"Two Decades of C2Ds : An assessment of the Debt Reduction-Development Contracts, France’s debt-swap mechanism"

In 1996, the deepening debt crisis led the International Monetary Fund (IMF) and the World Bank to launch the so-called Heavily Indebted Poor Countries (HIPC) initiative. This initiative enabled the cancellation of some of the debt obligations of around 40 of the poorest and most heavily indebted countries, so that they could regain a level of debt deemed ‘sustainable’. The disappointing results of the initiative combined with widespread mobilisation of public opinion led, as early as 1999, to a reworking of the system and uptake of less restrictive sustainability criteria.

The bilateral component of this so-called enhanced HIPC initiative involved the cancellation of at least 90% of non-concessional debt obligations, until the ‘sustainability’ level was reached. The debt obligations contracted as part of official development assistance (ODA) were, in principle, not affected, but most bilateral creditors decided on additional cancellations. Thus, at the G7 Summit in Cologne in June 1999, France announced additional cancellation of all its ODA debt obligations on countries eligible for the HIPC initiative. This concerned some twenty countries, with total debts at the time estimated at €3.7 billion.

But rather than cancelling the corresponding loan agreements outright, the French government opted for a unique debt-swap mechanism that worked via ‘refinancing through grants’. In practice, the debtor country continues to repay its debt, and then France pays it an equivalent amount in the form of a grant to finance poverty-reduction programmes determined in advance in a ‘Debt Reduction-Development Contract’ (C2D) signed by the two parties.

As soon as the use of refinancing through grants was announced, the organisations of the French Debt and Development Platform (PFDD) indicated their opposition to the mechanism. But, at the same time, they made the strategic choice to become involved in the mechanism and to use it as a lever to work towards greater participation by civil society in determining public cooperation and development policies.

What lessons can be drawn from twenty years of implementing Debt Reduction-Development Contracts, to which the public authorities have more or less explicitly assigned a wide variety of objectives (debt reduction, securing the use of funds, the fight against poverty, aid visibility, participation by civil society, etc.) ? This report provides an updated assessment of this specifically French debt-swap mechanism – an assessment that is topical not only for discussions on debt-relief policies (e.g., conditionalities, sustainability, additionality, etc.), but also discussions on development cooperation (e.g., ownership and predictability of aid, risks of corruption and misappropriation, untying of financing).

Based on the hindsight we have on C2Ds, the report concludes with a series of recommendations of a more general nature, should new debt-swap mechanisms come to be implemented. 

Position of the French Debt and Development Platform on C2Ds

After 20 years of implementation, the outcomes of the Debt Reduction-Development Contracts back up the PFDD’s initial analysis that they were not – and still are not – a satisfactory response to the debt crisis and the financing needs of developing countries. In fact, many beneficiary countries are now more indebted than they were at the beginning of the 2000s, and some are in critical debt distress.

• The mechanism does not provide for real cancellation, as the legal and financial link between debtor and creditor is not broken and the refinancing by grants can be stopped at any time. This latter feature is of little consequence if the beneficiary country is able to ensure its debt-service payments regularly. But with the new overindebtedness crisis and the Debt Service Suspension Initiative (DSSI, 2020-2021), C2Ds have been effectively suspended even though a third of commitments have not been refinanced.

• By ruling out outright cancellation of all or part of its ODA debt obligations, France has refused to acknowledge its co-responsibility for the way in which these countries’ debt has accumulated.

• The fact that C2Ds are linked to the timetable and conditionalities of the HIPC Initiative has led to numerous postponements in the signing of the first contracts, but France has always refused to distance itself from the macroeconomic conditionalities (structural adjustment programmes) imposed by the international financial institutions. This is why it took 13 years for all the eligible countries to reach their ‘completion point’ and receive the promised refinancing. Countries whose debts were considered ‘unsustainable’ therefore continued to repay their debts, including for debt obligations contracted under ODA that the French government had announced would be cancelled. From this point of view, France has not respected its initial commitment to total cancellation.

• These delays are accompanied by a great lack of clarity in the nature of the debt-service payments refinanced. At the end of 1999, the government announced that €3.7 billion in debt obligations (in nominal value) were involved. In the end, it is expected that nearly €5.4 billion will be repaid and refinanced. These amounts have thus been artificially inflated by interest payments and by the inclusion of arrears accumulated by some eligible countries pending their completion point.

• C2Ds provide significant additional resources to beneficiaries, but they have – in part and in varying proportions depending on the country – replaced other flows of French ODA. The initial commitments to full additionality of refinancing through grants have not been fully met.

• For the largest C2Ds, project aid has been systematically favoured over sectoral budget support, with specific arrangements that run counter to the principles of ownership, alignment and harmonisation of aid.

• For the largest C2Ds, the mechanism is a tool of influence accepted as such by the French public authorities and sometimes used to support French economic interests.

• Officially, C2Ds are aligned with the beneficiary’s national priorities. But the contracts were negotiated without discussions, during diplomatic negotiations behind closed doors. The parliaments and civil societies of the countries involved have been excluded from the discussions.

• C2D financing has been mainly earmarked for poverty-reduction programmes. However, allocation choices are also the result of diplomatic compromises, of priority given to rapid disbursements or of a desire for visibility, with ‘proper use’ of funds too often being summed up as simply the ‘securing’ of the spending circuit. The fact that priorities and orientations of the C2Ds have not been discussed has meant that the development models underlying the programmes financed have likewise not been discussed.

• In Cameroon and Côte d’Ivoire, it was possible for national platforms of civil society organisations to set up independent monitoring projects with C2D funding. These mechanisms are a response to the need for accountability in the use of public funds. They also act as levers for citizen participation and mobilisation in C2Ds and, more broadly, for citizen oversight of public policies. They help strengthen and structure civil society as well as create spaces for dialogue with public authorities. They are essential components for enabling civil society involvement in C2Ds, which was not extended to all the beneficiary countries.

The presence of representatives of peer-appointed civil society organisations in the governance bodies of the system is, when accepted, also real progress. However, the commitments to ‘fully involve civil society’ in implementing C2Ds have not been met. The civil society organisations that have been able to become involved have often been confined to the role of merely guaranteeing how the funds are used. Above all, in the absence of real political will and a strategic vision of the role of civil society common to all C2Ds, the conditions needed for civil society to influence the choices and directions of the programmes financed have never been met.

Contact : Mathieu Paris - PFDD coordinator ; m.paris@ccfd-terresolidaire.org ;
+33 1 44 82 81 25