-13, now approved by ExCo26 , provides more detail on how the problem is perceived, as well as possible solutions/remedies 27 .
Fuller work plans for achieving these goals and for identifying specific projects and targets, are detailed in the specific business plans made by each department in the Falkland Islands Government. The discussion of various parts of the economy, which follows immediately below, is reflected in current work plans.
Agriculture For over a decade from the mid-1990s, Falklands agriculture was in decline but several of the projects listed at Appendix IX, some of which are on-going, have contributed to reversing this adverse trend by improving the quality of Falklands meat and wool, improving pastureland, and providing facilities like the successful abattoir that facilitates exports to the EU that fully comply with EU standards. Further efforts to strengthen agriculture, and rural areas more generally, are included within the Rural Development Strategy referred to above.
Tourism The Falkland Islands have two main forms of tourism activity, namely stops by cruise liners (usually only on the Islands for a day, mostly in and around Stanley) and individual or longer visits to see the remarkable wildlife, to go fishing, to see the war memorials, and so on. There is also a modest flow of visiting researchers and scientists. The capacity for all forms of tourism is currently quite limited, but there is great potential for development, with several projects listed in the current Tourism Development Strategy . Marketing and smaller projects are typically handled by the Falkland Islands Tourist Board (FITB) itself, while larger projects, such as the proposed redevelopment of the Stanley waterfront (initial ideas for which have been reviewed by ExCo), fall within the remit of Falkland Islands Development Corporation (FIDC). There is also a proposal, currently under consideration by the Falkland Islands Government and ExCo, for a new statutory corporation to deliver the tourism strategy and make it more effective.
Environmental research This is recognised as an important area for the Falklands, an opportunity for the Islands to build up high-level research expertise that could benefit both the Islands themselves, and other places. The benefits could take a variety of different forms, including improvements in our knowledge about wildlife conservation (plants, fish, marine mammals, birds, etc.),
26 The RDS Action Plan and Budget 2012-13 , Paper 204/12, 29 th August 2012. 27 See Rural Development Strategy 2012-17 , Stanley: Falkland Islands Government, February 2012
28 knowledge of geology atmospheric science, better understanding of breeding practices and patterns, improved knowledge of migration paths, etc. Early moves to provide initial funding to SAERI (see Chapter 2.6 above and Appendix IX) represent a welcome starting point for this work. Indeed, SAERI has already appointed a director for a three-year initial period.
Business infrastructure There are several aspects to this, and in most cases work (and hence, spending) is on- going: • Port facilities. The Falkland Interim Port and Storage System (FIPASS), established by the UK’s Ministry of Defence in 1983, consists of 7 moored barges offering 300 metres of berth space. FIPASS has been very important for the Falklands economy, but its current condition and limited capacity increasingly constrain development. This has been brought to a head by the agreement for substantial investment in oil production that was announced in July 2012 28 . Plans to renovate existing port facilities to extend their life are being considered in conjunction with longer-term solutions, as the Islands may need the improved services that a new deep-water port would deliver. At its October 2012 meeting, ExCo rejected proposals to develop FIPASS 29 to extend its useful life and available berthing capacity, in favour of exploring options for a wholly new deep-water port. Nevertheless, since developing a new port will take a few years, further work on FIPASS will very likely still be required as an interim measure. This has now been officially accepted, with plans for a separate FIPASS2, to be constructed as a temporary (3 year) facility by the oil companies, until Port William is ready.
• Electricity supply. Wind power around Stanley already provides around 30-40% of the town’s electricity, emphasising the Islands’ green credentials. The critical wind power constraint has to do with the storage of generated power to enhance supply flexibility; this is being examined. In Camp – small settlements and individual, often remote, farms – it will rarely be economic to be part of an electricity supply network linked to Stanley. However, a mix of diesel generators and small windmills works well and is reasonably efficient.
• TV, Telecoms and Internet. Improvements in access and speed of these services are essential to help alleviate the rural population's sense of isolation. Likewise, from the point of view of developing new businesses – in tourism, crafts, conservation, services linked to agriculture, or anything else – a web presence is vital these days. While these services are largely a matter for the private sector, the Falkland Islands Government can and does play a valuable supportive role. In particular it has a crucial role in regulation, and there is a recognised need to invest in regulatory capacity, and to ensure more effective competition 30 .
28 When developing its economic diversification plans, the Falkland Islands’ Government sensibly did not also bank on potential benefits from the recent programme of oil exploration. 29 Falklands Interim Port and Storage System (FIPASS) , Paper 125/12, Stanley: ExCo, July 2012 30 More generally, there is no regulation of retail trade or banking on the Falklands. The capacity to manage even a fairly simple and limited regulatory framework could help to bring in more competition.
29
• Local roads. Outside Stanley, very few roads are metalled, most are dirt or gravel tracks receiving minimal maintenance other than the occasional grading. Hence most private vehicles are fairly robust 4x4s. However, access to markets for small rural firms, plus access to tourist sites for visitors, would both be enhanced by a programme of gradually upgrading parts of the road network.
• Business services and premises. Most new businesses need somewhere to operate, and one of the activities of the FIDC has been to provide such ‘spaces’. Likewise, new and established firms require legal, accounting and other standard business services, which can also be considered as part of a territory’s business infrastructure.
Other industries Over-reliance on the fisheries sector as the economic driver in the Islands (with fisheries making up an average 60% of GDP annually) is problematic because of the volatility in the sector. Aside from making the fiscal situation unusually hard to forecast, it is widely understood that operating with such a narrow focus of economic activity is both risky and possibly even unsustainable in the longer term. Hence policymakers on the Islands see diversification as critical for future living standards and economic growth. Naturally, such diversification in a very small economy can only succeed by expanding export capacity, since the local market is so small. This means either producing more, and more diverse goods for sale in export markets, and some of the developments listed earlier would facilitate that. Or it means delivering high quality local services that visitors will come and buy, notably services related to tourism: hotels, guest houses, lodges, restaurants, craft production and sale, transport services, etc. Initial steps have been taken in both these areas, as earlier discussion indicates, but there is much more potential.
30 7 Chapter 4: Assessment of past and on-going cooperation between the Falklands and the European Union The Falkland Islands received EUR 700,000 under the 6 th EDF and a further EUR4,547,000 under the 9 th EDF, which was implemented through sector budget support. The Falkland Islands Government was also a beneficiary of the STABEX scheme to mitigate the harmful consequences to primary producers of instability in agricultural export earnings receiving EUR 2,496,673 in 2007. In the case of the Falkland Islands, there was instability in the price of wool exports. The Falkland Islands did not take part in the 7 th and 8 th EDF programmes, in part because during the relevant periods the islands were still in receipt of significant aid funding directly from the UK.
The Mid-term Review of the 9 th EDF 31 found that the Falkland Islands Government’s past experience of problems associated with project support was a key factor in leading to the selection of budget support for the 9 th EDF. The ensuing programme was focused on trade development, with the general objective to accelerate economic growth by supporting private sector development in trade. Specific objectives were, first, to increase the share of the private sector in the overall economy and, second, to increase the contribution of key export sectors to gross domestic product.
The Falkland Islands were judged to meet the general eligibility criteria in full for the fixed tranches and the specific conditions for the variable tranches 32 . The Islands were among the first of the Overseas Territories to draw down their full allocation under the 9 th EDF, with the balance of funds transferred in December 2009.
Despite the early draw down of funds, the Mid-term Review 33 noted a significant delay after the Single Programming Document (SPD) was signed on 21 st June 2004 until the Financing Proposal was approved nearly two years later. The delays were the result of staffing changes in Brussels, exacerbated by the Falkland Islands’ limited staff and resources, the lack of direct contact with EU officers in Brussels and a lack of external technical assistance. In the circumstances, the Falkland Islands Government was praised for continuing to implement the programme through drawing on reserve funds so that the impact of the delays was limited to the impact on its budget.
The key lessons to be learned were the need for a clear manual on procedures, for EU officials to visit OCTs when SPDs are being finalised, for clear information to be given regarding processes and timelines and to put more emphasis on communication initiatives to assist OCT stakeholders work with the EDF programme. Similar points emerged from the EU’s OCT Evaluation of 2011 34 , and the Falkland Islands Government has sought to manage better its relations with the EU and EU programmes.
31 OVERSEAS COUNTRIES AND TERRITORIES Technical assistance for the Mid Term Review (MTR) 2006 , Ecorys, 2006 32 Project 9 PTU FK 001 – Sector Budgetary Support for Trade Development in the Falkland Islands , Note to the File, AIDCO, Brussels, 30/11/2009 33 Op. Cit., Ecorys 2006 34 Region Level Evaluation: Overseas Countries and Territories, Final Report (Volume 1: Main Report) Brussels, October 2011
31 Nevertheless, stakeholder feedback showed that the EDF programme was crucial for the development of the Falkland Islands in so far as it enabled the Falklands development spending priorities to be accelerated over the 9 th EDF implementation period. Conversely, once the EU financing agreement was in place, this also served – helpfully – as an external commitment device supporting the Falkland Islands Government in implementing its plans. Following a positive Mid-Term Review of the 9 th EDF funding for the Falkland Islands, which highlighted the commitment of the Falkland Islands Government, not least through extensive complementary funding, an additional funding of EUR 1.5 million was made available through the C-Reserve envelope 35 .
This earlier EDF funding, as well as STABEX support and related audits 36 , have allowed the Falkland Islands Government to learn valuable lessons concerning both the programming and implementation of EU funds. These are detailed below and are reflected in the proposed response strategy in Chapter 5 where key challenges are addressed:
• That the Falkland Islands Government apply for and utilise budget support for future EDF financing. For this to be beneficial the islands need to continue to build on excellent past performance in ‘prudent budgetary management’; ‘sound financial management systems’ and ‘appropriate fiscal and regulatory structures governing public finance management’ 37 .
• That the Falkland Islands Government focus future development on mitigating the risk associated with the volatility of fishing revenues. This will need to be achieved through a focus on diversification and close partnership with third party (especially private) enterprises in utilising EU support 38 .
The Falkland Islands have not received any financial support from the UK for over a decade, and do not receive support from other donors, with the exception of the EU, other than a small amount of project funding from the UK for environmental work (see DEFRA report referred to above in the discussion of the Environment at Chapter 2.6).
The Falkland Islands Government have had total operating revenue receipts of on average EUR 58.4 million (£50.12 million) per annum over the past 5 years (2007/08 to 2011/12) 39 . The main sources of revenue in 2009-10 were: Sales and services, 22.9%; Fisheries license fees, 34.2%; Corporate and personal taxation, together with customs duties and charges, 34.7%; and Overseas investment returns, 10.6% (lower than in earlier years).
35 Op. Cit., Ecorys 2006 and AidCo 2009 36 Financial Audit 2006 – 2008 , European Commission, Moore Stephens Chartered Accountants, May 2009 37 See, Draft PFM , Richard Stoneman and Paul Hare, May 2012, EC/Transtec; and Assessment of PFM , Mark Q. Watson, Jan 2009, EC/Linpico 38 Enhancing Atlantic OCTs Trade & Economic Activity ’, Brooks et al., 2009 39 Budget Book 2012/13 , Stanley: Falkland Islands Government
32 Previously received EDF funds have been used to augment these revenues, though they are viewed as a capital receipt and have generally been directed towards infrastructure and capacity building schemes.
33 8 Chapter 5: Response Strategy Under the 10 th EDF the Falklands Islands will benefit from a territorial allocation of EUR4.13 million. EU cooperation with the Falkland Islands intends to support the overall implementation of the 2012-2017 Islands Plan with special attention to economic diversification, particularly in the areas of tourism and rural development. Economic diversification is the key thrust of economic development priorities laid out in the Islands Plan. Capacity building to support the private sector and government-backed trade-related development are the intended outcomes. 40
The most effective way of providing the EU programme is through a Good Governance Development Contract as the budget support implementing modality. The Falkland Islands have a proven record of making good use of EDF support, as noted in Chapter 4 above. Its Islands Plan 2012-2017 provides a suitable framework through which to implement a programme of budget support, particularly as it is focussed on economic diversification to mitigate the economic volatility associated with its major industry. As outlined above, these economic diversification efforts to be supported through 10 th EDF funding to the Falkland Islands will aim to strengthen two important areas: Rural Development; and Tourism.
In parallel with the 10 th EDF Programme – and repeating its experience under the 9 th EDF noted in Chapter 4 above - the Falkland Islands have already been undertaking a variety of initiatives and activities to support its goals of economic diversification. These include the commitment of significant financial resources, as is detailed in the table at Appendix IX. This covers spending on economic diversification over the five fiscal years 2008-09 through to 20012-13 and planned spending up to 2016/17. The total expenditure of the Falkland Islands Government on economic diversification, from when the 10 th EDF programme was initially planned in 2008-09 to when it is likely to be completed in 2015- 16 will be nearly EUR 17.5 million (£15 million). This includes expenditure of about EUR 6.9 million (£5.942 million) during the proposed implementation stage of the 10 th EDF from 2012-13 to 2015-16. EU support for this key diversification programme
constitutes an appropriate and important response.
At the same time, institutional capacity is of a quality that can support the wide-ranging policy programme, though additional staff may have to be taken on board to ensure timely monitoring and implementation. The quality of institutional management has been demonstrated by prior effective management of EDF funding, along with annual audits of all institutions involved, as well as external studies conducted on behalf of the European Commission (see Chapter 4 above). It has also been demonstrated by the progress made since the initial plans were laid for the 10 th EDF, a five year period during which the Falkland Island Government has spent over EUR 9.9 million (£8.5 million) on economic diversification.
40 This is consistent with Article 12 of the Overseas Association Decision of November 2001, which identifies trade development as a focal area of OCT-EU co-operation. In particular the Falkland Islands Government wishes to target supply-side constraints as described in Commission Document COM (2002) 513 Trade and Development: Assisting Developing Countries to Benefit from Trade, Brussels, 2002.
34 In summary, the response strategy of the EU will consist at supporting the implementation of the sustainable development and the economic diversification component of the Islands Plan 2012-2017 and will in particular focus on Rural Development and tourism 41 .
41 See Appendix XI, which summarises the Rural Development Strategy, and Appendix XII, which presents the Tourism Development Strategy.
35 PART B: ACTION FICHE , FALKLAND ISLANDS (UK OVERSEAS 42 TERRITORY )
6. Territorial Programme Falkland Islands 6.1. Identification Title/Number Support to trade development and private sector business expansion in the Falkland Islands CRIS reference of the Decision: EDF/021-913 Total cost EUR 11,054,000 EU/EDF contribution: EUR 4,130,000 10 th EDF contribution Aid method / Good Governance and Development Contract Management mode
Centralised management
Operational 36 months Duration Type of Aid Code Markers A01-General budget support A01 DAC Sector Code 33110 Sector Trade policy and administrative management Complementary Support (Falkland Islands Government) Title Complementary support for EDF 10 Management mode Centralised Amount EUR 6,924,000 DAC Sector Code 33110 Sector Trade policy and administrative management 8.1
6.2. Rationale and country context The overall rationale for the use of budget support is to assist the Falkland Islands in diversifying its economy to reduce short-term volatility caused by substantial year-to- year variations in the performance of its main industry, fishing, and to reduce its vulnerability to exogenous economic shocks.
42 To be changed to ‘annex’ when becoming an attachment to the financing decision
36 6.2.1. Country Context 6.2.1.1. Main challenges towards poverty reduction/inclusive and sustainable growth Economic and Social Situation The Falkland Islands lie in the South Atlantic Ocean, 650 kilometres off the south-eastern tip of South America and are one of the so-called most isolated OCTs. Despite difficult access, made worse by Argentina’s policies in pursuit of its sovereignty claim, the performance of the Islands’ small economy has been robust over recent years, particularly in light of the global economic recession.
As is discussed in more detail in Chapter 2.2 of Part A above, there is virtually full employment amongst a stable population of around 2,500 43 . GDP growth over the past decade has averaged about 4% per annum,44 with income from the Islands’ offshore fishery contributing around 60% of GDP and trade flows about double the level of GDP. In addition to fishing, the Islands also export wool and meat and have a small tourism industry, catering for cruise-ship passengers and limited numbers of longer stay visitors. There is also a business services sector, which services the offshore fishing industry and which has developed limited onshore value-adding services.
Since the valuable fishing resource was developed in the 1980s, the Falkland Islands have enjoyed a high and gradually improving standard of living. According to the most recent national accounts data, GDP per capita in 2010 amounts to a little over EUR 51,260 (£44,000). However, this is a very misleading figure as a guide to living standards in the islands, since so much of GDP derives from the fishing industry and a high proportion of the income generated by that sector flows to owners overseas (mostly in Spain). Hence a far more realistic guide to living standards on the Falkland Islands is Gross National Income (GNI) per capita, estimated for 2010 at just EUR 19,100 (£16,400), about 80% of the UK level. As part of the transformation of the economy during the past three decades, the Falkland Islands were able to develop a social infrastructure comparable to that in EU member states, though without the same spread or depth. There is no poverty and the Falkland Islands’ Government provides social assistance to people in need. These issues are discussed in more detail in Chapters 2.4 and 2.5 of Part A above.
The maintenance and improvement of social provision in the Falkland Islands is largely dependent on economic performance. National Development Policy Although the Islands’ income is too dependent on the fishing sector, the revenues from which are volatile, the Falkland Islands’ Government has devised a number of
43 The population in the 2012 census was virtually unchanged from that in 2006. The figure of 2,500 excludes the UK military presence and overseas civilian contractors employed by the military. See Falkland Islands Census 2012: Headline Results , Policy Unit, Stanley: Falkland Islands Government, September 2012. 44 In nominal terms, equivalent to about 2.5% per annum growth in real terms.
37 mechanisms to iron out resulting fluctuations in short-term economic performance. In essence, conservative and sound economic and financial management has become the necessary cornerstone of national policy. In addition, increasing efforts have been put into economic diversification. These initially concerned diversification within the fishing sector to include species less volatile in annual volumes than the high-value Ilex squid. In more recent years, there have been gradual moves to diversify the economy away from its high dependence on fish.
In the Islands’ Plan for 2012-2017, eleven priority areas are specified, with the key actions to bring them about. Of these eleven, three are especially focussed around the economic development theme of this report, as noted in Chapter 3 of Part A above. As far as economic development is concerned, sustainable growth based on diversifying the economy is the priority. This policy has been under implementation for a number of years during which it has gradually deepened and gained momentum. The objectives specified in the relevant sections of the Islands’ Plan have been developed in a detailed EDS and have been further specified in sector strategies and action plans. The key sector strategies for economic diversification are for Rural Development and for Tourism.
When developing its economic diversification plans, the Falkland Islands’ Government did not include potential, but speculative, benefits from the recent programme of oil exploration. Nevertheless, the test drilling in the Sea Lion field, and the increased interest in other fields, has clearly added to economic activity over the last two or three years. Following successful finds in the Sea Lion field, the subsequent commitment to invest $1 billion in the commercial development of the Sea Lion field by Premier Oil, which was announced in July 2012, is a significant event for the Falkland Islands’ economy. In preparation for the development of this major new industry, the Government has committed EUR 13.98 million (£12 million) in infrastructure and other investment. As well as boosting economic output, this investment is likely to speed up economic diversification.
Some of the funds invested will seed the removal of a key constraint to economic growth. This constraint is the Islands’ longstanding lack of adequate port facilities 45 . The investment agreement with Premier Oil requires temporary improvements to existing facilities, whilst longer term plans for a new port are developed concurrently. Detailed discussions of investment options are currently underway and significant new capacity will be required by the second half of 2014. This capacity is likely to cost an initial EUR23-35 million of the full development costs of a new port of circa EUR120 million. As well as catering to the nascent oil industry, the redeveloped port will be important both for economic diversification 46 and for increased on-shoring of the fishing industry. 6.2.1.2. Fundamental Values Despite its very small size, the Falkland Islands have well-functioning political and legal institutions. The institutional and political context was outlined in Chapter 2.1 of Part A
45 The current port facilities are known as FIPASS (Falklands Interim Port and Storage System), which are a floating network of barges; they were installed by the UK military after 1982. 46 Making it easier to handle both cruise ship visitors and meat and wool exports.
38 above and further information is given in Appendix VII below, particularly items 4 and 8. The stable system of government and strong supporting institutions, combined with a high level of transparency and regular review, ensure a high degree of adherence to the fundamental values of democracy, human rights and the rule of law.
Whilst the Falkland Islands can be judged to meet the fundamental values pre-condition for a Good Governance and Development Contract in its own right, this eligibility criterion “need not be assessed for OCTs as they are part of the Overseas Association Decision and monitored within the association framework” according to the Budget Support Guidelines, 2012 47 . At the same time, whilst the islands are self-governing on a day-to-day basis, they are accountable to the UK through the Governor for upholding fundamental values. Similarly, defence policy is under the direct control of the UK Government. 6.2.2. Eligibility for budget support The Falkland Islands fulfil the four criteria for a Good Governance Development Contract (GGDC) on the following basis: i. The islands are implementing a credible, relevant and complete national development policy and strategy aimed at widening the country’s economic base, increasing stability and sustainability and maintaining growth; ii. The Government has developed increasingly robust stability-oriented macroeconomic policies over a number of years in response to year-to-year volatility in its current major source of income; iii. In an economy with a relatively large public sector, these stability-oriented policies have been driven by sound and conservative public finance policies backed up by public finance management that has, by and large, adopted the most up-to-date practices and techniques and especially those that are relevant to a small island economy. There is clear linkage between the Medium Term Financial Plan and national policies expressed in the overarching Islands’ Plan, where a hierarchy of strategies and action plans emanates from that overarching document; iv. Consultation and transparency have increasingly been built into the Falkland Islands’ governance and procedures with all key budget documents published and clear checks and balances to ensure full accountability.
The information and analysis required to meet the eligibility criteria of the 2012 Budget Support Guidelines is given at Appendix VIII, which was prepared for the Falkland Islands as the Guidelines were being published 48 . 6.2.2.1. Public Policy National Development Policy and Strategy The Islands’ Plan concept was introduced during the last decade to help develop a more coherent policy framework and to relate the framework to measurable actions. An
47 See Annex 10, page 101, of Budget Support Guidelines , Part III , European Commission, September 2012. 48 Appendix VIII was accepted during the QSGII of 30.10.2012.
39 updated plan is produced every one to two years. The latest Islands’ Plan for 2012-2017 therefore builds on similar plans for recent years in a system where a stronger policy framework has gradually emerged. Whilst the Islands’ Plan sets out general actions to deliver economic development priorities, the EDS 49 published in 2010 examined the feasibility and delivery of priorities in much greater detail and posited a sustainable annual rate of growth of 4-6% over the medium term in real terms. The EDS has, in turn, been rolled down into sector strategies for economic diversification for Tourism, in 2011, and for Rural Development, in 2012, respectively. These strategies are subsequently being developed into annual Action Plans. There are also Action Plans for various other constituents of economic diversification, covering the development of various business services and business opportunities.
The EDS is clearly relevant to the Falkland Islands’ position of being over dependent on one source of income. It is also credible. There are indications of some success with the Rural Development Strategy since the fostering of a recovery in the fortunes of the Camp 50 economy became a priority several years ago. Increases in volumes and prices of wool and meat exports appear sustainable particularly with a greater emphasis on yields and on quality. It will take longer for the Tourism Development Strategy to show positive results in light of the global economic situation and the special factors impacting tourism to the Falkland Islands, but it has greater potential.
On the basis of these developments, a sustainable annual rate of growth of 4-6% over the medium term in real terms appears achievable, as it does not represent a major increase on annual growth of around 2.5% (4% in nominal terms) that was achieved in the decade to 2009 51 .
Now the possibility of a sizeable oil industry has become a reality, the longer term growth potential of the Falkland Islands’ economy could exceed 4-6% per annum by a substantial margin. The constraint on Falkland Islands’ economic growth will be capacity. With the economy already running at full capacity, escalating activities over the next 3-4 years as preparations are made for oil production will provide more than enough work for the entire population. In these circumstances, outturn growth in coming years is likely to depend more on political decision-making than on the potential for economic diversification.
Whereas there are worries that too much immigration could change the Islands’ way of life in unacceptable ways, too little immigration could also choke off economic diversification beyond offshore fishing and offshore oil. It therefore makes sense that
49 As noted in Appendix VIII below, the EDS involved an extensive process of consultation. 50 In Falkland Islands’ terminology, the Camp is made up of all the land outside the capital, Port Stanley. The population of the Camp, over an area half the size of Wales, is around 350 people dotted around a few small communities. The population of Port Stanley is over 2,100. In the latest census (2012), the decline in the Camp population has slowed which also provides some indication of the beginnings of a revival in the rural economy. 51 See Report on Enhancing Atlantic OCTs’ Trade and Economic Activity , Atos Origin 2010, particularly Part A1, the Consultant’s report on a Study of the Falkland Islands .
40 there is currently active consideration of developing a more flexible immigration policy 52 to accommodate the need to diversify the economy. As the local labour market tightens, this has become a more urgent priority.
This analysis of national policy and strategy confirms that a well-defined national policy and strategy that is responding to the challenges and problems faced by the Falkland Islands is being actively implemented. As a result, this national policy and strategy offers an appropriate basis for providing EU budget support. 6.2.2.2. Macroeconomic Policy The Falkland Islands has perhaps defined itself by its own version of stability-oriented macroeconomic policy. When its fishery was first developed in the 1980s, reserve funds were set up quite quickly with fishing revenues regarded to some extent as a windfall gain from the outset. As the year-to-year volatility of fishing revenues – and hence government revenues – became increasingly apparent, a major role of government was to iron out these violent swings 53 . Appendix VI gives summary data that illustrates these swings and government’s response.
This role is particularly important because the public sector is relatively large in the Falkland Islands, with an operating budget representing around half of the Islands’ GDP. This puts a premium on prudent and sound macroeconomic and financial management. That the fishery resource is high value, particularly in relation to the Islands’ population, has made it possible to deliver a high standard of living and good social and welfare services in a relatively low tax jurisdiction whilst, at the same time, building up reserves and assets to iron out short-term fluctuations and to guard against the possibility of a long-term decline in the fishery resource 54 .
The robust performance of the Falkland Islands’ economy over recent years owes much to its culture of prudent and sound macroeconomic and financial management. After a difficult year in 2009 55 , there have been healthy budget surpluses in each of the last two years, with the outturn surplus for 2011-12 of EUR 22.5 million (£19.3 million) being almost half of expenditure and 15-20% of GDP 56 . These surpluses suggest that high levels of economic growth for 2010 and 2011 will be revealed, once the figures have been tabulated.
52 As well as regulating the size of the labour market, a wider immigration policy will need to consider the rights of potential investors and settlers. 53 The need for such a role is borne out by the fact that average GDP growth rates of 4% per annum in the first decade of the 21 st century conceal annual variations in growth from +50% down to -30%. 54 Whilst the management of the Falklands fishery is regarded as excellent and there is nothing to indicate long-term depletion in the resource, significant uncertainty will always remain. 55 Owing as much to the non-appearance of Ilex squid as to the global financial crisis. 56 GDP figures in the Falkland Islands are only available after a significant time lag because the value added method is used. This method depends on analysing firms’ tax returns, which are only available 12 months or so after the end of the year in question. The net effect of this is that figures are not available until 18 months or so after the year in question.
41 The analysis of the macroeconomic framework shows that the macroeconomic policy is conducive to maintaining macroeconomic stability over the coming years. As a result, this stability oriented macroeconomic policy is an appropriate basis for providing EU budget support. 6.2.2.3. Public Financial Management
The Falkland Islands’ Government’s key financial management policies are as follows: • Minimising debt and contingent liabilities : This is a long-standing policy. Apart from some minor guarantees and one of three pension schemes not being fully funded, the Government has no medium or long-term debt. The level of its invested reserve funds means that it has a high (and increasing) asset-to-GDP ratio of around 200% at a time when most of the world is worrying about the obverse - high (and increasing) debt-to-GDP ratios; • Budgeting to account for unreliable revenues: The Falkland Islands Government has dramatically reduced the impact of volatile fishing revenues on its revenue projections by assuming low overall revenues from the fishery that more-or-less iron out the huge fluctuations in income from Ilex. In effect, Ilex income is now regarded as a windfall to be allocated to reserves; • Conservative expenditure policies: Despite providing a high level of social services and welfare, the Government has maintained tight control over public spending. Over recent years expenditure has increased slowly. Rapid increases in revenues are treated as windfalls until it becomes clear that any increase is permanent. At the same time, expenditure tends to be held or reduced whenever there is downward volatility in revenues. The introduction of a Medium Term Expenditure Framework at the time of 9 th EDF, which has now become an established part of the annual budget process, has contributed to the control of public expenditure. • An equally conservative Medium Term Financial Plan (MTFP) : In addition to extrapolating existing affordable commitments, policies in the Islands’ Plan are costed and included in budget projections over the forthcoming five years. This means that not only are new policy commitments taken into account, but they are also rigorously examined on grounds of affordability. In particular, the Economic Diversification Strategy has been developed into sector strategies and action plans and these are included in the MTFP.
As a result of these policies, there has only been relatively minor downward volatility in the government budget balance in recent years. In 2010/11 rapidly rising investment income, a good year for Ilex fish and unbudgeted income from oil exploration resulted in the aforementioned budget surplus of over EUR 22.5 million (£19 million).
In the context of the current structure of the Falkland Islands’ economy, these prudent policies underpin the islands’ economic future. They provide a level of protection against economic shocks that make it unlikely that the islands need to change from being a low
42 tax economy; the highest rate of income tax is 26% and there is no VAT or general sales’ taxes.
The position of the Falkland Islands is now even stronger than initially thought, following Premier Oil’s agreement to invest in oil production. The indications are that exploitable oil wealth and revenues are very substantial in relation to the Falkland Islands’ current population and assets. As a result of the Government’s prudent financial management, the islands are in a better position to maximise the benefits from oil production. Some resources are available to make investments in facilities 57 to enable some onshore spin- off activities from oil production, rather than the industry being solely offshore with royalties and taxes being the only income generated. Indeed the significant windfall gains expected in 2013 as a result of tax on the oil industry farm-in agreements will be placed into a reserve to fund oil readiness activities including infrastructure, strengthening Government capacity, legislative reviews, etc. (some of which are already underway).
The January 2009 Linpico report 58 gave a favourable assessment of PFM and the Falkland Islands’ eligibility for budget support. The report highlighted some risk factors and some areas where improvements should be made. This report has been updated in 2012. All the matters raised in 2009 have been adequately dealt with by the Falkland Islands Government. At the same time, as the result of its own procedures and processes and noting the advice of its external auditors, the Government has made further improvements. To ensure continued improvements, its budget processes are updated each year.
This analysis of public financial management shows that the Falkland Islands has established a credible and relevant programme of improvement in public financial management justifying the allocation of budget support with respect to the legal requirements concerning the eligibility criteria for budget support. 6.2.2.4. Budget Transparency and Oversight of the Budget The Falkland Islands Government’s PFM arrangements include extensive procedures and processes resulting in clear oversight of all budgetary matters and in extensive transparency.
Budgetary Procedures are updated annually in a document that goes to Executive Council for approval and which includes clearly set out processes and a timetable. There is an extensive round of budgetary preparations and reviews involving a wide-ranging oversight by civil servants, the Budget Select Committee and ultimately the Legislative Assembly.
57 Government policy is to encourage private sector investment where possible, such as with cash generating port facilities. But its level of reserves and financial creditworthiness put it in a position to step in as necessary to seed fund and in some cases fully fund the necessary investments. 58 Linpico (2009), Preliminary Assessment of Public Finance Management, Procurement Procedures, and Assessment of the Economic Situation for Overseas Territories under the 10 th EDF: Falkland Islands , prepared by Mark Watson, LINPICO, January 2009
43 At the end of this process, the full budget is published, as are various other documents. As PFM reports have confirmed, financial management is operated to a high standard, with clear checks and balances and oversight. Internal and external auditing is carried out to a high standard on a timely basis with the Public Accounts Committee being open to the public.
The Falkland Islands Government takes transparency seriously and engages in exhaustive public consultations concerning the regularly updated Islands’ Plan to develop national ownership. A similar process was undergone for the EDS. As well as developing a high degree of consultation and transparency with the Falkland Islands’ community in general, regular and open discussions between the Government, the Falkland Islands Development Corporation and the private sector play a key role in developing and taking forward an agreed and workable economic strategy.
6.2.3. Lessons learnt The Falkland Islands operated successfully under Budget Support for the 9 th EDF with a programme of trade development. As this leads naturally into the current programme of economic diversification, there should be no major challenges in the implementation of the 10 th EDF. It will be important that requests for tranche releases be made within the first few months of the fiscal year to allow full reporting on the economic and financial activities of the preceding year. Given the small size of the Falkland Islands’ government administration, it is particularly important both to avoid duplication in reporting and to take advantage of the extensive data and information already produced to satisfy the Islands’ increasingly well-developed processes of national governance.
6.2.4. Complementary Actions The Falkland Islands’ Government has contributed over EUR 7.4 million (£6.3 million) to economic diversification in the four years between 2008-09 and 2011-12 and has budgeted a further EUR 6.9 million (£5.9 million) during the four years from 2012-13 over which it is proposed that the GBSP be implemented, as can be seen at Appendix IX.
The EU is the Falkland Islands’ sole development partner so the issue of complementary actions by third parties does not arise.
6.2.5. Risk Management Framework
This section should be read in conjunction with Annex 7a, attached hereto, and is structured in accordance with the main headings of Annex 7a. (a) Identification of the major risks Political governance Human rights are protected by Chapter 1 of the Falkland Islands Constitution that came into effect in 2009, and are governed by the same laws and agreements that apply in the UK, with the legal system and the courts also operating according to UK practices. The Attorney General is appointed from the UK and the Chief Magistrate is a UK judge
44 appointed by the Governor. In such a small community as the Falkland Islands, achieving effective separation of powers (between executive, legislature, and judiciary) is generally difficult but many checks and balances are in place to ensure this. Current practice works well.
As noted in Chapter 6.2.1.2, both the UK Government role and the monitoring carried out through the Overseas Association Decision provide checks and balances on fundamental values in the Falkland Islands.
The main arena of political difficulty concern relations between Argentina, the UK, and the Falkland Islands, but despite much threatening and hostile rhetoric, all sides appear committed to the peaceful resolution of outstanding issues.
On March 10 th and 11 th 2013, the Falkland Islands held a referendum on their sovereignty, with the question: "Do you wish the Falkland Islands to retain their current political status as an Overseas Territory of the United Kingdom?". The referendum achieved a 92% turnout and an overwhelming majority of 99.8% voted Yes. The UK government has stated that it will respect and support the outcome of this vote, while Argentina has stated that the vote will have no effect on its territorial claims.
The Falklands population is fairly homogeneous, and the government is aware of possible inequalities between Camp and Stanley residents, with policies developed to mitigate these; indeed the rural development component of the EU’s proposed 10 th EDF funding is in part aimed at achieving that.
Macro-economic stability Although highly open and very dependent on the volatile fishing sector (accounting for 60% of the GDP), the Falkland Islands maintain a highly conservative fiscal policy with budget surpluses often achieved and an accumulated reserve fund with assets valued at around 200% of GDP. Hence fluctuations can be accommodated without threat to local services. There is no exchange rate risk, since the currency, the Falklands pound, exchanges at par with the pound sterling, and the latter is legal tender in the islands. Export prices for major exports, notably fish (mainly squid) and wool in European and Far Eastern (mainly Japanese) markets – are vulnerable to the state of the world economy, and the Falklands have had to find ways to manage the diverse efforts by Argentina to isolate them economically.
Development risk The government administration, due to its tiny staffing levels, has limited capacity to adapt development policies rapidly in response to economic shocks, but the islands have demonstrated their ability to respond appropriately and effectively to major swings in revenues received. Local statistical services cannot always keep up to date in their production of economic statistics, but they do manage to provide the basic data that policy makers require. Independent, external assessments of government effectiveness for
45 the Falklands 59 are not carried out on a regular basis, but a comprehensive review of procedures and relevant documents for this SPD suggests that the government operates with a high level of effectiveness.
Public financial management The comprehensiveness of the budget, and the procedures for preparing it, including discussion in ExCo and final approval by the Legislative Assembly, comply with the best PFM standards, as was confirmed by the 2009 PEFA assessment of the Falkland Islands, and by the 2012 PFM update. The 2009 assessment identified some risks in the area of public procurement due to the small size of the local market, lack of competition, etc. New public procurement regulations have been put in place and serious efforts are made to comply with best practice, especially for the larger contracts. There is a well- functioning Public Accounts Committee to review the public accounts, extensive internal auditing, and the Governor appoints the external auditor.
Corruption and fraud No instances of corruption or fraud by public officials have been prosecuted, and officials are guided by rigorous codes of practice. The small size of the administration, and lack of local competition, certainly leaves the islands potentially vulnerable to corruption and maladministration, but diverse checks and balances are in place to protect against that. The UK government provides valuable oversight that helps to maintain the effectiveness of the local arrangements.
(b) Overview of the mitigating measures The Falkland Islands’ plans for economic diversification drawn up in 2010 excluded the development of an oil sector since this development was not something that could then be planned. Now that a major investment in oil production has been agreed, both sustainable growth and economic diversification have become more certain but probably not in the ways hitherto foreseen. Although oil production will most likely not commence before 2017, associated preparatory developments are already going forward very rapidly.
With the development of oil, parts of the existing diversification strategy, such as the development of business services and the expansion of the private sector, are likely to grow more rapidly. Nevertheless, the Tourism Development Strategy and the Rural Development Strategy will face a more challenging environment as other priorities compete for resources, particularly human resources in an already tight labour market. On the other hand, revenues linked to the on-going oil developments may provide additional financial resources to enable the islands to overcome this problem in the longer term, and ideally without detriment to tourism and rural development.
59 There was a fundamental review of government in 2008, carried out by the then new Chief Executive. This has been followed by a review of the review in early 2012, carried out by a former Permanent Secretary in the UK civil service, to assess whether or not the 2008 review had produced successful outcomes. See - A Review of the 2008 Review of the Falkland Islands Government , February 2012, Irene Lucas, CBE
46 It was already clear that immigration and investor policies needed to be adjusted to facilitate economic diversification and there is now a risk that these adjustments might be insufficient to meet the requirements of a more rapidly growing economy. In particular, there is a risk that tourism development and the revival of the Camp economy are more likely to be squeezed than oil development, since jobs in the latter area might well offer higher wages. To mitigate this risk, a significant focus of conditionality for the performance tranches of the budget support programme relates to the consideration of appropriate changes in immigration and investor policies.
There are other less controllable risks to the development of tourism. The Falkland Islands’ potential for developing a significant tourism niche given its unique natural attractions is vulnerable to continuing economic stagnation in major potential markets. Attracting investors to develop top-of-the-market lodges will not be straightforward in the current international investment climate. The Tourism Development Strategy has set, as one of its priority goals, the securing of a new air link to the islands to help deliver the Falklands’ tourism ambitions and achieving this is seen as fundamental to the future success of tourism. The Falkland Islands Government, along with the tourism authorities, are actively pursuing this matter. Whilst the risks to some expansion of the established cruise-ship business are relatively small, there is more uncertainty over the development of land-based tourism unless the new air link just referred to can be established.
As far as reversing the decline of the Camp is concerned, a significant fall in wool prices would test some of the gains made over the last three years and constitute a risk to the rural development programme. However, the increasing focus on sheep breeds that produce both meat and wool makes the islands less vulnerable than in the past. With the development of oil, a more serious risk may be the relative attractions of other economic activities, particularly if wage rates and other prices are bid up as a result of demand from oil development activities. In such circumstances, more linkages between the rural development strategy and the potentially higher value-added land-based tourism developments are likely to be important.
Although the constraints resulting from Argentina’s attempts to blockade the Falkland Islands’ are a continuing risk, the islands have had to find ways to develop their economy over many years in the face of a difficult and sometimes hostile large neighbour. In practice, for instance, any firm with business interests in Argentina will not be able to do business in the Falklands (hence this limits the potential pool of investors for oil, hotels, and so on).
6.3. Description of the Budget support Contract
6.3.1. Objectives The global objective of the GGDC is to assist the Falkland Islands achieve the key element of its national strategy, which is sustainable growth through economic diversification.
47 The purpose of economic diversification is to: • Bring about sustainable growth; • Develop the private sector to reduce the islands’ dependence on fishing; in particular in regards to tourism. • Modernise the economy in the rural areas of the Falkland Islands (the Camp), whilst preserving the best aspects of the traditional way of life. The objectives of the programme of rural development are both social and economic and will contribute to growth and to the development of trade.
Crosscutting Issues The Falkland Islands meets international best practice with regards to gender equality, having adopted the UK’s standards and practices. The Falkland Islands have signed up to the European Convention on Human Rights and abide by it.
The Islands Plan has important sections on good governance. A combination of recent institutional reform, first-class standards of financial management, clear transparency in procedures and practices and the widespread use of consultations suggest that impressive standards of governance have been achieved, not least given the small size of the Falkland Islands government administration. These issues are discussed in greater detail in Appendix VII.
The Falkland Islands Government is especially vigilant in its protection of the environment, as is described above in Chapter 2.6 of Part A.
6.3.2. Expected results It is expected that this programme will result in the Falkland Islands’ Government and private sector developing a more sustainable and diversified growth-oriented economy. As well as operating to help reduce constraints to economic diversification and sustainable growth, the programme will contribute directly to economic diversification in the tourism and rural development areas.
The specific results are: • Preparation and facilities for increased tourism. Whilst a wider programme of developing business services and of increasing the fishing sector’s value-adding onshore activities is underway, the focus of the diversification programme is on preparations and facilities for increased tourism, including land-based tourists and cruise ship visitors. Although oil production may change the economy significantly after 2017 60 , the Falkland Islands remain committed to the further development and broadening of the Islands’ small tourism industry; • Rural Development to reverse decline in Camp. A series of improvements and initiatives in the agricultural sector are designed to make the rural sector sustainable and reverse the decline in the Camp economy. These initiatives
60 When developing its economic diversification plans, the Falkland Islands’ Government did not rely on potential benefits from the recent programme of oil exploration. The development of oil has only turned from potential to reality since July 2012 and after the Identification Fiche was prepared.
48 include further development of the islands’ meat-export potential and other diversification activities to supplement the islands’ traditional wool exports, supported by improvements in grazing and livestock management; • A clear immigration policy which enables the Islands to match their desired rate of growth and development with sufficient availability of labour to meet the chosen rate and path of development.
6.3.3. Rationale for the amounts allocated for budget support The total amount allocated to the Programme of Support to trade development and private sector business expansion in the Falkland Islands under the SPD is EUR 4.13 million of which 100% is to be delivered under the present budget support programme. This amount is based on Article 2 of Commission Regulation 1424/2007 amending Commission Regulation 2304/2011. 6.3.4. Main activities
The main activities to implement the budget support package are policy dialogue, financial transfer, performance assessment, reporting and capacity development. 6.3.4.1. Budget Support
The budget support programme entails engagement in dialogue around the agreed conditions and government reform priorities, the verification that those conditions have been met and, as appropriate, the payment of budget support.
6.3.5. Donor coordination There is no donor co-ordination since the EU is the only official donor involved in the Falkland Islands (other than small amounts of project funding from the UK for environmental initiatives, as noted in Chapter 2.6 of Part A above).
However, co-ordination between the Falkland’s Islands Government and the EU Commission is important because of the remoteness of the Falkland Islands. The UK Foreign and Commonwealth Office plays a co-ordination role, as does the Falkland Islands Government Office in London. Dialogue between the European Commission and the UK is regularly held through structured meetings, such as the OCTA Forum, and through ad hoc meetings as necessary. 6.3.6. Stakeholders The main stakeholders and beneficiaries are the Falkland Islands’ population in general. The deepening of macroeconomic and financial policies based both on principles of prudence (to maintain and develop the Islands’ assets and reserves) and on diversifying the economy are with a view to protect and increase both the relatively high standard of living and the social provision enjoyed by the Islands’ population.
As noted above in Chapter 2.1 of Part A, the elected body is the Falklands Islands Legislative Assembly, which elects three of its members to Executive Council, the
49 Islands’ cabinet and highest decision-making body. As is further noted in Appendix VII below, the Falkland Islands have well-functioning political and legal institutions. There is widespread consultation amongst stakeholders and a high level of transparency. Through the Public Accounts Committee and various other public and government structures, a robust and transparent system of checks and balances has also been developed.
As far as economic diversification is concerned, preparations for the EDS, the Rural Development Strategy and the Tourism Development Strategy have involved widespread consultations with the public, the private sector and the Falkland Islands’ Government. In particular, the Government’s Policy Unit was involved in lengthy consultations with the Falkland Islands’ Development Corporation, the Chamber of Commerce and other business organisations and the private sector when developing the EDS. The EDS was, in turn, debated publicly before being adopted by the Legislative Assembly as a key policy.
Despite its very small size, the Falkland Islands have well-functioning political and legal institutions. A fundamental review of government in 2008 has led to improved management capabilities, which is important to facilitating significant structural change in the economy. Economic diversification should help strengthen the private sector, whilst a better-aligned immigration policy will improve the balance of skills available. Nevertheless, institutional capacity across the government will always be a constraint in such a small community as the Falkland Islands.
6.3.7. Conclusion on the balance between risks (6.2.5) and expected benefits/results (6.3.2) As the risk assessment at Annex 7a demonstrates, most of the risks facing the Falkland Islands are low. The major exception is the risk of external shocks where Government revenue and the economy are exposed and over which the Government has no control. This overall summary of the risks that are being faced is confirmed in the assessment in Chapter 6.2.5 above. The key mitigating factors are crucial. The accumulated reserve funds, with assets-to-GDP of around 200%, not only serves to protect the standard of living and level of social services enjoyed by Falkland Islanders from serious economic shocks, but also provides breathing space to adapt and diversify the economy to lessen the impact of future shocks. In the political sphere, the commitment of the UK to the Falkland Islands’ future and the stated intentions of the Falkland Islands, the UK and Argentina to resolve the sovereignty dispute by diplomatic means provide a high level of protection against political shocks.
By spreading the risk, the successful diversification of the economy will reduce the likely impact of future exogenous economic shocks to the economy. A significant increase in tourism and in earnings from meat and wool exports would provide ballast against both volatility in year-to-year income from the fishing sector and against a more general economic shock, as the impact of such is likely to vary across different sectors. Whilst not part of the 10 th EDF programme, successful diversification into oil is likely to have an even more pronounced impact in reducing the impact of future economic shocks.
50 Although the success of the diversification programme is in general dependent on whether the sectors involved can develop and sustain the required competitiveness, there are specific risks to both. With the Falklands Islands already experiencing full employment, a programme of managed immigration may be essential to avoid labour shortages. The major risks to obtaining the expected benefits from the 10 th EDF programme of economic diversification are that tourism and rural development will be squeezed out by oil-related development. Measures to increase port capacity and to ensure that there is sufficient labour available to meet demand should mitigate these risks. 6.4. Design and Implementation issues
6.4.1. Budget and timetable
Table 3: EDF 10 Base and Performance Tranches for Falkland Islands Budget Support Programme (EUR million)
Fiscal Year/ 2012/13 2013/14 2014/15 2015/16 Total
Type of Tranche
Base 1.03 0 0 0 1.03 tranche
Performance 0 1.0 1.0 1.0 3.0 tranche
Evaluation 0 0 0 0.1 0.1 & Monitoring
Total 1.03 1.0 1.0 1.1 4.13
The planned period for the disbursement of EU funding will be from mid-2013 to early- 2016. With the exception of the first tranche in 2013, EU disbursements will follow the government budgetary cycle. The necessary information for disbursement requests should be available during the 4 th Quarter of each calendar year.
The budget available to implement the action is detailed in Appendix I.
The indicative schedule of disbursements is summarised in the table above (all figures in million euros) based on the fiscal year of the beneficiary and developed in more detail at Appendix I (summary budget) and Appendix IX (planned complementary spending by the Falkland Islands Government).
51 The period of execution for this Programme commences on the signature of the Financing Agreement and ends 72 months later. This period of execution will comprise two phases, commencing with an operational phase for programme implementation of 48 months after signature of the Financing Agreement. This is followed by the closure phase of 24 months.
6.4.2. Procurement and grants award procedures
For evaluation and monitoring, all contracts implementing the action must be awarded and implemented in accordance with the procedures and standard documents laid down and published by the Commission for the implementation of external operations, in force at the time of the launch of the procedure in question. Participation in the award of contracts for the present action shall be open to all natural and legal persons covered by article 22 of the Overseas Association Decision (Council Decision 2001/822/EC as amended by Council Decision 2007/249/EC).
6.4.3. Criteria for disbursement The base tranche will be disbursed in full on the basis of fulfilment of the general conditions for budget support as follows: • Satisfactory progress with national policy on the basis of the implementation of the Islands’ Plan (2012-17) and using monitoring reports made by the Falkland Islands Government to demonstrate progress with implementation; • Satisfactory progress with the maintenance of a stability-oriented macroeconomic policy on the basis of the Falkland Islands Government’s assessment in their request for tranche release; • Improved public financial management on the basis of the Falkland Islands Government responding satisfactorily to recommendations made by their external auditors. The report of the external auditors should be submitted by the Falkland Islands Government together with an assessment of what follow-up government has made in light of the observations and recommendations of the external auditors; • Satisfactory evidence of transparency and satisfactory oversight of the budget on the basis of the Falkland Islands Government’s assessment in their request for tranche release
The performance tranches will be disbursed on the basis of fulfilment of the general conditions for budget support mentioned above and of specific conditions concerning the easing of specific constraints to economic growth and of progress with rural development and tourism development. The fulfilment of the general conditions for budget support will lead to a minimum release of 60% of the performance tranche. The fulfilment of specific conditions will contribute to the release of a maximum of 40% of the performance tranche. The emphasis is on easing constraints, as these are critical to achieving sustainable growth and diversifying the economy. The indicators judged to have achieved the expected results will be scored 1.0 and those considered to have made
52 progress without fully meeting the targets will be scored 0.5. Those not showing progress will be scored 0.
6.4.4. Performance monitoring The Falkland Islands’ Policy Unit will support the implementation of 10 th EDF support in co-ordination with other parts of the Falkland Islands’ Government. The Policy Unit will also facilitate discussions between the European Commission and the Falkland Islands’ Government.
The Policy Unit will provide disbursement requests for the release of the base tranche of budgetary support in 2013 and the performance tranches in 2014, 2015 and 2016. These will include the submission of appropriate analytical data, statistics, budgetary data, reports and other documents necessary to assess whether general and specific conditions have been met for the base and performance tranches. Such assessments will enable the European Commission to decide on the release of the funds.
A steering committee will be set up to monitor and support the implementation of the EDF programme. This committee will comprise the Head of the Policy Unit, a senior member of the Finance Department and a nominated member of the Legislative Assembly. It will call on the Falkland Islands Development Corporation, the Falkland Islands Tourist Board and members of the private sector as necessary.
Disbursement reports will be made available to the EU at the beginning of each calendar year (and during the third quarter of the financial year) when outturn figures and reports for the previous financial year become available. The required content of the disbursement reports is given in Appendix VII (especially paragraph 7) and Appendix VIII. The initial disbursement report will be made available in mid-2013.
6.4.5. Evaluation and audit All government expenditure is subject to annual audit, with the EU programme and Falkland Islands’ complementary expenditure subject to these standard procedures as laid out in the recent PFM update report 61 .
For every payment, the European Commission will request proof that the funds have been transferred to the relevant government account and of the exchange rate at which the funds have been credited.
As is the case for all EDF support, the programme will be subject to an external evaluation following the end of the implementation period. An amount of EUR 100,000 from the overall programme has been set aside for monitoring and evaluation as noted in the Budget Table, Appendix I. As the programme is relatively short, no mid-term reviews are planned.
61 Draft PFM Update: Falkland Islands EDF 10 , Paul Hare & Richard Stoneman, Transtec, May 2012
53 In parallel, the European Commission operates the results-oriented monitoring (ROM) evaluation system, which covers all activities funded by its Development Co-operation Financial Instrument (DCI) and EDF resources. This programme is decided on an annual basis by the Directorate General Development and Co-operation (DEVCO) Evaluation Service and funded separately from EDF programmes. Should the Falkland Islands programme be selected for a ROM evaluation, the Falkland Islands Government will cooperate with the Commission and its agents.
6.4.6. Communication and visibility Relevant information on the budget support programme, the financing agreements and performance reviews will be published on the Falkland Islands Government website and given publicity in the Falkland Islands’ media. The EDF programme will be explained and publicised on the government website and in the local media (such as Penguin News) whenever there is a development such as the programme being agreed, a disbursement application or funds paid.
54
9 Appendices I. Budget Table.
II. Country Data
III. Falkland Islands Map
IV. Government Structure
V. List of Key Documents
VI. Summaries of Revenue and Expenditure and Balance Sheet
VII. Eight Key Areas of Assessment
VIII. Performance Criteria and Indicators
IX. Falkland Island Government Expenditure and Commitments to Economic
Diversification
X. Environmental Profile
XI. Executive Summary of Rural Development Strategy
XII. Tourism Development Strategy
55
9.1 Appendix I. Budget Table
10 th EDF Base and Performance Tranches for Falkland Islands Budget Support Programme and contributions from Falkland Islands Government (EUR million)
Fiscal Year 2012/13 2013/14 2014/15 2015/16 Total
Type of Tranche
Base tranche 1.03 0 0 0 1.03
Performance 0 1.0 1.0 1.0 3.0 tranche
Evaluation & 0 0 0 0.1 0.1 Monitoring
Total 1.03 1.0 1.0 1.1 4.13
(10 th EDF)
Falkland Gov’t 1.73 1.79 1.71 1.69 6.92 Contributions
Note : Figures in the last row are also in EUR million. they are taken from Appendix IX which sets out the Falkland Islands Government planned spending on diversification activities. The Appendix IX table is mostly in £ sterling, but the last row, converted to Euros, gives the figures shown above.
56
9.2 Appendix II: Summary country data – Falkland Islands Surface 12,173 Sq. Km Geographic region South west Atlantic Population, total 2,563 (2012 Census) (excl. MPA) Membership of regional/international organisations UKOTA, OCTA, Commonwealth Parliamentary Association Population growth (average % past five years) 0% Life expectancy at birth (years) 75+ Fertility rate (births per woman) 1.7 Mortality of under 5 years (per 1000 children) 0 Illiteracy total 0% Illiteracy female (% age 15 and above) 0% Primary enrolment (% of relevant age group) 100% Secondary enrolment (% of relevant age group) 100% Secondary enrolment, female (% of age group) 100% Unemployment rate (% of labour force) 1% (2012 census) Unemployment rate, females (% of female labour force) 1.1% (2012 census) Poverty rate (percentage population below poverty line) 0% HIV incidence (per 1000 population) 0 Main natural resources (items) Fin Fish, Squid, Grasslands, Oil Inflation rate (GDP deflator) (average past three years) 2008, About 1% 2009, 2010 GDP per capita (GNI per capita) 2010 EUR 51,300 (£44,000) (EUR 19,100 (£16,400)) GDP growth (average % past five years, 2005-2010) 4% Value added in industry (% of GDP) 2010 5.2% Value added in services (% of GDP) 2010 22.6% Value added in agriculture (% of GDP) 2010 2.4% Value added in fishing (% of GDP) 2010 69.8% Exports of goods and services (% of GDP) 2008 128% Imports of goods and services (% of GDP) 2008 99% Number of tourists (2011) 35,200 (Cruise) + 6,650 (Land) External debt (percentage of GDP) 0% Foreign direct investment, flow n.a. Overall government budget balance (% of GDP) 2011 3.3% Fixed lines and mobile phones (penetration) Over 95%
57 Personal computers (per 1000 people) Over 600 Internet users (per 1000 people) Over 750
58 9.3 Appendix III: Falkland Islands Map
9.4 Appendix IV: Falkland Islands’ Government Structure (January 2013)
- 60 - 9.5 Appendix V: List of Key Documents
The Hierarchy of National Policy 1. The Islands’ Plan, 2012-2017 – A series that now comes out every one to two years 2. The Economic Development Strategy (2010), Part A – Setting the Scene; Part B – Strategic Direction , Falkland Islands Government, Stanley 3. Tourism Development Strategy (May 2011) 4. Rural Development Strategy (February 2011) 5. Annual and multi-year Action Plans to implement strategies 6. Departmental and Statutory Body Business Plans (linked to the above in terms of responsibilities for implementation and funding)
Budget and Finance 7. Treasury (2012a), Falkland Islands Government: Approved Estimates of Revenue and Expenditure for the Financial Year 2012/13 (Budget Book 2012-13), Stanley (version date: 27/6/12) – produced annually 8. Treasury (2012b), FIG Financial Instructions , Year 2012 Edition, Stanley – produced annually 9. ExCo (2011), ‘Budgetary Procedures 2012/13 onwards’, paper 245/11 , Executive Council, October 26th – produced annually 10. An external audit is produced annually, usually in November 11. Draft PFM Update: Falkland Islands EDF 10 , Paul Hare & Richard Stoneman, Transtec: May 2012 12. Preliminary Assessment of PFM, Procurement Procedures and Assessment of the Economic Situation for Overseas Territories under the 10 th EDF, Falkland Islands , Mark Q Watson, Linpico
Economy 13. Policy Unit (2009), The State of the Falkland Islands Economy , Falkland Islands Government, Stanley 14. Enhancing Atlantic OCTs’ Trade and Activity, Report on the Falkland Islands , Richard Stoneman, 2009
Other 15. Policy Unit (2012), Falkland Islands Census 2012: Headline Results , Falkland Islands Government, Stanley 16. Falklands Forecast , Issue 10, 1 st Quarter 2012, Falkland Islands Tourist Board – produced twice per year 17. The Falkland Islands Constitution Order , UK Parliament, 2008 18. Managing Risk in UK Overseas Territories , UK National Audit Office, 2007
9.6 Appendix VI: Budget Documentation, Revenue & Expenditure and Balance Sheet
Table 1. Falkland Islands Summary of Budget Documentation
Elements of budget documentation Availability
Macroeconomic assumptions , incl. at least estimates of aggregate growth, inflation and exchange rate (the last of these is redundant, as the Yes Falkland Islands, in effect, are in a currency union with the UK)
Fiscal deficit/surplus , defined according to GFS or other internationally Yes recognized accounting standard.
Deficit financing , describing anticipated composition. (Since the Islands normally budget for, and achieve, a surplus, and have large accumulated N/A reserves, this is not relevant)
Debt stock , incl. details at least for the beginning of the current year Yes
Financial assets , incl. details at least for the beginning of the current year Yes
Prior year’s budget out-turn , presented in same format as the budget Yes proposal
Current year’s budget (revised budget or estimated out-turn), presented in Yes same format as budget proposal
Summarised budget data for both revenue and expenditure , according to the main heads of the classification used, incl. data for current and previous Yes year
Explanation of budgetary implications of new policy initiatives , with estimates of the budgetary impact of all major revenue policy changes, and/or Yes some major changes to expenditure programmes
Source : Budget reports, Policy Unit Note : This table is an updated version of Table 11 from the 2009 Linpico report that first assessed PFM for the Falkland Islands.
62
Table 2: Comparative Data on Falkland Islands GDP, Revenue, Expenditure and Assets (Source: Budget Book, various years, and Policy Unit estimates)
Actuals: 2002/3 to 2011/12 (£ million)
2003/04 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 20 10/11 2011/12 - ESTIMATE Audit Opinion due December 2012 Millions Millions Millions Millions Millions Millions Mil lions Millions Millions Operating Revenue 35 35 44 46 43 42 44 62 65 Operating Expenditure 37 35 36 35 38 42 40 37 41 After depreciation, but before transfer payments Net Liquid Assets Carried forward 86 89 92 97 91 85 92 110 1 19 Net Assets Carried forward 164 167 172 180 176 171 180 200 2 09
Projected: 2012/13 to 2016/17 (£ million) Year 12/13 13/14 14/15 15/16 16/17 Operating Revenue 53 48 48 48 48 Operating Expenditure 46 43 43 42 42 Net Liquid Assets 117 117 117 117 118
Note. At the time of finalising this report, February 2013, the relevant exchange rate between pounds sterling and euros was: EUR 1 = GBP 0.8583
Table 3. Falkland Islands Revenues, Expenditures and Balance Sheet (Source, Budget Book 2012-13)
FALKLAND ISLANDS GOVERNMENT ESTIMATES 2012/13 ABSTRACT OF REVENUE BY DIRECTORATE
Actual Original Original Projection Projection Projection Projection 2010/11 Estimate Estimate for for for for 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 £ £ £ £ £ £ £ 1,423,277 110 Central 1,475,330 1,693,800 1,554,350 1,561,840 1,554,110 1,554,110 Services1 2,293,011 200 Health and 2,709,740 2,773,680 2,773,850 2,773,850 2,765,280 2,765,280 Education 7,037,137 350 Public Works 6,063,310 6,698,230 6,781,970 6,850,600 6,923,220 6,969,310 20,716,948 410 Natural 13,503,530 15,751,800 15,751,800 15,751,800 15,751,800 15,751,800 Resources 85,585 450 Attorney 94,080 91,280 94,280 97,280 97,280 97,280 General 3,414,117 550 Emergency 3,964,520 3,450,070 3,493,670 3,543,530 3,596,880 3,653,960 Services 179,195 600 Executive 18,650 10,700 10,750 10,800 10,850 10,850 Management1 700,828 620 Mineral 602,000 601,500 601,500 601,500 601,500 601,500 Resources 25,519,860 700 The Treasury 18,057,920 21,826,340 16,749,950 16,997,520 16,998,120 16,998,120 61,369,957 TOTAL DEPARTMENTAL 46,489,080 52,897,400 47,812,120 48,188,720 48,299,040 48,402,210 BUDGET TRANSFER PAYMENTS 75,777 999 Programmed - 25,000 25,000 25,000 25,000 25,000 Revenue for 2012/13 61,445,734 TOTAL OPERATING 46,489,080 52,922,400 47,837,120 48,213,720 48,324,040 48,427,210 REVENUE
64 ABSTRACT OF EXPENDITURE BY DIRECTORATE
Actual Original Original Projection Projection Projection Projection 2010/11 Estimate Estimate for for for for 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 £ £ £ £ £ £ £ 4,456,237 110 Central Services1 4,557,340 4,961,250 4,713,240 4,731,550 4,648,950 4,616,460 13,170,647 200 Health and Education 12,661,850 13,596,250 13,661,040 13,469,380 13,164,640 13,130,750 8,772,217 350 Public Works 8,876,730 10,388,300 10,452,190 10,456,140 10,361,020 10,147,310 5,807,772 410 Natural Resources 5,937,670 6,356,260 6,366,810 6,360,540 6,354,520 6,357,470 900,886 450 Attorney General 954,070 1,109,840 1,034,430 870,320 817,170 840,990 1,521,591 550 Emergency Services 1,780,600 1,987,080 1,919,450 1,973,410 1,904,210 1,948,880 1,811,528 600 Executive 2,076,650 2,133,810 1,956,200 1,981,850 1,871,560 1,888,510 Management1 400,889 620 Mineral Resources 597,060 520,110 513,090 510,590 513,090 513,090 1,554,183 700 The Treasury 4,577,470 4,566,410 2,766,530 2,793,610 2,783,330 2,782,290 38,395,949 TOTAL DEPARTMENTAL 42,019,440 45,619,310 43,382,980 43,147,390 42,418,490 42,225,750 BUDGET TRANSFER PAYMENTS 7,023,238 999 Programmed 3,890,560 4,344,990 4,619,050 4,600,770 4,672,420 4,718,540 Expenditure for 2012/13 45,419,187 TOTAL OPERATING 45,910,000 49,964,300 48,002,030 47,748,160 47,090,910 46,944,290 EXPENDITURE 1,043,493 Less Internal Recharges 921,160 1,066,290 1,056,820 1,056,370 1,055,320 1,055,320 3,500,254 Less Capital Charges 3,384,570 4,005,030 3,908,320 3,954,860 3,492,520 3,267,170 40,875,440 NET OPERATING 41,604,270 44,892,980 43,036,890 42,736,930 42,543,070 42,621,800 EXPENDITURE 3,862,000 Add Fund 3,862,000 4,362,000 4,362,000 4,362,000 4,362,000 4,362,000 Transfers 44,737,440 TOTAL APPROPRIATION 45,466,270 49,254,980 47,398,890 47,098,930 46,905,070 46,983,800
65 BALANCE SHEET AS AT 30 JUNE 2011
2010 2011 General Fund General Fund £000 £000 Fixed Assets 87,807 Tangible Fixed Assets 89,875 73,559 Investments – 80,963 Consolidated Fund 161,366 Total Fixed Assets and 170,838 Investments 3,587 Debtors falling due after 3,123 more than 1 year Current Assets 4,075 Stocks 4,345 7,015 Debtors falling due within 10,088 1 year 11,002 Cash at bank and in hand 17,765 22,092 Total Current Assets 32,198 (5,757) Creditors due within 1 (5,779) year 16,335 Net Current Assets 26,419 181,288 Total Assets Less 200,380 Current Liabilities (349) Creditors falling due (310) after more than 1 year (921) Provisions for liabilities (19) 180,018 Net Assets 200,051 Financed by Taxpayers’ Equity: 180,018 General Fund 200,051 180,018 General Fund 200,051
Note. The relevant exchange rate between pounds sterling and euros was: EUR 1 = GBP 0.8583
9.7 Appendix VII: Eight Key Areas of Assessment
1. National Development Policy and Strategy The Falkland Islands now has a hierarchy of interlinked development policy and strategy documents (see Appendix V above) that provide a strong and effective framework for all aspects of development on the Islands. These documents are updated and revised regularly to take account of progress with various projects, new events and opportunities, and evolving economic conditions. All documents are discussed by the ExCo and/or by the Legislative Assembly before final approval and publication, and all are based on extensive discussion within the relevant government departments, often accompanied by extensive public consultation. Hence aside from providing a strong framework for operational policy, the whole process of formulating and updating the Falklands development policy and strategy is impressively open and transparent.
Together with the macroeconomic policy and budgetary processes, these reports provide a robust set of management tools both to project forward likely scenarios for the Falklands Islands economy, and to manage the process of achieving Falkland Islands Government goals for the people of the Islands.
2. Macroeconomic Policy For a small highly open economy such as the Falkland Islands, macroeconomic policy is both less complex and more constrained than it would be for a larger economy such as that of any EU member state. Nevertheless, there are still issues of economic management to be considered, some of which are covered in the areas outlined below. The key features of Falkland Islands economic policy can be summed up as follows: • Monetary policy . There is a Falkland Islands pound, which is in monetary union with the pound sterling and exchanges at a rate of 1 Falklands pound to 1 pound sterling. This means it is important for FIG to manage public sector wages and any other costs over which it has some control to keep prices (and inflation) more or less in line with the UK. Such control is essential to maintain the competitiveness of Falkland Islands exports. • Foreign exchange balance . A mix of trade flows, fees (e.g. fishing licence income) and profit transfers (e.g. fishing company profits transferred back to Europe) are managed to maintain approximate balance in the Islands’ current account. • Fiscal policy . With near full employment and some temporary labour brought in to make up for manpower shortages, there is clearly no need to use fiscal policy to achieve full employment. Moreover, the near-free movement of (in coming) labour helps to relieve labour market pressures and hence limit inflationary pressures. Taxes are low and stable, providing attractive conditions for business formation and development. As detailed below, the budget is managed cautiously to accommodate fluctuating fishery revenues while, on average, delivering a modest surplus and enabling the Government to maintain financial reserves amounting to two-and-a-half times annual budget spending.
3. Public Financial Management (PFM) PFM in the Falkland Islands is embedded into the annual budget cycle, with provision for regular learning and updating of practices, procedures and outcomes. This learning process occurs through the internal and external audit reports; through reviews of
- 67 - revenues and spending at departmental level; and through experience gained from planning and implementing projects at all levels. No doubt there is also a limited amount of learning from international experience, such as from other OCTs via meetings of the OCTA Forum.
The current Islands Plan (2012-17) provides the broad framework within which the budget for a given fiscal year (running from July 1st through to June 30 th ) is elaborated, though the detailed budget depends on recent out-turns, the plans and bids from departments, and the medium-term expenditure framework (see below). The Treasury always aims to budget cautiously, in part to provide some security against the fluctuations of fishery revenues. Balance, or a financial surplus, are sought, with a view to maintaining financial reserves of around two-and-a-half times annual budgetary spending.
This eminently cautious approach to budgeting and public financial management has served the Islands well in recent years, enabling public spending to remain stable in the face of rather severe economic shocks. As a result, although there is modest pressure to cut back spending in some departmental budgets, this has been managed well to protect key services to the public. Overall, the Islands’ PFM system works well, is open and transparent (see below), and is subject to annual review and improvement.
4. Transparency and Oversight of Budget The Falkland Islands Government’s PFM arrangements include extensive procedures and processes resulting in clear oversight of all budgetary matters and in extensive transparency.
Budgetary Procedures are updated annually in a document that goes to Executive Council for approval and which includes clearly set out processes and a timetable. There is an extensive round of budgetary preparations and reviews involving a wide-ranging oversight by civil servants, the Budget Select Committee and ultimately the Legislative Assembly.
At the end of this process, the full budget is published, as are various other documents. As PFM reports have confirmed, financial management is carried out to a high standard, with clear checks and balances and oversight. Internal and external auditing are carried out to a high standard on a timely basis with the Public Accounts Committee being open to the public. Issues arising from the audit processes are reported to ExCo and the Legislative Assembly, and necessary follow up action is undertaken promptly.
The Falkland Islands Government takes transparency seriously and engages in exhaustive public consultations concerning the regularly updated Islands’ Plan to develop national ownership. A similar process was undergone for the EDS. As well as developing a high degree of consultation and transparency with the Falkland Islands’ community in general, regular and open discussions between the Government, the Falkland Islands Development Corporation and the Chamber of Commerce play a key role in developing and taking forward an agreed and workable economic strategy.
5. Budget and Medium Term Expenditure Framework The Medium Term Financial Plan (MTFP) covers the current year, the forthcoming budget year and four further years ahead, and is updated as part of the Falkland Islands’
- 68 - annual budget cycle. The estimates resulting from the MTFP are included in the Budget Book published in May or June as part of the documentation submitted to the Legislative Assembly for approval of the annual budget ordinance. Background papers supporting the MTFP projections are available in Treasury, and are periodically submitted, in summary form, to ExCo as part of the Islands’ general policy of openness.
The MTFP is synchronised with the Islands’ Plan and the hierarchy of government policies and strategies emanating from that. In other words, the resulting sector action plans and departmental business plans are developed into funding plans that are built into budget plans.
In line with long-standing Government policy, the most recent update of the MTFP, included in Budget Book 2012-13, provides for the achievement of small budget surpluses in each of the coming five fiscal years. Moreover, as usual these projections are based on cautious forecasts of fisheries revenues and low estimates of likely economic growth rates. The financial plan (expenditure framework) is built up from initial departmental estimates and judgements, supplemented by queries and issues for discussion from Treasury, and concluded where necessary with overarching Treasury judgements to ensure overall consistency with budgetary goals, in the framework of the Islands Plan.
The final MTFP is available as a fairly simple Excel spread sheet model, where all the underlying assumptions are clearly set out. This financial framework is well managed, and functions very satisfactorily for a small economy such as the Falklands.
6. Donor Co-ordination As the EU is the only official aid donor to the Falkland Islands, the issue of general donor co-ordination does not arise.
However, the issue of co-ordination between the Falkland Islands Government and the EU Commission is an important one because of the remoteness of the Falkland Islands. The UK Foreign & Commonwealth Office plays a co-ordination role, as does the Falkland Islands Government Office in London. Dialogue between the EC Services and the UK is regularly held through structured meetings, such as the OCTA Forum, and through ad hoc meetings as necessary.
7. Performance Measurement In considering performance measurement, it is important to consider the minute size of the Falkland Islands’ public administration, which is illustrated by the fact that the full complement for the Treasury (i.e. Ministry of Finance) is 15, for the Executive Administration, 9, and for the Policy Unit, 2. As has been demonstrated by GDP figures not being as up-to-date as might be desirable, the temporary loss of one or two staff or an irregular major piece of work, such as the Census carried out in 2012, can have a substantial impact on the speed at which non-statutory work or new initiatives are taken forward.
It has been proposed that total 10 th EDF funds, excluding the amount for auditing and evaluation, should be divided into a base tranche of EUR 1.03 million in the first year (2013), followed by three annual performance tranches of EUR 1 million each.. The base tranche would be released on fulfilment of the four 10 th EDF general eligibility criteria,
- 69 - while the performance tranche for each successive year would be based on the general eligibility criteria (up to 60%) and on three specific performance indicators (for the remaining 40%).
The thinking behind this division is, first, that the most important facet of the Government’s policy stance are its overall policies for sustainable growth and economic diversification in an economy that is now likely to be subject to rapid change.
Second, the performance indicators for the performance tranches are purposely tilted towards policy implementation that will have economy-wide impacts, rather than on the narrower aspects of economic diversification. In this respect, it is important that two key constraints to economic growth be addressed and the variable tranches address each of these. At the same time, the Government has already been implementing GGDC policies well throughout the 10 th EDF period by carrying out the agreed complementary spending. Hence, had the programme been prepared earlier, the Government would most likely already have met the specific requirements for the performance tranches. It would thus be rather unfair if specific narrow targets were now missed as a result of the positive economic shock that the economy has just experienced.
Key documents are listed in Appendix V above and those produced regularly should be included in the disbursement files for meeting the general conditions of 10 th EDF and for the release of the performance tranches of funding. The documents produced regularly mainly concern the budget and financial management. As these include an annually updated Medium Term Financial Plan, an external audit and regular updates and improvements in procedures, they should be sufficient, with a short additional commentary, to satisfy the general conditions concerning the macroeconomic situation, financial management and transparency. Reports on progress with the appropriate elements of the Islands’ Plan should be sufficient as the condition concerning national strategy.
The disbursement files should also include an annual statement on economic diversification, which should detail allocations made to the various components of economic diversification and the sources of funding.
The accompanying commentary with the disbursement files should, first, signpost the data and analysis that is pertinent to satisfying the general conditions. Second, it should draw particular attention both to changes and new developments and to progress and improvements that are relevant to satisfying the general conditions. Third, the commentary should demonstrate the extent to which the performance indicators have been with relevant documents also included in the disbursement files with appropriate signposting and explanations.
8. Institutional Assessment and Capacity Development Despite its very small size, the Falkland Islands have well-functioning political and legal institutions. There was also a fundamental review of government in 2008, carried out by the then new Chief Executive. This led to substantial reform and modernisation in the Islands’ small administration.
- 70 - This has been followed by a review of the review in early 2012 62 , carried out by a former Permanent Secretary in the UK civil service, to assess whether or not the 2008 review had produced successful outcomes. The overall conclusion of the 2012 report is that the changes have been a qualified success. Whilst substantial change was required, the scale of what was attempted has led to some change management problems and some resistance. A few of the measures introduced were also not appropriate to such a small administration. In time, and with sensitive leadership, the residual resistance to change can be overcome. Nevertheless a more modern and streamlined government administration, and one that is much better able to take advantage of new opportunities, has emerged.
These improvements in government are important for economic diversification. The less conservative administration that has emerged, and one that has improved management capabilities, is important for facilitating significant structural change in the economy. Economic diversification will not only reduce the Falkland Islands’ dependence on fish but also reduce the dominance of government over the economy. The emergence of a stronger and more vibrant private sector is clearly a desirable outcome of economic diversification and one that will make the Islands’ economy and society more sustainable.
At the same time, capacity development will always be a serious constraint in such a small community as the Falkland Islands. The institutional changes over the last few years, not least those that have focussed on producing a cohort of young island leaders, have helped relieve that constraint.
62 A Review of the 2008 Review of the Falkland Islands Government , February 2012, Irene Lucas, CBE
- 71 -
9.8 Appendix VIII: Performance Criteria and Indicators
The thinking behind the performance criteria is given in item 7, Performance Measurement, of Appendix VII above. This includes the requirements for the disbursement files for the release of 10 th EDF base and performance tranches. The logic behind the performance indicators is developed in Table 1, immediately below. This is followed by Table 2, which details the specific performance indicators for the release of the performance tranches. Table 1: Falkland Islands, EDF10: Performance Indicators and their Logic Intervention Logic Objectively Verifiable Indicators Sources of Verification Assumptions /Remarks Overall The development of a Non-fishing components of GDP The overall objectives will not Continued macro-economic stability and good Objectives diversified and sustainable expected to grow over the medium to be verified by specific statistics quality public financial management. economy delivering improving long-term. but rather by the overall Continued official support for new businesses, living standards for the people disbursement reports. diversification, and public infrastructure of the Falkland Islands. improvements. These reports will include Falkland Islands Government reports and statistics.
In any event, GDP statistics, which are produced by the Secretariat, are only available after unavoidable lags. Programme To support economic Growing exports, especially from new Export statistics produced Careful use is made of these and other Purpose diversification and export activities and rural areas (meat, wool). annually. statistics, as some are not immediately development on the Falkland Higher levels of tourism activity. Agricultural statistics produced available and others are not under Islands; and to support rural annually, including output data. Government control and, because of other development as part of the factors, may not respond as predicted in Cruise ship visitor numbers and broad diversification agenda. response to government programmes. longer-stay numbers reported annually.
Intervention Logic Objectively Verifiable Indicators Sources of Verification Assumptions /Remarks Continued • National Policy • Islands Plan (2012-2017), gives • Regular monitoring reports by • Continued eligibility should be based on Eligibility To protect and improve the eleven key policy areas and each the Falkland Islands satisfactory progress with implementation quality of life of Falkland area is rolled down into key actions. Government to demonstrate of the islands plan. Islands people and • The Islands Plan is updated every progress with implementation • “Satisfactory progress” means that some community. one to two years so progress should of the Islands Plan. actions have been taken during the period in be verified against the latest plan. question in some of the policy areas covered by the Islands Plan so that it can be demonstrated that some progress has been made since the previous year. • Macroeconomic Stability • Fishing revenues, which fluctuate • Fishing licence revenues from • Continued eligibility should be based on the To guard against the substantially from year-to-year and outturn budgets. maintenance of established stability- vicissitudes of the Falkland remain a high proportion of GDP. • Medium-Term Expenditure oriented macroeconomic policies. The key Islands main source of • Fiscal policy, which is used to Framework (MTEF). issue in judging macroeconomic stability is how fiscal policy, including the multi-year income to enable the accommodate fluctuating fishing • Financial reserves and planned framework, responds to revenue volatility. sustainable delivery of a high revenues. adjustments in them. standard of living and good • • Foreign exchange balance and GDP figures The level of government net assets • All, as per Budget Book. social and welfare services. and liquidity. not available in time to be sources of verification. • Public Financial • Each stage of the process occurs at a • Preferred source would be • Continued eligibility should be based on Management (PFM) fixed point of the budget year and is external audit with auditors improved PFM defined as the Falkland How this is done and reported to ExCo. giving a view that government Islands Government responding reported sets the framework • Auditing of Falkland Islands has responded satisfactorily to satisfactorily to recommendations made by for everything else to do with Government operations and its recommendations. the external auditors. “Satisfactorily” means economic policy. budgets. Specific sources are: • Alternative source would be responding to recommendations either by Budget Book, Financial more detailed government taking appropriate action or by looking into Instructions, Budgetary Procedures, report demonstrating that it has the issue raised. internal audit reports and external responded satisfactorily. • Well-established system assumed to remain audit. in place and function well. • Transparency and Oversight • Regular budgeting and reporting • Published government • Continued eligibility should be on the basis of the Budget cycle with open discussion and documents and government of satisfactory evidence of transparency and In line with established publication of reports, including website. of budgetary oversight. “Satisfactory” government policy to PFM reports, as above. • Public consultations reported means evidence of a continuation of current provide full information to on government websites and in practices. the public Penguin News.
- 73 - Intervention Logic Objectively Verifiable Indicators Sources of Verification Assumptions /Remarks Results Tourism • A growing tourism industry is the best (As a basis prospect for successful economic diversification for practical • New Air Link performance • • indicators Securing a new passenger air Achieve defined stages in the Tourism Development service (scheduled or preparation and implementation of Strategy • A new air link is crucial to the growth of for 10th tourism and the development of the charter) between the these projects. • Falkland Islands Government EDF) economy. Falkland Islands and North • International air passenger arrivals reports or South America. • ExCo Reports
• New jetty in Stanley • Improvements in Stanley’s tourist • Construction completed • Falkland Islands Government infrastructure and services will help attract reports higher tourist numbers.
• Accreditation scheme for • Scheme launch documents • Tourist Board Documents • hotels, guest houses & Improved services important to sustain • accommodation • Visitor numbers & visitor spend Annual tourism statistics higher quality and growing tourism
• Agriculture . Together with • Achievement of 4 strategic • Rural Development Strategy For agriculture , the aims are to: tourism, this is seen as key to objectives specified in Rural 2012-2017 • Improve the value of economic activity in improving rural livelihoods Development Strategy • Rural Development Strategy Camp by 20% by 2017 (measured in terms and hence making life in • Spending on 18 projects in the Action Plan 2012-13 (and its of Gross Value Added (GVA) generated in Camp more economically Rural Development Strategy Action successors) Camp) viable. Plan for 2012-13 • Progress reports to • Increase the economically active population • Exports of agricultural products Government and ExCo in Camp by 5% by 2017 (though less good as an indicator as • Agriculture Department • To broaden services available in Camp and only partly under Government statistics and other reports thereby to improve the quality of life control) • To manage, protect and conserve the environment. • Economic Development/ • Stages of progress with the policy • Policy Unit and ExCo reports, • Population and workforce have been static Immigration Policy . This is review ExCo decisions and on the Falkland Islands, with economic a policy area urgently • Stages of implementing the review legislation. expansion depending on needing review and the imported/temporary workers, high Policy Unit has started the participation rates and islanders taking
- 74 - Intervention Logic Objectively Verifiable Indicators Sources of Verification Assumptions /Remarks process. more than one job. • Sustained growth in the future will likely need a higher permanent population and it is time to be considering the implications of this. • In longer term, potential oil development will also call for a larger workforce to service the activity.
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Table 2: Specific Performance Monitoring Indicators for Performance Tranche Disbursement
The fulfilment of the general conditions for budget support will lead to a minimum release of 60% of the performance tranche. The fulfilment of specific conditions will contribute to the release of a maximum of 40% of the performance tranche. The emphasis is on easing constraints, as these are critical to achieving sustainable growth and diversifying the economy. The indicators judged to have achieved the expected results will be scored 1.0 and those considered to have made progress without fully meeting the targets will be scored 0.5. Those not showing progress will be scored 0.
From the Log Frame Indicators for 2013/14 Indicators for 2014/15 Indicators 2015/16 Remarks/Assumptions Purpose:
To support economic diversification and export development on the Falkland Islands; and to support rural development as part of the broad diversification agenda. Results: Sustainable economic growth through economic diversification by removing key constraints to growth and by assisting with the development of specific sectors.
1. Improved tourism infrastructure.
1. Tourism 1. Tourism 1. Tourism 1. Tourism
a. Business Case for new air link a. Action plan and budget to a. Increase in international air If ExCo makes a negative decision developed by December 2013 , enable a new airlink in place by passenger arrivals on to go ahead with a new air link , the as evidenced by Falkland June 2014, as evidenced by previous year. remaining indicator should be used Islands Government written government reports and budget as the single tourism indicator for report. – contingent on ExCo decision the last two years of the programme. to go ahead
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b. New jetty in Stanley completed b. Accreditation scheme for hotel, b. Increased visitor spend per by December 2013 guesthouse and other capita on previous year accommodation launched by June 2014.
2. Increased economic 2. Agriculture 2. Agriculture 2. Agriculture 2. Agriculture activity in Camp To demonstrate satisfactory To increase the value of To increase the value of Progress is based on the targets in progress with the 2012-13 Action economic activity in Camp by economic activity in Camp by the Rural Development Strategy, Plan as evidenced by delivery of 10% (measured in terms of Gross 15% by (measured in terms of rolled out in detail in the 2012-13 project outcomes. Satisfactory Value Added (GVA)) on the base Gross Value Added (GVA)) Action Plan. Should the national means that progress has been made year of 2011/12. on the base year of 2011/12. targets for GVA be significantly against most of the projects revised for later years in light of identified in the action plan . experience, consideration should be given to revising the indicators.
- 77 - 3. Labour market policy 3. Immigration 3. Immigration 3. Immigration 4. Immigration aligned with the desired rate of development Immigration Review commences, Decisions on recommendations Implementation of ExCo A study for a review of including community consultation of Immigration Review made by decisions underway, as immigration , led by the Policy
(June 2013), as evidenced by ExCo (June 2014). evidenced by necessary Unit and reporting to ExCo and consultancy contract and/or legislation, enabling orders or MLAs, which will include the rights announcements on government other appropriate actions of investors and settlers has been website. (December 2015). agreed.
Weight given to indicators 10% to tourism and 15% to 10% to tourism and 15% to 10% to tourism and 15% to Note: In this row, percentages agriculture indicators with tourism agriculture indicators with agriculture indicators with should be understood to mean divided into 2 as indicated; 15% to tourism divided into 2 as tourism divided into 2 as percentage points. Labour Market indicated; 15% to Labour Market indicated; 15% to Labour Market Note. These indicators are to be used to measure the specific criteria for the Performance tranche (up to a maximum of 400,000 euros)
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Appendix IX: Falkland Islands Government Expenditure on Economic Diversification
Project Dept\Year Up to 2012/13 2013/14 2014/15 2015/16 Total Total 2011/12 (2008-16) (Over 10th EDF) Agricultural diversification and rural development Development of meat industry (Abattoir) FS 1583 187 1770 187 Dairy project FIDC 121 121 Improvement in wool returns FIDC 135 135 Grassland improvements DoA 350 350 Farm improvements programme DoA 625 190 190 190 190 1385 760 Agriculture business development DoA 44.5 5 5 5 5 64.5 20 Rural development strategy FITB/FIG 1185.5 250 1435 250 Import substitution programme FIDC 0 250 250 250
Other economic diversification activities Aquaculture development FIDC 595 595 Environmental research institute Policy Unit 41 97.5 94 55 287.5 246.5 Research into new industries FIDC 45 45
Tourism development Tourism marketing and development FITB 1605 462 659 725 730 4181 2576
Immigration review Recruitment of specialist advisor Policy Unit 50 50 50
Infrastructure and oil-readiness programme Oil readiness review Policy Unit 267 217 484 484 Economic development (reserve fund allocation) Policy Unit 410 410 410
FIDC subvention (future years' allocation) FIDC FIDC 590 492 521 1603 1603
TOTALS (with oil readiness) 6330 1818.5 1905 1617 1446 13116.5 6786.5 TOTALS (without oil readiness) 6330 1491.5 1538 1467 1446 12272.5 5942.5
TOTALS (without oil readiness) EUR’000 737 5 6924
Source : Policy Unit, Falkland Islands Government Notes 1. Figures are in £'000 (except last row) 2. The relevant exchange rate between pounds sterling and euros (February 2013) was: EUR 1 = GBP 0.8583 3. The first column of data sums up spending in the years 2008/9 to 2011/12 (i.e. before 10th EDF funding comes into effect) 4. The next 4 columns show spending over the period planned for the 10th EDF contract. 5. Totals are shown with and without oil-readiness spending, since oil was not an active policy area when the SPD was first drafted, and EU support is not being sought for oil-related infrastructure spending. 6. Spending on diversification activities from 2008/9 to 2011/12 was £6330000, and the planned spend over the 10th EDF contract period is £5942500 (excluding on going and planned oil readiness spending) 7. Years are FIG financial years (running from July-June each year.
Note that the rows in the above table for farm improvements, tourism marketing, and FIDC each refers to a range of different projects that will be on going during the 10 th EDF implementation period; some projects will come to an end while others commence. Disbursement reports for each year will provide additional detail, as required.
- 80 - 9.9 Appendix X: Environmental Profile
The most comprehensive report on the environment of the Falkland Islands was published in 2008 by the Environmental Planning Department of the Falkland Islands Government, and Falklands Conservation. Entitled: Falkland Islands – State of the Environment Report 2008 , its 288 pages are divided into 12 major chapters plus references and a glossary, and they review in some depth all aspects of the territory’s environment. The summary of the report picks out the key facts and policy issues, and the next few paragraphs are drawn from the summary, with some editing:
‘The ‘State of the Falkland Islands Environment 2008’ report documents the current knowledge of the Falkland Islands environment, both on land and at sea, of the geology, meteorology, oceanography and biology. It also describes the current human population, social infrastructure, and commercial and recreational activities undertaken within land and marine habitats. The report highlights processes that threaten Falkland Islands wildlife and identifies some key conservation policies required to mitigate these threats. A summary of the geo-diversity and biodiversity assets and land-use and marine-use activities are described below.
‘The Falkland Islands have a cool temperate oceanic climate, dominated by westerly winds and low annual rainfall (450 – 600 mm/year). During the last 50 years, there has been a drying and warming of the climate, both on land and at sea, but in the long-term, it is likely to be cooler, more cloudy and rainy in the Falkland Islands. However, there has been little analysis of the land or oceanographic climate data available for the Falkland Islands to develop predictive models in order for the Falkland Islands community to prepare for the ramifications of global climate change.
‘The majority of Falkland Islands animals and plants show strong affinities to Patagonian South America. As the Falkland Islands is on the edge of the Patagonian shelf, there is an abundance of demersal and pelagic marine species, which provide rich foraging for seabirds and marine mammals, which often have strong connections with the land environment.
‘Nineteen land habitat types are recognised in the Falkland Islands. The lower and non- vascular plants (e.g. freshwater algae, liverworts, lichens and fungi) are poorly studied in the Falkland Islands, whilst 21 species of ferns and clubmosses have been recorded. The vascular flora consists of 363 species, with 171 native species and 13 endemic species. Most plant species found in the Falkland Islands, including endemic species, occur over a wide range of altitudes, soil types, habitats and exposures.
‘In a land without native trees, reptiles, amphibians or terrestrial mammals, insect life forms a very important part of the Falkland Islands ecology. Insects perform a critical role in the breakdown and recycling of organic matter, the formation of soil and at all stages of their life cycle, insects are important food sources for a variety of birds. Twelve species of earthworm, 43 species of spider and nearly 200 species of insect are reported for the Falkland Islands, although many collected specimens remain to be fully analysed. Thirteen terrestrial invertebrates are currently recognised as endemic.
The avifauna of the Falkland Islands is fairly well documented, with 21 resident land bird species, 18 resident water birds, 22 breeding seabirds and 18 annual non-breeding migrants
recognised and at least 143 species recorded as occasional visitors. The Falkland Islands support globally significant numbers of a number of species, as well as two endemic species and 14 sub-species. Under IUCN classification, there are ten species of global conservation concern here.
‘The importance and value of the biodiversity and ecosystem processes in the Falkland Islands is clear, both economically and in the sense of national awareness and well-being. The future of the Falkland Islands hinges on the sustainable use of our resources and on our success in balancing the needs of the community, government and environment. There are 15 processes that threaten the biodiversity of the Falkland Islands, some needing to be addressed more urgently than others. The development and implementation of a Biodiversity Strategy will prioritise required actions to address the critical threats. These actions should be developed in line with social and economic developments and policies currently in place in the Falkland Islands.’
Following this report, the Falkland Islands Government prepared and published the Falkland Islands Biodiversity Strategy 2008-2018 , focusing on a range of biodiversity threats, priority species, and significant habitats. Subsequent work has involved developing action plans to deal with some of the highlighted concerns, though resource constraints have meant that the pace of such work has been quite slow. However, the right framework is in place, and there is a high level of environmental awareness in the Falkland Islands, with no major development being undertaken without a careful assessment of its likely environmental impact.
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9.10 Appendix XI: Executive Summary of Rural Development Strategy
1. Executive Summary
1.1. This, the Falklands’ first Rural Development Strategy (RDS), sets out a comprehensive response to the development needs of the Falkland Islands rural hinterland, known locally as Camp. The strategy has been designed to address the needs of Camp over the next 5 years (2012-2017). The strategy provides a route map for the future development of Camp, identifying the policies required to achieve sustainable growth in Camp. A detailed Action Plan for delivery of the strategy will be published in mid-2012 following a period of review and consultation.
1.2. It is fully intended that the Rural Development Strategy be an integrated response to the economic, social, environmental and community issues confronting Camp. In doing so it is recognised that the RDS must operate successfully alongside the national Economic Development Strategy (EDS) and must complement and reinforce the aims and objectives of both the EDS and the emerging Tourism Development Strategy (TDS). Fundamentally the RDS is intended to ensure that Camp contributes to, and benefits from, growth of the Falkland Islands economy.
Key Issues and Opportunities
1.3. Camp plays an important role in the social and economic fabric of the Falkland Islands, underpinning important areas of economic activity such as tourism and agriculture. Its natural and cultural heritage adds to quality of life and helps reinforces a sense of place.
1.4. However a number of significant issues and opportunities currently confront Camp. The success of the Strategy will depend on its responsiveness to these challenges. The research and consultation undertaken in the preparation of the Strategy suggests that the most pressing of these challenges are:
••• The population of Camp is declining and lacks the critical mass needed to support private sector enterprises providing consumer services (such as retail, entertainment, hairdressing etc). There is a need to improve the delivery of essential services both through growth in private consumer services and in the delivery of essential public sector services such as health and education.
••• The Camp economy is almost entirely dependent on agriculture and tourism. There is a need to extend the breadth of economic activities in Camp through the development of new economic activities and by supporting continued diversification within the agriculture and tourism sectors.
••• Agriculture remains the primary economic activity in Camp. There are opportunities to increase the sustainability and profitability of farming activities by increasing the volume and value of meat and wool production.
••• Whilst the exceptional natural environment and biodiversity in Camp are already well-regarded assets for attracting tourism to the Islands, scope exists for adding value to the Camp tourism product and increasing the profile of the Camp tourism offer.
••• Whist Camp is home to a number of successful entrepreneurs, there is a need to foster greater levels of entrepreneurship to drive the formation of new businesses in Camp – and to provide the necessary advice, guidance and other support (including access to finance) that entrepreneurs and fledgling business will require to be successful.
••• Scarcity of labour in Camp presents a threat to the sustainability of existing businesses and will constrain any future business growth and new business formation. Low levels of skills also present a barrier to growth.
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••• Underdeveloped infrastructure in Camp discourages new investment and new business formation. Improving provision of efficient, reliable and affordable premises, utilities and communications will be essential in seeking to establish new businesses and new industries in Camp.
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The Vision
1.5. The process undertaken to produce this strategy (which involved the private sector, government and extensive consultation with those living in Camp) led to the development of the following ‘mission statement’ for the Falkland Islands Rural Development Strategy:
To maintain Camp in order to encourage a well-populated, economically and socially sustainable community integrated within the national economy.
Strategic Objectives
1.6. To deliver this Vision, the strategy proposes four overarching strategic objectives:
••• Strategic Objective 1: To increase the value of economic activity in Camp by 20% by 2017 (measured in terms of Gross Value Added (GVA)) generated in Camp 63
••• Strategic Objective 2: To increase the economically active population of Camp by 5% by 2017
••• Strategic Objective 3: To broaden the range of services available in Camp and increase accessibility of both public and private services for Camp residents, so as to lead to an overall improvement in the quality of life in Camp.
••• Strategic Objective 4: To manage, protect and conserve the natural environment.
1.7. These overarching strategic objectives have been translated into five Key Priority Areas for action:
••• Key Priority Area 1 - Business Growth and Development: developing a more productive and dynamic business base in Camp
••• Key Priority Area 2 - Workforce Development: increasing the size of the Camp labour force and improving skills and training to provide a flexible, adaptive and highly skilled workforce.
••• Key Priority Area 3 – Services: improving access to services and expanding service provision to better serve the needs of the current population and to make Camp an attractive destination for new residents.
••• Key Priority Area 4 - Infrastructure: providing the infrastructure required to drive growth in the economy and improve the quality of life in Camp.
••• Key Priority Area 5 – Environment: Managing, protecting and conserving the natural environment of Camp.
1.8. Each priority area is supported by a number of operational objectives that will guide the actions and deployment of resources needed to realise the goals of the strategy. The overall approach is summarised in the following diagram.
63 GVA is a measure of the value of the goods and services produced in the economy.
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Falkland Islands Rural Development Strategy
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Implementation
1.9. The success of the Strategy will depend in large part on developing an effective and collaborative approach to implementation. A Rural Development Strategy Steering Group will be convened to oversee the delivery of the Strategy. The membership of this group will include FIG, private sector and community representatives.
1.10. For the Strategy to achieve its full potential it will be necessary to secure funding from potential partner organisations (including the private sector) and other funding sources – such as the European Development Fund. A partnership and collaborative approach will be needed to ensure the successful implementation of the Strategy. The costs of implementing the strategy are expected to be met through investment from FIG and other public and private sector sources.
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9.11 Appendix XII: Tourism Development Strategy
1.0 Background
1.1 A Tourism Strategy for 2008 – 12 was developed during 2008 and has been followed since that time. However the development of the Economic Development Strategy (EDS) led to some new thinking and the Tourism section of the EDS was not consistent with the existing strategy. As a result it was decided to reconsider both documents and develop a single Tourism strategy for the next few years, which fitted both existing thinking and the new thinking of the EDS.
2.0 Tourism Strategy
Markets
2.1 As with any good business planning, the Tourism strategy group focused its initial work on considering target markets in both geographic and demographic/economic terms.
2.2 The key determinants of appropriate market segments are:
• The inherent nature of the Island’s product in terms of environment and wildlife • The limited nature of the infrastructure • The high cost of travel
2.3 Taken together these factors point towards the Islands as a ‘high value, low volume’ market.
2.4 The group considered where future growth in this general market segment might most likely be obtained taking in to account geographic location, transport, nationality and language. It also considered retention/expansion of existing markets. The following was identified:
Target segment Reasons Characteristics
North America – wealthy Significant wealthy sectors Require straightforward retirees and employed looking for premium travel and high degree of holidays with comfort and care. High environmental and standards of adventure components accommodation and activity Significant and growing numbers of US tourists in Chile
United Kingdom: Continued potential to grow Niche sectors/enthusiasts in existing niche segments have high tolerance/limited • Wildlife/fishing/military according to marketing requirements and will
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History enthusiasts effort, cost, travel and probably respond to (existing niches) activities marketing efforts and cost containment • Wealthy retirees and Additional potential to grow employed in to more general high More general environmental quality environmental holiday niche will be more holidays (assuming cost and cost sensitive and have travel issues resolved) higher expectations re accommodation etc
North-west Europe – Continued potential to grow Niche sectors/enthusiasts Germany and Holland: in existing niche segments have high tolerance/limited according to marketing requirements and will • Wildlife/fishing/military effort, cost, travel and probably respond to history enthusiasts activities Additional marketing efforts and cost (existing niches) potential to grow in to more containment (plus travel general high quality issues from these areas). • Wealthy retirees and environmental holidays employed (same as UK) (assuming cost and travel More general issues resolved) environmental holiday niche will be more cost sensitive and have higher expectations re accommodation etc
Existing cruise vessels Retaining existing volumes Limited time on shore and (large; day visits) should be do-able and limited budget. Need to makes obvious sense: but carefully tune retail offers achieve increased spend per on Waterfront head by offering more/better opportunities to spend
Expedition cruise vessels Potential of this segment is Travel from home country evidenced by volume of is the key: direct air links passenger exchanges in the should enable exchanges to recent past and continued take place. visits. May then be able to arrange Significant anecdotal more local cruising. evidence that many operators would prefer passenger exchanges from the Falklands
Domestic tourism Significant numbers of Good value for money people from both Stanley would stimulate more
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and MPA would be pleased activity. to have more options for local holidays/activities
Product – capacity and standards
2.5 Any good business needs to bring together market demand in key target segments with providing the right product to meet that demand – at the right price.
2.6 For the Falklands, it is considered that our ‘core product’ – our environment and wildlife - is first class and can more than meet expectations. But the overall product offer needs development if it is to capture more market share and meet expectations. In particular:
Product feature Requirements
Accommodation Increased number of higher quality units
Activities Increased choice/variety of organised /guided activity
Catering Improved choice and quality
Internal transport Cost and availability issues
General customer service Increased training and professionalism required
Arrival/departure facilities Substantial improvement to quality (air) Quality and provisioning improvements and cost competitiveness to be reviewed (sea)
External transport Reduced cost and better quality links to key markets; preferably direct links (essential for cruise exchange)
Stanley Retail and activity offer to be significantly strengthened
2.7 It will be evident that both the market side and the product side need to develop and come together at the same time – there is no use providing more/better product with no demand to use/pay for it, and no point ‘selling’ to the market if the product is not actually there. The Action Plan provided by the group attempts to provide a way of doing this, which is affordable and practicable (see below).
Objectives
2.8 Based on the analysis summarised above, the group proposes the following objectives
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for a medium term (5 year) Tourism Strategy:
Tourism Strategy Objectives
Objective 1: Retain larger cruise vessels at historic volumes and increase amount of local spend via development of Waterfront.
Objective 2: Increase frequency, length of stay and activity by expedition (smaller) cruise vessels and yachts through passenger exchanges, changed routing and agreement with South Georgia.
Objective 3: Prioritise attracting more affluent tourists from North America, followed by the UK, then Germany and Holland.
Objective 4: Improve standards and capacity of facilities for tourists – accommodation, air and sea gateways, staff training and availability, availability of appropriate land and land access, provision of a suitable range of activities, improve infrastructure.
Objective 5: Increase the level of domestic tourism
Objective 6: Develop Joint Ventures as a vehicle for developing tourist attractions and facilities including attraction of foreign direct investment.
3.0 Action Plan 2011 – 13
3.1 The group has carefully considered a practical and risk managed approach to developing growth markets in a way that balances capacity and product improvement with marketing efforts.
3.2 Although a large number of actions are involved, at their heart is a linked set of proposals which include:
• Re-start cruise passenger exchanges at the level of 100 – 150 passengers per week with effect from the 2012/13 season. This obviously depends on gaining agreement from some expedition cruise companies to relocate to Stanley from Ushuaia; • Ensure (preferably at cruise company risk: this may not be possible) a chartered but regular direct weekly air service to North America throughout the cruise/tourism season with a 200+ seat capacity to enable the cruise passenger exchanges; • Begin to utilise the spare capacity (50 – 100 seats) on the flight to attract North American land based tourists within the high income/quality bracket targeted by the strategy (seats would also be available to any other passenger, for example to connect to the UK) • Develop/refurbish two new high quality tourist lodges plus a Stanley hotel to provide suitable accommodation for the additional North American tourists – if possible in time for the 2012/13 season (2013/14 may be more realistic) • Develop an enhanced range of guided activities to ensure these new tourists are
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well provided for • Simultaneously improve other aspects of the Tourist experience including customer service and catering • Begin marketing within the North American target market in good time for the 2012/13 season with further build up for the 2013/14 – this will need to commence in the near future • Improve the Stanley retail and activity offer including the relocation of the Museum and implementation of a Waterfront plan • Review and where needed improve port facilities including provisioning/bunkering; review cost competitiveness with Ushuaia • Develop a commission structure for the Islands’ tourist providers, which is essential to achieve international marketing
3.3 It cannot be stressed enough that achieving this plan will require strong commitment from the Government and from the industry. Although the plan sensibly is on a limited scale and draws on our history of successful cruise passenger exchanges it will require strong leadership and commitment – including financial commitment – to make it happen. If this is forthcoming there is no reason it should not succeed though of course it carries a fair degree of inherent risk.
3.4 Major financial commitments will only be entered in to at the appropriate milestone and on the basis of detailed specifications and contracts: but the decision to invest in accommodation will need to be made at the same time as the decision to commit to supporting the air service (no point in having one without the other) and on the basis that firm offers to provide passenger exchanges have been made by cruise companies.
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