# EUR-Lex - 52012DC0435 - EN

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# 52012DC0435

**COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL AND THE COURT OF AUDITORS FINAL ACCOUNTS OF THE 8TH, 9TH AND 10TH EUROPEAN DEVELOPMENT FUNDS - FINANCIAL YEAR 2011 /* COM/2012/0435 final */**

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TABLE
OF CONTENTS

NOTE ACCOMPANYING THE ACCOUNTS. 2

IMPLEMENTING AND
ACCOUNTING FOR THE EDF RESOURCES. 3

PART I – EDF ANNUAL
ACCOUNTS: FUNDS MANAGED BY THE EUROPEAN COMMISSION. 8

1......... FINANCIAL STATEMENTS OF THE 8TH, 9TH AND
10TH EUROPEAN DEVELOPMENT FUNDS  9

1.1...... 8TH, 9TH AND 10TH EDFs:
AGGREGATED BALANCE SHEET, ECONOMIC OUTTURN ACCOUNT, CASH FLOW STATEMENT AND
STATEMENT OF CHANGES IN NET ASSETS. 9

1.2...... 8TH EDF: BALANCE SHEET, ECONOMIC
OUTTURN ACCOUNT AND STATEMENT OF CHANGES IN NET ASSETS. 13

1.3...... 9TH EDF: BALANCE SHEET, ECONOMIC
OUTTURN ACCOUNT AND STATEMENT OF CHANGES IN NET ASSETS. 16

1.4...... 10TH EDF: BALANCE SHEET,
ECONOMIC OUTTURN ACCOUNT AND STATEMENT OF CHANGES IN NET ASSETS. 19

1.5...... NOTES TO THE FINANCIAL
STATEMENTS OF THE 8TH, 9TH AND 10TH EDFs 22

2. ....... REPORT ON
FINANCIAL IMPLEMENTATION. 44

2.1...... ALLOCATIONS. 48

2.2 ..... CONSOLIDATED
ACCOUNTS. 51

2.3...... OTHER MANAGEMENT
INFORMATION. 56

PART II – EDF ANNUAL
ACCOUNTS: FINANCIAL STATEMENTS OF THE INVESTMENT FACILITY  57

3......... FINANCIAL STATEMENTS OF THE INVESTMENT
FACILITY. 59

3.1...... STATEMENT OF COMPREHENSIVE
INCOME FOR THE YEAR ENDED 31 DECEMBER 2011  59

3.2...... STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 2011. 60

3.3...... STATEMENT OF CHANGES IN
CONTRIBUTORS' RESOURCES. 61

3.4...... STATEMENT OF CASH FLOWS FOR THE
YEAR ENDED 31 DECEMBER 2011. 62

3.5...... NOTES TO THE FINANCIAL
STATEMENTS. 63

ANNEX TO PART I – CHAPTER
2 (REPORT ON THE FINANCIAL IMPLEMENTATION): SITUATION BY COUNTRY AND BY
INSTRUMENT. 93

CERTIFICATION OF THE
ACCOUNTS

The annual accounts of the 8th, 9th
and 10th European Development Funds for the year 2011 have been prepared in
accordance with Title VIII of the Financial Regulation of the 10th European
Development Fund and with the accounting principles, rules and methods set out
in annex to the financial statements.

I acknowledge my responsibility for
the preparation and presentation of the annual accounts of the 8th, 9th and
10th European Development Funds in accordance with Article 125 of the Financial
Regulation of the 10th European Development Fund.

I have obtained from the
authorising officer and from the EIB, who guarantee its reliability, all the
information necessary for the production of the accounts that show the European
Development Funds' assets and liabilities and the budgetary implementation.

I hereby certify that based on this
information, and on such checks as I deemed necessary to sign off the accounts,
I have a reasonable assurance that the accounts present a true and fair view of
the financial position of the European Development Funds in all material
aspects.

[signed]

Philippe Taverne

Accounting Officer

IMPLEMENTING AND ACCOUNTING FOR THE EDF RESOURCES

1.         BACKGROUND

The European Union has cooperative
development relations with a large number of developing countries. The main
purpose is to promote economic and social development with a particular focus
on reducing and alleviating poverty in the long-term, by providing beneficiary
countries with development aid and technical assistance. To achieve this, the Union draws up, jointly with the partner countries, cooperation strategies and mobilises
the financial resources to implement them. These Union resources allocated to
development come from three sources:

– The European Union
budget

– The European Development
Fund

– The European Investment
Bank

The European Development Fund (EDF)
is the main instrument for providing Union aid for development cooperation to
the African, Caribbean and Pacific (ACP) States and Overseas Countries and
Territories (OCTs). The 1957 Treaty of Rome made provision for its creation
with a view to granting technical and financial assistance, initially limited
to African countries which at that time were still colonised and with which
some Member States had historical links.

The EDF is not funded by the
European Union's budget. It is funded by the Member States, subject to its own
financial regulation and managed by a specific committee. The European
Commission is responsible for the financial implementation of the operations
carried out with EDF resources and the European Investment Bank (EIB) manages
the Investment Facility.

During the period 2008-2013, the
geographic aid granted to ACP States and OCTs will continue to be mainly funded
by the EDF. Each EDF is usually concluded for a period of around five years.
Since the conclusion of the first partnership convention in 1964, the EDF
programming cycles have generally followed the partnership agreement/convention
cycles. Each EDF is governed by its own Financial Regulation which imposes the
preparation of financial statements for each individual EDF. Accordingly,
financial statements are prepared separately for each EDF in respect of the
part that is managed by the European Commission. These financial statements are
also presented in an aggregated way so as to provide a global view of the
financial situation of the resources for which the European Commission is
responsible.

Within the framework of
the Cotonou agreement, the Investment Facility was established. This Investment
Facility is managed by the European Investment Bank and is used to support
private sector development in the ACP States by financing essentially – but not
exclusively – private investments. The Facility is designed as a renewable
fund, so that loan repayments can be reinvested in other operations, thus
resulting in a self-renewing and financially independent Facility. As the
Investment Facility is not managed by the European Commission, it is not
consolidated in the first part of the annual accounts – the financial
statements of the 8th, 9th and 10th EDFs and the related report on financial
implementation. The financial statements of the Investment Facility are
included as a separate part of the annual accounts (part 2) to provide a full
picture of the development aid of the EDF. The 10th EDF covers the period from
2008 to 2013 and has an overall budget of EUR 22 682 million. Of this
amount, EUR 21 966 million is allocated to the ACP countries, EUR 286 million
to the OCTs and EUR 430 million to the Commission as support expenditure for
programming and implementation of the EDF[1].

2.         HOW
IS THE EDF FUNDED?

The European Council of 15-16
December 2005 adopted the financial perspectives for 2007-2013. In this context
it was decided that geographical cooperation with the ACP States would not be
integrated into the European Union budget (budgetised), but would continue to
be funded through the existing inter-governmental EDF for the period 2008-2013.

The European Union
budget is annual and according to the budgetary principle of annuality,
expenditure and revenue are planned and authorised for one year. Unlike the
European Union, the EDF is a fund operating on the basis of multiannuality.
Each EDF is concluded through a partnership agreement between Member States and
is associated with an overall fund to implement development cooperation during
a period of usually five years. As resources are allocated on a multiannual
basis, the allocated funds may be used over the period of the EDF. The lack of
budget annuality is highlighted in the budgetary reporting, where the budgetary
implementation of the EDFs is measured against the total funds.

The EDF resources are “ad hoc”
contributions from the EU Member States. Approximately every five years, Member State representatives meet at intergovernmental level to decide on an overall amount
that will be allocated to the Fund and to oversee its implementation. The
Commission then manages the fund. Since Member States have their own
development and aid policies in addition to the Union wide policies, the Member
States must coordinate their policies with the EU to ensure they are
complementary. Until 2010, contributions were called from the 15 participating
Member States. In 2011, the first contributions under the 10th EDF, in which
the 27 Member States participate, were called.

While some funds of the 10th EDF
have been set aside for unforeseen needs, most are being programmed in
indicative multi-annual frameworks, mainly geographic but also thematic, currently
set for the years 2008-2013. Country strategy papers, regional strategy papers
and intra-ACP strategy papers have been adopted by the Commission accordingly.
Their implementation is monitored annually and the strategies are reviewed at
mid-term (2010, ongoing) and at end-of-term (2012). As a result of these
mid-term or end-of-term reviews, the Commission may, on behalf of the European
Union, revise the strategies and resource allocation in the light of the
current needs and the performance of the ACP states or regions concerned.

In addition to the above
mentioned contributions, it is also possible for Member States to enter into
co-financing arrangements or to make voluntary financial contributions to the
EDF.

3.       HOW ARE THE EDF RESOURCES MANAGED
AND SPENT?

3.1      Operational expenditure

EDF operational expenditure takes
different forms, depending on how the money is paid out and managed. In
accordance with the Financial Regulation, the Commission implements the EDF
resources using the following methods:

Decentralised management: these are the cases
where the Commission delegates, more or less substantially according to the
local situation of the beneficiary concerned, certain tasks for implementation
of the budget to third countries.

Centralised management: this is where the
budget is implemented either directly by the Commission services or indirectly
where the Commission confers tasks of implementation of the budget to bodies of
European Union law or national law, such as the European Union agencies of
public law or with public service missions.

Joint management with
international organisations: under this method, the Commission entrusts certain
implementation tasks to an international organisation.

3.2      The
different financial actors

The responsibility of the Authorising
Officer by delegation covers the entire management process, from
determining what needs to be done to achieve the policy objectives set to
manage the activities launched from both an operational and budgetary
standpoint, including signing legal commitments, monitoring performance, making
payments and even recovering funds, if necessary.

The Head of the
Delegation of the European Union is the local liaison between the
Commission and the national or regional ACP/OCT authorities in the field.
He/she works in close collaboration with the national or Regional Authorising
Officers in defining the implementing strategy and Sectoral policies,
preparing, studying and reviewing EDF programmes and projects.

The National
Authorising Officer in the recipient country is a senior official
appointed by the government of each ACP State/OCT. He/she represents the
authorities of his/her country for all activities financed by the Fund and
managed by the Commission and by the EIB. In most cases, these functions are
exercised by a member of the government, generally the State Minister of
Planning or Finance. The National Authorising Officer carries out the
administrative, technical and financial duties of managing EDF programmes and
projects.

The Accounting Officer
executes payment and recovery orders drawn up by Authorising Officers and is
responsible for managing the treasury, laying down accounting rules and
methods, validating accounting systems, keeping the accounts and drawing up the
corresponding annual accounts. Furthermore, the Accounting Officer is required
to sign the accounts declaring that they provide a true and fair view of the
financial position.

3.3      Implementing the EDF
resources

The vast majority of financial
resources awarded to ACP States and OCTs through the EDF are grants. At the
beginning of each EDF, the European Union informs the ACP States and the OCTs
about the level of grants which should be available to them over the period of
the fund. Resources are allocated based on a country’s specific needs, taking
into account the recipient country’s own policies and development efforts.

The beneficiary country develops a
cooperation strategy while or after holding consultations with its development
partners (donors). The cooperation strategies set with the European Union
normally include both the country’s own medium-term development strategies, an
analysis of the political and socio-economic context, plus the European Union’s
own assessment. The European Commission’s staff provide technical support to
the national authorities in preparing the cooperation strategy document.

A National Indicative
Programme (NIP) is then drawn up to implement the cooperation strategy. The NIP
targets the sectors and fields which will receive the aid, explains how the aid
will fulfil its objectives, gives a timetable for implementation, and specifies
how other actors such as International Organisations or NGOs will be involved
in the programme (if relevant). This indicative global programme is subject to
an annual, mid-term and end-of-the-EDF-term review and improvements and changes
are made when necessary during its operation period.

3.4      Committing
to spend the EDF resources

No EDF resources can be spent
unless and until the Commission and the possible recipient of EDF money have
entered into a written legal commitment.

Before a legal commitment (for
example a contract or grant agreement) can be entered into with a third party,
there must be a budget line with sufficient funds authorising the activity in
question. If this condition is met, the funds required must be reserved in the
budget by means of a budgetary commitment made in the accounting system. This,
however, has no effect on the general accounts (or general ledger) since no
charge has yet been incurred. This is because the accounting system of the EDF
comprises two separate but linked elements:

(a)
budget
accounts, which provide a detailed record of budget implementation; and,

(b)
general
accounts, used to prepare the balance sheet and economic outturn.

The budget accounts show the
commitments and payments made. They are based on the cash accounting principle,
whereby an item of expense or income is only recorded in the accounts when cash
is committed, paid out or received. This type of accounting is typical of the
public sector whose focus has, historically, tended to be on the budget and its
implementation.

The general accounts (based on the
accrual accounting principle) show all expenditure and revenue over the
financial year (and thus the economic outturn) and establish the financial
position of the EDF in the form of a balance sheet of assets and liabilities at
31 December of a given year.

3.5      Making
a payment

No payment can be made unless a
budgetary commitment has already been approved by the Authorising Officer.

Pre-financing is a payment intended
to provide the beneficiary with a cash advance, i.e. a float. It may be split
into a number of payments over a period defined in the particular pre-financing
agreement. The float or advance is either used for the purpose for which it was
provided during the period defined in the agreement or is repaid – if the
beneficiary does not incur eligible expenditure he/she is obliged to return the
pre-financing advance to the EDF. Thus pre-financing paid is not a definitive
expense until the relevant contractual conditions are met and so is recorded as
an asset on the balance sheet when the initial payment is made. The amount of
the pre-financing asset is reduced (wholly or partially) by the acceptance of
eligible costs (which are taken as expenses in the economic outturn account)
and amounts returned.

At year-end, an assessment has to
be made concerning eligible expenses incurred by beneficiaries of EDF funds but
not yet reported. Following these cut-off calculations, estimated eligible
amounts are recorded as accrued charges, while the estimated non-eligible parts
remain open in the “eligibility to be checked” accounts. These amounts are
shown under current liabilities so as not to overestimate assets and liabilities.

3.6      Recovering
undue payments

The eligibility of expenditure
charged to the EDF is verified on the basis of the supporting documents
stipulated in the applicable rules or in the conditions of each grant. With the
aim of optimising the relationship between the costs and the benefits of
control systems, checks on the supporting documents for final claims tend to be
more detailed than those on interim claims, and thus may detect errors in
interim payments which are corrected by adjustment of the final payment.
Furthermore, the Commission has the right to verify the probity of the
supporting documents by making checks on the claimant's premises, during the
implementation of the action financed and/or afterwards (ex-post). Errors found
during the implementation period may be corrected by adjustment of subsequent
claims. Errors found ex-post will be the subject of a recovery order.

4.         YEAR-END REPORTING

4.1      Annual accounts

It is the Accounting Officer's
responsibility to prepare the annual accounts and ensure that they present a
true and fair view of the financial position of the EDF.

The annual accounts are presented
as follows:

Part I: Funds managed
by the European Commission

– Financial statements of
the 8th, 9th and 10th European Development Funds

– Report on financial
implementation of the 8th, 9th and 10th European Development Funds

Part II: Funds managed
by the European Investment Bank

– Financial statements of
the Investment Facility

The financial statements
of the Investment Facility are included as a separate part of the annual
accounts so as to provide a full picture of the development aid of the EDF.

Following audit by the Court of
Auditors, the annual accounts are adopted by the Commission by 31 July of the
subsequent year and presented to the Council and Parliament for discharge.

4.2      Annual
Activity Report

The Authorising Officer is required
to prepare an Annual Activity Report (AAR) on the activities under his/her
responsibility. In this AAR, the Authorising Officer reports on policy results
and on the reasonable assurance he may have that the resources assigned to the
activities described in his report have been used for their intended purpose
and in accordance with the principles of sound financial management, and that
the control procedures put in place give the necessary guarantees concerning
the legality and regularity of the underlying transactions.

5.         AUDIT AND DISCHARGE

5.1      Audit

The EDF annual accounts and
resource management are overseen by its external auditor, the European Court of
Auditors, which draws up an annual report for the Council and the European
Parliament. The Court's main task is to conduct an external, independent audit
of the EDF annual accounts. As part of its activities, the Court of Auditors
produces:

(1)
an
annual report, detailing its observations on the annual accounts and underlying
transactions;

(2)
an
opinion, based on its audits and given in the annual report in the form of a
statement of assurance, on (i) the reliability of the accounts and (ii) the
legality and regularity of the underlying transactions;

(3)
special
reports giving the findings of audits covering specific areas of management.

The Court of Auditors is entitled
to access all documents required during the course of its audit. The Court
audits all areas of EDF activities, right down to examining the legality and
regularity of individual transactions and payments. It also audits the annual
accounts themselves, reviewing individual balance sheet and economic outturn
account items, as well as the overall presentation of the financial statements.
Thus the Court can offer its opinion not only on the figures presented, but
also on the system and controls in place.

5.2      Discharge

The final control is the discharge
of the financial implementation of the EDF resources for a given financial
year. The European Parliament is the discharge authority of the EDF. This means
that following the audit and finalisation of the annual accounts it falls to
the Council to recommend and then to the Parliament to decide whether to grant
discharge to the Commission for the financial implementation of the EDF
resources for the preceding financial year. This decision is based on a review
of the accounts and the annual report of the Court of Auditors (which includes
an official statement of assurance) and replies of the Commission, and also
following questions and further information requests to the Commission.

The discharge represents the
political aspect of the external control of financial implementation and is the
decision by which the European Parliament, acting on a Council recommendation,
"releases" the Commission from its responsibility for management of
the financial implementation of a given financial year. This discharge
procedure may produce one of two outcomes: the granting or postponement of the
discharge. When granting discharge the Parliament may highlight observations it
considers important, often recommending actions that the Commission should take
concerning these matters. The Commission sets out the measures taken in a
follow-up report and an action plan which it sends to both the Parliament and
the Council.

PART I – EDF ANNUAL ACCOUNTS: FUNDS MANAGED BY THE
EUROPEAN COMMISSION[2]

1.           FINANCIAL STATEMENTS OF THE 8TH, 9TH AND
10TH EUROPEAN DEVELOPMENT FUNDS

1.1         8TH, 9TH
AND 10TH EDFs: AGGREGATED BALANCE SHEET, ECONOMIC OUTTURN ACCOUNT, CASH FLOW
STATEMENT AND STATEMENT OF CHANGES IN NET ASSETS

AGGREGATED BALANCE SHEET of the 8th, 9th and 10th EDFs

|| || || || EUR millions

|| Note || 31.12.2011 || 31.12.2010

|| NON-CURRENT ASSETS || || ||

|| Long-term pre-financing || 2.1 || 380 || 353

|| || || ||

|| CURRENT ASSETS || || ||

|| Short-term pre-financing || 2.2 || 1 175 || 1 096

|| Short-term receivables || 2.3 || 111 || 247

|| Cash and cash equivalents || 2.5 || 1 224 || 808

||   || || ||

|| TOTAL ASSETS || || 2 891 || 2 503

|| || || ||

|| CURRENT LIABILITIES || || ||

|| Short-term payables || 2.6 || (1 033) || (1 045)

|| || || ||

|| TOTAL LIABILITIES || || (1 033) || (1 045)

|| || || ||

|| NET ASSETS || || 1 858 || 1 458

|| || || ||

|| FUNDS & RESERVES || || ||

|| Called fund capital || 2.7 || 26 979 || 23 879

|| Other reserves || 2.8 || 2 252 || 2 252

|| Economic outturn carried forward from previous years || || (24 674) || (21 909)

|| Economic outturn of the year || || (2 700) || (2 765)

|| NET ASSETS || || 1 858 || 1 458

AGGREGATED ECONOMIC OUTTURN ACCOUNT
of the 8th, 9th and 10th EDFs

|| || EUR millions

|| Note || 2011 || 2010

|| || ||

OPERATING REVENUE || 3.1 || 99 || 140

|| || ||

OPERATING EXPENSES || || ||

Operating expenses || 3.2 || (2 702) || (2 914)

Administrative expenses || 3.3 || (75) || (86)

|| || ||

SURPLUS (DEFICIT) FROM OPERATING ACTIVITIES || || (2 679) || (2 860)

|| || ||

Financial revenue || 3.4 || (20) || 95

SURPLUS (DEFICIT) FROM FINANCIAL ACTIVITIES || || (21) || 95

|| || ||

ECONOMIC OUTTURN OF THE YEAR || || (2 700) || (2 765)

AGGREGATED CASH FLOW STATEMENT of
the 8th, 9th and 10th EDFs

|| || EUR millions

|| Note || 2011 || 2010

|| || ||

Economic outturn of the year || || (2 700) || (2 765)

|| || ||

OPERATING ACTIVITIES || 4.2 || ||

Ordinary contributions from Member States || || 3 238 || 3 420

Co-financing contributions from Member States || || 7 || 65

(Reversal of) impairment losses on receivables || || 6 || 2

|| || ||

(Increase)/decrease in long-term pre-financing || || (28) || (157)

(Increase)/decrease in short-term pre-financing || || (79) || (296)

(Increase)/decrease in short-term receivables || || 14 || (62)

Increase/(decrease) in short-term payables || || (42) || 78

|| || ||

NET CASH FLOW || || 417 || 285

|| || ||

NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS || || 417 || 285

Cash and cash equivalents at the beginning of the year || 2.5 || 808 || 523

Cash and cash equivalents at the end of the year || 2.5 || 1 224 || 808

AGGREGATED STATEMENT OF CHANGES IN
NET ASSETS of the 8th, 9th and 10th EDFs

|| || || || || || || EUR millions

|| Fund Capital (a) || Uncalled funds (b) || Called fund capital (c)=(a)-(b) || Cumulative reserves (d) || Other reserves (e) || Total Net Assets (c)+(d)+(e)

BALANCE AS AT 31 DECEMBER 2009 || 45 761 || 25 381 || 20 381 || (21 909) || 2 252 || 724

|| || || || || ||

Capital increase – ordinary contributions || - || (3 500) || 3 500 || - || - || 3 500

Reclassification of co-financing contributions[3] || (70) || (69) || (2) || - || - || (2)

Economic outturn of the year || - || - || - || (2 765) || - || (2 765)

BALANCE AS AT 31 DECEMBER 2010 || 45 691 || 21 812 || 23 879 || (24 674) || 2 252 || 1 458

|| || || || || ||

Capital increase – ordinary contributions || - || (3 100) || 3 100 || - || - || 3 100

Economic outturn of the year || - || - || - || (2 700) || - || (2 700)

BALANCE AS AT 31 DECEMBER 2011 || 45 691 || 18 712 || 26 979 || (27 374) || 2 252 || 1 858

1.2         8TH EDF:
BALANCE SHEET, ECONOMIC OUTTURN ACCOUNT AND STATEMENT OF CHANGES IN NET ASSETS

BALANCE SHEET of the 8th EDF

|| || || || EUR millions

|| Note || 31.12.2011 || 31.12.2010

|| CURRENT ASSETS || || ||

|| Short-term pre-financing || 2.2 || 70 || 100

|| Short-term receivables || 2.3 || 4 || 9

|| Liaison accounts || 2.4 || 387 || 497

|| || || ||

|| TOTAL ASSETS || || 461 || 605

|| || || ||

|| CURRENT LIABILITIES || || ||

|| Short-term payables || 2.6 || (29) || (45)

|| || || ||

|| TOTAL LIABILITIES || || (29) || (45)

|| || || ||

|| NET ASSETS || || 432 || 560

|| || || ||

|| FUNDS & RESERVES || || ||

|| Called fund capital || 2.7 || 12 840 || 12 840

|| Other reserves || 2.8 || (2 276) || (2 237)

|| Economic outturn carried forward from previous years || || (10 042) || (9 985)

|| Economic outturn of the year || || (90) || (58)

|| NET ASSETS || || 432 || 560

ECONOMIC OUTTURN ACCOUNT of the
8th EDF

|| || EUR millions

|| Note || 2011 || 2010

|| || ||

OPERATING REVENUE || 3.1 || 40 || 54

|| || ||

OPERATING EXPENSES || 3.2 || (128) || (116)

|| || ||

|| || ||

SURPLUS (DEFICIT) FROM OPERATING ACTIVITIES || || (88) || (61)

|| || ||

Financial revenue || 3.4 || (1) || 4

SURPLUS (DEFICIT) FROM FINANCIAL ACTIVITIES || || (2) || 4

|| || ||

ECONOMIC OUTTURN OF THE YEAR || || (90) || (58)

STATEMENT OF CHANGES IN NET ASSETS
of the 8th EDF

|| || || || || || || EUR millions

|| Fund Capital (a) || Uncalled funds (b) || Called fund capital (c)=(a)-(b) || Cumulative reserves (d) || Other reserves (e) || Total Net Assets (c)+(d)+(e)

BALANCE AS AT 31 DECEMBER 2009 || 12 840 || - || 12 840 || (9 985) || (2 153) || 703

|| || || || || ||

Capital increase – ordinary contributions || - || - || - || - || - || -

Transfers to the 10th EDF || - || - || - || - || (85)   || (85)

Economic outturn of the year || - || - || - || (58) || - || (58)

BALANCE AS AT 31 DECEMBER 2010 || 12 840 || - || 12 840 || (10 042) || (2 237) || 560

|| || || || || ||

Capital increase – ordinary contributions || - || - || - || - || - || -

Transfers to the 10th EDF || - || - || - || - || (38) || (38)

Economic outturn of the year || - || - || - || (90) || - || (90)

BALANCE AS AT 31 DECEMBER 2011 || 12 840 || - || 12 840 || (10 132) || (2 276) || 432

1.3         9TH EDF:
BALANCE SHEET, ECONOMIC OUTTURN ACCOUNT AND STATEMENT OF CHANGES IN NET ASSETS

BALANCE SHEET of the 9th EDF

|| || || || EUR millions

|| Note || 31.12.2011 || 31.12.2010

|| NON-CURRENT ASSETS || || ||

|| Long-term pre-financing || 2.1 || 191 || 158

|| || || ||

|| CURRENT ASSETS || || ||

|| Short-term pre-financing || 2.2 || 569 || 742

|| Short-term receivables || 2.3 || 87 || 233

|| Liaison accounts || 2.4 || 2 557 || 2 516

|| Cash and cash equivalents || 2.5 || 6 || 7

||   || || ||

|| TOTAL ASSETS || || 3 410 || 3 655

|| || || ||

|| CURRENT LIABILITIES || || ||

|| Short-term payables || 2.6 || (315) || (392)

|| || || ||

|| TOTAL LIABILITIES || || (315) || (392)

|| || || ||

|| NET ASSETS || ||  3 096 || 3 263

|| || || ||

|| FUNDS & RESERVES || || ||

|| Called fund capital || 2.7 || 11 699 || 11 039

|| Other reserves || 2.8 || 4 227 || 4 157

|| Economic outturn carried forward from previous years || || (11 932) || (10 854)

|| Economic outturn of the year || || (898) || (1 078)

|| NET ASSETS || || 3 096 || 3 263

ECONOMIC OUTTURN ACCOUNT of the
9th EDF

|| || EUR millions

|| Note || 2011 || 2010

|| || ||

OPERATING REVENUE || 3.1 || 49 || 82

|| || ||

OPERATING EXPENSES || || ||

Operating expenses || 3.2 || (924) || (1 230)

Administrative expenses || 3.3 || (3) || (6)

|| || ||

|| || ||

SURPLUS (DEFICIT) FROM OPERATING ACTIVITIES || || (879) || (1 155)

|| || ||

Financial revenue || 3.4 || (19) || 77

SURPLUS (DEFICIT) FROM FINANCIAL ACTIVITIES || || (19) || 77

|| || ||

ECONOMIC OUTTURN OF THE YEAR || || (898) || (1 078)

STATEMENT OF CHANGES IN NET ASSETS
of the 9th EDF

|| || || || || || || EUR millions

|| Fund Capital (a) || Uncalled funds (b) || Called fund capital (c)=(a)-(b) || Cumulative reserves (d) || Other reserves (e) || Total Net Assets (c)+(d)+(e)

BALANCE AS AT 31 DECEMBER 2009 || 11 699 || 4 160 || 7 539 || (10 854) || 4 308 || 993

|| || || || || ||

Capital increase – ordinary contributions || - || (3 500) || 3 500 || - || - || 3 500

Transfers to the 10th EDF || - || - || - || - || (151) || (151)

Economic outturn of the year || - || - || - || (1 078) || - || (1 078)

BALANCE AS AT 31 DECEMBER 2010 || 11 699 || 660 || 11 039 || (11 932) ||   4 157 || 3 263

|| || || || || ||

Capital increase – ordinary contributions || - || (660) || 660 || - || - || 660

Transfers to and from the 10th EDF || - || - || - || - || 70 || 70

Economic outturn of the year || - || - || - || (898) || - || (898)

BALANCE AS AT 31 DECEMBER 2011 || 11 699 || 0 || 11 699 || (12 830) || 4 227 || 3 096

1.4         10TH EDF:
BALANCE SHEET, ECONOMIC OUTTURN ACCOUNT AND STATEMENT OF CHANGES IN NET ASSETS

BALANCE SHEET of the 10th EDF

|| || || || EUR millions

|| Note || 31.12.2011 || 31.12.2010

|| NON-CURRENT ASSETS || || ||

|| Long-term pre-financing || 2.1 || 189 || 195

|| || || ||

|| CURRENT ASSETS || || ||

|| Short-term pre-financing || 2.2 || 536 || 255

|| Short-term receivables || 2.3 || 20 || 5

|| Cash and cash equivalents || 2.5 || 1 218 || 801

||   || || ||

|| TOTAL ASSETS || || 1 963 || 1 255

|| || || ||

|| CURRENT LIABILITIES || || ||

|| Short-term payables || 2.6 || (689) || (608)

|| Liaison accounts || 2.4 || (2 944) || (3 013)

|| || || ||

|| TOTAL LIABILITIES || || (3 633) || (3 621)

|| || || ||

|| NET ASSETS || || (1 670) || (2 366)

|| || || ||

|| FUNDS & RESERVES || || ||

|| Called fund capital || 2.7 || 2 440 || -

|| Other reserves || 2.8 || 301 || 333

|| Economic outturn carried forward from previous years || || (2 699) || (1 070)

|| Economic outturn of the year || || (1 712) || (1 629)

|| NET ASSETS[4] || || (1 670) || (2 366)

ECONOMIC OUTTURN ACCOUNT of the
10th EDF

|| || EUR millions

|| Note || 2011 || 2010

|| || ||

OPERATING REVENUE || 3.1 || 10 || 4

|| || ||

OPERATING EXPENSES || || ||

Operating expenses || 3.2 || (1 650) || (1 567)

Administrative expenses || 3.3 || (72) || (80)

|| || ||

|| || ||

SURPLUS (DEFICIT) FROM OPERATING ACTIVITIES || || (1 712) || (1 643)

|| || ||

Financial revenue || 3.4 || 0 || 14

SURPLUS (DEFICIT) FROM FINANCIAL ACTIVITIES || || (1) || 14

|| || ||

ECONOMIC OUTTURN OF THE YEAR || || (1 712) || (1 629)

STATEMENT OF CHANGES IN NET ASSETS
of the 10th EDF

|| || || || || || || EUR millions

|| Fund Capital (a) || Uncalled funds (b) || Called fund capital (c)=(a)-(b) || Cumulative reserves (d) || Other reserves (e) || Total Net Assets (c)+(d)+(e)

BALANCE AS AT 31 DECEMBER 2009 || 21 222 || 21 221 || 2 || (1 070) || 97 || (971)

|| || || || || ||

Capital increase – ordinary contributions || - || - || - || - || - || -

Reclassification of co-financing contributions[5] || (70) || (69) || (2) || - || - || (2)

Transfers from the 8th and the 9th EDF || - || - || - || - || 236 || 236

Economic outturn of the year || - || - || - || (1 629) || - || (1 629)

BALANCE AS AT 31 DECEMBER 2010 || 21 152 || 21 152 || - || (2 699) || 333 || (2 366)

|| || || || || ||

Capital increase – ordinary contributions || - || (2 440) || 2 440 || - || - || 2 440

Transfers from/to the 8th and the 9th EDF || - || - || - || - || (32) || (32)

Economic outturn of the year || - || - || - || (1 712) || - || (1 712)

BALANCE AS AT 31 DECEMBER 2011 || 21 152 || 18 712 || 2 440 || (4 411) || 301 || (1 670)

1.5         NOTES TO
THE FINANCIAL STATEMENTS OF THE 8TH, 9TH AND 10TH EDFs

1.         SIGNIFICANT ACCOUNTING
POLICIES

1.1.     LEGAL PROVISIONS AND THE
FINANCIAL REGULATION

The
financial statements are drawn up in accordance with the Financial Regulation
applicable to the 10th EDF. In accordance with the provisions of Article 121 of
this regulation, the financial statements are prepared respecting the
principles of accrual based accounting.

These financial statements have
been drafted in conformity with the accounting rules and methods of the EDF,
themselves drawn up on the basis of International Public Sector Accounting
Standards (IPSAS) or by default, International Financial Reporting Standards
(IFRS) as respectively issued by the International Public Sector Accounting
Standard Board (IPSASB) and the International Accounting Standard Board (IASB).
The rules on valuation and accounting methods adopted by the Accounting Officer
of the EDF have been applied in respect of the part of the EDF resources for
which the European Commission is responsible for financial management.

The EDF Accounting Officer must
submit the provisional accounts to the Court of Auditors for audit by
31 March of the following year. The Court of Auditors shall in turn make
its observations on the accounts known to the Commission by 15 June (Article
125). On the basis of these observations, the Commission approves the final
accounts by 31 July and sends them to the European Parliament, the Council and
the Court of Auditors. The accounts are then published in the Official Journal
by 15 November, together with the statement of assurance given by the Court of
Auditors in respect of the part of the EDF resources for which the Commission
is responsible for the financial management.

1.2.     ACCOUNTING
PRINCIPLES

The objective of the financial
statements is to provide information about the financial position, performance
and cash flows of an entity that is useful to a wide range of users. For a
public sector entity such as the EDF, the objectives are more specifically to
provide information useful for decision making, and to demonstrate the accountability
of the entity for the resources entrusted to it.

If they are to present a true and
fair view, financial statements must not only supply relevant information to
describe the nature and range of an organisation’s activities, explain how it
is financed and supply definitive information on its operations, but do so in a
clear and comprehensible manner which allows comparisons between financial
years. It is with these goals in mind that the present document has been drawn
up.

The accounting system of the EDF
comprises general accounts and budget accounts. The budget accounts give a
detailed picture of the implementation of the budget. They are based on the
cash accounting principle. The general accounts allow for the preparation of
the financial statements as they show all expenses and income for the
financial year based on accrual accounting rules and are designed to establish
the financial position in the form of a balance sheet at 31 December.

Article 120 of the 10th EDF
Financial Regulation sets out the accounting principles to be applied in
drawing up the financial statements:

– going concern basis;

– prudence;

– consistent accounting
methods;

– comparability of
information;

– materiality;

– no netting;

– reality over appearance;

– accrual-based
accounting.

1.3.     BASIS
OF PREPARATION

1.3.1.  Functional and reporting currency

The financial statements are
presented in millions of euros, the euro being the functional and reporting
currency of the EDF.

1.3.2.  Currency
and basis for conversion

Foreign currency transactions are
translated into euros using the exchange rates prevailing on the dates of the
transactions. Foreign exchange gains and losses resulting from the settlement
of foreign currency transactions and from the translation at year-end exchange
rates of monetary assets and liabilities denominated in foreign currencies are
recognised in the economic outturn account.

Year-end balances of monetary
assets and liabilities denominated in foreign currencies are converted into
euros on the basis of the below exchange rates applying on 31 December:

Currency || 31.12.2011 || 31.12.2010 || Currency || 31.12.2011 || 31.12.2010

BGN || 1.9558 || 1.9558 || LTL || 3.4528 || 3.4528

CZK || 25.7870 || 25.0610 || PLN || 4.4580 || 3.9750

DKK || 7.4342 || 7.4535 || RON || 4.3233 || 4.2620

EEK || N/A || 15.6466 || SEK || 8.9120 || 8.9655

GBP || 0.8353 || 0.8607 || CHF || 1.2156 || 1.2504

HUF || 314.5800 || 277.9500 || JPY || 100.2000 || 108.6500

LVL || 0.6995 || 0.7094 || USD || 1.2939 || 1.3362

1.3.3.  Use of estimates

In accordance with IPSAS and
generally accepted accounting principles, the financial statements necessarily
include amounts based on estimates and assumptions by management based on the
most reliable information available. Significant estimates include, but are not
limited to, amounts for provisions, impairment losses on accounts receivable
and accrued charges. Actual results could differ from those estimates. Changes
in estimates are reflected in the period in which they become known.

1.4.     BALANCE SHEET

1.4.1   Pre-financing amounts

Pre-financing is a payment intended
to provide the beneficiary with a cash advance, i.e. a float. It may be split
into a number of payments over a period defined in the particular pre-financing
agreement. The float or advance is repaid or used for the purpose for which it
was provided during the period defined in the agreement. If the beneficiary
does not incur eligible expenditures, he/she has to return the pre-financing
advance to the EDF. The amount of the pre-financing is reduced (wholly or
partially) by the acceptance of eligible costs and amounts returned.

At year-end, outstanding pre-financing
amounts are valued at the original amount(s) paid less: amounts returned,
eligible amounts cleared, estimated eligible amounts not yet cleared at
year-end and value reductions.

Interest on pre-financing is
recognised as it is earned in accordance with the provisions of the relevant
agreement. An estimate of the accrued interest revenue, based on the most reliable
information, is made at year-end.

1.4.2   Receivables

Receivables are carried
at original amount less write-down for impairment. A write-down for impairment
of receivables is established when there is objective evidence that the full
amount due cannot be collected according to the original terms of the
receivable. The amount of the write-down is the difference between the asset’s
carrying amount and the recoverable amount, being the present value of expected
future cash flows, discounted at the market rate of interest for similar
borrowers. Also recognised is a general write-down for outstanding recovery
orders not already subject to a specific write-down. This general write-down is
based on the historical loss rates. The amount of the write-down is recognised
in the economic outturn account.

1.4.3   Cash
and cash equivalents

Cash and cash
equivalents are financial instruments and are defined as short-term assets.
They include cash at hand, deposits held at call with banks and other
short-term highly liquid investments with original maturities of three months
or less.

1.4.4   Payables

A significant amount of the
payables of the EDF are not related
to the purchase of goods or services – instead they are unpaid cost claims from
beneficiaries of grants or other funding. They are recorded as payables for the
requested amount when the cost claim is received and, after verification,
accepted as eligible by the relevant financial agents. At this stage they are
valued at the accepted and eligible amount.

Payables arising from the purchase
of goods and services are recognised at invoice reception for the original
amount and corresponding expenses are entered in the accounts when the supplies
or services are delivered and accepted.

1.4.5   Provisions

Provisions are recognised when the
EDF has a present legal or constructive obligation towards third parties as a
result of past events; it is more likely than not that an outflow of resources
will be required to settle the obligation, and the amount can be reliably
estimated. The amount of the provision is the best estimate of the expenditures
expected to be required to settle the present obligation at the reporting date.

1.4.6   Accrued
and deferred income and charges

A critical element in accrual
accounting is the exercise of ensuring that transactions are recorded in the
accounting year to which they relate. This exercise is referred to as the
cut-off exercise. In particular, an assessment has to be made concerning
eligible expenses incurred by beneficiaries of EDF funds but not yet reported
to the EDF (accrued charges). Conversely, some payments made in the current
year relate to subsequent periods (deferred charges) and these have to be
identified and included in the subsequent period(s).

According to the EDF accounting
rules, transactions and events are recognised in the financial statements in
the period to which they relate. At the end of the accounting period, accrued
expenses are recognised based on an estimated amount of the transfer obligation
of the period. The calculation of the accrued expenses is made in accordance
with detailed operational and practical guidelines issued by the Commission which
aim at ensuring that the financial statements reflect a true and fair view.

Revenue is also accounted for in
the period to which it relates. At year-end, if an invoice is not yet issued
but the service has been rendered, the supplies have been delivered by the EDF
or a contractual agreement exists (i.e. by reference to a treaty), an accrued
income will be recognised in the financial statements.

In addition, at year-end, if an
invoice is issued but the services have not yet been rendered or the goods supplied
have not yet been delivered, the revenue will be deferred and recognised in the
subsequent accounting period.

1.5.     ECONOMIC OUTTURN ACCOUNT

1.5.1   Revenue

There is no revenue budgeted for
the European Development Fund. The ordinary contributions from Member States
are treated as fund capital. Revenue comprises recovery of expenses and
interest income.

Recovery of expenses

For operations giving rise to
reimbursement of expenditures previously paid by the EDF to a final beneficiary
or third country, recovery orders and deductions from subsequent payments are
established and accounted for as follows:

– Recovery of expenses:
the recovery order issued results in a receivable with the corresponding entry
being income in the economic outturn account for that year; or,

– Recovery of
pre-financing amounts: in this case the amount is included under the
pre-financing heading on the balance sheet.

Interest income

Interest income is recognised in
the economic outturn account using the effective interest method. The interest
income comprises interest received or receivable on cash balances and
demandable deposits held with commercial banks and on late payment of
entitlements to the EDF. Interest income is recognised as it accrues.

1.5.2   Expenditure

Exchange expenses arising from the
purchase of goods and services are recognised when the supplies are delivered
and accepted. They are valued at original invoice cost.

Non-exchange expenses account for
the majority of the EDF's expenditure. They relate to transfers to
beneficiaries and can be of three types: entitlements, transfers under
agreement and discretionary grants, or contributions and donations.

Transfers are recognised as
expenses in the period during which the events giving rise to the transfer
occurred, as long as the nature of the transfer is allowed by regulation
(Financial Regulation or other) or a contract has been signed authorising the
transfer; any eligibility criteria have been met by the beneficiary; and a
reasonable estimate of the amount can be made.

When any request for payment or
cost claim is received and meets the recognition criteria, it is recognised as
an expense for the eligible amount. At year-end, incurred eligible expenses
already due to the beneficiaries but not yet reported are estimated and
recorded as accrued expenses.

Interest expense

Interest expense is recognised in
the economic outturn account using the effective interest method. The interest
expense comprises interest paid or payable and is recognised as it accrues.

1.6.     CONTINGENT ASSETS AND
LIABILITIES

1.6.1   Contingent assets

A contingent asset is a possible
asset that arises from past events and whose existence will be confirmed only
by the occurrence or non-occurrence of one or more uncertain future events not
wholly within the control of the EDF. A contingent asset is disclosed when an
inflow of economic benefits or service potential is probable.

Contingent assets are assessed at
each balance sheet date to ensure that developments are appropriately reflected
in the financial statements. If it has become virtually certain that an inflow
of economic benefits or service potential will arise and the asset’s value can
be measured reliably, the asset and the related revenue are recognised in the
financial statements of the period in which the change occurs.

Guarantees are possible assets that
arise from past events and whose existence will be confirmed by the occurrence
or non-occurrence of the object of the guarantee. Guarantees can thus qualify
as contingent assets. A guarantee is settled when the object of the guarantee
no longer exists. It is crystallised when the conditions are fulfilled for
calling for a payment from the guarantor.

1.6.2   Contingent
liabilities

A contingent liability is a
possible obligation that arises from past events and whose existence will be
confirmed only by the occurrence or non-occurrence of one or more uncertain
future events not wholly within the control of the EDF; or a present obligation
that arises from past events but is not recognised because: it is not probable
that an outflow of resources embodying economic benefits or service potential
will be required to settle the obligation or, in the rare circumstances where
the amount of the obligation cannot be measured with sufficient reliability. A
contingent liability is disclosed unless the possibility of an outflow of
resources embodying economic benefits or service potential is remote.

Contingent liabilities are assessed
at each balance sheet date to determine whether an outflow of resources
embodying economic benefits or service potential has become probable. If it
becomes probable that an outflow of resources embodying economic benefits or
service potential will be required for an item dealt with as contingent
liability, a provision is recognised in the financial statements of the period
in which the change of probability occurs.

2.         NOTES TO THE BALANCE
SHEET

NON CURRENT ASSETS

2.1      LONG-TERM PRE-FINANCING

|| || || || EUR millions

|| 8th EDF || 9th EDF || 10th EDF || TOTAL 31.12.2011 || TOTAL 31.12.2010

Long-term pre-financing || - || 191 || 189 || 380 || 353

TOTAL || - || 191 || 189 || 380 || 353

Many contracts provide for payments
of advances before the commencement of works, deliveries of supplies or the
provision of services. Sometimes the payment schedules of contracts foresee
payments on the basis of progress reports. Pre-financing is normally paid in
the currency of the country or territory where the project is executed.

Pre-financing is presented net of
open recovery orders related to advances and estimated amounts not yet cleared
at year-end. The timing of the recoverability or utilisation of the
pre-financing governs whether it is disclosed as a short-term or a long-term
pre-financing asset. The utilisation is defined by the project's underlying
agreement. Any repayments or utilisation due within twelve months of the
reporting date is disclosed as short-term pre-financing and therefore as
current assets. As many of the EDF projects are long-term in nature, it is
necessary that the related advances are available for more than one year. Thus
these pre-financing amounts are shown as long-term assets.

The increase in long-term
pre-financing of EUR 28 million compared to 31.12.2010 is mainly explained by
an increase in long-term pre-financing related to Intra ACP Projects (EUR 49
million)  and to Administrative Expenditure (EUR 14 million), offset by a
decrease in the long-term pre-financing related to Sectoral Policy (EUR 17
million) and to Programmable Aid (EUR 15 million).

CURRENT ASSETS

2.2      SHORT-TERM PRE-FINANCING

|| || || || EUR millions

|| 8th EDF || 9th EDF || 10th EDF || TOTAL 31.12.2011 || TOTAL 31.12.2010

Short-term pre-financing (gross) || 148 || 1 659 || 1 608 || 3 415 || 3 115

Less estimated clearing of pre-financing || (78) || (1 090) || (1 072) || (2 240) || (2 019)

TOTAL || 70 || 569 || 536 || 1 175 || 1 096

The increase in net short-term
pre-financing of EUR 79 million is mainly due to an increase in net short-term
pre-financing related to Administrative Expenditure (EUR 77 million), Programmable
Aid (EUR 29 million), Institutional support (EUR 44 million) and Sectoral
Policy (EUR 25 million). This increase was offset by a decrease in Intra ACP
Projects (EUR 68 million), Other aid programmes related to former EDFs (EUR 20
million), and Emergency aid (EUR 7 million).

2.2.1
Guarantees received in respect of pre-financing

Guarantees are held to secure
pre-financing and released when the final claim under a project is paid. A
guarantee has two different values referred to as the “nominal” and the
“on-going” values. For the “nominal” value, the generating event is linked to
the existence of the guarantee. For the “on-going” value, the guarantee’s
generating event is the pre-financing payment and/or subsequent clearings.

At 31 December 2011 the
"nominal" value of guarantees received by the EDF in respect of
pre-financing amounts to EUR 637 million. The "on-going" value of
those guarantees amounts to EUR 394 million. At 31 December 2010 these
values were EUR 674 million and EUR 363 million respectively.

2.3      SHORT-TERM
RECEIVABLES

|| || || || EUR millions

|| 8th EDF || 9th EDF || 10th EDF || TOTAL 31.12.2011 || TOTAL 31.12.2010

Receivables from customers || 2 || 10 || 1 || 13 || 10

Receivables from Member States || - || - || 9 || 9 || 125

Accrued income and deferred charges || 2 || 77 || 10 || 89 || 112

TOTAL || 4 || 87 || 20 || 111 || 247

2.3.1 Receivables from
customers

|| || || || EUR millions

|| 8th EDF || 9th EDF || 10th EDF || TOTAL 31.12.2011 || TOTAL 31.12.2010

Receivables from customers || 6 || 18 || 2 || 27 || 18

-Impairment of receivables from customers || (4) || (8) || (1) || (13) || (8)

TOTAL || 2 || 10 || 1 || 13 || 10

These are recovery orders entered
in the accounts at 31 December 2011 as established entitlements to be recovered
and not already included under other headings on the assets side of the balance
sheet. The closing balance for recovery orders represents the value of recovery
orders issued but not yet paid at year-end.

A provision is estimated for impairment losses for the amounts owed by
beneficiaries that are unlikely to be recovered. This provision has two
elements:

–
Specific
cases: Based on the risk of non recovery.

–
General:
Applying a provision based on historical loss rates to receivables which are
not subject to a specific write-down.

The fact that such an adjustment is
made does not mean that the future recovery of these amounts is waived.

The movements in open recovery
orders during the period are detailed below.

|| || || || EUR millions

|| 8th EDF || 9th EDF || 10th EDF || TOTAL 2011 || TOTAL 2010

Open recovery orders at beginning of year || 7 || 11 || 0 || 18 || 20

Recovery orders issued || 11 || 63 || 55 || 130 || 164

Recovery orders closed || (12) || (56) || (55) || (123) || (166)

Cashed || (9) || (46) || (53) || (108) || (143)

Waived (art 73 FR) || 0 || (1) || 0 || (1) || (1)

Cancelled || (1) || (1) || 0 || (2) || (5)

Offset || (3) || (8) || (1) || (13) || (17)

Open recovery orders at end of year || 6 || 19 || 1 || 25 || 18

2.3.2 Receivables from Member
States

The EUR 9 million receivable from
Member States in the 10th EDF comprises  contributions receivable due from
Hungary and Portugal which were received in January and February 2012 respectively
and a cofinancing contribution from Denmark not yet due.

2.3.3 Accrued income and deferred
charges

Accrued income and deferred charges
mainly include accrued interest on pre-financing amounts. Furthermore, accrued
interest income on late payment of contributions is included under this
heading.

The decrease in accrued income and
deferred charges of EUR 23 million is explained by lower accrued interest on
pre-financing (EUR 23 million) (see note 3.4.2).

2.4      LIAISON ACCOUNTS

|| || || || EUR millions

|| 8th EDF || 9th EDF || 10th EDF || TOTAL 31.12.2011 || TOTAL 31.12.2010

to/from 6th EDF || (2 065) || (214) || - || (2 279) || (2 279)

to/from 7th EDF || - || 2 279 || - || 2 279 || 2 279

to/from 8th EDF || - || (3 037) || 584 || (2 453) || (2 563)

to/from 9th EDF || 3 037 || - || (3 529) || (491) || (450)

to/from 10th EDF || (584) || 3 529 || - || 2 944 || 3 013

TOTAL || 387 || 2 557 || (2 944) || 0 || 0

For reasons of efficiency, the
single treasury covering all the EDFs is allocated to the 10th EDF; this leads
to operations between the various EDFs, which are balanced out in the liaison
accounts between the various EDF balance sheets.

The major 2011 movements in the
liaison accounts include payments made by the 10th EDF for implementation of
the 8th and 9th EDFs and cash received by the 10th EDF related to contributions
called under the 9th EDF.

2.5      CASH AND CASH EQUIVALENTS[6]

|| || || || EUR millions

|| 8th EDF || 9th EDF || 10th EDF || TOTAL 31.12.2011 || TOTAL 31.12.2010

Cash at banks || - || - || 1 211 || 1 211 || 781

STABEX security accounts || - || - || 5 || 5 || 17

Co-financing bank accounts || - || 6 || 2 || 8 || 10

Democratic Republic Congo special fund[7] || - || - || 1 || 1 || 0

TOTAL || - || 6 || 1 218 || 1 224 || 808

2.5.1 Cash at banks

|| || || || EUR millions

|| 8th EDF || 9th EDF || 10th EDF || TOTAL 31.12.2011 || TOTAL 31.12.2010

Special accounts - financial institutions of Member States || - || - || 1 129 || 1 129 || 599

Current accounts – commercial banks || - || - || 80 || 80 || 180

Local Paying Agents || - || - || 2 || 2 || 1

TOTAL || - || - || 1 211 || 1 211 || 781

The overall increase in cash at
banks is mainly explained by a lower budget execution in 2011 than planned.

Local paying agent accounts
represent amounts held in bank accounts within ACP States and OCTs used for
making payments in local currency within the beneficiary state. These accounts
are kept in euros or in a currency of a Union Member State. In order to achieve
a more centralised management of payments, during 2011, 2 out of the 8
remaining local paying agent accounts were closed.

2.5.2 STABEX Security accounts

|| EUR millions

|| Balance at 31.12.2011 || Balance at 31.12.2010

Saint Lucia || 0 || 7

St Vincent and the Grenadines || 0 || 4

Ivory Coast || 2 || 2

Malawi || 1 || 1

Other countries || 2 || 3

TOTAL || 5 || 17

STABEX is the acronym for a European
Union compensatory finance scheme to stabilise export earnings of the ACP
countries. It was first introduced in the Lomé Convention (1975) with the
purpose of remedying the harmful effects of the instability of export revenue
from agricultural products. The balance on the STABEX security accounts
represents the total of STABEX funds available which will be transferred to the
relevant beneficiary ACP State at a future date. This balance is allocated to
the 10th EDF. In 2011, two STABEX security accounts were closed following the
winding up of the STABEX aid instrument.

In addition to these funds, there
are other STABEX funds held by beneficiary ACP States. Once the Commission and
the beneficiary (ACP) State reach agreement on how the STABEX funds are to be
utilised, a transfer convention is signed by both parties. In accordance with
the provisions of Article 211 of the Lomé IV Agreement[8] (as revised), the funds are transferred
into an interest bearing double signature account (European Commission and
Beneficiary State) opened in the name of the ACP State. The funds remain in
these double signature accounts until a FMO (Framework of Mutual Obligations)
justifies a transfer for a project.

The Commission's Authorising
Officer retains the power of signature over the account in order to ensure that
the funds are disbursed as intended. The funds in the double signature accounts
are the property of the ACP State and are consequently not recorded as assets
in the EDF accounts. The transfers to these accounts are recorded as STABEX
payments.

In 2011, EUR 26 million was
returned to the EDF from double signature accounts in ACP countries following
Article 1.4 of the Internal Agreement of the 10th EDF[9]. These funds were transferred mainly from
 Saint Lucia (EUR 9 million), Kenya (EUR 7 million) and Togo (EUR 4 million).  These revenues are
included in operating income (STABEX aid instrument) in the economic outturn
account of the 8th EDF.

2.5.3 Co-financing bank accounts

|| || || || EUR millions

|| 8th EDF || 9th EDF || 10th EDF || TOTAL 31.12.2011 || TOTAL 31.12.2010

Co-financing bank accounts || - || 6 || 2 || 8 || 10

TOTAL || - || 6 || 2 || 8 || 10

These bank accounts include amounts
related to co-financing agreements dated 2007 and earlier. These co-financing
funds are the property of the Member States concerned and hence a corresponding
amount is registered as payable. Therefore, the effect on the net assets is nil.

The Italian co-financing under the
9th EDF is still ongoing in Somalia.

The co-financing bank accounts of
the 10th EDF relate to old co-financing projects in the process of closure.
These funds will be returned to the Member States after instruction from the
Authorising Officer.

CURRENT LIABILITIES

2.6      SHORT-TERM PAYABLES

|| || || || EUR millions

|| 8th EDF || 9th EDF || 10th EDF || TOTAL 31.12.2011 || TOTAL 31.12.2010

Current payables || 9 || 146 || 243 || 399 || 487

Accrued charges || 20 || 168 || 151 || 339 || 286

Deferred capital contribution ||  - || - || 295 || 295 || 272

TOTAL || 29 || 315 || 689 || 1 033 || 1 045

Short-term payables include cost
statements received by the EDF under the framework of the grant and procurement
activities. They are recorded for the amount being claimed from the moment the
demand is received. The same procedure applies to invoices and credit notes
received under procurement activities. The cost claims concerned have been
taken into account for the year-end cut-off procedures. Following the cut-off
entries, estimated eligible amounts have been recorded as accrued charges.

2.6.1 Current payables

|| || || || EUR millions

|| 8th EDF || 9th EDF || 10th EDF || TOTAL 31.12.2011 || TOTAL 31.12.2010

Suppliers and other || 9 || 140 || 159 || 308 || 400

Payables to Member States – co-financing || - || 6 || 75 || 81 || 75

Sundry payables || - || - || 10 || 10 || 12

TOTAL || 9 || 146 || 243 || 399 || 487

2.6.1.1 Suppliers and other

Included under this heading are
amounts owed to suppliers as well as amounts payable to public bodies and third
states.

The decrease of EUR 92 million
compared to the previous reporting period includes primarly a EUR 62 million
decrease in payables to third states.

2.6.1.2 Payables to Member States
co-financing

Co-financing contributions received
are presented as payables to Member States as they fulfil the criteria of
revenues from non-exchange transactions under condition. The EDF is required to
use the contributions to deliver services to third parties or is otherwise
required to return the assets (the contributions received) to the Member
States. The outstanding payable for co-financing agreements represents the
co-financing contribution received less the expenses incurred related to the
project. The effect on the net assets is nil.

EUR 8 million of the co-financing
payables to Member States relate to co-financing agreements dated 2007 and
earlier. These funds are kept in dedicated bank accounts, see 2.5.3,
co-financing bank accounts, above.

In 2011, new co-financing
contributions of EUR 7 million were received (Belgium EUR 3 million,
United Kingdom EUR 2 million, Sweden EUR 1 million and Switzerland EUR
1 million). The funds relating to co-financing agreements signed in 2008
and later are not kept in dedicated bank accounts.

The co-financing payables were
decreased by EUR 2 million to recognise revenue  related to the co-financing
projects (see 3.1.4 and 3.2.2).

2.6.1.3 Sundry payables

Sundry payables mainly comprise
unallocated cash receipts and returned amounts.

2.6.2 Accrued charges

|| || || || EUR millions

|| 8th EDF || 9th EDF || 10th EDF || TOTAL 31.12.2011 || TOTAL 31.12.2010

Accrued charges || 20 || 168 || 151 || 339 || 286

TOTAL || 20 || 168 || 151 || 339 || 286

At year-end, an assessment is made
concerning eligible expenses incurred by beneficiaries of EDF funds but not yet
reported. Following these cut-off calculations, estimated eligible amounts are
recorded as accrued charges. Estimated utilisation of pre-financing amount is
presented as an estimated clearing of pre-financing (see 2.2).

2.6.3 Deferred fund capital
contribution

|| || || EUR millions

|| 8th EDF || 9th EDF || 10th EDF || TOTAL 31.12.2011 || TOTAL 31.12.2010

United Kingdom || - || - || 289 || 289 || 269

Ireland || - || - || 5 || 5 || 3

Lithuania || - || - || 1 || 1 || -

TOTAL || - || - || 295 || 295 || 272

This comprises Member States'
contributions paid in advance.

NET ASSETS

2.7      CALLED FUND CAPITAL

|| || EUR millions

|| 8th EDF || 9th EDF || 10th EDF || TOTAL

Fund Capital || 12 840 || 11 699 || 21 152 || 45 691

Uncalled fund capital || - || (660) || (21 152) || (21 812)

Called fund capital 31.12.2010 || 12 840 || 11 039 || - || 23 879

|| || || ||

Fund Capital || 12 840 || 11 699 || 21 152 || 45 691

Uncalled fund capital || - || - || (18 712) || (18 712)

Called fund capital 31.12.2011 || 12 840 || 11 699 || 2 440 || 26 979

The fund capital represents the
total amount of contributions from the Member States for the relevant EDF fund
as laid down in each of the Internal Agreements.

Uncalled funds represent the
initial allocation not yet called up from Member States.

Called fund capital represents the
amount of the initial allocations which has been called up for transfer to the
treasury accounts by the Member States in accordance with the procedure laid
down in Article 16 of the 10th EDF Financial Regulation.

The capital of the 8th and the 9th EDF
has been called up and received in its entirety.

The 10th EDF entered into force in
2008 with a fund capital amounting to EUR 21 152 million,
according to the Internal Agreement applicable to the 10th EDF.

Fund capital

|| || || || EUR millions

Contributions || % || uncalled 9th EDF 31.12.2010 || called up in 2011 || uncalled 9th EDF 31.12.2011

Austria || 2.65 || (19) || 19 || -

Belgium || 3.92 || (27) || 27 || -

Denmark || 2.14 || (15) || 15 || -

Finland || 1.48 || (10) || 10 || -

France || 24.30 || (170) || 170 || -

Germany || 23.36 || (164) || 164 || -

Greece || 1.25 || (9) || 9 || -

Ireland || 0.62 || (4) || 4 || -

Italy || 12.54 || (88) || 88 || -

Luxemburg || 0.29 || (2) || 2 || -

Netherlands || 5.22 || (37) || 37 || -

Portugal || 0.97 || (7) || 7 || -

Spain || 5.84 || (41) || 41 || -

Sweden || 2.73 || (19) || 19 || -

United Kingdom || 12.69 || (89) || 89 || -

EIB || N.A. || 40 || (40) || -

TOTAL || 100,00 || (660) || 660 || -

|| || || || EUR millions

Contributions || % || uncalled 10th EDF 31.12.2010 || called up in 2011 || uncalled 10th EDF 31.12.2011

Austria || 2.41 || (510) || 59 || 451

Belgium || 3.53 || (747) || 86 || 661

Denmark || 2.00 || (423) || 49 || 374

Finland || 1.47 || (311) || 36 || 275

France || 19.55 || (4 135) || 477 || 3 658

Germany || 20.50 || (4 336) || 500 || 3 836

Greece || 1.47 || (311) || 36 || 275

Ireland || 0.91 || (192) || 22 || 170

Italy || 12.86 || (2 720) || 314 || 2 406

Luxemburg || 0.27 || (57) || 7 || 51

Netherlands || 4.85 || (1 026) || 118 || 908

Portugal || 1.15 || (243) || 28 || 215

Spain || 7.85 || (1 660) || 192 || 1 469

Sweden || 2.74 || (580) || 67 || 513

United Kingdom || 14.82 || (3 135) || 362 || 2 773

Cyprus || 0.09 || (19) || 2 || 17

Czech Republic || 0.51 || (108) || 12 || 95

Estonia || 0.05 || (11) || 1 || 9

Hungary || 0.55 || (116) || 13 || 103

Lithuania || 0.12 || (25) || 3 || 22

Latvia || 0.07 || (15) || 2 || 13

Malta || 0.03 || (6) || 1 || 6

Poland || 1.3 || (275) || 32 || 243

Slovenia || 0.18 || (38) || 4 || 34

Slovakia || 0.21 || (44) || 5 || 39

Bulgaria || 0.14 || (30) || 3 || 26

Romania || 0.37 || (78) || 9 || 69

TOTAL || 100,00 || (21 152) || 2 440 || 18 712

In 2011, the final call under the 9th
EDF was made and the first contributions under the 10th EDF, in
which the 27 Member States participate, were called.

2.8      OTHER
RESERVES

|| || || || EUR millions

|| 8th EDF || 9th EDF || 10th EDF || TOTAL 31.12.2011 || TOTAL 31.12.2010

to/from 6th EDF || 94 || 490 || - || 584 || 584

to/from 7th EDF || 533 || 1 135 || - || 1 668 || 1 668

to/from 8th EDF || - || 2 762 || 141 || 2 903 || 2 864

to/from 9th EDF || (2 762) || - || 161 || (2 601) || (2 531)

to/from 10th EDF || (141) || (161) || - || (302) || (333)

TOTAL || (2 276) || 4 227 || 301 || 2 252 || 2 252

Since the entry into force of the
10th EDF in 2008, all decommitted funds of previous EDFs are transferred to the
reserve of the 10th EDF. This reserve may be committed only under the
conditions set out in Article 1.4 of the Internal Agreement on the 10th EDF.

In 2011, EUR 38 million and EUR 80
million of decommitted funds were transferred to the 10th EDF from the 8th and
9th EDFs respectively and EUR 150 million were transferred from performance
reserve of the 10th EDF to the 9th EDF.[10]

On 23 May 2011 a Council decision
was taken[11] to
allocate an amount of EUR 200 million to South Sudan from funds decommitted from
projects under the 9th and previous EDF's. At year-end 2011 this amount is
still allocated to the performance reserve of the 10th EDF but should be
released from these reserves in 2012.

3.         NOTES
TO THE ECONOMIC OUTTURN ACCOUNT

3.1      OPERATING REVENUE

EUR millions

|| 8th EDF || 9th EDF || 10th EDF || TOTAL 2011 || TOTAL 2010

Recovery of expenses || 3 || 11 || 2 || 16 || 29

Recovery of STABEX funds || 26 || - || - || 26 || 32

Exchange gains || 11 || 37 || 7 || 54 || 78

Operating income co-financing || - || - || 2 || 2 || 1

TOTAL || 40 || 49 || 10 || 99 || 140

3.1.1 Recovery of expenses

This heading represents the
recovery orders issued by the EDF and the deduction from subsequent payments
recorded in the EDF accounting system, to recover expenditures previously paid
out, based on controls, audits or eligibility analysis. It should be noted that
recovery of pre-financing amounts is not included as revenue, but credited to the
pre-financing heading on the balance sheet.

3.1.1.1 Recovery of undue payments

In 2011, recovery orders for EUR 12
million were issued in respect of undue payments, compared to EUR 11 million in
2010. Of these, EUR 8 million related to the recovery of expenses and were thus
recorded as operating revenue. EUR 4 million represented recoveries of
pre-financing amounts paid and were credited to the pre-financing asset on the
balance sheet.

The nature of the recovery of undue
payments can be summarised as follows:

EUR millions ||

|| Revenue || Pre-financing || TOTAL 2011 || Revenue || Pre-financing || TOTAL 2010

Error || 2 || 1 || 3 || 1 || 1 || 2

Irregularity || 6 || 3 || 8 || 5 || 3 || 8

OLAF Notified || 1 || - || 1 || 1 || - || 1

TOTAL || 8 || 4 || 12 || 7 || 4 || 11

3.1.2 Recovery of STABEX funds

In 2011, EUR 26 million was
returned to the EDF from double signature accounts in ACP countries following
Article 1.4 of the Internal Agreement of the 10th EDF[12]. These funds were transferred mainly from
 Saint Lucia (EUR 9 million), Kenya (EUR 7 million) and Togo (EUR 4 million). These revenues are included in operating income (STABEX aid instrument) in the
economic outturn account of the 8th EDF.

3.1.3 Exchange gains

Exchange gains arise
from the everyday activities and related transactions made in currencies other
than the euro, as well as the year-end revaluation required to prepare the
annual accounts. They contain both realised and unrealised gains.

3.1.4 Operating income
co-financing

The operating income relating to
co-financing represents the contributions used (see 3.2.2). As these
contributions fulfil the criteria of revenues from non-exchange transactions
under condition, the contribution is recognised in accordance with the
implementation of the co-financing project.

3.2      OPERATING EXPENSES

EUR millions

|| 8th EDF || 9th EDF || 10th EDF || TOTAL 2011 || TOTAL 2010

Operating expenses – aid instruments || 114 || 879 || 1 640 || 2 633 || 2 852

Operating expenses co-financing || - || - || 2 || 2 || 1

Exchange losses || 11 || 41 || 8 || 61 || 58

Impairment of receivables || 3 || 4 || - || 7 || 3

TOTAL || 128 || 924 || 1 650 || 2 702 || 2 914

3.2.1 Operating expenses – aid
instruments

|| || || || EUR millions

|| 8th EDF || 9th EDF || 10th EDF || TOTAL 2011 || TOTAL 2010

Programmable aid || 58 || 56 || 1 136 || 1 251 || 1 127

Macro-economic support || - || 51 || - || 51 || 35

Sectoral policy || 0 || 372 || 0 || 371 || 765

Interest rate subsidies || 0 || - || - || 0 ||

Intra ACP projects || - || 301 || 349 || 650 || 336

Emergency aid || - || 63 || 149 || 212 || 442

Refugee aid || 0 || - || - || 0 || (1)

Risk capital || 19 || - || - || 19 ||

STABEX || 12 || - || - || 12 || 46

Sysmin[13] || (8) || - || - || (8) || 10

Other aid programmes related to former EDFs || - || 24 || - || 24 || (17)

Debt relief - Heavily Indebted Poor Countries and World Bank || - || - || - || - || 14

Institutional support || - || 2 || 6 || 8 || 44

Compensation export receipts || 32 || 10 || - || 42 || 37

Democratic Republic Congo Fund || - || 0 || - || 0 || 15

Total || 114 || 879 || 1 640 || 2 633 || 2 852

The EDF operating
expenditure covers the various aid instruments and takes different forms,
depending on how the money is paid out and managed.

3.2.2 Operating expenses
co-financing

These are the expenses
incurred on co-financing projects in 2011. As the co-financing contributions
received fulfil the criteria of revenues from non-exchange transactions under
condition, a corresponding amount of contributions has been recognised as
operating revenue (see 3.1.4).

3.2.3 Exchange losses

Exchange losses occur
on the everyday activities and related transactions made in currencies other
than the euro, as well as the year-end revaluation required to prepare the
annual accounts – they are both realised and unrealised.

Looking at the net
position, there was a net exchange loss of EUR 6 million for the year (exchange
losses of EUR 61 million less exchange gains of EUR 54 million).

3.2.4 Impairment of receivables

This heading includes mainly
pre-financing corrections and amounts written down/lost on realisation
concerning debtors.

3.3      ADMINISTRATIVE
EXPENSES

EUR millions

|| 8th EDF || 9th EDF || 10th EDF || TOTAL 2011 || TOTAL 2010

Administrative expenses || 0 || 3 || 72 || 75 || 86

TOTAL || 0 || 3 || 72 || 75 || 86

This heading includes support
expenditure; i.e. the administrative costs related to the programming and
implementation of the EDFs. This includes expenses for preparation, follow-up,
monitoring, and evaluation of projects as well as expenses for computer
networks, Technical Assistance etc.

3.4      FINANCIAL REVENUE

EUR millions

|| 8th EDF || 9th EDF || 10th EDF || TOTAL 2011 || TOTAL 2010

Interest income - European banks || - || 0 || 1 || 1 || 1

Interest income – STABEX || 0 || - || - || 0 || 0

Interest income on late payments of recovery orders || 0 || 0 || 0 || 0 || 3

Interest on pre-financing || (1) || (19) || (1) || (21) || 91

TOTAL || (1) || (19) || 0 || (20) || 95

The interest income in 2011 remains
low due to the continued low interest rates.

3.4.1 Interest income
on late payments of recovery orders

This is interest earned on late
payments of recovery orders by debtors, including late payments of
contributions by Member States. Such funds can be used for financing projects
in accordance with Articles 1 and 6 of the Internal Agreement applicable to the
10th EDF.

3.4.2 Interest on pre-financing

Interest on pre-financing is
recognised in the accounts in accordance with the provisions of article 7
paragraph 3 and article 8 of the 10th EDF Financial Regulation.

The accrued interest on
pre-financing amounts for 2011 is lower than that of 2010 and in fact the reversal
of the 2010 accrual resulted in negative interest revenue. This was caused by a
reclassification during 2011 of several contracts which were previously labelled
as grant contracts in 2010 to joint management contracts with International
organisations. According to the provisions of the Financial Regulation articles
mentioned above the former type of contracts give rise to calculation of
interest accruals on prefinancing while the latter type of contracts does not.

4.         NOTES TO THE CASH FLOW
STATEMENT

4.1      PURPOSE AND PREPARATION OF THE CASH FLOW STATEMENT

Cash flow information
is used to provide a basis for assessing the ability of the EDF to generate
cash and cash equivalents, and its needs to utilise those cash flows.

The cash flow statement
is prepared using the indirect method. This means that the net surplus or
deficit for the financial year is adjusted for the effects of transactions of a
non-cash nature and any deferrals or accruals of past or future operating cash
receipts or payments.

Cash flows arising from
transactions in a foreign currency are recorded in the EDF's reporting currency
(euro), by applying to the foreign currency amount the exchange rate between
the euro and the foreign currency at the date of the cash flow.

4.2      OPERATING ACTIVITIES

The EDF cash flow
statement only shows cash flows from operating activities as the EDF does not
have investment or financing activities. The objective of the operating
activities is to participate in the achievement of policy targeted outcomes.

5.         CONTINGENT ASSETS AND
LIABILITIES AND OTHER DISCLOSURES

5.1      CONTINGENT ASSETS

EUR millions

|| 8th EDF || 9th EDF || 10th EDF || TOTAL 31.12.2011 || TOTAL 31.12.2010

Performance guarantees || 16 || 221 || 88 || 325 || 360

Retention guarantees || 5 || 151 || 40 || 197 || 227

Contingent assets relating to legal cases || - || 1 || - || 1 || 1

TOTAL || 21 || 373 || 128 || 523 || 587

5.1.1 Performance
guarantees

Performance guarantees
are sometimes requested to ensure that beneficiaries of EDF funding meet the
obligations of their contracts with the EDF.

The decrease of EUR 35
million in performance guarantees is a difference between the  guarantees
released and new guarantees received. Most of the guarantees were relased under
the 8th EDF (EUR 23 million linked mainly to programmable aid) and 9th EDF (EUR
90 million mainly linked to Sectoral policy aid).

5.1.2 Retention
guarantees

Retention guarantees
concern only works contracts. Typically, 10% of the interim payments to
beneficiaries are withheld to ensure that the contractor fulfils his/her
obligations. These withheld amounts are reflected as amounts payable. Subject
to the approval of the contracting authority, the contractor may instead submit
a retention guarantee which replaces the amounts withheld on interim payments.
These received guarantees are disclosed as contingent assets.

The decrease of EUR 30
million in retention guarantees is a difference between the  guarantees
released and new guarantees received. Most of the guarantees were released
under the 9th EDF (EUR 63 million linked mainly to Sectoral policy aid). The
new guarantees were mainly received under the 9th EDF (EUR 31 million
mainly linked to Sectoral policy aid) and the 10th EDF (EUR 22 million).

5.2      CONTINGENT
LIABILITIES

EUR millions

|| 8th EDF || 9th EDF || 10th EDF || TOTAL 31.12.2011 || TOTAL 31.12.2010

Amounts relating to legal cases || - || 0 || - || 0 || 6

TOTAL || - || 0 || - || 0 || 6

The above amounts relate to actions
for damages currently being brought against the EDF, other legal disputes and
the estimated legal costs. All contingent liabilities and commitments would be
financed, should they fall due, by the EDF in the future.

5.3      OTHER
DISCLOSURES

5.3.1
Budgetary commitments

EUR millions

|| 8th EDF || 9th EDF || 10th EDF || TOTAL 31.12.2011 || TOTAL 31.12.2010

Outstanding budgetary commitments not yet paid || 157 || 1 643 || 3 794 || 5 594 || 5 991

Related amounts included in the economic outturn account || (29) || (308) || (309) || (646) || (714)

TOTAL || 128 || 1 335 || 3 485 || 4 948 || 5 277

Outstanding budgetary commitments
represent open commitments for which payments and/or decommitments have not yet
been made. This is a normal consequence of the existence of multiannual
programmes. At 31 December 2011 the outstanding budgetary commitments totalled
EUR 5 594 million. The amount disclosed as a future commitment to be funded is
this outstanding budgetary commitment less related amounts that have been
included as expenses in the 2011 economic outturn account, giving a total of
EUR 4 948 million.

6.         FINANCIAL
RISK MANAGEMENT

The following disclosures with
regard to the financial risk management of the European Development Fund relate
to the treasury operations carried out by the European Commission on behalf of
the European Development Fund in order to implement its resources.

6.1      RISK MANAGEMENT POLICIES
AND HEDGING ACTIVITIES

The rules and principles for the
management of the EDF's treasury operations are laid down in Council Regulation
215/2008 on the Financial Regulation applicable to the 10th EDF, and in the
Internal Agreement.

As a result of the above
regulation, the following main principles apply:

– The EDF contributions
are paid by Member States in special accounts opened with the bank of issue of
each Member State or the financial institution designated by it. The amounts of
the contributions shall remain in those special accounts until the payments of
EDF need to be made.

– EDF contributions are
paid by Member States in EUR, while the EDF's payments are denominated in EUR
and in other currencies, including less well-known ones.

– Bank accounts opened by
the Commission on behalf of the EDF may not be overdrawn.

In addition to the special accounts,
other bank accounts are opened by the Commission on behalf of the EDF, with
financial institutions (central banks and commercial banks), for the purpose of
executing payments and receiving receipts other than the Member State
contributions to the budget according to art. 44 of the Council Regulation
215/2008 (see 6.4 below).

All commercial banks where accounts
other than the "special accounts" mentioned above have been opened
for the EDF, are selected by the Commission by call for tenders.

Treasury and payment operations are
highly automated and rely on modern information systems. Specific procedures
are applied to guarantee system security and to ensure segregation of duties in
line with the Financial Regulation, the Commission’s internal control standards,
and audit principles.

A written set of guidelines and
procedures regulate the management of the treasury and payment operations with
the objective of limiting operational and financial risk and ensuring an adequate level of
control. They cover the different areas of operation, and compliance with the
guidelines and procedures is checked regularly.

6.2      MARKET
RISK

6.2.1   Currency risk

All contributions are held in EUR,
and other currencies are purchased only when they are needed for the execution of
payments. As a result the EDF's treasury operations are not exposed to currency
risk.

6.2.2   Interest
rate risk

The EDF does not borrow monies; as
a consequence it is not exposed to interest rate risk.

It however earns interest on
balances it holds on its different banks accounts. The Commission, on behalf of
the EDF, has therefore put in place measures to ensure that interest earned
regularly reflect market interest rates as well as their possible fluctuation.

Overnight balances held on
commercial bank accounts are remunerated on a daily basis. The remuneration of
balances on such accounts is based on variable market rates to which a
contractual margin (positive or negative) is applied. For most of the accounts
the interest calculation is linked to the EONIA (Euro Over Night Index
Average), and is adjusted to reflect any fluctuations of this rate. For some
other accounts the interest calculation is linked to the ECB marginal rate (the
one used for the ECB refinancing operations). As a result no risk is taken by
the EDF that its balances be remunerated at rates lower than market rates.

6.3      CREDIT RISK (COUNTERPARTY
RISK)

Most of the EDF's treasury
resources are kept, in accordance with Council Regulation 215/2008, in the
"special accounts" opened by Member States for the payment of their
contributions. The majority of such accounts are held with Member States'
treasuries or national central banks. These institutions carry the lowest
counterparty risk for the EDF (exposure is with its Member States).

For the part of the EDF's treasury
resources kept with commercial banks in order to cover the execution of
payments, replenishment of these accounts is executed on a just-in-time basis
and is automatically managed by the Commission treasury's cash management
system. Minimum cash levels, proportional to the average amount of daily
payments made from it, are kept on each account. As a consequence the amounts
kept overnight on these accounts remain constantly at low levels which ensure
the EDF's risk exposure is limited.

In addition, specific guidelines
are applied for the selection of commercial banks in order to further minimise
counterparty risk to which the EDF is exposed.

All commercial banks are selected
by call for tenders. The minimum short-term credit rating required for
admission to the tendering procedures is Moody's P-1 or equivalent (S&P A-1
or Fitch F1). A lower level may be required in specific and duly justified
circumstances.

6.4      LIQUIDITY
RISK

Budget principles applied to the
EDF ensure that overall cash resources for the budgetary period are always
sufficient for the execution of all related payments. Indeed the total Member
States' contributions equal the overall amount of payment appropriations for
the relevant budgetary period.

Member States contributions to EDF,
however, are paid in three instalments per year, while payments are subject to
certain seasonality.

In order to ensure that treasury
resources are always sufficient to cover the payments to be executed in any
given month, information on the treasury situation is regularly exchanged
between the Commission' treasury and the relevant spending departments in order
to ensure that payments executed in any given period do not exceed the
available treasury resources.

In addition to the above, in the
context of the EDF's daily treasury operations, automated cash management tools
ensure that sufficient liquidity is available on each of the EDF's bank
accounts, on a daily basis.

7.         RELATED
PARTY DISCLOSURES

No related party transactions requiring
separate disclosure under this heading have been identified.

8.         EVENTS
AFTER THE BALANCE SHEET DATE

At the date of transmission of
these accounts, no material issues had come to the attention of the Accounting
Officer of the EDF or were reported to him that would require separate
disclosure under this section. The annual accounts and related notes were
prepared using the most recently available information and this is reflected in
the information presented above.

9.         RECONCILIATION ECONOMIC
OUTTURN - BUDGET OUTTURN

The economic outturn of the year is
calculated on the basis of accrual accounting principles. The budget outturn is
however based on cash accounting rules, in accordance with the Financial
Regulation. As both are the result of the same underlying transactions, it is a
useful control to ensure that they are reconcilable. The table below shows this
reconciliation, highlighting the key reconciling amounts, split between revenue
and expenditure items.

|| || EUR millions

|| 2011 || 2010

|| ||

ECONOMIC OUTTURN OF THE YEAR || (2 700) || (2 765)

|| ||

REVENUE || ||

Entitlements not affecting the budget outturn || (52) || (33)

Entitlements established in the current year but not yet collected || (3) || (4)

Entitlements established in previous years and collected in the current year || 10 || 10

Net effect of pre-financing || 46 || 53

Net accrued revenue || (13) || (173)

|| ||

EXPENDITURE || ||

Expenses of the current year not yet paid || 98 || 178

Expenses of previous years paid in the current year || (249) || (155)

Payment cancellations || 17 || 39

Net effect of pre-financing || (346) || (353)

Net accrued expenses || 317 || (31)

|| ||

BUDGET OUTTURN OF THE YEAR || (2 874) || (3 233)

9.1 Reconciling items – Revenue

The budgetary revenue of a
financial year corresponds to the revenue collected from entitlements
established in the course of the year and amounts collected from entitlements
established in previous years.

The entitlements not affecting
the budget outturn are recorded in the economic outturn but from a
budgetary perspective cannot be considered as revenues as the cashed amount is
transferred to reserves and cannot be recommitted without a Council decision.

The entitlements established in
the current year but not yet collected are to be deducted from the economic
outturn for reconciliation purposes as they do not form part of budgetary
revenue. On the contrary, the entitlements established in previous years and
collected in the current year must be added to the economic outturn for
reconciliation purposes.

The net effect of pre-financing
is the clearing of the recovered pre-financing amounts. This is a cash receipt
which has no impact on the economic outturn.

The net accrued revenue
mainly consists of accruals made for year-end cut-off purposes. Only the net
effect, i.e. the accrued revenue of the current year less the reversal of
accrued revenue of the previous year, is taken into consideration.

9.2 Reconciling items –
Expenditure

Expenses of the current year not
yet paid are
to be added for reconciliation purposes as they are included in the economic
outturn but do not form part of budgetary expenditure. On the contrary, the expenses
of previous years paid in the current year must be deducted from the
economic outturn for reconciliation purposes as they are part of the current
year's budgetary expenditure but have either no effect on the economic outturn
or they decrease the expenses in case of corrections.

The cash receipts from payment
cancellations do not affect the economic outturn whereas they impact the
budget outturn.

The net effect of pre-financing
is the combination of the new pre-financing amounts paid in the current year
(recognised as budgetary expenditure of the year) and the clearing of
pre-financing paid in the current year or previous years through the acceptance
of eligible costs. The latter represents an expense in accrual terms but not in
the budgetary accounts since the payment of the initial pre-financing had
already been considered as a budgetary expenditure at the time of its payment.

The net accrued expenses
mainly consist of accruals made for year-end cut-off purposes, i.e. eligible
expenses incurred by beneficiaries of EDF funds but not yet reported to the
EDF. Only the net effect, i.e. the accrued expenses of the current year less
the reversal of accrued expenses of the previous year, is taken into
consideration.

2. REPORT ON FINANCIAL IMPLEMENTATION

INTRODUCTORY NOTE

Previous EDFs

·
Decision
1/2000 of the ACP-EC Council of 27 July 2000 regarding transitional measures
provides for some of the unallocated resources from previous EDFs to be used
for programmes consistent with the relevant provisions of the Cotonou Agreement
and put into early application under transitional measures.

· Commission Decision
410/2001 of 16 March 2001, which fixes the allocations for the indicative
programmes of the ACP countries under the ACP-EC Partnership Agreement,
provides that the unallocated resources from previous EDFs up to a maximum of
EUR 1.2 billion are to be used for implementation in accordance with the rules
and procedures of the relevant EDFs, pending the entry into force of the
Financial Protocol to the 9th EDF.

· Commission Decision
1033/2001 of 15 June 2001 fixed the allocations for regional programmes and
intra-ACP cooperation under the Financial Protocol to the ACP-EC Partnership
Agreement.

· Commission Decision
1252/2002 of 11 July 2002 increased the envelope intended for intra-ACP
cooperation by EUR 60 million, from the general reserves of the 6th and 7th
EDFs, and also provided for the use of these additional funds pending the entry
into force of the Financial Protocol to the 9th EDF, in accordance with the
rules and procedures applicable to the original EDFs.

· Lastly, Decision 3/2002
of the ACP-EC Council of Ministers of 23 December 2002 took an amount of EUR 25
million from the unallocated resources of the 8th EDF (general reserve) and
allocated it to regional cooperation under the ACP-EC Partnership Agreement.

· As the 6th EDF was
closed in 2006 and the 7th EDF was closed in 2008, the annual accounts no
longer contain implementation tables for these EDFs. However, implementation of
the transferred balances can be found in the 9th EDF.

· As in past years, to
ensure transparency in the presentation of the accounts for 2009, the tables
below set out separately for the 8th EDF the part used for Lomé Convention
programming and the part used for programming under the Cotonou Agreement.
Regarding the latter, entry in the accounts and the presentation of accounts is
based on Article 3(2) of Annex IV to the ACP-EC Partnership Agreement, as
regards countries. That Article gives the ACP countries an A envelope to cover
macroeconomic support and support for programmes and projects and a B envelope
to cover unforeseen needs such as emergency assistance, debt relief initiatives
and support to offset the adverse effects of instability in export earnings[14]. For the regions, the accounts are set
out according to the regional programming as referred to in Chapter 2 of the
ACP-EC Partnership Agreement (i.e. regional indicative programmes and intra-ACP
cooperation).

· Under Point 4 of Annex
Ib (Multiannual financial framework for the period 2008 to 2013) to the ACP-EC
Partnership Agreement, the remaining balances and the amounts decommitted under
the Funds between 31.12.2007 and the entry into force of the 10th EDF were transferred
to the 9th EDF to ensure that the EU administration could do its work and to
cover the costs of ongoing projects until the 10th EDF comes into force.

· Council Decision
2010/406/EU decided to use for the benefit of Sudan an amount of EUR150 million
from the funds de-committed from projects under the 9th and previous
EDF's for the purpose of addressing the needs of the most vulberable
population. This amount has been allocated during 2011.

· Council Decision
2011/315/EU decided to use for the benefit of South Sudan an amount of EUR 200
million from the funds de-committed from projects under the 9th and
previous EDF's to be used to support the implementation of the Three Year
Southern Sudan Development plan. This amount has not yet been allocated for programming.

10th EDF

The ACP-EC Partnership Agreement
signed on 23 June 2000 in Cotonou by the Member States of the European
Community and the States of Africa, the Caribbean and the Pacific (ACP States)
entered into force on 1 April 2003. The Cotonou Agreement was amended on 25
June 2005 and 23 June 2010.

The EU Council Decision of 27
November 2001 (2001/822/EC) on the association of the overseas countries and
territories (OCT) with the European Union entered into force on 2 December
2001. This Decision was amended on 19 March 2007 (Decision 2007/249/EC).

The Internal Agreement on the
financing of Community aid under the multiannual financial framework for the
period 2008-2013 in accordance with the revised Cotonou Agreement, adopted by
the Representatives of the Governments of the Member States of the European
Community on 17 July 2006, entered into force on 1 July 2008.

Under the Cotonou Agreement, the
second period (2008-2013) of EU aid to the ACP States and OCTs is funded by the
10th EDF to the tune of EUR 22 682 million, of which:

– EUR 21 966 million is
allocated to the ACP countries in accordance with the multiannual financial
framework set out in Annex Ib to the revised Cotonou Agreement, of which EUR 20
466 million  is managed by the European Commission;

– EUR 286 million is
allocated to the OCTs in accordance with Annex IIAa of the revised Council
Decision on the association of the OCTs with the European Community, of which EUR 256 million
is managed by the European Commission;

– EUR 430 million is for the
Commission to finance the costs arising from the programming and implementation
of 10th EDF resources, in accordance with Article 6 of the Internal Agreement.

On the date of entry into force of
the 10th EDF, these amounts were supplemented by unexpended balances and are
still supplemented by decommitted funds resulting from the system to guarantee
the stabilisation of export earnings from primary agricultural products
(STABEX) under the Funds prior to the 9th EDF. These balances and decommitted
funds should be used and managed in accordance with the revised Cotonou
Agreement and the Internal Agreement.

Of the above mentioned 10th EDF
allocations,
the European Commission manages the amount of EUR 21 152 million as follows

– EUR 15 300 million for
the national indicative programmes, comprising:

·
EUR
13 500 million for the A envelopes, of which EUR 12 467 million in allocations
are opened and, from this amount, a sum of EUR 33 million was transferred to
regional allocations (MTR region-PALOP). In addition, the A envelope was
increased by EUR 57 million representing Stabex decommitted funds;

· EUR 1 800 million for
the B envelopes, of which EUR 601 million as initial allocations, and EUR 1 199
million as a reserve for unforeseen needs (used for financing different
instruments like the yearly FLEX, and the ad-hoc Vulnerability FLEX and
response to food prices crisis). Of this total an amount EUR 1 624 Million are
openend.

– EUR 1 783 million for
the regional indicative programmes, together with a transfer of
EUR 33 million resulting in EUR 1 816 of allocations opened;

– EUR 2 700 million in
Intra-ACP allocations, of which EUR 2 664 million opened;

– EUR 683 million as a
reserve for subsequent allocation to the national and regional indicative
programmes following the mid-term and end-of-term reviews;

– EUR 430 million for
implementation costs, all opened;

– EUR 256 million OCT
allocations:

·
A
enveloppe funds for EUR 195 million, of which EUR 66 million are opened

·
B
enveloppe funds of EUR 15 million, of which EUR 7 million are opened

·
Regional
allocations funds of EUR 40 million, all are opened

·
Studies/technical
assistance funds of EUR 6 million, all opened.

- 10th EDF
non-mobilisable performance reserve

Since the 10th EDF came into force
on 1 July 2008, the remaining balances and the amounts decommitted from
projects under the 9th and previous EDFs are transferred to the
performance reserve of the 10th EDF, with the exception of Stabex funds and 9th
EDF administrative envelope. This reserve may be used under the conditions set
out in Article 1(4) of the Internal Agreement on the 10th EDF.

Please find below the detail of
this reserve as at 31.12.2011 (EUR million):

Total funds transferred to the 10th EDF non-mobilisable reserve: || 438

minus funds transferred to the 9th EDF in favour of  Sudan, Council Decision 2010/406/EU of 12.07.2010 || -150

Total available in the reserve (ACP+OCT): || 288

Note:
this reserve is to be decreased by EUR 200 million following Council Decision
2011/315/EU of 23/05/2011 in favour of South Sudan and to be transfered to the
9th EDF

- 10th EDF Stabex reserve

Following the closure of Stabex
accounts, unused/decommitted funds are transferred to the 10th EDF
Stabex A Envelope reserve (10th EDF Internal Agreement Art. 1(4))
and then to the national indicative programmes of the countries concerned.

- 10th EDF Co-financings

Under the 10th EDF, transfer
agreements for co-financings from Member States were signed for  EUR 89 million
and commitment appropriations were opened for a total amount of EUR 79 million,
while payment appropriations were opened for the cashed amounts totalling EUR
73 million.

The
situation of co-financing appropriations at 31.12.2011 is shown in the table
below (EUR million):

|| Commitments appropriations || Payment appropriations

Co-financing - A Envelope || 69 || 61

Co-financing - Intra ACP || 12 || 12

Co-financing – Administrative expenses || 2 || 2

|| 83 || 75

The
following tables, concerning the amounts decided, contracted and paid, show net
figures.

The
tables presenting the situation by country and by instrument are annexed.

2.1         ALLOCATIONS

2.2 CONSOLIDATED ACCOUNTS

2.3.       OTHER MANAGEMENT INFORMATION

Italian
co-financing (1985)

In 1985 the European Commission
signed an agreement with the Italian Government providing for the co-financing
of development projects managed by the Commission.

The agreement was regularly
extended by means of exchanges of letters between the Italian Government and
the Development Commissioner until 31 December 2004.

Then by written procedure
E/1588/2004 the Commission took a decision on implementation of the
co-financing framework agreement. The purpose of the decision was to lay down
the budgetary and regulatory framework for commitments made under the
agreement. The Commission decision accordingly provided that this co-financing
should be implemented in accordance with the provisions of the EDF Financial
Regulation. The decision empowered the EDF authorising officers by delegation
or subdelegation to manage Italy's contribution to this co-financing. They were
also empowered to determine the final date for its implementation in compliance
with the relevant rules.

In accordance with Article 4,
point 4 of the July 1985 agreement between the European Commission and the
Italian Government, a provision confirmed in Article 3, point 3 of decision
E/1588/2004, the Italian Government requested by letter of 15 December 2006
that the Commission repay the account balances of the closed projects. These
balances then totalled EUR 4 708 867.66. This amount was
reimbursed to the Italian Government in March 2008.

The situation of the Italian funds
managed by the Commission for projects in the ACP countries, at 31.12.2011, is
presented below.

In all, 52 projects implemented in
the ACP countries have been co-financed by Italy since the signing of the above
agreement, only one of which, '4th rehabilitation programme – Somalia', is still in progress and is managed by the EU delegation in Kenya, bank balance for each
individual item are:

Project N° || Country || Project || Balance (EUR) || Balance (EUR)

|| || || || 31/12/2010 || 31/12/2011

ITA COF || 37 || || Interest from co-financing || 317 230.20 || 320 646.67

ITA COF || 40 || || Administrative expenditure || 408 990.37 || 410 580.63

ITA COF || 50 || SOMALIE || Rehabilitation || 6 722 163.55 || 5 452 595.91

TOTAL || || || 7 429 706.86 || 6 183 823.21

PART II – EDF ANNUAL ACCOUNTS: FINANCIAL STATEMENTS
OF THE INVESTMENT FACILITY

EUROPEAN INVESTMENT BANK || CA/454/12

|| 15 March 2012

|| Document 12/069

||

|| Audited by KPMG

BOARD OF DIRECTORS

Investment Facility

financial statements

as at 31 december 2011

|| ||

|| - Statement of financial position - Statement of comprehensive income - Statement of changes in contributors’ resources - Statement of cash flows - Notes to the financial statements - Independent auditor’s report ||

ORG.: E ||

3.           FINANCIAL STATEMENTS OF THE INVESTMENT
FACILITY

3.1         STATEMENT OF COMPREHENSIVE INCOME FOR THE
YEAR ENDED 31 DECEMBER 2011

(In
EUR’000)

|| || From 01.01.2011 || From 01.01.2010

|| Notes || to 31.12.2011 || to 31.12.2010

|| || ||

Interest and similar income || 16 || 59 561 || 54 601

Interest and similar expense  || 16 || -940 || -2 591

|| || ||

Net interest and similar income || || 58 621 || 52 010

|| || ||

Fee and commission income || 17 || 2 149 || 11 775

Fee and commission expenses || 17 || -144 || -372

|| || ||

Net fee and commission income || || 2 005 || 11 403

|| || ||

Net result on financial operations || 18 || 18 070 || -15 823

|| || ||

Change in impairment on loans and receivables, net of reversal || 7 || 27 452 || 25 428

Impairment on available-for-sale financial assets || 8 || -6 888 || -3 714

|| || ||

General administrative expenses || 19 || -38 006 || -34 086

|| || ||

|| || ||

Profit for the year || || 61 254 || 35 218

|| || ||

Other comprehensive income: || || ||

Available-for-sale financial assets – Fair value reserve || || ||

1. Net change in fair value of available-for-sale financial assets || || 20 574 || 2 962

2. Net amount transferred to profit or loss || || -3 394 || 1 898

Total available-for-sale financial assets || || 17 180 || 4 860

|| || ||

Total other comprehensive income || || 17 180 || 4 860

|| || ||

Total comprehensive income for the year || || 78 434 || 40 078

3.2         STATEMENT OF FINANCIAL POSITION AS AT 31
DECEMBER 2011

(In
EUR’000)

|| Notes || 31.12.2011 || 31.12.2010 || 31.12.2009

|| || || ||

ASSETS || || || ||

Cash and cash equivalents || 5 || 452 279 || 411 587 || 330 057

Derivative financial instruments || 6 || 434 || 1 376 || 12 870

Loans and receivables || 7 || 1 033 160 || 844 428 || 693 441

Available-for-sale financial assets || 8 || 251 660 || 194 828 || 164 606

Amounts receivable from contributors || 9/14 || 87 310 || 100 000 || 87 310

Other assets || 10 || 416 || 3 172 || 925

|| || || ||

Total Assets ||   || 1 825 259 || 1 555 391 || 1 289 209

|| || || ||

|| || || ||

LIABILITIES AND CONTRIBUTORS' RESOURCES || || || ||

|| || || ||

LIABILITIES || || || ||

Derivative financial instruments || 6 || 12 702 || 6 110 || 5 522

Deferred income || 11 || 33 003 || 29 579 || 24 317

Amounts owed to third parties || 12 || 329 660 || 298 415 || 213 850

Other liabilities || 13 || 1 113 ||  940 || 1 560

|| || || ||

Total Liabilities || || 376 478 || 335 044 || 245 249

|| || || ||

CONTRIBUTORS' RESOURCES || || || ||

Member States Contribution called || 14 || 1 281 309 || 1 131 309 || 995 000

Fair value reserve || || 41 750 || 24 570 || 19 710

Retained earnings || || 125 722 || 64 468 || 29 250

|| || || ||

Total Contributors' resources || || 1 448 781 || 1 220 347 || 1 043 960

|| || || ||

Total Liabilities and Contributors' resources || || 1 825 259 || 1 555 391 || 1 289 209

3.3         STATEMENT OF CHANGES IN CONTRIBUTORS'
RESOURCES

(In
EUR’000)

|| Contribution called || Fair Value Reserve || Retained earnings || Total

At 1 January 2011 || 1 131 309 || 24 570 || 64 468 || 1 220 347

|| || || ||

Member States contribution called during the year || 150 000 || - || - || 150 000

|| || || ||

Profit for the year 2011 || - || - || 61 254 || 61 254

|| || || ||

Total other comprehensive income for the year || - || 17 180 || - || 17 180

|| || || ||

Changes in contributors’ resources || 150 000 || 17 180 || 61 254 || 228 434

|| || || ||

At 31 December 2011 || 1 281 309 || 41 750 || 125 722 || 1 448 781

|| || || ||

|| Contribution called || Fair Value Reserve || Retained earnings || Total

At 1 January 2010 || 995 000 || 19 710 || 29 250 || 1 043 960

|| || || ||

Member States contribution called during the year || 130 000 || - || - || 130 000

Unused interest subsidies || 6 309 || - || - || 6 309

Profit for the year 2010 || - || - || 35 218 || 35 218

|| || || ||

Total other comprehensive income for the year || - || 4 860 || - || 4 860

|| || || ||

Changes in contributors’ resources || 136 309 || 4 860 || 35 218 || 176 387

|| || || ||

At 31 December 2010 || 1 131 309 ||  24 570 || 64 468 || 1 220 347

|| || || ||

|| || || ||

3.4         STATEMENT OF CASH FLOWS FOR THE YEAR
ENDED 31 DECEMBER 2011

|| From 01.01.2011 to 31.12.2011 || From 01.01.2010 to 31.12.2010

OPERATING ACTIVITIES || ||

Profit for the financial year || 61 254 || 35 218

Adjustments || ||

Impairment on available-for-sale financial assets || 3 172 || 3 714

Net change in impairment on loans and receivables || -27 452 || -25 428

Interest capitalised on loans and receivables || -10 512 || -13 239

Change in accrued interest and amortised cost on loans and receivables || -2 801 || -466

Increase in deferred income || 3 424 || 5 262

Effect of exchange rate changes on loans || -15 337 || -24 626

Effect of exchange rate changes on available-for-sale financial assets || 34 || -538

Profit on operating activities before changes in operating assets and liabilities || 11 782 || -20 103

|| ||

Loan disbursements || -237 040 || -206 952

Repayments of loans || 104 410 || 119 724

Fair value changes on derivatives || 7 534 || 12 082

Increase in available-for-sale financial assets || -67 829 || -50 952

Sale of available-for-sale financial assets || 24 971 || 22 414

Decrease/increase in other assets || 2 756 || -2 247

Increase/decrease in other liabilities || 173 || -620

Increase/decrease in other amounts payable to the European Investment Bank || 4 144 || -2 324

|| ||

Net cash flows from operating activities || -149 099 || -128 978

|| ||

FINANCING ACTIVITIES || ||

Contribution received from Member States || 136 345 || 187 310

Amounts received from Member States with regard to interest subsidies || 76 345 || 40 000

Amounts paid on behalf of Member States with regard to interest subsidies || -22 899 || -16 802

|| ||

Net cash flows from financing activities || 189 791 || 210 508

|| ||

Net increase in cash and cash equivalents || 40 692 || 81 530

Cash and cash equivalents at beginning of financial year || 411 587 || 330 057

|| ||

Cash and cash equivalents at the end of the financial year || 452 279 || 411 587

3.5         NOTES TO THE FINANCIAL STATEMENTS

1
General information

The Investment Facility (“the
Facility” or “IF”) has been established within the framework of the Cotonou
Agreement (the “Agreement”) on co-operation and development assistance
negotiated between the African, Caribbean and Pacific Group of States (the “ACP
States”) and the European Union and its Member States on 23 June 2000, revised
on 25 June 2005 and 23 June 2010.

Financing under the Agreement is
provided from EU Member States’ budgets and is disbursed according to financial
protocols defined for successive five- to six-year periods. Within the
framework of the Agreement and following the entry into force of a second
financial protocol on 1st July 2008 (covering the period 2008-2013), referred
to as the 10th European Development Fund (“EDF”), the European Investment Bank
(“EIB” or “the Bank”) is entrusted with the management of:

-
the
Facility, a EUR 3 185.5 million  risk-bearing revolving fund geared to
fostering private sector investment in ACP countries of which EUR 48.5 million
are allocated to Overseas Countries and territories (“OCT countries”);

-
grants
for the financing of interest rate subsidies worth EUR 400 million for ACP
countries and EUR 1.5 million for OCT countries. Up to 10% of these subsidies
can be used to fund project-related technical assistance.

On a proposal from the Management
Committee of EIB, the Board of Directors of EIB adopted the Financial
Statements on 15 March 2012 and authorised their submission to the Board of
Governors for approval by 30 April 2012.

2
Significant
accounting policies

2.1 Basis of
preparation – Statement of compliance

In 2011, the Facility applied
International Financial Reporting Standards (IFRS) as adopted by the European
Union for the preparation of its financial statements and this adoption was
done according to IFRS 1 “First-time Adoption of IFRS” using 1 January 2011 as
the transition date.

2.2 Significant
accounting judgments and estimates

The preparation of financial
statements requires the use of accounting estimates. It also requires the
European Investment Bank’s Management to exercise its judgment in the process
of applying the Investment Facility’s accounting policies. The areas involving
a higher degree of judgment or complexity, or areas where assumptions and
estimates are significant to the financial statements are disclosed hereafter.

The most
significant use of judgments and estimates are as follows:

§
Fair
value of financial instruments

Where the fair values of
financial assets and financial liabilities recorded on the statement of
financial position cannot be derived from active markets, they are determined
using a variety of valuation techniques that include the use of mathematical
models. The input to these models is taken from observable markets where
possible, but where this is not feasible, a degree of judgment is required in
establishing fair values. The judgments include considerations of liquidity and
model inputs such as correlation and volatility for derivatives with maturity
of more than three months.

§
Impairment
losses on loans and receivables

The Facility reviews its
problem loans and receivables at each reporting date to assess whether an
allowance for impairment should be recorded in the statement of comprehensive
income. In particular, judgment by the European Investment Bank’s Management is
required in the estimation of the amount and timing of future cash flows when
determining the level of allowance required. Such estimates are based on assumptions
about a number of factors and actual results may differ, resulting in future
changes to the allowance. In addition to specific allowance against
individually significant loans and receivables, the Facility may also book a
collective impairment allowance against exposures which, although not
specifically identified as requiring a specific allowance, have a greater risk
of default than when originally granted.

In principle, a loan is
considered as impaired when payment of interest and principal are past due by
90 days or more and, at the same time, the European Investment Bank’s
Management considers that there is an objective indication of impairment.

§
Valuation
of unquoted available-for-sale equity investments

Valuation of unquoted
available-for-sale equity investments is normally based on one of the
following:

-
recent
arms length market transactions;

-
current
fair value of another instrument that is substantially the same;

-
the
expected cash flows discounted at current rates applicable for items with
similar terms and risk characteristics; or

-
other
valuation models.

The determination of the
cash flows and discount factors for unquoted available-for-sale equity investments
requires significant estimation. The Facility calibrates the valuation
techniques periodically and tests them for validity using either price from
observable current market transactions in the same instrument or from other
available observable market data.

§
Impairment
of available-for-sale financial assets

The Facility treats
available-for-sale equity investments as impaired when there has been a
significant or prolonged decline in the fair value below its cost or where
other objective evidence of impairment exists. The determination of what is
“significant” or “prolonged” requires judgment. The Facility treats
“significant” generally as 30% or more and “prolonged” greater than 12 months.
In addition, the Facility evaluates other factors, including normal volatility
in share price for quoted equities and the future cash flows and the discount
factors for unquoted equities.

2.3 Change in
accounting policies

For the preparation of
its Financial Statements as at 31 December 2011, the Facility has changed its
accounting policies from accounting policies guided by IFRS as adopted by the
European Union to accounting policies based on IFRS as adopted by the European
Union. The management of EIB believes that this accounting policy change will
provide more relevant information about the Facility’s transactions and
financial situation. The change of accounting policies does not have any
effects on the Facility’s statement of financial position, statement of
comprehensive income, statement of changes in contributors’ resources or
statement of cash flows. Changes only affect the Risk Management note to the
financial statements prepared in accordance with IFRS 7 as well as fair value
disclosures for financial instruments in accordance with IFRS 7.

A number of new applicable
standards, amendments to standards and interpretations are effective for annual
periods beginning after 1 January 2012, and have not been applied in preparing
these financial statements.

IFRS 9 Financial instruments

The first step in a three part
project by the IASB to replace IAS 39 Financial instruments, this standard
redefines the categories of financial assets and liabilities and their
accounting treatment. The standard remains ‘work in progress’ and it will
eventually replace IAS39 in its entirety. The current effective date for
adoption of the latest revision of the standard is 1 January 2013 with a
proposed effective date of 1 January 2015. The Facility does not plan to adopt
this standard early and the extent of the impact has not yet been determined.

The
following two applicable standards were issued in 2011, all with an effective
date of 1 January 2013. The impact of the adoption of these standards on the
Facility’s financial statements has not yet been determined.

IFRS 12 Disclosure of interests
in other entities

The objective of this standard is
to require the disclosure of information that enables users of financial
statements to evaluate the nature of, and risks associated with, its interests
in other entities and the effects of those interests on its financial position,
financial performance and cash flows.

IFRS 13 Fair value measurement

This standard defines fair value,
sets out a framework for measuring fair value and requires disclosures about
fair value measurements.

2.4 Summary of
significant accounting policies

2.4.1 Foreign currency translation

The Facility uses the Euro (EUR)
for presenting its financial statements, which is also the functional currency.

Foreign
currency transactions are translated, at the exchange rate prevailing on the
date of the transaction.

Monetary
assets and liabilities denominated in currencies other than Euro are translated
into Euro at the exchange rate prevailing at the balance sheet date. The gain
or loss arising from such translation is recorded in the statement of
comprehensive income.

Non-monetary
items that are measured in terms of historical cost in a foreign currency are
translated using the exchange rates at the dates of the initial transactions.
Non-monetary items measured at fair value in a foreign currency are translated
using the exchange rates at the date when the fair value was determined.

Exchange
differences arising on the settlement of transactions at rates different from
those at the date of the transaction, and unrealised foreign exchange
differences on unsettled foreign currency monetary assets and liabilities, are
recognised in the statement of comprehensive income.

The
elements of the statement of comprehensive income are translated into Euro on
the basis of the exchange rates prevailing at the end of each month.

2.4.2 Cash and cash equivalents

The
Facility defines cash and cash equivalents as current accounts, short-term
deposits or commercial papers with original maturities of three months or less.

2.4.3 Financial assets other than derivatives

Financial assets are accounted for
using the settlement date basis.

§
Loans

Loans originated by the Facility
are recognised in the assets of the Facility when cash is advanced to
borrowers. They are initially recorded at cost (net disbursed amounts), which
is the fair value of the cash given to originate the loan, including any
transaction costs, and are subsequently measured at amortised cost, using the
effective yield method, less any provision for impairment or uncollectability.

§
Available-for-sale
financial assets

Available-for-sale financial assets
are those which are designated as such or do not qualify to be classified as
designated at fair value through profit or loss, held-to-maturity or loans and
receivables. They include equity instruments and investments in venture capital
funds.

After initial measurement,
available-for-sale financial assets are subsequently carried at fair value.
Note the following details for the fair value measurement of equity
investments, which cannot be derived from active markets:

a. Venture capital funds

The fair value of each venture
capital fund is based on the latest available Net Asset Value (NAV), reported
by the fund, if calculated based on international valuation guidelines
recognised to be in line with IFRS (for example: the International Private
Equity and Venture Capital Valuation guidelines, IPEV Guidelines, as published
by the European Venture Capital Association). The Facility may however decide
to adjust the NAV reported by the fund if there are issues that may affect the
valuation.

b. Direct equity
investments

The fair value of the investment is
based on the latest set of financial statements available, re-using, if
applicable, the same model as the one used at the acquisition of the
participation.

Unrealised gains or losses on
venture capital funds and direct equity investments are reported in
contributors’ resources until such investments are sold, collected or disposed
of, or until such investments are determined to be impaired. If an available-for-sale
investment is determined to be impaired, the cumulative unrealised gain or loss
previously recognised in equity is included in the statement of comprehensive
income.

For unquoted investment, the fair
value is determined by applying recognised valuation techniques (for example
discounted cash flows or multiple). These investments are accounted for at cost
when the fair value cannot be reliably measured.

The participations acquired by the
Facility typically represent investments in private equity or venture capital
funds. According to industry practice, such investments are generally
investments jointly subscribed by a number of investors, none of whom is in a
position to individually influence the daily operations and the investment
activity of such fund. As a consequence, any membership by an investor in a
governing body of such fund does not in principle entitle such investor to
influence the day-to-day operations of the fund. In addition, individual
investors in a private equity or a venture capital fund do not determine
policies of a fund such as distribution policies on dividends or other
distributions. Such decisions are typically taken by the management of a fund
on the basis of the shareholders agreement governing the rights and obligations
of the management and all shareholders of the fund. The shareholders’ agreement
also generally prevents individual investors from bilaterally executing
material transactions with the fund, interchanging managerial personnel or
obtaining privileged access to essential technical information. The Facility’s
investments are executed in line with the above stated industry practice,
ensuring that the Facility neither controls nor exercises any form of
significant influence within the meaning of IAS 27 and IAS 28 over any of these
investments, including those investments in which the Facility holds over 20 %
of the voting rights.

§
Guarantees

At initial recognition, the
financial guarantees are recognised at fair value corresponding to the Net
Present Value (NPV) of expected premium inflows. This calculation is performed
at the starting date of each transaction and is recognised on balance sheet as
“Financial guarantees” under “other assets” and “other liabilities”.

Subsequent to initial recognition,
the Facility’s liabilities under such guarantees are measured at the higher of:

-
the
best estimate of expenditure required to settle any financial obligation
arising as a result of the guarantee, which is estimated based on all relevant
factors and information existing at the date of the statement of financial
position.

-
the
amount initially recognised less cumulative amortisation. The amortisation of
the amount initially recognised is done using the actuarial method.

Any increase or decrease in the
liability relating to financial guarantees is taken to the statement of
comprehensive income under “fee and commission income”.

The Facility’s assets under such
guarantee are subsequently amortized using the actuarial method and tested for
impairment.

In addition, when a guarantee
agreement is signed, it is presented as a contingent liability for the Facility
and when the guarantee is engaged, as a commitment for the Facility.

2.4.4 Impairment of financial assets

The Facility assesses at each
balance sheet date whether there is any objective evidence that a financial
asset is impaired. A financial asset or a group of financial assets is deemed
to be impaired if, and only if, there is objective evidence of impairment as a
result of one or more events that has occurred after the initial recognition of
the asset (an incurred “loss event”) and that loss event has an impact on the
estimated future cash flows of the financial asset or the group of financial
assets that can be reliably estimated. Evidence of impairment may include
indications that the borrower or a group of borrowers is experiencing
significant financial difficulty, default or delinquency in interest or
principal payments, the probability that they will enter into bankruptcy or
other financial reorganisation and where observable data indicate that there is
a measurable decrease in the estimated future cash flows, such as changes in
arrears or economic conditions that correlate with defaults.

For the loans outstanding at the
end of the financial year and carried at amortised cost, impairments are made
when presenting objective evidence of risks of non recovery of all or part of
their amounts according to the original contractual terms or the equivalent
value. If there is objective evidence that an impairment loss has been incurred,
the amount of the loss is measured as the difference between the assets
carrying amount and the present value of estimated future cash flows. The
carrying amount of the asset is reduced through the use of an allowance account
and the amount of the loss is recognised in the statement of comprehensive
income. Interest income continues to be accrued on the reduced carrying amount
based on the effective interest rate of the asset. Loans together with the
associated allowance are written off when there is no realistic prospect of
future recovery. If, in a subsequent year, the amount of the estimated
impairment loss increases or decreases because of an event occurring after the
impairment was recognised, the previously recognised impairment loss is increased
or reduced by adjusting the allowance account.

The Facility conducts the credit
risk assessments based on each individual operation and does not consider a
collective impairment.

For the available-for-sale
financial assets, the Facility assesses at each balance sheet date whether
there is objective evidence that an investment is impaired. Objective evidence
would include a significant or prolonged decline in the fair value of the
investment below its costs. Where there is evidence of impairment, the cumulative
loss (measured as the difference between the acquisition cost and the current
fair value, less any impairment loss on that investment previously recognised
in the statement of comprehensive income) is removed from contributors’
resources and recognised in the statement of comprehensive income. Impairment
losses on available-for-sale financial assets are not reversed through the
statement of comprehensive income; increases in their fair value after
impairment are recognised directly in contributors’ resources.

The European Investment Bank’s Risk
Management reviews financial assets for impairment at least once a year.
Resulting adjustments include the unwinding of the discount in the statement of
comprehensive income over the life of the asset, and any adjustments required
in respect of a reassessment of the initial impairment.

2.4.5 Derivative financial instruments

Derivatives include cross currency
swaps, cross currency interest rate swaps and currency forwards.

In the normal course of its
activity, the Facility may enter into swap contracts with a view to hedge
specific lending operations or into currency forward contract with a view to
hedge its currency positions, denominated in actively traded currencies other
than the Euro, in order to offset any gain or loss caused by foreign exchange
rate fluctuations.

The Facility has not entered into
any hedge accounting transactions as at December 31, 2010 and 2011. All
derivatives are measured at fair value through the income statement. Fair
values are derived primarily from discounted cash-flow models, option-pricing
models and from third party quotes.

Derivatives are recorded at fair
value and carried as assets when their fair value is positive and as
liabilities when their fair value is negative. Changes in the fair value of
derivative financial instruments are included in “Net result on financial
operations”.

2.4.6 Contributions

Contributions from Member States
are recognised as receivables in the statement of financial position on the
date of the Council Decision fixing the financial contribution to be paid by
the Member States to the Facility.

The Member States contributions
meet the following conditions and are consequently classified as equity:

-
as
defined in the contribution agreement, they entitle the Member States to decide
on the utilisation of the Facility’s net assets in the events of the Facility’s
liquidation;

-
they
are in the class of instruments that is subordinate to all other classes of
instruments;

-
all
financial instruments in the class of instruments that is subordinate to all
other classes of instruments have identical features;

-
the
instrument does not include any features that would require classification as a
liability; and

-
the
total expected cash flows attributable to the instrument over its life are
based substantially on the profit or loss, the change in the recognised net
assets or the change in the fair value of the recognised and unrecognised net
assets of the Facility over the life of the instrument.

2.4.7 Interest income on loans

Interest on loans originated by the
Facility is recorded in the statement of comprehensive income (‘Interest and
similar income’) and on the statement of financial position (‘Loans and
receivables’) on an accrual basis using the effective interest rate, which is the
rate that exactly discounts estimated future cash payments or receipts through
the expected life of the loan to the net carrying amount of the loan. Once the
recorded value of a loan has been reduced due to impairment, interest income
continues to be recognised using the original effective interest rate applied
to the new carrying amount.

2.4.8 Interest subsidies and technical
assistance

As part of its activity, the
Facility manages interest subsidies and technical assistance on behalf of the
Member States.

The part of the Member States
contributions allocated to the payment of interest subsidies is not accounted
for in the Facility’s contributors’ resources but is classified as amounts owed
to third parties. The Facility operates the disbursement to the final
beneficiaries and then decreases the amounts owed to third parties.

When amounts contributed with
regard to interest subsidies and technical assistance are not fully granted,
they are reclassified as contribution to the Facility.

2.4.9 Interest income on cash and cash
equivalents

Interest income on cash and cash
equivalents is recognised in the statement of comprehensive income of the
Facility on an accrual basis.

2.4.10 Fees, commissions and dividends

Fees received in respect of
services provided over a period of time are recognised as income as the
services are provided. Commitment fees are deferred and recognised in income
using the effective interest method over the period from disbursement to
repayment of the related loan.

Dividends relating to available-for-sale
financial assets are recognised when received.

2.4.11 Taxation

The
Protocol on the Privileges and Immunities of the European Communities, appended
to the Treaty of 8 April 1965 establishing a Single Council and a Single
Commission of the European Communities, stipulates that the assets, revenues
and other property of the Institutions of the Union are exempt from all direct
taxes.

3
Risk Management

This
note presents information about the Facility's exposure to and its management
and control of credit and financial risks, in particular the primary risks
associated with its use of financial instruments. These are:

-
credit risk – the risk of loss resulting from client or
counterparty default and arising on credit exposure in all forms, including
settlement risk;

-
liquidity risk – the risk that an entity will encounter
difficulty in meeting obligations associated with financial liabilities that
are settled by delivering cash or another financial asset;

-
market risk – exposure to observable market variables such
as interest rates, foreign exchange rates and equity market prices.

3.1
Risk management organisation

The
European Investment Bank adapts its risk management on an ongoing basis.
Systems are in place to control and report on the main risks inherent in its
operations, i.e. credit, market and liquidity risks.

The
Risk Management of the Bank independently identifies, assesses, monitors and
reports the credit and equity price risks to which the Facility is exposed.
Within a framework whereby the segregation of duties is preserved, the Risk
Management is independent of the Front Offices. The Director General of Risk
Management reports for risk matters, to the designated Vice-President of the
European Investment Bank. The designated Vice-President meets regularly with
the Audit Committee to discuss topics relating to risks. He is also responsible
for overseeing risk reporting to the European Investment Bank’s Management
Committee and the Board of Directors.

3.2
Credit risk

Credit risk is the potential loss that could result from
client or counterparty default and arising on credit exposure in all forms,
including settlement.

3.2.1.
Credit risk policy

In carrying out the
credit analysis on loan counterparts, the Bank assesses credit risk with a view
to quantify and pricing it. The Facility has developed an Internal Rating
Methodology (IRM) for corporates or financial institutions to determine the
Internal Ratings of its main borrower/guarantor beneficiary counterparts. The
methodology is based on a system of scoring sheets tailored for each major
credit counterpart type (e.g. Corporates, Banks, Public Sector Entities, etc).
Taking into consideration both, best banking practice and the principles set
under the Basel International Capital Accord (Basel II), all counterparts that
are material to the credit profile of a specific transaction are classified
into internal rating categories using the IRM for the specific counterpart
type. Each counterpart is initially assigned to an Internal Rating reflecting
the counterpart’s long-term foreign currency rating (or local currency
equivalent when required) following an in-depth analysis of the counterpart’s
risk profile and its country risk operating context.

The credit assessment of
project finance and other structured limited recourse operations is not subject
to IRM and is using credit risk tools relevant for the sector, focused mainly
on cash flow availability and debt service capacity. These tools include the
analysis of projects’ contractual framework, counterpart’s analysis and cash flow
simulations. Similarly to corporates and financial institutions, each project
is assigned to an internal risk rating and an expected loss.

All non-sovereign (or
non sovereign guaranteed/assimilated) operations are subject to specific
transaction-level and counterpart size limits. The maximum nominal amount of
each transaction is capped by a limit which depends on the transaction expected
loss. Counterpart limits are applied to consolidated exposures. Such limits
typically reflect the size of counterparts own funds as well as their total
external long-term funding.

In order to mitigate credit risk
the Facility uses various credit enhancements which are:

-
project
related securities (e.g., pledge over the shares; pledge over the assets; assignment
of rights; pledge over the accounts); or/and

-
guarantees,
generally provided by the sponsor of the financed project (e.g., completion
guarantees, first demand guarantees).

In addition, the Facility uses
seldom credit enhancements which are not immediately correlated to the project
risk, like collaterals or bank guarantees.

The Facility does not use any
credit derivatives to mitigate credit risk.

3.2.2. Maximum exposure to credit risk without
taking into account any collateral and other credit enhancements

The
following table shows the maximum exposure to credit risk for the components of
the statement of financial position, including derivatives. The maximum
exposure is shown gross, before the effect of mitigation through the use of
collateral.

Maximum exposure (in EUR'000) || 31.12.2011 || 31.12.2010

|| ||

ASSETS || ||

Cash and cash equivalents || 452 279 || 411 587

Derivative financial instruments || 434 || 1 376

Loans and receivables || 1 033 160 || 844 428

Amounts receivable from contributors || 87 310 || 100 000

Other assets || 416 || 3 172

Total Assets || 1 573 599 || 1 360 563

|| ||

OFF BALANCE SHEET || ||

Contingent liabilities || ||

- Guarantees undrawn || 20 000 || 45 000

Commitments || ||

- Undisbursed loans || 701 092 || 808 865

- Guarantees drawn || 7 909 || 9 484

Total Off balance sheet || 729 001 || 863 349

|| ||

Total credit exposure || 2 302 600 || 2 223 912

3.2.3. Credit risk on loans and receivables

3.2.3.1 Credit risk
measurement for loans and receivables

Each and every lending
transaction undertaken by the Facility benefits from a comprehensive risk
assessment and quantification of expected loss estimates that are reflected in
a Loan Grading (“LG”). LGs are established according to generally accepted
criteria, based on the quality of the borrower, the maturity of the loan, the
guarantee and, where appropriate, the guarantor.

The loan grading (LG)
system comprises the methodologies, processes, databases and IT systems
supporting the assessment of credit risk in lending operations and the
quantification of expected loss estimates. It summarises a large amount of
information with the purpose of offering a relative ranking of loans’ credit
risks. LGs reflect the present value of the estimated level of the “expected
loss”, this being the product of the probability of default of the main
obligors, the exposure at risk and the loss severity in the case of default.
LGs are used for the following purposes:

-
as
and aid to a finer and more quantitative assessment of lending risks;

-
as
help in distributing monitoring efforts;

-
as a
description of the loan’s portfolio quality at any given date;

-
as
one input in risk-pricing decisions based on the expected loss.

The following factors
enter into the determination of an LG:

i)
The
borrower’s creditworthiness: RM independently reviews borrowers and assesses
their creditworthiness based on internal methodologies and external data. In
line with the Basel II Advanced Approach chosen, the Bank has developed an
internal rating methodology (IRM) to determine the internal ratings of
borrowers and guarantors. This is based on a set of scoring sheets specific to
defined counterparty types.

ii)
The
default correlation: it quantifies the chances of simultaneous financial
difficulties arising for both the borrower and the guarantor. The higher the
correlation between the borrower and the guarantor’s default probabilities, the
lower the value of the guarantee and therefore the lower the LG.

iii)
The
value of guarantee instruments and of securities: this value is assessed on the
basis of the combination of the issuer’s creditworthiness and the type of
instrument used.

iv)
The
contractual framework: a sound contractual framework will add to the loan’s
quality and enhance its internal grading.

v)
The
loan’s duration: all else being equal, the longer the loan, the higher the risk
of incurring difficulties in the servicing of the loan.

A loan’s expected loss
is computed by combining the five elements discussed above. Depending on the
level of this loss, a loan is assigned to one of the following LG classes
listed below:

A    Prime
quality loans: there are three sub-categories. A° comprises all EU sovereign
risks, i.e. loans granted to or fully, explicitly and unconditionally
guaranteed by Member States, where no repayment difficulties are expected and
for which an unexpected loss of 0% is allocated. A+ denotes loans granted to (or
guaranteed by) entities other than Member States, with no expectation of
deterioration over their duration. A- includes those lending operations where
there is some doubt about the maintenance of their current status (for instance
because of a long maturity, or for the high volatility of the future price of
an otherwise excellent collateral), but where any downside is expected to be
quite limited.

B    High
quality loans: these represent an asset class with which the bank feels
comfortable, although a minor deterioration is not ruled out in the future. B+
and B- are used to denote the relative likelihood of the possibility of such
deterioration occurring.

C    Good
quality loans: an example could be unsecured loans to solid banks and
corporates with a 7-year bullet, or equivalent amortising, maturity at
disbursement.

D    This
rating class represents the borderline between "acceptable quality"
loans and those that have experienced some difficulties. This watershed in loan
grading is more precisely determined by the sub-classifications D+ and D-.
Loans rated D- require heightened monitoring.

E    This
LG category includes loans with a risk profile greater than generally accepted.
It also includes loans which in the course of their lives have experienced
severe problems and their sliding into a situation of loss cannot be excluded.
For this reason, the loans are subject to close and high monitoring. The
sub-classes E+ and E- differentiate the intensity of this special monitoring
process, with those operations graded E- being in a position where there is a
strong possibility that debt service can not be maintained on a timely basis
and therefore some form of debt restructuring is required, possibly leading to
an impairment loss.

F    F (fail)
denotes loans representing unacceptable risks. F- graded loans can only arise
out of outstanding transactions that have experienced, after signature,
unforeseen, exceptional and dramatic adverse circumstances. All operations
where there is a loss of principal to the Facility are graded F and a specific
provision is applied.

Generally,
loans internally graded D- or below are placed on the Watch List. However, if a
loan was originally approved with a risk profile of D- or weaker, it will only
be placed on the Watch List as a result of a material credit event causing a
further deterioration of its LG classification.

The
table in section 3.2.3.3 shows the credit quality analysis of the Facility’s
loan portfolio based on the various LG classes as described above.

3.2.3.2 Analysis of lending
credit risk exposure

The following table shows the maximum
exposure to credit risk on loans signed and disbursed by nature of borrower
taking into account guarantees provided by guarantors:

At 31.12.2011 (in EUR ‘000) || Guaranteed || Not guaranteed || Total

Banks || 111 020 || 197 245 || 308 265

Corporates || 71 300 || 475 012 || 546 312

Public institutions || 37 670 || - || 37 670

States || 6 214 || 134 699 || 140 913

Total disbursed || 226 204 || 806 956 || 1 033 160

Signed not disbursed || 183 918 || 517 174 || 701 092

At 31.12.2010 (in EUR ‘000) || Guaranteed || Not guaranteed || Total

Banks || 101 675 || 156 488 || 258 163

Corporates || 304 283 || 127 611 || 431 894

Public institutions || 36 667 || - || 36 667

States || 6 779 || 110 925 || 117 704

Total disbursed || 449 403 || 395 025 || 844 428

Signed not disbursed || 279 425 || 529 410 || 808 865

3.2.3.3
Credit
quality analysis per type of borrower

The
tables below show the credit quality analysis of the Facility's loan portfolio
as at 31 December 2011 and 31 December 2010 by the Loan Grading applications,
based on the exposures signed (disbursed and undisbursed).

At 31.12.2011 || ||  High Grade ||  Standard Grade ||  Min. Accept. ||  High Risk ||  No grading ||  TOTAL

(in EUR'000) || || ||  Risk || || ||

|| ||  A to B- ||  C ||  D+ ||  D- and below || ||

Borrower || Banks || 50 002 || 9 674 || 39 966 || 356 629 || 351 476 || 807 747

Corporates || 3 917 || 5 279 || - || 635 825 || - || 645 021

Public institutions || - || - || - || 38 761 || - || 38 761

States || - || - || - || 242 723 || - || 242 723

TOTAL || || 53 919 || 14 953 || 39 966 || 1 273 938 || 351 476 || 1 734 252

At 31.12.2010 || ||  High Grade ||  Standard Grade ||  Min. Accept. ||  High Risk ||  No grading ||  TOTAL

(in EUR'000) || || ||  Risk || || ||

|| ||  A to B- ||  C ||  D+ ||  D- and below || ||

Borrower || Banks || 4 915 || 19 754 || 16 208 || 335 759 || 359 497 || 736 133

Corporates || 4 189 || 5 095 || 3 366 || 595 062 || - || 607 712

Public institutions ||  - || - || - || 37 757 || - || 37 757

States ||  - ||  - || - || 271 691 || - || 271 691

TOTAL || || 9 104 || 24 849 || 19 574 || 1 240 269 || 359 497 || 1 653 293

3.2.3.4 Risk concentrations of loans and
receivables

3.2.3.4.1       Geographical
analysis

Based
on the country of borrower, the Facility's loan portfolio can be analysed by
the following geographical regions (in EUR ‘000):

Country of borrower || 31.12.2011 || 31.12.2010

Regional - ACP || 99 543 || 94 789

Uganda || 117 035 || 102 676

Regional - West Africa || 14 161 || 6 659

Mozambique || 126 666 || 86 992

Mauritania || 43 427 || 29 359

Ethiopia || 84 266 || 52 449

Dominican Republic || 66 118 || 55 717

Kenya || 65 611 || 69 183

Cameroon || 60 706 || 67 546

Zambia || 43 294 || 50 557

Congo (Democratic Republic) || 8 980 || 2 742

Nigeria || 28 691 || 49 395

Regional - Pacific || 20 603 || 29 766

Regional - Central Africa || 12 109 || 13 838

Jamaica || 59 317 || 30 062

Madagascar || 1 253 || 1 503

Mauritius || 12 732 || 14 742

Ghana || 7 812 || 10 585

Angola || 13 598 || 6 719

Trinidad and Tobago || 1 002 || 5 269

Burkina Faso || 12 588 || 14 242

Malawi || 5 833 || 6 086

New Caledonia || 4 673 || 1 802

Rwanda || 11 197 || 9 600

Niger || 3 950 || 5 935

French Polynesia || 3 131 || 2 734

Botswana || - || 1 609

Senegal || 10 329 || 6 779

Lesotho || 3 902 || 3 751

Vanuatu || 3 917 || 4 189

Belize || 103 ||  729

Grenada || 2 698 || 2 907

Gabon || 1 509 || 2 014

Togo || 53 224 || -

Cape Verde || 28 405 || -

Djibouti || 777 || 1 504

TOTAL || 1 033 160 || 844 428

3.2.3.4.2
Industry
sector analysis

The table below analyses the
Facility's loan portfolio by industry sector of the borrower. Operations which
are first disbursed to a financial intermediary before being disbursed to the
final beneficiary are reported under global loans (in EUR’000):

Industry sector of borrower || 31.12.2011 || 31.12.2010

Global loans and agency agreements || 218 912 || 232 581

Airlines and aircraft manufacture || 103 ||  729

Airports and air traffic management systems || 31 052 || 30 062

Basic material and mining || 135 573 || 119 512

Chemicals, plastics and pharmaceuticals || 20 400 || 5 925

Drinking water, water treatment || 33 247 || 17 074

Electricity, coal and others || 358 745 || 320 490

Food chain || 1 244 || 1 491

Investment goods/consumer durables || 3 902 || 3 751

Marine transport and other || 6 214 || 6 779

Materials processing, construction || 29 025 ||  64

Paper chain || 4 840 || 2 603

Roads and motorways || 62 856 || 23 125

Telecommunications || 24 963 || 26 621

Tertiary and other || 102 084 || 53 620

TOTAL || 1 033 160 || 844 428

3.2.3.5 Arrears on loans

Amounts in arrears are identified,
monitored and reported according to a set of procedures called “Guidelines for
the Monitoring of late payments”.

The monitoring and reporting of
amounts in arrears is generally managed by the Late Payment Unit (“LPU”) of
EIB’s Transaction Management and Restructuring Directorate. LPU prepares a
monthly report on unpaid loan instalments of the Facility, including a table
comparing arrears of more than eight days from month to month. The monthly
report gives a detailed indication of the steps already taken or to be taken by
country, loan and instalment.

In addition, a monthly report on
loans overdue by more than 90 days is prepared and sent to the European
Commission. Twice a year the EIB management committee receives a summary table
on arrears for loans overdue by more than 30 days and 90 days as well as a
report including comparative information on the annual and semi-annual
evolution of arrears.

The
arrears of payments on concerned loans can be analysed as follows (in EUR’000):

|| Instalments overdue  more than 30 days || Instalments overdue more than 90 days || Instalments overdue more than 180 days

|| || ||

31.12.2011 || 14 087 || 10 179 || 10 146

31.12.2010 || 8 224 || 4 461 || 4 366

3.2.4. Credit risk on cash and cash equivalents

Available
funds are invested in accordance with the Facility’s schedule of contractual
disbursement obligations. As of 31.12.2011, investments were only in the form
of bank deposits and other short-term financial instruments. Investments in
medium and long-term bonds could also be eligible, according to the investment
guidelines and depending on liquidity requirements.

The
minimum short term rating required for authorised banks or issuers is
A-1/P-1/F1 (Moody’s, S&P, Fitch). In case of different ratings being
granted by more than one credit rating agency, the lowest rating governs. The
maximum authorized limit for each authorised bank or issuer is currently EUR 50
000 000 (fifty million euro).

The
deposits are executed with authorised entities with a maximum maturity of three
months from trading date and up to the credit exposure limit.

As at
31 December 2011 and 31 December 2010 all bank deposits and short term
commercial papers held by the Facility had a minimum rating of P-2 according to
Moody’s.

The
following table shows the situation of bank deposits including accrued interest
(in EUR’000):

Minimum short-term rating || Moody's rating || 31.12.2011 || 31.12.2010

P-1 || A1 || 117 603 || 26% ||        138 724 || 36%

P-1 || A2 || 179 938 || 40% ||          18 822 || 5%

P-1 || Aa2 || 28 622 || 6% ||        118 562 || 31%

P-1 || Aa3 || 105 547 || 24% ||        110 527 || 29%

P-2 || A3 ||    17 441 || 4% || - || -

TOTAL || || 449 151 || 100% ||        386 635 || 100%

The
following table shows the situation of short term commercial papers (in
EUR’000):

Minimum short-term rating || Moody's rating || 31.12.2011 || 31.12.2010

P-1 || A1 || - || - ||          21 473 || 100%

TOTAL || || - || - ||          21 473 || 100%

3.2.5. Credit risk on derivatives

3.2.5.1 Credit risk policy of
derivatives

The
credit risk with respect to derivatives is represented by the loss which a
given party would incur where the other counterparty to the deal would be
unable to honour its contractual obligations. The credit risk associated with
derivatives varies according to a number of factors (such as interest and
exchange rates) and generally corresponds to only a small portion of their
notional value.

In
the normal course of its activity, the Facility may enter into swap contracts
with a view to hedge specific lending operations or into currency forward
contracts, with a view to hedge its currency positions denominated in actively
traded currencies other than the Euro. All the swaps are executed by the
European Investment Bank with an external counterpart. The swaps are
disciplined by the same Master Swap Agreements and Credit Support Annexes
signed between the European Investment Bank and its external counterparts.

3.2.5.2 Credit risk measurement for
derivatives

All
the swaps executed by the European Investment Bank that are related to the
Facility are treated within the same contractual framework and methodologies
applied for the derivatives negotiated by the European Investment Bank for its
own purposes. In particular, eligibility of swap counterparts is determined by
the European Investment Bank based on the same eligibility conditions applied
for its general swap purposes.

The
European Investment Bank measures the credit risk exposure related to swaps and
derivatives transactions using the Net Market Exposure (NME) and Potential
Future Exposure (PFE) approach for reporting and limit monitoring. The NME and
the PFE fully include the derivatives related to the Investment Facility.

The
following table shows the maturities of swap contracts (including cross
currency swaps, cross currency interest rate swaps and excluding short-term
currency swaps), sub-divided according to their notional amount and fair value:

Swap contracts at 31.12.2011 || less than || 1 year || 5 years || more than || Total 2011

(in EUR' 000) || 1 year || to 5 years || to 10 years || to 10 years ||

|| || || || ||

Notional amount || 7 042 || 43 593 || 16 899 || - || 67 534

Fair Value (i.e. net discounted value) || -674 || -1 331 || -3 869 || - || -5 874

Swap contracts at 31.12.2010 || less than || 1 year || 5 years || more than || Total 2010

(in EUR' 000) || 1 year || to 5 years || to 10 years || to 10 years ||

|| || || || ||

Notional amount || 431 || 37 822 || 65 514 || 1 440 || 105 207

Fair Value (i.e. net discounted value) || - 6 || -728 || - 3 787 || - 213 || - 4 734

The
Facility enters into short-term currency swap contracts in order to hedge
currency risk on loan disbursements in currencies different from EUR.
Short-term currency swaps have a maturity of maximum three months and are
regularly rolled-over.

The
notional amount of short-term currency swaps stood at EUR 585 million at 31
December 2011 against EUR 458 million at 31 December 2010. The fair value of
short-term currency swaps amounts EUR -6.4 million at 31 December 2011 against
EUR nil at 31 December 2010.

3.3 Liquidity
risk

Liquidity
risk represents the risk that an entity will encounter difficulty in meeting
obligations associated with financial liabilities that are settled by
delivering cash or another financial asset.

The
IF is primarily funded by annual contributions from Member States (9th
and 10th EDF resources) and secondly by reflows stemming from IF
operations. Each year, the EC, taking into account EIB’s forecasts concerning
the management and operations of the IF, shall establish and communicate to the
Council by 15 October a statement of the commitments, payments and the annual
amount of the calls for contributions (interest subsidies included) to be made
in the current and the following budget years.

In
order to calculate Member States annual contributions, disbursement pattern of
the existing and pipelined portfolio is analysed and followed up throughout the
year. Special events, such as early reimbursements, sales of shares or default
cases are taken into account to correct annual liquidity requirements. To further
minimize the liquidity risk, the Facility maintains a liquidity reserve
sufficient to cover at any point in time forecasted disbursements, as
communicated periodically by OPS.

The
treasury assets of the accounts opened in the name of the IF are managed by the
Bank’s Treasury Department. In accordance with the principle of segregation of
duties between the Front and Back Office. Settlement operations related to the
investment of these assets are under the responsibility of the Planning and
Settlement of Operations Department.

Where
so required for operational reasons in the judgment of the managers of the
Front and Back Offices during their day-to-day management of the treasury
assets, the Bank’s Liquidity and Cash flows Operational Committee (LICOCOM), a
body meeting on a weekly basis, bringing together the Financial, Lending and
Risk Management units will rule specifically on the problems raised and the
appropriate solutions. Operational requirements falling outside the framework
of day-to-day management of the assets, and the appropriate solutions adopted
will be submitted to the EC for agreement in principle.

Further,
according to the principle of segregation of duties, the authorisation of
counterparts and limits for treasury investments, as well as the monitoring of
such limits, are the responsibility of the Bank’s Risk Management Directorate.

The
table below sets out the Facility’s assets and liabilities by relevant maturity
groupings based on the remaining period to the contractual maturity date (in
EUR’000):

At 31 December 2011 || Up to 3 months || 3 to 12 months || 1 to 5 years || Over 5 years || Undefined || Total

ASSETS || || || || || ||

Cash and cash equivalents || 452 279 || - || - || - || - || 452 279

Derivative financial instruments || - || 15 || 419 || - || - || 434

Loans and receivables || 62 505 || 14 649 || 118 795 || 837 211 || - || 1 033 160

Available for sale financial assets || - || - || - || 236 446 || 15 214 || 251 660

Amounts receivable from contributors || 87 310 || - || - || - || - || 87 310

Other assets ||  122 || - || - || 294 || - || 416

Total assets || 602 216 || 14 664 || 119 214 || 1 073 951 || 15 214 || 1 825 259

LIABILITIES AND CONTRIBUTORS’ RESOURCES || || || || || ||

Liabilities || || || || || ||

Derivative financial instruments || 6 469 || 615 || 1 749 || 3 869 || - || 12 702

Deferred income || 505 || - || - || 32 498 || - || 33 003

Amount owed to third parties || 329 660 || - || - || - || - || 329 660

Other liabilities || 178 ||  - || - || 935 || - || 1 113

Total liabilities || 336 812 || 615 || 1 749 || 37 302 || - || 376 478

Contributors’ resources || || || || || ||

Member States Contribution called || - || - || - || - || 1 281 309 || 1 281 309

Fair value reserve || - || - || - || 31 873 || 9 877 || 41 750

Retained earnings || - || - || - || - || 125 722 || 125 722

Total Contributors’ resources || - || - || - || 31 873 || 1 416 908 || 1 448 781

Total liabilities and Contributors’ resources || 336 812 || 615 || 1 749 || 69 175 || 1 416 908 || 1 825 259

|| || || || || ||

At 31 December 2010 || Up to 3 months || 3 to 12 months || 1 to 5 years || Over 5 years || Undefined || Total

ASSETS || || || || || ||

Cash and cash equivalents || 411 587 || - || - || - || - || 411 587

Derivative financial instruments || - ||  3 ||  572 ||  801 || - || 1 376

Loans and receivables || 7 431 || 7 146 || 131 222 || 698 629 || - || 844 428

Available for sale financial assets || - || - || - || 171 637 || 23 191 || 194 828

Amounts receivable from contributors || 100 000 || - || - || - || - || 100 000

Other assets || 2 822 || - || - || - ||  350 || 3 172

Total assets || 521 840 || 7 149 || 131 794 || 871 067 || 23 541 || 1 555 391

LIABILITIES AND CONTRIBUTORS’ RESOURCES || || || || || ||

Liabilities || || || || || ||

Derivative financial instruments || - ||  10 || 1 300 || 4 800 || - || 6 110

Deferred income || - || - || - ||  92 || 29 487 || 29 579

Amounts owed to third parties || 298 415 || - || - || - || - || 298 415

Other liabilities ||  169 ||  419 || - ||  352 || - ||  940

Total liabilities || 298 584 ||  429 || 1 300 || 5 244 || 29 487 || 335 044

Contributors’ resources || || || || || ||

Member States Contribution called || - || - || - || - || 1 131 309 || 1 131 309

Fair value reserve || - || - || - || 10 113 || 14 457 || 24 570

Retained earnings || - || - || - || - ||  64 468 ||  64 468

Total Contributors’ resources || - || - || - || 10 113 || 1 210 234 || 1 220 347

Total liabilities and Contributors’ resources || 298 584 ||  429 || 1 300 || 15 357 || 1 239 721 || 1 555 391

3.4 Market risk

Market
risk represents the risk that changes in market prices, such as interest rates,
equity prices, foreign exchange rates and credit spreads (not relating to
changes in the issuer's credit standing) will affect an entity’s income or the
value of its holdings in financial instruments.

3.4.1.
Interest rate risk

Interest rate risk is the
volatility in the economic value of, or in the income derived from, the
Facility's positions due to adverse movements in market yields or the term
structure of interest rates. Exposure to interest rate risk occurs when there
are differences in repricing and maturity characteristics of the different
assets and liabilities.

The Facility does not manage the
interest rate risk.

The following table below
summarises the Facility's exposure to interest rate through its loans and
receivables (in EUR’000):

|| 31.12.2011 || 31.12.2010

Fixed rate interest || 516 175 || 412 428

Floating rate interest || 516 985 || 432 000

Total || 1 033 160 || 844 428

3.4.2.
Foreign exchange
risk

Foreign
exchange (“FX”) risk is the volatility in the economic value of, or in the
income derived from, the Facility's positions due to adverse movements of
foreign exchange rates.

The
Facility is exposed to foreign exchange risk whenever there is a currency
mismatch between its assets and liabilities. Foreign exchange risk also
comprises the effect of unexpected and unfavourable changes in the value of
future cash flows caused by currency movements.

3.4.2.1 Foreign exchange risk
and treasury assets

The IF’s treasury assets are
denominated either in EUR or USD.

FX risk is hedged by means of FX
spot or forward transactions, FX swaps or cross-currency swaps. The Bank’s
Treasury Department can, where deemed necessary and appropriate, use any other
instrument, in line with the Bank’s policy, that provide protection against
market risks incurred in connection with the IF’s financial activities.

3.4.2.2 Foreign exchange risk
and operations financed or guaranteed by the IF

Member States’ IF contributions are
received in EUR. The operations financed or guaranteed by the IF as well as
Interest Rate Subsidies can be denominated in EUR, USD or any other authorized
currency.

A foreign exchange risk exposure
(against the EUR reference currency) arises whenever transactions denominated
in currencies other than the EUR are left un-hedged. The IF’s foreign exchange
risk hedging guidelines are set out below.

3.4.2.2.1. Hedging of operations
denominated in currencies other than EUR or USD

-
IF
loans disbursed in currencies other than EUR and USD shall be hedged through
cross-currency swap contracts with the same financial profile as the underlying
Loan, provided that a swap market is operational.

-
For
disbursements under IF Operations made in a currency other than EUR and USD,
and for which a long-term hedging operation is not undertaken, the Treasury
Department shall enter into a foreign exchange transaction two business days
prior to the disbursement. The conversion rate applied to IF Operations shall
correspond to the market exchange rate obtained by the Treasury Department.
Similarly, for repayments received in a currency other than EUR and USD, the
Treasury Department shall undertake an FX operation where necessary to convert
the currencies received.

-
Uncalled
guarantees are not subject to any FX hedging. Guarantee calls in currencies
other than EUR and USD will be hedged.

-
Operations
in currencies other than EUR and USD for which no FX hedging operation can be
undertaken by the Treasury Department shall be left un-hedged. This also
includes (synthetic) operations denominated in local currency but settled in
EUR or USD. The IF shall remain exposed to the FX risk incurred thereby.

3.4.2.2.2. Hedging
of operations denominated in USD

-
The
total outstanding amount of all IF Operations (except uncalled Guarantees)
denominated in USD shall be hedged by means of USD/EUR FX swaps, rolled over on
a periodic basis. At the beginning of each period, the cash flows to be
received or paid in USD during the next period shall be estimated on the basis
of planned or expected reflows/disbursements. Subsequently, the maturing FX
swaps shall be rolled over, their amount being adjusted to cover at least the
USD liquidity needs projected over the next period.

-
A
periodic calculation of the overall USD exposure as per the accounting records
will be undertaken to adjust, if necessary, the hedge on the next FX swap roll.

-
If
deemed operationally convenient by the Treasury Department, cross-currency
swaps can also be used to hedge specific USD Loans.

-
Within
a roll-over period, unexpected USD liquidity deficits shall be covered by means
of ad hoc FX swap operations while liquidity surpluses shall either be invested
in treasury assets or swapped into EUR.

-
At
all times, the total outstanding un-hedged amount from USD transactions (in
nominal terms) shall never exceed USD 5 000 000 (five million US dollars). This
limit shall be adjusted annually. In case of breach of this limit, the Treasury
Department shall bring the exposure back within limits by means of an FX
operation.

The following tables
show the Facility's foreign exchange position (in EUR’000):

At 31 December 2011 || EUR || USD || CAD || ACP/OCT Currencies || Total

|| || || || ||

ASSETS || || || || ||

Cash and cash equivalents || 416 384 || 35 895 || - || - || 452 279

Derivative financial instruments || 13 419 || -12 985 || - || - || 434

Loans and receivables || 477 340 || 501 923 || - || 53 897 || 1 033 160

Available-for-sale financial assets || 54 287 || 186 525 || 4 303 || 6 545 || 251 660

Amounts receivable from contributors || 87 310 || - || - || - || 87 310

Other assets || 50 || - || - || 366 || 416

Total assets || 1 048 790 || 711 358 || 4 303 || 60 808 || 1 825 259

|| || || || ||

LIABILITIES AND CONTRIBUTORS’ RESOURCES || || || || ||

Liabilities || || || || ||

Derivative financial instruments || - 641 758 || 654 460 || - || - || 12 702

Deferred income || 32 689 || 314 || - || - || 33 003

Amounts owed to third parties || 329 598 || 62 || - || - || 329 660

Other liabilities || 691 || 19 || - || 403 || 1 113

Total liabilities || -278 780 || 654  855 || - || 403 || 376 478

Contributors’ resources || || || || ||

Member States Contribution called || 1 281 309 || - || - || - || 1 281 309

Fair value reserve || 41 750 || - || - || - || 41 750

Retained earnings || 125 722 || - || - || - || 125 722

Total Contributors’ resources || 1 448 781 || - || - || - || 1 448 781

Total liabilities and Contributors’ resources || 1 170 001 || 654 855 || - || 403 || 1 825 259

Currency position as at 31 December 2011 || -121 211 || 56 503 || 4 303 || 60 405 || -

|| || || || ||

As at 31 December 2011 : || || || || ||

COMMITMENTS || || || || ||

Un-disbursed loans and available-for-sale financial assets || 761 319 || 204 340 || - || - || 965 659

Guarantees drawn || - || - || - || 7 909 || 7 909

|| || || || ||

CONTINGENT LIABILITIES || || || || ||

Guarantees undrawn || - || - || - || 20 000 || 20 000

At 31 December 2010 || EUR || USD || CAD || ACP/OCT Currencies || Total

|| || || || ||

ASSETS || || || || ||

Cash and cash equivalents || 378 570 || 33 017 || - || - || 411 587

Derivative financial instruments || 332 399 || - 331 023 || - || - || 1 376

Loans and receivables || 385 187 || 403 417 || - || 55 824 || 844 428

Available-for-sale financial assets || 40 184 || 137 505 || 12 444 || 4 695 || 194 828

Amounts receivable from contributors || 100 000 || - || - || - || 100 000

Other assets || 2 742 || - || - || 430 || 3 172

Total assets || 1 239 082 || 242 916 || 12 444 || 60 949 || 1 555 391

|| || || || ||

LIABILITIES AND CONTRIBUTORS’ RESOURCES || || || || ||

Liabilities || || || || ||

Derivative financial instruments || - 69 815 || 75 925 || - || - || 6 110

Deferred income || 29 235 || 344 || - || - || 29 579

Amounts owed to third parties || 298 415 || - || - || - || 298 415

Other liabilities || 577 || 1 || - || 362 || 940

Total liabilities || 258 412 || 76 270 || - || 362 || 335 044

Contributors’ resources || || || || ||

Member States Contribution called || 1 131 309 || - || - || - || 1 131 309

Fair value reserve || 24 570 || - || - || - || 24 570

Retained earnings || 64 468 || - || - || - || 64 468

Total Contributors’ resources || 1 220 347 || - || - || - || 1 220 347

Total liabilities and Contributors’ resources || 1 478 759 || 76 270 || - || 362 || 1 555 391

Currency position as at 31 December 2010 || - 239 677 || 166 646 || 12 444 || 60 587 || -

|| || || || ||

As at 31 December 2010 : || || || || ||

COMMITMENTS || || || || ||

Un-disbursed loans and available-for-sale financial assets || 858 279 || 236 035 || - || - || 1 094 314

Guarantees drawn || - || - || - || 9 484 || 9 484

|| || || || ||

CONTINGENT LIABILITIES || || || || ||

Guarantees undrawn || 45 000 || - || - || - || 45 000

3.4.3.
Equity price risk

Equity price risk is the risk that
the fair values of equities decrease as the result of changes in the levels of
equity indices and the value of individual equity investments.

The IF is exposed to equity price
risk via its venture capital investments, i.e. investments in direct equity and
venture capital funds.

Equity investments are subject to scoring.
Each investment is assessed on several criteria ranging in three main
categories: management, business plan and structure. Individual cores are then
consolidated into a single overall score assigned to the investment and
summarizing its global strength.

Equity risk exposures are also
subject to limits, defined at both individual and cumulated levels. The size of
such limits depends on the quality of the equity investments.

4
Fair values of
assets and liabilities

The table below sets
out a comparison by category of the carrying amounts and fair values of the
Facility’s assets and liabilities that are carried in the financial statements
(in EUR’000):

|| Carrying value 31.12.2011 || Fair Value 31.12.2011 || Carrying value 31.12.2010 || Fair Value 31.12.2010

Assets carried at fair value || || || ||

Available-for-sale financial assets || 251 660 || 251 660 || 194 828 || 194 828

Derivative financial instruments || 434 || 434 || 1 376 || 1 376

Total || 252 094 || 252 094 || 196 204 || 196 204

|| || || ||

Assets carried at amortised cost || || || ||

Cash and cash equivalents || 452 279 || 452 279 || 411 587 || 411 587

Loans and receivables || 1 033 160 || 1 022 679 || 844 428 || 844 428

Amounts receivable from contributors || 87 310 || 87 310 || 100 000 || 100 000

Other assets || 416 || 416 || 3 172 || 3 172

Total || 1 573 165 || 1 562 684 || 1 359 187 || 1 359 187

|| || || ||

Total assets || 1 825 259 || 1 814 778 || 1 555 391 || 1 555 391

|| || || ||

Liabilities carried at fair value || || || ||

Derivative financial instruments || 12 702 || 12 702 || 6 110 || 6 110

Total || 12 702 || 12 702 || 6 110 || 6 110

|| || || ||

Liabilities carried at amortised cost || || || ||

Deferred income || 33 003 || 33 003 || 29 579 || 29 579

Amounts owed to third parties || 329 660 || 329 660 || 298 415 || 298 415

Other liabilities || 1 113 || 1 113 || 940 || 940

Total || 363 776 || 363 776 || 328 934 || 328 934

|| || || ||

Total liabilities || 376 478 || 376 478 || 335 044 || 335 044

The following
describes the methodologies and assumptions used to determine the fair value of
the assets and the liabilities:

§
Assets for which
fair value approximates carrying value

For assets and
liabilities that are liquid or having a short term maturity less than three
months, it is assumed that the carrying amounts approximate to their fair
value.

§
Assets and
liabilities recorded at their fair value

Published price
quotations in an active market are the first source for determining the fair
value of a financial instrument. Due to the investment scope of the Facility’s
portfolio those are rarely available. For instruments without available market
price, fair values are estimated using valuation techniques or models based
whenever possible on observable market data prevailing at the balance sheet
date.

The following table analyses
financial assets designated at fair value by valuation method. The different
levels have been defined as follows:

-
Level
1: quoted prices (unadjusted) in active markets;

-
Level
2: inputs other than quoted prices included within level 1 that are observable
for the asset, either directly (i.e. as prices) or indirectly (i.e. derived
from prices);

-
Level
3: inputs for the asset that are not based on observable market data
(unobservable inputs).

At 31 December 2011 || Level 1 || Level 2 || Level 3 || Total

(in EUR'000) || || || ||

|| || || ||

Financial assets || || || ||

Derivative financial instruments || - || 434 || - || 434

Available-for-sale financial assets || 15 214 || - || 236 446 || 251 660

TOTAL || 15 214 || 434 || 236 446 || 252 094

|| || || ||

Financial liabilities || || || ||

Derivative financial instruments || - || 12 702 || - || 12 702

TOTAL || - || 12 702 || - || 12 702

At 31 December 2010 || Level 1 || Level 2 || Level 3 || Total

(in EUR'000) || || || ||

|| || || ||

Financial assets || || || ||

Derivative financial instruments || - || 1 376 || - || 1 376

Available-for-sale financial assets || 23 190 || - || 171 638 || 194 828

TOTAL || 23 190 || 1 376 || 171 638 || 196 204

|| || || ||

Financial liabilities || || || ||

Derivative financial instruments || - || 6 110 || - || 6 110

TOTAL || - || 6 110 || - || 6 110

In
2011 the Facility did not made transfers from Level 1 to 2 or Level 2 to 1 of
the fair value hierarchy.

The
following tables present the changes in Level 3 instruments for the year ended
31 December 2011 and 31 December 2010:

(in EUR'000) || Available-for-sale financial assets

Balance at 1 January 2011 || 171 638

Total gains or losses ||

- in profit or loss || -3 206

- in other comprehensive income || 21 759

Disbursements || 67 829

Repayments || -21 574

Balance at 31 December 2011 || 236 446

(in EUR'000) || Available-for-sale financial assets

Balance at 1 January 2010 || 151 049

Total gains or losses ||

- in profit or loss || -3 176

- in other comprehensive income || -4 773

Disbursements || 50 952

Repayments || -22 414

Balance at 31 December 2010 || 171 638

5
Cash and cash
equivalents (in EUR’000)

The cash and cash equivalents can
be broken down between the funds received from the Member States and not yet
disbursed and the funds from the Facility’s operational and financial
activities.

|| 31.12.2011 || 31.12.2010

|| ||

Member states contributions received and not yet disbursed || 195 205 || 33 128

Funds from the Facility’s financial and operational activities || 257 074 || 378 459

|| ||

Cash and cash equivalents || 452 279 || 411 587

6
Derivative financial
instruments (in EUR’000)

The main components of derivative
financial instruments are as follows:

At 31 December 2011 || Fair Value || Notional amount

Assets || Liabilities

Cross currency swaps || 434 || -953 || 29 376

Cross currency interest rate swaps || - || -5 355 || 38 158

Short-term currency swaps || - || -6 394 || 585 000

|| || ||

Derivative financial instruments || 434 || -12 702 ||

At 31 December 2010 || Fair Values || Notional amount

Assets || Liabilities

Cross currency swaps || 1 235 || -945 || 47 526

Cross currency interest rate swaps ||  141 || -5 165 || 57 681

Short-term currency swaps ||  - || - || 458 000

|| || ||

Derivative financial instruments || 1 376 || -6 110 ||

7
Loans and
receivables (in EUR’000)

The main components of loans and
receivable are as follows:

|| Global loans (*) || Senior loans || Subordinated loans || Total

Nominal as at 1 January 2011 || 246 500 || 542 322 || 123 910 || 912 732

Disbursements || 25 689 || 211 351 || - || 237 040

Write offs || - || - || -2 000 || -2 000

Repayments || -48 554 || -51 712 || -4 144 || -104 410

Interest capitalised || - || 459 || 10 053 || 10 512

Foreign exchange rates differences || 1 730 || 13 930 || 860 || 16 520

Nominal as at 31 December 2011 || 225 365 || 716 350 || 128 679 || 1 070 394

|| || || ||

Impairment as at 1 January 2011 || -15 006 || -18 056 || -44 023 || -77 085

Impairment recorded in statement of comprehensive income || -1 746 || -1 514 || -773 || -4 033

Write offs || - || - || 2 000 || 2 000

Reversal of impairment || 9 499 || 3 263 || 18 723 || 31 485

Foreign exchange rates differences || -356 || -65 || -762 || -1 183

Impairment as at 31 December 2011 || -7 609 || -16 372 || -24 835 || -48 816

|| || || ||

Amortised Cost || -1 700 || -3 428 || -99 || -5 227

Accrued interest || 3 498 || 9 499 || 3 812 || 16 809

|| || || ||

Loans and receivables as at 31 December 2011 || 219 554 || 706 049 || 107 557 || 1 033 160

(*) including agency
agreements

|| Global loans (*) || Senior loans || Subordinated loans || Total

Nominal as at 1 January 2010 || 230 989 || 406 799 || 145 482 || 783 270

Disbursements || 39 596 || 165 781 || 1 575 || 206 952

Repayments || -33 573 || -46 053 || -40 098 || -119 724

Interest capitalised || - || - || 13 239 || 13 239

Foreign exchange rates differences || 9 488 || 15 795 || 3 712 || 28 995

Nominal as at 31 December 2010 || 246 500 || 542 322 || 123 910 || 912 732

|| || || ||

Impairment as at 1 January 2010 || -8 371 || -30 217 || -59 556 || -98 144

Impairment recorded in statement of comprehensive income || -6 522 || - || -582 || -7 104

Reversal of impairment ||  266 || 13 843 || 18 423 || 32 532

Foreign exchange rates differences || -379 || -1 682 || -2 308 || -4 369

Impairment as at 31 December 2010 || -15 006 || -18 056 || -44 023 || -77 085

|| || || ||

Amortised Cost || -1 727 || -2 047 || - 118 || -3 892

Accrued interest || 3 670 || 6 226 || 2 777 || 12 673

Loans and receivables as at 31 December 2010 || 233 437 || 528 445 || 82 546 || 844 428

(*) including agency
agreements

8
Available-for-sale
financial assets (in EUR’000)

The main components of
available-for-sale financial assets are as follows:

|| Venture Capital Fund || Direct Equity Investment || Total

Cost as at 1 January 2011 || 142 932 || 33 350 || 176 282

Disbursements || 59 579 || 8 250 || 67 829

Repayments / sales || -20 236 || -4 735 || -24 971

Foreign exchange rates differences on repayments / sales || 417 || -300 || 117

Cost as at 31 December 2011 || 182 692 || 36 565 || 219 257

|| || ||

Unrealised gains and losses as at 1 January 2011 || 11 335 || 13 235 || 24 570

Net change in unrealised gains and losses || 18 446 || -1 266 || 17 180

Unrealised gains and losses as at 31 December 2011 || 29 781 || 11 969 || 41 750

|| || ||

Impairment as at 1 January 2011 || -2 || -6 022 || -6 024

Impairment recorded in statement of comprehensive income during the year || - 6 888 || - || -6 888

Use of impairment booked in the statement of comprehensive income during previous years || 2 || 3 714 || 3 716

Foreign exchange rates differences on impairment || 1 || -152 || -151

Impairment as at 31 December 2011 || -6 887 || -2 460 || -9 347

|| || ||

Available-for-sale financial assets as at 31 December 2011 || 205 586 || 46 074 || 251 660

|| Venture Capital Fund || Direct Equity Investment || Total

Cost as at 1 January 2010 || 116 652 || 30 462 || 147 114

Disbursements || 48 040 || 2 912 || 50 952

Repayments / sales || -22 414 || - || -22 414

Foreign exchange rates differences on repayments / sales ||  654 || -24 ||  630

Cost as at 31 December 2010 || 142 932 || 33 350 || 176 282

|| || ||

Unrealised gains and losses as at 1 January 2010 || 18 138 || 1 572 || 19 710

Net change in unrealised gains and losses || -6 803 || 11 663 || 4 860

Unrealised gains and losses as at 31 December 2010 || 11 335 || 13 235 || 24 570

|| || ||

Impairment as at 1 January 2010 || -2 || -2 308 || -2 310

Impairment recorded in statement of comprehensive income during the year || - || -3 714 || -3 714

Impairment as at 31 December 2010 || -2 || -6 022 || -6 024

|| || ||

Available-for-sale financial assets as at 31 December 2010 || 154 265 || 40 563 || 194 828

9
Amounts receivable
from contributors (in
EUR’000)

The main components of amounts
receivable from contributors are as follows:

|| 31.12.2011 || 31.12.2010

|| ||

Member states contribution called but not paid || 87 310 || 100 000

|| ||

Total amount receivable from contributors || 87 310 || 100 000

10 Other assets (in
EUR’000)

The main components of other assets
are as follows:

|| 31.12.2011 || 31.12.2010

|| ||

Amount receivable from EIB || 59 || 2 743

Financial guarantees || 357 ||  429

|| ||

Total other assets || 416 || 3 172

11 Deferred income (in EUR’000)

The main components of deferred
income are as follows:

|| 31.12.2011 || 31.12.2010

|| ||

Deferred interest subsidies || 32 744 || 29 073

Deferred commissions on loans and receivables || 259 ||  506

|| ||

Total deferred income || 33 003 || 29 579

12 Amounts owed to third parties (in EUR’000)

The main components of amounts owed
to third parties are as follows:

|| 31.12.2011 || 31.12.2010

|| ||

Net general administrative expenses payable to EIB || 38 011 || 34 086

Other amounts payable to EIB || 219 || -

Interest subsidies not yet disbursed owed to Member States || 291 430 || 264 329

|| ||

Total amounts owed to third parties || 329 660 || 298 415

13 Other liabilities (in EUR’000)

The main components of other
liabilities are as follows:

|| 31.12.2011 || 31.12.2010

|| ||

Financial guarantees || 294 ||  351

Other || 819 ||  589

|| ||

Total amount of other liabilities || 1 113 ||  940

14 Member States Contribution called (in EUR’000)

Member States || Contribution to the Facility || Contribution    to interest subsidies || Total contributed || Called and    not paid (*)

Austria || 33 955 || 10 168 || 44 123 || 2 650

Belgium || 50 227 || 15 041 || 65 268 || 3 920

Denmark || 27 420 || 8 211 || 35 631 || 2 140

Finland || 18 963 || 5 679 || 24 642 || 1 480

France || 311 358 || 93 237 || 404 595 || 24 300

Germany || 299 314 || 89 630 || 388 944 || 23 360

Greece || 16 016 || 4 796 || 20 812 || 1 250

Ireland || 7 944 || 2 379 || 10 323 || 620

Italy || 160 676 || 48 115 || 208 791 || 12 540

Luxembourg || 3 716 || 1 113 || 4 829 || 290

Netherlands || 66 884 || 20 028 || 86 912 || 5 220

Portugal || 12 429 || 3 722 || 16 151 || 970

Spain || 74 828 || 22 407 || 97 235 || 5 840

Sweden || 34 980 || 10 475 || 45 455 || 2 730

United Kingdom || 162 599 || 48 690 || 211 289 || -

Total as at 31 December 2011 || 1 281 309 || 383 691 || 1 665 000 || 87 310

Total as at 31 December 2010 || 1 131 309 ||  333 691 || 1 465 000 ||  100 000

(*)
On 18.11.2010, the Council fixed the amount of financial contributions to be
paid by each Member State by 21.01.2012.

15 Contingent liabilities and commitments (in EUR’000)

|| 31.12.2011 || 31.12.2010

|| ||

Commitments || ||

Undisbursed loans || 701 092 || 808 865

Undisbursed available-for-sale financial assets || 264 567 || 285 449

Guarantees drawn || 7 909 || 9 484

|| ||

Contingent liabilities || ||

Guarantees undrawn || 20 000 || 45 000

|| ||

Total || 993 568 || 1 148 798

16 Net interest income (in EUR’000)

The main components of interest and
similar income are as follows:

|| From 01.01.2011 || From 01.01.2010

|| to 31.12.2011 || to 31.12.2010

|| ||

Cash and cash equivalents || 5 518 || 1 878

Loans and receivables || 50 800 || 50 299

Interest subsidies || 3 243 || 2 424

|| ||

Total interest and similar income || 59 561 || 54 601

The main component of interest and
similar expense is as follows:

|| From 01.01.2011 || From 01.01.2010

|| to 31.12.2011 || to 31.12.2010

|| ||

Derivative financial instruments || -940 || -2 591

|| ||

Total interest and similar expense || -940 || -2 591

17 Net fee and commission income (in EUR’000)

The main components of fee and
commission income are as follows:

|| From 01.01.2011 || From 01.01.2010

|| to 31.12.2011 || to 31.12.2010

|| ||

Fee and commission on loans and receivables || 1 894 || 11 510

Fee and commission on financial guarantees || 255 ||  265

|| ||

Total fee and commission income || 2 149 || 11 775

The main component of fee and
commission expenses is as follows:

|| From 01.01.2011 || From 01.01.2010

|| to 31.12.2011 || to 31.12.2010

|| ||

Commission paid to third parties with regard to available-for-sale financial assets || -144 || -372

|| ||

Total fee and commission expenses || -144 || -372

18 Net result on financial operations (in EUR’000)

The main components of net result
on financial operations are as follows:

|| From 01.01.2011 || From 01.01.2010

|| to 31.12.2011 || to 31.12.2010

|| ||

Fair value change on derivative financial instruments || -7 534 || -12 082

Foreign exchange gain/loss || 8 376 || -5 556

Dividend income and realised gain from available-for-sale financial assets || 17 228 || 1 815

|| ||

Net result on financial operations || 18 070 || -15 823

19 General administrative expenses (in EUR’000)

General administrative expenses
represent the actual costs incurred by the EIB for managing the Facility less
income generated from standard appraisal fees directly charged by the EIB to
clients of the Facility.

|| From 01.01.2011 || From 01.01.2010

|| to 31.12.2011 || to 31.12.2010

|| ||

Actual cost incurred by the EIB || -39 937 || -36 028

Income from appraisal fees directly charged to clients of the Facility || 1 931 || 1 942

|| ||

Net general administrative expenses || -38 006 || -34 086

Following the entry in force of the
revised Cotonou Partnership Agreement on the 1st of July 2008, general
administrative expenses are not covered anymore by the Member States.

20 Subsequent events

There have been no material post
balance sheet events which could require disclosure or adjustment to the 31
December 2011 financial statements.

ANNEX TO PART I – CHAPTER 2 (REPORT ON THE FINANCIAL
IMPLEMENTATION): SITUATION BY COUNTRY AND BY INSTRUMENT

Notes
to the tables:

· The figure
"0.00" indicates that the corresponding amount is between EUR –4999
and EUR 4999. Where no figure is given, the amount is zero.    
Countries with a nil balance in all columns are not listed in the tables.

· The heading "All
ACP/OCT countries" refers to projects which cover a number of countries
but are not financed by regional cooperation.

· The heading
"Financial and administrative expenses" represents projects financed
by EDF interest or the envelope covering administrative expenditure.

[1]         OJ L 247 of 09.09.2006

[2]       All figures are rounded into
millions of euros. It should be noted that due to the rounding of figures, some
financial data in the tables may not add up. Amounts shown as 0 represent
figures of less than EUR 500 000. Amounts that equal to zero are shown as a
dash (-).

[3]       In 2010, the co-financing
contributions were reclassified and presented as payables to Member States. The
co-financing contributions fulfil the criteria of revenues from non-exchange
transactions under condition and should be presented as such. The amount
reclassified represents the cumulative co-financing contributions from the
years 2008 and 2009.

[4]       The net assets of the 10th EDF are
negative due to the fact that contributions have been called for the first time
only in 2011.

[5]       In 2010, the co-financing
contributions were reclassified and presented as payables to Member States. The
co-financing contributions fulfil the criteria of revenues from non-exchange
transactions under condition and should be presented as such. The amount
reclassified represents the cumulative co-financing contributions from the
years 2008 and 2009.

[6]       In accordance with Article 153
of the 10th EDF Financial Regulation, the treasury is presented in the balance
sheet of the 10th EDF. The nature of the various bank accounts is outlined in
chapter 6, Financial Risk Management

[7]       This balance represents the amounts
available for the Democratic Republic of the Congo in accordance with the
provisions of Council Decision 2003/583/EC[7]. These funds are earmarked for a specific
purpose and beneficiary state.

[8]       OJ L 156 of 29.05.1998 pp. 3-106

[9]       OJ L 247 of 09.09.2006

[10]      Council Decision 2010/406/EU of 12
July 2010 concerning the allocation of the funds decommitted from projects
under the ninth and previous European Development Funds (EDF) for the purpose
of addressing the needs of the most vulnerable population in Sudan.

[11]      Council Decision 2011/315/EU of 23
May 2011.

[12]      OJ L 247 of 09.09.2006

[13]      The negative balance for Sysmin is
caused by a reversal of accrued charges.

[14]        The unallocated resources from the previous EDFs
include the balance of the Sysmin funds, which by Decision 3/2000 of the ACP-EC
Council of Ministers was set at EUR 410,926 million. Commission Decision
PE/410/2001 includes these resources in programming for the national indicative
allocations (part B) under the financial protocol to the ACP-EC Partnership
Agreement.