Proposal for a COUNCIL DECISION granting a Community guarantee to the European Investment Bank against losses under a special lending action for selected environmental projects in the Baltic Sea basin of Russia under the Northern Dimension

(presented by the Commission)

EXPLANATORY MEMORANDUM

1. Introduction

The Northern Dimension was first recognised EU-wide at the Luxembourg European Council in December 1997. The Vienna European Council (December 1998) and the Cologne European Council (June 1999) developed it into a more concrete concept. In November 1999, the Finnish EU Presidency held a Foreign Ministerial Conference on the Northern Dimension and, one month later, the Helsinki European Council invited the Commission to prepare an Action Plan which was endorsed by the Feira European Council in June 2000.

The Northern Dimension covers the geographical area from Iceland to the west across to North West Russia, from the Norwegian, Barents and Kara Seas in the North to the Southern coast of the Baltic Sea. It aims at addressing the special regional development challenges of northern Europe. These include harsh climatic conditions, long distances, particularly wide living standard disparities, environmental challenges including problems with nuclear waste and waste water management, as well as insufficient transport and border crossing facilities.

The Northern Dimension aims to intensify cross border cooperation between the EU and its neighbouring countries and regions in northern Europe. It aims to create security and stability in the region, as well as building a safe, clean and accessible environment for all people living in the north. The Northern Dimension also has the objectives of addressing the problems related to uneven regional development and avoiding the emergence of new dividing lines as new countries join the Union.

One key priority is addressing the environmental challenges in the area covered by the Northern Dimension, including re-establishing the ecological balance of the Baltic Sea. Urgent action is needed in the Baltic Sea rim of Russia. For instance, effluents from 3.5 million inhabitants of the St Petersburg region are at present discharged into the Gulf of Finland with only partial wastewater treatment. A similar situation exists around Kaliningrad.

Following an initiative by the Swedish Council presidency, a limited EIB special action for environmental projects in Russia was discussed at the Ecofin working lunch of 12 March 2001. An in principle agreement was reached for EIB involvement in environmental projects in North West Russia, notably in the St Petersburg and Kaliningrad. The criteria considered by the Council were summarised by President of the Ecofin Council in a letter dated 10 March 2001 and addressed to the Ecofin Ministers, the Commissioner for Economic and Financial Affairs and the President of the EIB:

- Projects shall be assessed and approved on a case-by-case basis by the Board of Governors of the EIB. It is thus not a question of a general lending mandate for Russia.

- Projects shall have a strong environmental objective and be of significant interest for the EU.

- EIB shall co-operate and co-finance with other IFIs in order to ensure reasonable risk sharing and appropriate project conditionality.

- The aggregate volume of loans shall be subject to an indicative ceiling of 100 million euros.

- Russia must honour its international financial obligations, including those to the Paris Club.

At its meeting in Stockholm on 23-24 March 2001, the European Union agreed "that the Union should open up EIB lending for selected environmental projects [in Russia], according to the specific criteria decided by the Council".

2. The proposal

The present communication puts forward a Commission proposal for a special action under the Northern Dimension to grant a Community guarantee to the European Investment Bank against losses under loans for selected environmental projects in the Baltic Sea basin of Russia. The guarantee will cover EIB loans on a case-by-case basis up to a ceiling of EUR100 million.

This special action will be separate from and over and above the general EIB lending mandate laid down in Council Decision 2000/24/EC of 22 December 1999 [1]. The 65% global Community guarantee for that mandate shall be extended to cover lending in Russia under the special action.

[1] OJ L 9, 13.1.2000, p. 24.

Given the specific criteria that EIB projects under the present special action must meet, the present proposal shall not constitute a lending mandate, but the Board of Governors of the EIB will be invited to approve the loans on a case-by-case basis under Article 18. of the Statute of the Bank.

Eligible projects shall have a strong environmental objective and be of significant interest to the EU. The limited number of projects that the Council has asked the EIB to support could for instance include wastewater projects, water supply projects, waste and hazardous waste disposal sites and investments helping to limit the environmental impact of new infrastructure or industrial projects. The Bank is already in talks on a waste water project in St Petersburg and intends to explore possible involvement in a similar, smaller project in Kaliningrad.

The EIB will apply its usual criteria for lending under the present special action. The financial viability of potential projects may be enhanced by the availability of sufficient grants from the EU through TACIS, bilateral donors and Russian contributions.

The EIB will only become active under the present guarantee in cooperation and co-financing with other IFIs.

A high-level meeting took place in Helsinki on 9 March 2001 to discuss key issues related to the financing of infrastructure and environmental investments in the transition economies in the Northern Dimension area. It was attended by EIB, the World Bank (IBRD), International Finance Corporation (IFC), the European Bank for Reconstruction and Development (EBRD), the Nordic Investment Bank (NIB), the Nordic Environmental Finance Corporation (NEFCO), the Council of Europe Development Bank (CEB), the Swedish EU presidency, the European Commission and representatives of the governments of Finland and Belgium.

The high-level meeting agreed to establish a "Northern Dimension Environmental Partnership (NDEP)" with participation of IFIs, the Commission, as well as bilateral and multilateral donors and the transition countries concerned, in order to meet environmental and energy efficiency challenges in the area. The meeting agreed to establish a working group for this purpose under the co-chairmanship of the Swedish EU Presidency and the EBRD, which would submit its report before the end of June 2001. The working group will focus on the operational aspects of co-operation in the financing of projects under the Northern Dimension and will in particular seek to facilitate and accelerate investment financing by IFIs, the European Union and bilateral donors and the transition countries in environmental protection and energy efficiency.

At the beginning of 2001, Russia's performance in servicing its sovereign debt and in particular its Paris Club obligations suffered from payment delays. In the meantime, Russia's debt service payments have started to catch up with existing agreements, and should be current on its Paris Club debt in the near future. The EIB shall present projects for approval by its Board of Governors only if Russia is deemed to ensure proper servicing of its external financial obligations, notably towards Paris Club creditors.

The present special action aims at supporting the implementation of selected environmental projects of Community interest in the Baltic Sea rim of Russia. It is not part of the general external lending mandate of the EIB, and does not constitute a precedent for any future actions.

3. Budgetary implications

The present proposal for introducing a ceiling of EUR100 million for a special EIB lending action for environmental projects in the Baltic Sea rim of Russia, on the basis of a 65% global guarantee will have a total impact of EUR 5.85 million on the guarantee fund for external actions.

At present, after taking into account all external actions already decided or proposed as well as those that can be foreseen with some certainty but before taking account of the present proposal, the margin remaining in the reserve for the Guarantee Fund for 2001 stands at EUR 18.55 million. This figure also includes the effect of a small, positive correction that will take place in connection with this year's first budgetary transfer from the reserve for loans and loan guarantees to the Guarantee Fund for external actions, which is currently being prepared by the Commission. The correction is in pursuance of Council Regulation 2728/94 of 31 October 1994, as amended by Regulation 1149/99/EC of 25 May 1999, and stems from the introduction of the EIB Turkey customs union facility under Decision 2000/788/EC of 4 December 2000 [2] into the budgetary system already in December 2000, whilst lending effectively only commenced in 2001.

[2] OJ L 314, 14/12/2000, p. 27-28.

The current proposal will bring the margin remaining in the reserve for the guarantee fund for 2001 to EUR 12.70 million. The margin for the following years will not be affected by the current proposal.

2001/0121(CNS)

Proposal for a COUNCIL DECISION granting a Community guarantee to the European Investment Bank against losses under a special lending action for selected environmental projects in the Baltic Sea basin of Russia under the Northern Dimension

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community, and in particular Article 308 thereof,

Having regard to the proposal from the Commission [3],

[3] OJ C

Having regard to the opinion of the European Parliament [4],

[4] OJ C

Whereas:

(1) The Northern Dimension was launched by the Helsinki Council of 10-11 December 1999, which invited the Commission to put forward an Action Plan for the Northern Dimension. The Feira European Council in June 2000 adopted the Action Plan in the external and cross-border policies of the EU during 2000-2003. The Northern Dimension covers the geographical area from Iceland to the west across to North West Russia, from the Norwegian, Barents and Kara Seas in the North to the Southern coast of the Baltic Sea.

(2) The Northern Dimension aims at addressing the special regional development challenges in northern Europe. These include harsh climatic conditions, long distances, particularly wide living standard disparities, environmental challenges including problems with nuclear waste and waste water management, as well as insufficient transport and cross border facilities. It aims to intensify cross border co-operation between the EU and its neighbouring countries and regions in northern Europe.

(3) The environmental situation in Northwest Russia remains very difficult. There is a large heritage of environmental degradation, which is difficult to handle financially by the present government of Russia, or by the users of utilities through tariffs in view of the still relatively poor level of purchasing power of the population. Thus dangerous transboundary environmental black spots originating in Northwest Russia have not yet been addressed. Sewage from 3.5 million people in the St. Petersburg area is still discharged only partially treated into the Baltic Sea, with a similar situation around Kaliningrad. Some huge dumpsites of toxic waste are threatening the ground water.

(4) The Union already supports some environmental projects in Northwest Russia with grants from TACIS. Given the need to urgently strengthen the environmental protection in the area to prevent major further transboundary damage, it is justified for the Community to strengthen its support through limited EIB loans. The involvement of the EIB would reinforce the impact of Community actions, not only by multiplying the funds available, but also through the professional involvement of the Bank's project teams. Community support would be extended in a form that takes account of the cash generation capacity of projects and which is recoverable.

(5) At the initiative of the presidency, the Ecofin Council of 12 March 2001 considered a set of criteria for a limited EIB special action for environmental projects in North West Russia, notably in the St Petersburg and Kaliningrad areas. It was underlined that (a) projects shall be assessed by the EIB and the loans authorised on a case-by-case basis by its Board of Governors. It is thus not a question of a general lending mandate for Russia; (b) projects shall have a strong environmental objective and be of significant interest for the EU; (c) EIB shall co-operate and co-finance with other IFIs in order to ensure reasonable risk sharing and appropriate project conditionality; (d) the aggregate volume of loans shall be subject to an indicative ceiling of EUR 100 million; (e) Russia must honour its international financial obligations, including those to the Paris Club.

(6) The Stockholm European Council of 23-24 March 2001 concluded "that the Union should open up EIB lending for selected environmental projects [in Russia], according to the specific criteria decided by the Council".

(7) It is therefore appropriate to provide a guarantee to the EIB to allow it to sign loan operations under this special lending action for selected environmental projects in the Baltic Sea rim of Russia, notably in the St. Petersburg and Kaliningrad areas. The guarantee under this special action is of exceptional nature and is not to be considered a precedent for any future actions. The EIB has indicated its ability and willingness to extend loans from its own resources in North West Russia, in accordance with its Statute.

(8) The Community guarantee under the present action should have a ceiling of EUR 100 million. In order to strengthen the impact of this comparatively small action, it should be focused on projects located in the Baltic rim area of Russia.

(9) The Northern Dimension Environmental Partnership (NDEP) will provide a framework for priority setting involving the Commission, bilateral and multilateral donors, the IFIs and the transition countries concerned.

(10) Council Decision 2000/24/EC [5] grants the EIB a global 65% Community guarantee against losses under loans for projects outside the Community (Central and Eastern Europe, Mediterranean countries, Latin America and Asia and the Republic of South Africa).

[5] OJ L 9, 13.1.2000, p. 24.

(11) On 2 December 1996, the Council approved conclusions on new guarantee arrangements for EIB lending to third countries, according to which the approach of a global guarantee, without distinguishing between regions and projects, is approved and a risk-sharing scheme accepted. Under the risk-sharing scheme the EIB should secure adequate non-sovereign third-party guarantees for commercial risks, with the budgetary guarantee covering only political risks.

(12) The global guarantee covering the general EIB external lending mandate laid down in Decision 2000/24/EC should also apply to the special EIB lending action in Russia under the Northern Dimension. Credits opened under this Decision should benefit from the global guarantee as governed by Decision 2000/24/EC. In view of the special nature of this action, Article 1(3) of Decision 2000/24/EC should not apply to it.

(13) Time is of the essence in the implementation of this Decision. There is urgent need for environmental investment in the Baltic Sea rim of Russia.

(14) For the purpose of adopting this decision, the only powers provided for by the Treaty are those set out in Article 308.

HAS DECIDED AS FOLLOWS:

Article 1

Objective

The Community shall grant the European Investment Bank (hereinafter referred to as "the EIB") a global guarantee in respect of all payments not received by it but due in respect of credits opened, in accordance with its usual criteria, for investment projects carried out under this special lending action in the Baltic Sea basin of Russia under Northern Dimension. Eligible projects shall have a strong environmental objective and be of significant interest to the EU.

Article 2

Ceiling and conditions

1. The overall ceiling of the credits opened shall be EUR 100 million or the equivalent thereof.

2. The Community guarantee with respect to credits opened by the EIB under this Decision shall take the form of an extension of the 65% global Community guarantee granted to the EIB under the general external lending mandate, as laid down in Decision 2000/24/EC.

3. Projects financed by loans to be covered by the guarantee shall satisfy the following criteria:

- The eligibility in accordance with Article 1;

- Co-operation and co-financing by EIB with other International Financial Institutions in order to ensure reasonable risk-sharing and appropriate project conditionality.

4. The EIB shall only present projects for approval if Russia is deemed to honour its international financial obligations, including obligations for its Paris Club debt.

5. The Board of Governors of the EIB, under Article 18 of the Statute of the Bank, shall approve on a case-by-case basis each loan to be covered by the Community guarantee.

6. For the purposes of this Decision, Article 1 (3) of Decision 2000/24/EC does not apply.

Article 3

Reporting

The Commission, in the framework of reporting under Council Decision 2000/24/EC, shall inform the European Parliament and the Council each year of the loan operations carried out under this Decision and shall, at the same time, submit an assessment of the implementation of this Decision and of co-ordination between the International Financial Institutions involved in the projects. The Commission information submitted to the European Parliament and to the Council shall include an assessment of the contribution of the lending under this Decision to the fulfilment of the Community's objectives under Northern Dimension.

For the purposes referred to in the first subparagraph, the EIB shall transmit to the Commission the appropriate information.

Article 4

Duration

The guarantee shall cover loans signed during a period of three years from the date of adoption of this Decision. If, on expiry of those three years, the loans signed by the EIB have not attained the overall ceiling referred to in Article 2, this period shall be automatically extended by six months.

Article 5

Final provisions

1. This Decision shall take effect on the day of its publication in the Official Journal of the European Communities.

2. The EIB and the Commission shall fix the terms on which the guarantee is to be given.

Done at Brussels,

For the Council

The President

FINANCIAL STATEMENT

1. Title of operation

European Community guarantee for European Investment Bank loans in the Baltic Sea basin of North West Russia.

2. Budget heading(s) involved

B0-221. European Community guarantee for loans granted by the European Investment Bank to third countries in central and eastern Europe and Western Balkans.

3. Legal basis

Article 308 of the Treaty.

4. Description of operation

4.1 General objective

The action is intended to provide support for selected environmental projects of special Community interest in the Baltic Sea basin of the North West of Russia under the Nordic Dimension. Projects shall have a strong environmental objective and be of strong Community interest.

4.2 Description

The budget entry is intended to provide budgetary back-up for a guarantees granted by the European Community to the European Investment Bank to cover a ceiling of EUR 100 million under which the Bank shall extend loans for selected projects in North West Russia, notably in the St Petersburg and Kaliningrad areas. The projects shall have a strong environmental objective and be of significant Community interest.

4.3 Period covered and arrangements for renewal

Three years; for renewal a new Council Decision would be necessary.

5. Classification of expenditure or revenue

Compulsory expenditure/Non-differentiated appropriations.

6. Type of expenditure or revenue

A guarantee to the European Investment Bank.

7. Financial impact

Only if a call is made on the guarantee.

7.1 Method of calculating total cost of operation (relation between individual and total costs)

A token entry is proposed, given that the amount and timing of any call on this budget heading is fraught with uncertainty and cannot be calculated in advance.

7.2 Itemised breakdown of cost

Not applicable.

7.3 Operational expenditure for studies, experts etc. included in Part B of the budget

Not applicable.

8. Financing of expenditure for operations

In the event of a default, payments would be made directly from the Guarantee Fund to the creditor.

If the Guarantee Fund did not contain sufficient resources to cover a default, additional payments would be called up from the budget, with

- any margin remaining in the reserve being the first recourse;

- any margin available under the ceiling of Category 4 of the Financial Perspective or following redeployment within Category 4 being the second recourse;

- a revision of the Financial Perspective in line with the provisions of the Interinstitutional Agreement which might involve redeployment within other categories being the third recourse.

In order to meet its obligations, the Commission may provisionally undertake debt servicing by drawing on its liquid assets. In that event, Article 12 of Council Regulation (EEC, Euratom) No 1552/89 of 29 May 1989 is applicable.

9. Measures to verify that guarantee arrangements have been implemented

Appropriate control measures will be put in place, in accordance with the EIB's usual procedures including appropriate and specific control and monitoring arrangements consistent with those of the co-financing International Financial Institutions.

Appropriate arrangements will be made to allow the Court of Auditors of the European Community and the European Anti-fraud Office (OLAF) to exercise their mission in relation to this Decision in accordance with the applicable legislation.

10. Elements of cost-effectiveness analysis

10.1 Specific and quantified objectives; target population

- Quantifiable objectives: see point 4 above.

- Population: The Baltic Sea basin of North West Russia in the framework of Northern Dimension.

10.2 Justification of the operation

- To provide support for investment projects with strong environmental objective and of significant Community interest in the North West of Russia under Northern Dimension.

- Choice of ways and means: The EIB has been active in emerging markets for over two decades. This operation involves the Bank in Russia in a limited role. The EIB will only lend in co-operation and co-financing with International Financial Institutions already operating in Russia.

- Main factors of uncertainty which could affect the specific results of the operation: e.g. suspension by Russia of honouring its international financial obligations.

10.3 Monitoring of the operation

Performance indicators selected

The Commission information to be submitted to the European Parliament and the Council annually shall include an assessment of the contribution of the lending under the present Decision to the Community's objectives under Northern Dimension, taking into account the operational objectives and appropriate measurements of their fulfilment to be established by the European Investment Bank for lending under this Decision.

Project appraisal and approval by the EIB in accordance with the Bank's usual criteria and procedures.

EIB lending outside the EU is governed by Article 18 of the Statute of the Bank, and in particular paragraph 18(1), which reads: "...By way of derogation authorised by the Board of Governors acting unanimously on a proposal from the Board of Directors, the Bank may grant loans for investment projects to be carried out, in whole or in part, outside the European territories of Member States". According to the request by Council, lending under the present decision shall be authorised on a case-by-case basis by the Board of Governors of the EIB.

11. Administrative expenditure (Section III, Part A of the budget)

Not applicable. The proposed operation will not involve any increase in the number of Commission staff or administrative expenditure.

12. Impact on the reserve for guarantees

12.1 Provisional schedule of loans to be committed while the decision is in force

>TABLE POSITION>

12.2 Estimated use of the guarantee reserve to provision the Guarantee Fund

The provisioning rate of the Guarantee Fund for external actions as from 1 January 2000 is 9%. The rate of the blanket guarantee is 65%.

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12.3 Estimated use of the guarantee reserve by the present proposal [6]

[6] Situation as of 1 April 2001.

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* Annotation: The figures for EIB lending already take into account a small, positive correction with this year's first budgetary transfer from the reserve for loans and loan guarantees to the Guarantee Fund for external actions in pursuance of Council Regulation 2728/94 of 31 October 1994, as amended by Regulation 1149/99/EC of 25 May 1999, which stipulates that the Commission must start the payment procedure for lending under a framework facility spread over a number of years (such as EIB mandates and Euratom lending) at the beginning of the financial year. The provisioning for lending under these facilities must be made in annual tranches. The amounts paid into the Fund will be corrected by the difference recorded on 31 December of the previous year between the estimates that were taken as a basis for the previous payment and the actual figure of the loans signed during the year.