In 1951 and 1952 the Government of Canada entered into comprehensive Colombo Plan agreements with the Governments of Ceylon,¹⁰ India¹¹ and Pakistan.¹² These established the general conditions and agreed principles under which Canada would furnish assistance to these countries under the Plan. Each agreement provided, inter alia, that if goods financed by grants from the Canadian Government were "sold or otherwise distributed to the public" of the recipient country, an amount equivalent to the Canadian Government's expenditures would be set aside as "counterpart funds". These local currency funds were to be used to finance economic development projects agreed upon by the two governments concerned.

2. In addition to these three general agreements, Canada has entered into a number of specific intergovernmental agreements related to particular projects under the Colombo Plan. These agreements define the financial and other responsibilities of Canada and of recipient governments in connection with the individual projects. Following the procedure agreed upon in the general agreements referred to above, these agreements provide that the government of the recipient country will establish "counterpart funds" in local currency for the goods provided by Canada should the goods be sold or otherwise distributed "to the public". In some cases they go further and provide for "counterpart funds" if the goods are transferred to government agencies or to provincial governments.

3. It is possible to distinguish between "real counterpart funds" and "notional counterpart funds". "Real counterpart funds" arise when the goods are actually sold to the public for cash and the current revenues of the recipient governments are increased immediately as a result of the sale. On the other hand when goods are disposed of against some long-term obligation, for instance, an increase in the book-debt owed by a provincial government to a central government, are transferred as an outright grant to an autonomous government operating agency of a provincial government or are distributed without charge or at a subsidized price, the funds are completely or partly "notional" in the sense that either they are reflected in book entries but not in any current cash receipts, or the immediate cash receipts may be less than the amount of "counterpart funds" set aside. "Real counterpart funds" usually, but not necessarily, arise when Canada provides food or raw materials (e.g., wheat, flour, copper and aluminum); "notional" ones when Canada provides capital goods to a central Government and these are then transferred to a Crown Corporation or to a state, provincial or local government (or conceivably also if the transfer were to a private firm which was capable of playing an important role in the country's development and the central Government wished to encourage or support it by allowing equipment to be transferred on a long-term credit basis).

Reasons for Counterpart Funds

4. The setting up of "counterpart funds" was undertaken for a number of good reasons and with a number of objectives in mind:

(1) it would ensure that the current revenues of recipient governments derived from the cash sale of goods provided by Canada would be used for economic development purposes and not to finance ordinary expenditures;

(2) it would provide a useful means by which Canada could devote some of its foodstuffs and raw materials to support the development programmes of the recipient government while ensuring the implementation of the Canadian Government's general policy of having its aid programme associated with capital development projects in the recipient countries;

(3) it was hoped that this procedure might provide an additional incentive for the central governments to require the ultimate recipients of capital goods to make appropriate allowances for the value of such goods in their cost accounting and amortization arrangements; and

(4) it was hoped that, even though the transaction might not bring any new money into the central government currently, those governments might be induced to devote larger amounts to their own economic development than would otherwise be the case.

Objections to Counterpart Funds

5. Some years of experience show that the first two objectives are fully understood, considered worthwhile and readily accepted by all concerned. But they also reveal that the setting aside of "notional counterpart funds" with no objectives in mind other than the third and fourth is objectionable on a number of grounds:

(1) any public relations value which the existence of such funds might seem to have is more than offset by the impression which is created that Canada is seeking to obtain credit for twice the contribution it in fact makes, once when the capital asset is provided and again when the "counterpart funds" are assumed to have been created and allocated;

(2) there appears to be little logic in creating "counterpart funds" for goods sold or transferred to another government or another governmental agency (or even to a private firm which was equally involved in the development programme) when no such "counterpart funds" would have been required if the goods had been retained by the central government and devoted to identical economic development purposes;

(3) it has sometimes proved difficult to find appropriate "uses" for such "notional counterpart funds";

(4) the Auditor-General of at least one Asian country (Ceylon) has occasionally criticized the delays in "using" such "notional counterpart funds" and this has no doubt detracted unjustifiably from the reputation of the national planning agencies and of the Colombo Plan as a whole;

(5) the Canadian Auditor-General has raised questions about methods of computing and accounting for such "notional counterpart funds" to which there cannot be entirely satisfactory answers, given the nature of these funds;

(6) the knowledge that "notional counterpart funds" are essentially fictitious has tended to discredit "counterpart funds" generally and has undoubtedly led to the "real counterpart funds" being given less serious treatment than they deserve.

These objections take on added force when it is realized that the governments concerned take a reasonably sensible view of their financial and economic responsibilities without the cumbersome and irritating introduction of special devices. It might be equally effective and a good deal less troublesome for both the Asian and Canadian Governments if the recipient government were to be asked simply to inform the Canadian Government of the general terms on which it intends to transfer or sell capital goods provided by Canada to other public bodies or to private firms involved in the development programmes. If, on occasion, the manner of disposition did not appear satisfactory to the Canadian Government or if it appeared to be in Canada's interest to have "counterpart funds" set aside even if such funds were "notional", the offer of aid could be withdrawn, the recipient government could be asked to set aside "notional" funds or some other action could be taken.

Recommendations

9. In the light of the foregoing considerations and on the understanding that none of the goods provided by Canada will be re-exported, I recommend, with the concurrence of the Ministers of Finance and of Trade and Commerce, that

(a) "counterpart funds" in an amount equivalent to the Canadian outlay on goods and services, should be set aside in all cases where Canadian aid takes the form of commodities such as raw materials and foodstuffs, or other consumables;

(b) for the future, as a general rule, no automatic request be made for the establishment of "counterpart funds" in the case of capital goods, but the government of the recipient country be requested to inform the Canadian Government of the terms and conditions of any transfer of capital goods to be provided or provided by Canada which it proposes to make in order to allow the Canadian Government to take any action which it deems to be in its own interest, such as requesting the establishment of "counterpart funds" or, perhaps, in the final analysis withdrawing its offer of assistance;

(c) officials of the Departments concerned be instructed to review Colombo Plan agreements already in force for the purpose of bringing them, wherever practicable, into conformity with (a) and (b) above.¹³

L.B. PEARSON
Concurred in:
W.E. HARRIS
Minister of Finance
C.D. HOWE
Minister of Trade & Commerce