REPORT FROM THE COMMISSION TO THE COUNCIL AND THE EUROPEAN PARLIAMENT ON THE BORROWING AND LENDING ACTIVITIES OF THE COMMUNITY IN 1999

TABLE OF CONTENTS

INTRODUCTION

1. BORROWING ACTIVITIES IN 1999

1.1. Community issues

1.2. Borrowing trends

2. LENDING IN THIRD COUNTRIES

2.1. Overview

2.2. The Community's Macrofinancial assistance

2.3. Lending within the Framework of Council Decision 97/256/EC, as amended by Council Decisions 98/348/EC and 98/729/EC : Central and Eastern Europe, The Mediterranean Countries, Asian and Latin American Countries, The Republic of South Africa, The Former Yugoslav Republic of Macedonia (Fyrom) and Bosnia-Herzegovina

2.3.1. EIB objectives and priorities

2.3.2. Lending activity

2.3.3. Risk sharing

2.3.4. Cooperation with other institutions

3. BUDGETARY IMPACT OF BORROWING AND LENDING

3.1. Interest subsidies

3.2. Budget guarantees

4. STATISTICAL ANNEX

INTRODUCTION

1. The Council decisions establishing the various Community lending instruments [1], [2] require the Commission to inform the Council and Parliament each year of the use made of these instruments.

[1] Decision 78/870/EEC (OJ L 298, 25.10.1978).

[2] Decision 77/270/Euratom (OJ L 88, 6.4.1977).

However, in view of the moratorium on the construction of nuclear power stations within the EU, the fact that the appropriations allocated by the Council to the New Community Instrument (NCI) have been used up and the cessation of ECSC loans as the expiry of the ECSC Treaty in 2002 approaches, the Commission considers that there is no longer any need to inform the Council and Parliament of Community lending activities under the instruments applicable within the Community. This report contains only information concerning the repayment of loans (see the section on borrowings).

2. As for lending activities outside the Community, a decision adopted in 1997 requires the Commission to inform the Council and Parliament on an annual and a six-monthly basis of the situation regarding EIB loans guaranteed by the Community budget in central and eastern Europe, in the Mediterranean countries, in the Latin American and Asian countries and in South Africa. [3]

[3] Decision 97/256/EEC (OJ L 102, 19.4.1997).

In order to meet this requirement, this report describes these operations for each of the areas concerned. It also gives a brief summary of macrofinancial assistance provided by the Community to central and eastern European countries.

1. BORROWING ACTIVITIES IN 1999

1.1. Community issues

In order to finance the lending activities decided on by the Council, the Commission is empowered to borrow funds on the capital market. However, given that the NCI ceilings have been fully used up, and in view of the moratorium on Euratom activities within the EU and the approaching expiry in 2002 of the ECSC Treaty, no finance was mobilised on the basis of these instruments in 1999.The only borrowings last year were for macrofinancial assistance to central and eastern European countries (CEECs),loans to the African, Caribbean and Pacific (ACP) countries, measures adopted pursuant to the Mediterranean protocols (MEDA), and EIB activities inside and outside the Union (in particular CEECs, ACP and MEDA), which account for the bulk of borrowings in terms of volume.

1.2. Borrowing trends

In view of the above, borrowings by the European institutions fell in 1999 by 6.7%; EIB borrowings fell by 5.8%. The total amount of issues was thus EUR28.5 billion, against EUR30.5 billion in the previous year (see able 4-1 in the annex).

Taking into account repayments, cancellations and exchange-rate fluctuations, the total amount of net borrowings outstanding as at 31 December 1999 was EUR154.7 billion, 18.2% up on 1998 (see Table 4-2 in the annex).

Following the adoption of the single currency on 1 January 1999, euro borrowings virtually quadrupled as compared with 1998, to a level slightly below total borrowings in ecus and in the currencies of Member States participating in monetary union. The share of the currencies of the "pre-in" countries fell significantly, while borrowings in dollars and Swiss francs increased appreciably.

There was also a marked increase in variable-rate borrowings, probably because of monetary uncertainties and expectations of an increase in the ECB's key rates which actually occurred much later in 2000.

With regard to the NCI, almost all loans have now been repaid; the corresponding situation for outstanding borrowings is indicated by currency in Table 4-4 in the annex.

2. LENDING IN THIRD COUNTRIES

2.1. Overview

Lending designed to provide financial support to third countries that have concluded cooperation agreements with the Community takes a variety of forms depending on the geographical areas concerned and the objectives pursued. State-to-State loans are used when the EU wishes to help place the macroeconomic fundamentals of these countries on a sounder footing; individual loans are used where the aim is to develop infrastructure and carry out major improvement projects; global loans to local banks are used to develop the productive network of SMEs and stimulate the market economy. In particular, the EIB's operations in the central and eastern European countries forms part of the pre-accession strategy designed to assist the integration process. in the Mediterranean countries, the Bank's lending comes under the Euro-Mediterranean partnership; in Latin America and Asia, the Bank continues to finance projects of common interest; in South Africa, lending is designed to underpin the programme of reconstruction and development of the country;finally, in the ACP countries, the Bank's activities are being developed in the context of the Lomé Convention and those countries' privileged relations with the Community.

Table 2-1 Financing outside the Community in 1999 - overview

(EUR million)

>TABLE POSITION>

2.2. The Community's Macrofinancial assistance

Macrofinancial assistance in the form of loans is, by its very nature, exceptional and forms part of the efforts of the international community to provide, in conjunction with the Bretton Woods institutions, balance-of-payments support to certain countries grappling with transitional difficulties. The Community's assistance focuses on neighbouring regions, such as central and eastern Europe, the new European states of the former USSR and the countries of the southern Mediterranean. Disbursements are themselves linked to the beneficiary countries' meeting objectives in terms of macroeconomic stabilisation and structural reforms. In these circumstances, the number of operations effected each year is limited, and it is difficult to make valid comparisons for the assistance given from one year to the next.

In 1999 the Council approved macrofinancial assistance in five cases in the form of loans to Albania (up to EUR20 million), Bosnia-Herzegovina (up to EUR20 million in loans and up to EUR40 million in grants), Bulgaria (up to EUR100 million), the Former Yugoslav Republic of Macedonia (up to EUR50 million in loans and EUR30 million in grants) and Romania (up to EUR200 million). The total amount of loans approved by the Council was therefore EUR390 million.

As regards disbursements, aid paid out in 1999 in the form of loans amounted to EUR108 million. The breakdown is as follows: EUR58 million to Ukraine under an operation approved by the Council in 1998, EUR40 million to Bulgaria under an operation approved in 1999 and EUR10 million (accompanied by a EUR15 million grant) to Bosnia-Herzegovina under an operation approved in 1999

2.3. Lending within the Framework of Council Decision 97/256/EC, as amended by Council Decisions 98/348/EC and 98/729/EC : Central and Eastern Europe, The Mediterranean Countries, Asian and Latin American Countries, The Republic of South Africa, The Former Yugoslav Republic of Macedonia (Fyrom) and Bosnia-Herzegovina

Section 2.3 constitutes the report to be submitted to the European Parliament and the Council in accordance with Articles 2 and 3 of Council Decision 97/256/EC, i.e. it comprises the six-monthly report for the second half of 1999 and the annual report for 1999.

2.3.1. EIB objectives and priorities

In central and eastern Europe, the Bank assists the countries which have applied for EU membership, by helping them to create the economic framework necessary for them to join.In adition, it assists Cyprus and Malta, which are also applicants, [4] Albania, FYROM and Bosnia-Herzegovina.

[4] In addition to its activities under the Council decisions, the Bank has recently renewed its substantial Pre-Accession Facility for lending from its own resources without budgetary guarantee, with a view to helping the countries which have applied for EU membership.

The EIB gives priority to upgrading, modernising and developing the communications and energy sectors, with particular emphasis on Trans-European Networks (TENs) on the basis of the road and rail corridors defined by the Pan-European Conference of Transport Ministers as development priorities for the medium term.

Environmental issues related to EIB projects are given priority within the framework of the gradual adaptation of the legislation of the countries concerned to that of the EU.

The EIB also supports SMEs and other industrial initiatives, in particular when involving EU partners either directly or through its global loan instrument.

In the Mediterranean region, the Bank's lending in support of the economic development of the countries concerned takes place mainly within the framework of the Euro-Mediterranean Partnership. It supports individual investment projects and, through the global loan mechanism, smaller projects and SMEs, while at the same time strengthening the financial sector in the various countries.

Under the terms of the Euro-Mediterranean Partnership, EIB own-resources lending is complemented by interest subsidies (for loans in the environmental sector) and risk capital from EU budgetary sources managed by the Bank.

In Asia and Latin America, the Bank finances projects which are of mutual interest to the countries concerned and the European Union - co-financing with EU promoters, transfer of technology, cooperation in the fields of energy and environmental protection. Details of the mutual interest of the projects concerned are included in Table 2.7.

In the Republic of South Africa, the Bank's objective is to contribute to the successful completion of the country's reconstruction and development programme.

In FYROM, the Bank focuses on transport infrastructure projects.

In Bosnia-Herzegovina, the Bank finances infrastructure projects.

2.3.2. Lending activity

In 1999, the Bank signed 19 loan contracts in central and eastern Europe and in FYROM within the framework of the Council decisions (in addition to substantial lending under the Pre-Accession Facility) for an aggregate amount of EUR966 million. Loans for projects in Bulgaria, Romania and the Slovak Republic accounted for 82% of the aggregate amount. The Bank signed loans pursuant to the Council decisions in 6 countries.

* Bank activity continues to support the economic development of the countries concerned, principally by financing strategic infrastructure. Of total financing 83% (EUR803 million) was allocated to the communications sector, including rehabilitation and completion of motorways in Romania on Pan-European Transport Corridor IV, modernisation of the railway networks in the Slovak Republic, Bulgaria and Lithuania, acquisition of aircraft by the Romanian national airline and extension of the GSM network in Lithuania.

* A loan in support of industry and services, allocated to a car production plant in the Slovak Republic, accounted for 4% of total financing (EUR40 million).

* In the energy sector, a loan of EUR4 million was allocated to a district heating network in Romania.

* In the water management and miscellaneous sector, EUR25 million was allocated to protection works on the Black Sea coast and the banks of the Danube - a project with substantial environmental benefits.

* Finally, global loans totalling EUR50 million were allocated in support of SMEs in Bulgaria and the Slovak Republic.

Table 2-2 Breakdown by country and sector of EIB lending in central and eastern Europe in 1999

>TABLE POSITION>

In the Mediterranean region, the Bank signed 20 loans in 7 countries in 1999 (not including two loans in Cyprus under the Pre-Accession Facility and 2 loans - 1 in Egypt and 1 in Tunisia - under the Fourth Financial Protocols with those countries). Loans for projects in Egypt and Morocco accounted for 59% of the overall amount.

* 17% of total financing (EUR122 million) was allocated to the water management and miscellaneous sector. Projects financed included the rehabilitation and extension of wastewater networks, sewerage networks and treatment plants in Morocco, Egypt and Turkey.

* In the energy sector, which accounted for 0.7% of total financing (EUR5 million), a gas pipeline in Egypt received assistance.

* Egypt, Jordan, Morocco and Tunisia benefited from loans to the industry and services sector representing 46% of total financing (EUR330 million). The loans went to an industrial gases plant and a hydrocracking unit in Egypt, two chemical plants in Morocco, fertiliser plants in Tunisia and Jordan, and a phosphate mine in Jordan.

* A roads project in Tunisia and a railways project in Morocco were financed under the heading of communications and accounted for 23% of total financing in the region (EUR167 million).

* Global loans in Egypt, Lebanon and Turkey accounted for 13% of overall financing (EUR95 million).

Table 2-3 Breakdown by country and sector of EIB lending in the Mediterranean basin in 1999

>TABLE POSITION>

The Bank signed 6 loans in 4 countries of Asia and Latin America, together with one loan for a project of regional interest (hurricane reconstruction) in Central America, for an overall amount of EUR 310 million.

* A water treatment project in China accounted for 8% of total financing (EUR 25 million).

* In the energy sector, a gas-fired heat and power plant in Thailand and a gas distribution project in Mexico accounted for 31% of total financing (EUR 97 million).

* A telecommunications project in Brazil accounted for 19% of total financing (EUR 58 million).

* Loans to industry and SMEs in Brazil accounted for 31% of total financing (EUR 96 million).

Table 2-4 Breakdown by country and sector of EIB lending in Asia and Latin America in 1999

>TABLE POSITION>

In 1999 the Bank signed 4 loan contracts in the Republic of South Africa for an aggregate amount of EUR150 million, with EUR55 million going to 2 energy projects, EUR45 million to a communications (roads) project and EUR50 million to a global loan benefiting small and medium-scale ventures primarily in the water and sewerage sectors.

2.3.3. Risk sharing [5]

[5] Council Decision 97/256/EC invites the Bank "to aim to cover the commercial risk on 25% of its lending under this decision from non-sovereign guarantees to be expanded upon whenever possible insofar as the market permits on an individual mandate basis".

During 1999 the Bank continued to work towards the risk-sharing objective. The cumulative total for risk-sharing projects since the start of lending activity within the framework of the Council decisions was EUR1 484 million on an overall mandate basis at the end of 1999, i.e. 20.5% of the overall lending ceiling and 21.8% of lending to date. Details per region are as follows :

* In central and eastern Europe, risk sharing in respect of EIB lending amounted to EUR819 million, or 23.3% of the lending ceiling for those countries and 24.3% of lending to date. In central and eastern Europe, all lending under the Bank's Pre-Accession Facility is entirely at the Bank's risk and, therefore, risk sharing by the Bank will, "by definition", be more than 50% of overall lending in the region (Pre-Accession Facility lending, to which will be added risk-sharing projects signed within the framework of the Council decisions).

* In the Mediterranean region, risk sharing in respect of EIB lending amounted to EUR71 million, or 3.1% of the lending ceiling for those countries and 3.1% of lending under the mandate (the full amount of which has been signed). In accordance with the programming procedures inherent in the Euro-Mediterranean Partnership, most projects have been signed with governments or public bodies. It is thus not surprising that the risk-sharing total for the Mediterranean countries is relatively low.

* In Asia and Latin America, risk sharing in respect of EIB lending amounted to EUR594 million, or 66% of the lending ceiling [6] for those countries and 77.8% of lending to date.

[6] An amount of EUR122 million of lending in Asia and Latin America under the previous interim mandate is also covered by the guarantee arrangements laid down in the Council decisions.

* No risk-sharing loans have been signed in the Republic of South Africa or in FYROM.

* The risk-sharing arrangements do not apply to lending in Bosnia-Herzegovina.

The regional tables at the end of Section 2.3 identify the loans which are risk-sharing loans.

2.3.4. Cooperation with other institutions

In the countries which are candidates for EU membership, the Bank's activities are conducted within the framework of the EU programme to help the candidate countries prepare for accession, in particular by financing investment aimed at integrating their infrastructure with that of the EU and by assisting SMEs. Whenever possible, projects are co-financed with other institutions. The Bank's activities thus form part of a concerted approach pursued in close cooperation with the Commission and, where appropriate, with the international financial institutions (IFIs) working in the countries concerned.

The Bank cooperates closely with the PHARE programme, with which it has developed a productive relationship, much appreciated by the beneficiary countries. In addition to frequent PHARE assistance during the pre-investment phase to ensure that the necessary studies and technical assistance are implemented in support of EIB projects, the Bank also cooperates with PHARE in co-financing infrastructure projects.

The contributions of PHARE and the international financial institutions to projects financed by the EIB in 1999 are shown in the table below. Additional projects were co-financed within the framework of the Bank's Pre-Accession Facility, which is outside the scope of this report.

For south-eastern Europe, the Bank has established a special Balkans Task Force to identify infrastructure projects which should be financed as a priority, in cooperation with other IFIs and within the framework of the Stability Pact for the region.

Table 2-5 Co-financing in central and eastern Europe in 1999

(EUR million)

>TABLE POSITION>

In the Mediterranean region, the Bank's operations are conducted within the framework of EU policy and form part of a concerted approach pursued in close cooperation with the Commission and, where appropriate, with other IFIs, including through co-financing operations. The contributions of these institutions to projects financed by the EIB are shown in the table below.

Table 2-6 Co-financing in Mediterranean countries in 1999

(EUR million)

>TABLE POSITION>

In Asia and Latin America, the Bank continues to finance projects of mutual interest to the country concerned and to the EU. The mutual interest of loans signed in 1999 is described in the table below.

Table 2-7 Mutual interest of projects in Asia and Latin America

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Wherever possible, the Bank cooperates with other IFIs in Asia and Latin America. The table below gives details of co-financing.

Table 2-8 Co-financing in Asia and Latin America in 1999

(EUR million)

>TABLE POSITION>

3. BUDGETARY IMPACT OF BORROWING AND LENDING

The Community's general budget is affected by lending activities where loans are accompanied by interest subsidies and/or budget guarantees.

3.1. Interest subsidies

Interest subsidies are granted by the Community in the following fields (see Table 4.7):

(a) under the "SME facility";

(b) industrial conversion of coal and steel areas (Article 56 of the ECSC Treaty);

(c) reconstruction in the disaster-hit areas of Italy, Greece and Portugal (Autonomous Region of Madeira).

The Copenhagen European Council in 1993 increased by ECU 3 billion the funds available for the temporary facility agreed in Edinburgh for major infrastructure projects. Of that amount, ECU 1 billion was earmarked for measures to strengthen the competitiveness of small and medium-sized enterprises in Europe and was combined with interest subsidies linked to job creation. The subsidy amounted to ECU 3 000 per additional job created (equivalent on average to an interest-rate reduction of two percentage points). The allocation of loans ended on 15 December 1995, the ECU 1 billion limit having been reached.

No ECSC loans have been signed since 1998, and there has therefore been no further budgetary impact resulting from Article 56 of the Treaty.

The aggregate amount of interest subsidies granted for the reconstruction of disaster-hit areas in 1999 was EURO EUR2.2 million. This includes payments made directly by the Commission to the Autonomous Region of Madeira without EIB involvement (EUR475 500).

Interest subsidies are also provided in connection with certain EIB loans outside the Community. These are included in the budgetary and EDF resources shown in Table 2.1.

3.2. Budget guarantees

The situation with regard to guarantees is described in the Commission report on the Budget Guarantee Fund, which is drawn up every six months by DG BUDG.

4. STATISTICAL ANNEX

Table 4-1 Trend of borrowing and lending in the Community

(EUR million)

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Table 4-2 Community borrowings outstanding at the end of each period (1)

(ECU/EUR million)

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Table 4-3 Community borrowings in 1999, by currency

(EUR million)

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Table 4-4 Breakdown of NCI loans by currency: amounts outstanding as at 31.12.1999

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Table 4-5 Interest subsidies paid out by the various Community mechanisms 1987-99

(ECU/EUR million)

>TABLE POSITION>

Table 4-6 Loans signed in 1999 by the EIB in Central and Eastern Europe and FYROM

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Table 4-7 Loans signed in 1999 in the Mediterranean countries

>TABLE POSITION>

Table 4-8 Loans signed in 1999 in Asia and Latin America

>TABLE POSITION>

Table 4-9 Loans signed in 1999 in the Republic of South Africa

>TABLE POSITION>