EUROPEAN COMMISSION Brussels, 22.9.2016 SWD(2016) 297 final/2 Corrigendum of SWD(2016)297 final of 14/9/2016 concerning only the correction of wrong numbering of sub-chapters. COMMISSION STAFF WORKING DOCUMENT EVALUATION Accompanying the document Proposal for a Regulation of the European Parliament and of the Council amending Regulations (EU) No 1316/2013 and (EU) 2015/1017 as regards the extension of the duration of the European Fund for Strategic Investments as well as the introduction of technical enhancements for that Fund and the European Investment Advisory Hub {COM(2016) 597 final}

{SWD(216) 298 final}



Contents 1. Introduction 1.1 Background of the evaluation 1.2 Scope of the evaluation 1.3 Evaluation questions 2. The EU Guarantee 3. The use of the EU Guarantee 3.1 Infrastructure and Innovation Window (IIW) 3.1.1 IIW Debt sub-window 3.1.2 IIW Equity sub-window 3.2 SME Window (SMEW) 4. The functioning of the EU Guarantee Fund under EFSI 4.1 The provisioning mechanism of the Guarantee Fund 4.2 Annual flows 4.2.1 Payments from the Union budget 4.2.2 Revenues and interests 4.2.3 Guarantee calls in relation to defaulted operations 4.2.4 Recovered amounts 4.2.5 Guarantee calls in relation to EIB funding costs

4.2.6 Guarantee calls in relation to other EIB costs (recovery costs, recoverable administrative costs) 5. Risk analysis and scenarios 5.1 IIW – Debt products 5.2 IIW – Equity instruments 5.3 SMEW – Debt products 5.4 SMEW – Equity products 6. Evaluation findings 6.1 Effectiveness 6.2. Efficiency 6.3. Relevance 7. Conclusions Appendix A – Information sources Appendix B – Abbreviations Appendix C – IIW – List of projects as of 30 June 2016 List of Figures Figure 1: IIW – EFSI-related investment for approved operations (by sector as of 30 June 2016) Figure 2: IIW EFSI-related investment for signed operations (by sector as of 30 June 2016) Figure 3: IIW - Number of operations approved and signed (as of 30 June 2016) Figure 4: IIW - Number of operations signed (as of 30 June 2016)

List of Tables Table 1: Payment schedule to the Guarantee Fund Table 2: Payment schedule to the Guarantee Fund until the month of July 2016 Table 3: SMEW debt instrument - Risk assessment (Expected Loss) Table 4: EFSI - Provisioning rate estimation Table 5: IIW - Debt sub-window projects Table 6: IIW - Equity sub-window projects



1.Introduction 1.1Background of the evaluation In 2014 the Commission announced the Investment Plan for Europe, a new initiative that was established in 2015 to support investment in Europe after the financial and economic crisis. The European Fund for Strategic Investments (EFSI) has been set up, together with the European Investment Advisory Hub (EIAH) and the European Investment Project Portal (EIPP), under Regulation (EU) No 2015/1017 of the European Parliament and of the Council of 25 June 2015 on the European Fund for Strategic Investments, the European Investment Advisory Hub and the European Project Investment Portal and amending Regulations (EU) No 1291/2013 and (EU) No 1316/2013 – the European Fund for Strategic Investments (the Regulation), with the aim of kick-starting investments in the Union through the mobilisation of private finance. The EFSI is established within the EIB, which manages it under the rules set out in the Regulation and in the Agreement on the Management of the EFSI and on the granting of the EU Guarantee between the EU and the EIB of 22 July 2015, in accordance with Article 4 of the Regulation (the EFSI Agreement). Article 18(1) of the Regulation provides that the EIB shall evaluate the functioning of the EFSI, while Article 18(2) provides that the Commission shall evaluate the use of the EU guarantee and the functioning of the guarantee fund which are established under Articles 8 to 13 of the Regulation (respectively 'the EU Guarantee' and 'the Guarantee Fund'), both by 5 January 2017. The latter evaluation is to be accompanied by an opinion of the Court of Auditors. Based on the results delivered by the EFSI so far, the Commission has decided to propose the extension of the EU Guarantee to the EIB. The timeline should avoid any interruptions in the financing going forward and ensure the continuity of the pipeline by providing a signal to potential promoters. As a result, the evaluation foreseen in Article 18(2) is being presented now. In parallel, the Commission has already started the process to launch the independent external evaluation foreseen in Article 18(6) of the Regulation. The comprehensive measures adopted with the Investment Plan for Europe are already delivering tangible results, despite the fact that larger infrastructure investment projects display sizeable macroeconomic effects over time. As of 30 June 2016, on the basis of approved operations (under the Infrastructure and Innovation Window (IIW) and the SME Window (SMEW)) the aggregated EIB Group investment catalysed through the EFSI is estimated at about EUR 106.8 billion, covering 26 Member States across all general objectives set out in the Regulation. 1.2Scope of the evaluation The present report provides an overview of the use of the EU Guarantee and the functioning of the Guarantee Fund during its first year of activity until 30 June 2016 in terms of effectiveness, efficiency and relevance and evaluates whether the current setting and parameters could be reviewed to optimise the use of the EU Guarantee. In particular, the evaluation includes an analysis of the risk profile of the current and future EFSI Guaranteed Operations and, consequently, of the adequacy of the target rate and level of the Guarantee Fund.

EFSI Guaranteed Operations must also satisfy additionality and eligibility criteria (as established respectively in Articles 5 and 6 of the Regulation). As foreseen in the Regulation, a parallel evaluation on the functioning of the EFSI is currently being conducted by the EIB. While the present report reviews the use of the EU Guarantee and functioning of the Guarantee Fund, the evaluation to be prepared by the EIB will consider the coherence of EFSI Guaranteed Operations with the above criteria and more generally the extent to which the EFSI is meeting the objectives set out in the Regulation. The Commission and the EIB have coordinated that dual evaluation process in order to avoid overlaps to the extent possible and optimise the overall scope of the exercise. 1.3Evaluation questions The analysis focused on the following specific evaluation questions: Effectiveness: 1. To what extent has the EU Guarantee been effectively used to fulfil its objectives until 30 June 2016? 2. To what extent have the current level of the target rate of the Guarantee Fund and the provisioning mechanism of the Guarantee Fund effectively served the needs that the Guarantee Fund was designed to address until 30 June 2016? Efficiency: 1. Has the EU Guarantee been used efficiently to achieve its objectives? 2. Did the provisioning mechanism of the Guarantee Fund address the objectives of the Fund in a timely and cost-efficient manner, in particular with regard to the budgetary process and discipline? 3. Was the level of the EU budget resources foreseen for the Guarantee Fund appropriate to cover the EFSI Guaranteed Operations in an efficient manner, and what conclusions can be drawn for the future? Relevance: 1. To what extent has the EU Guarantee been able to address the needs it was designed to address? 2. To what extent have the objectives of the Guarantee Fund been pertinent to the needs it was designed to address? How could the functioning mechanism of the Guarantee Fund be improved to address better the needs for coverage by the EU Guarantee? 3. In relation to the Guarantee Fund's target rate (currently set at 50%), what is the right level of the target rate taking into account the risk profile of the Fund? 2.The EU Guarantee The EFSI initiative builds on a EUR 16 billion guarantee from the Union budget, complemented by an allocation of EUR 5 billion of EIB’s own resources. The operational strategy is twofold: the guarantee aims to increase the volume of higher risk projects supported by EIB Group financing and investment operations and as a result help addressing the market failures and sub-optimal investment situations which hinder investment in Europe. The Union provides an irrevocable and unconditional guarantee to the EIB for financing and investment operations under the EFSI. Those operations are carried out in the Union or involve entities located or established in one or more Member States and extending to third countries defined in the Regulation. In addition, Article 10 of the Regulation sets out the instruments eligible for coverage by the EU Guarantee:

-EIB loans, guarantees, counter-guarantees, capital market instruments, any other form of funding or credit enhancement instrument, equity or quasi-equity participations, including in favour of national promotional banks or institutions, investment platforms or funds; -EIB funding or guarantees to the EIF enabling it to undertake loans, guarantees, counter-guarantees, any other form of credit enhancement instrument, capital market instruments and equity or quasi-equity participations, including in favour of national promotional banks or institutions, investment platforms or funds; -EIB guarantees to national promotional banks or institutions, investment platforms or funds under a counter- guarantee of the EU Guarantee. The amount of the EU Guarantee has been partitioned between the IIW – up to a maximum of EUR 13.5 billion – and the SMEW – up to a maximum of EUR 2.5 billion – although the thresholds may be modified, as long as the cumulated amount of the ceilings do not exceed EUR 16 billion at any time, and the amount allocated to the SMEW does not exceed EUR 3 billion. Given the particularly strong response to the SMEW, the EFSI Steering Board, composed of members of the Commission and the EIB, already decided to reinforce the latter through the reassignment of up to EUR 500 million from the IIW to the SMEW in July 2016. 3.The use of the EU Guarantee Under the EFSI Agreement, the Union grants the EU Guarantee which is a first demand guarantee of an amount capped at EUR 16 billion for potential losses which the EIB Group may suffer from its investments (default of repayments or capital losses). The aggregate net payments from the Union general budget are also capped at the same level. The EU Guarantee covers part of financing and investment operations signed by the EIB under the IIW and by the EIF under the SMEW. Part of the operations is carried out at the own risk of the EIB Group. The nature of the EU Guarantee is revolving, in that the available cover under the EU Guarantee may be made available to new operations following the amortisation of existing ones, provided that the EU Guarantee never exceeds EUR 16 billion and that aggregate net payments from the general budget of the Union under the EU Guarantee do not exceed EUR 16 billion. The present section reviews the use of the EU Guarantee under the different activities supported by the EFSI. In particular, the EU Guarantee covers different financing instruments depending on the Window of operation (IIW or SMEW) and on the product type (debt or equity). 2 3 3.1Infrastructure and Innovation Window (IIW) Under the IIW, the allocation of EIB operations to the debt or equity (-type) sub-window is based on the EIB's system of loan grading and the EIB's standard risk assessment. Under the IIW, the use of the EU Guarantee was limited to an amount equivalent to EUR 13.5 billion, broken down into two parts: I.up to EUR 11 billion as a first-loss piece under the Debt sub-window. II.up to EUR 2.5 billion for equity-type operations; As of 30 June 2016, under the IIW, the EIB Board of Directors approved 77 operations (see Figure 1 and Figure 3 ) of which 40 operations were signed (see Figure 2 and Figure 4 ). As of end-June 2016, approved operations account for a total amount of EUR 11 billion in EFSI financing, of which EUR 4.7 billion have been signed, and are expected to support an estimated amount of investments of EUR 58 billion. In terms of total EFSI investments, energy and support to smaller companies are the two main sectors for signed operations under IIW (see Figure 2 ). Source: EIB and ECFIN calculations

Source: EIB and ECFIN calculations Source: EIB Source: EIB 3.1.1IIW Debt sub-window The IIW Debt Portfolio includes all signed and not cancelled debt-type operations. For each debt-type operation, the EIB conducts its standard risk assessment, involving the computation of the probability of default and the recovery rate, without taking into account the EU Guarantee (in order to reflect the overall risk of the transaction). The operations supported by the EU Guarantee typically have a higher risk profile than EIB normal operations and hence fall within the scope of special activities. Less risky transactions may be incorporated into the EFSI portfolio, provided that a high added-value is clearly demonstrated and their inclusion is consistent with the criterion of providing additionality. The risk profile of the portfolio is expected to adjust during the investment period, upon addition of new operations, amortisations and realisations of effective losses. Under the IIW debt sub-window, the Union budget provides a 100 % first-loss piece guarantee for the debt portfolio originated by the EIB under the EFSI. The first-loss piece is expected to represent around 25 % of the volume of the overall portfolio of operations financed by the EIB at the end of the investment period (approximately EUR 42 billion), whereas the residual risk is fully borne by the EIB. The latter reserves the right to determine the overall portfolio volume depending on the risk and structure of the underlying operations, the size of the available EU Guarantee and the residual risk to be borne by the EIB, which should be maintained at an acceptable level. The first-loss piece must remain available in full until the time that the aggregate outstanding nominal exposure under the IIW Debt Portfolio has decreased to an amount lower than the available (after deduction of losses) first-loss piece. Thereafter, the first-loss piece will decrease in line with the reduction of the aggregate nominal exposure. The payment of any recovered amounts to the EFSI account will increase the first-loss piece by the same amount. The EU Guarantee may be called in case of defaults by EIB obligors under the EFSI or, if a restructuring process is undertaken, to cover so-called "restructuring losses" in relation to debt-type operations. EIB debt operations generate revenues established in accordance with EIB pricing methodology. Risk-related revenues are shared between the Union and the EIB on a quarterly basis on the basis of the risk taken, in accordance with the risk- and revenue-sharing principles set out in the EFSI Agreement. As of 30 June 2016, 59 debt-type operations had been approved under the IIW. All the operations have been considered by the EIB as special activities. Signed operations amount to EUR 4.5 billion. No guarantee calls were made by the EIB in relation to EIB debt type financing operations under the EFSI. 3.1.2IIW Equity sub-window The IIW Equity Portfolio includes all signed and not cancelled equity-type operations. Under the equity framework, the EU Guarantee may be used to support direct investments in individual companies or projects (equity-type direct investments) or financing for funds or analogous portfolio risks (equity-type portfolio), as long as the EIB invests on a pari passu basis for its own risk as well. The EIB will perform its standard assessment and determine whether an operation bears equity-type risks or not, irrespective of its legal form and nomenclature. Equity-type investments are to be priced in line with the market, absent which market testing or benchmarking is to be used.

Under the IIW equity sub-window, the EU Guarantee covers 100 % of the amounts financed by the EIB (as explained above, to the extent that the EIB finances at its own risk an equivalent amount) and the EIB funding costs associated to the underlying investment. Given the nature of equity-type investments, the pari passu requirement enshrined in the EFSI Agreement and the requirement to use EIB rules and procedures, the Commission and the EIB have agreed that the EU Guarantee should be called when there is an adjustment in value of the underlying portfolio of investment as recognised in the accounts of the EIB. As a result, a reduction in value of the assets guaranteed by the Union does not have a negative impact on the accounts of the EIB (beyond the one due to the EIB pari passu investment). The amount of a call on the EU Guarantee due to a value adjustment is to be returned to the Guarantee Fund or the EFSI Account, should the value of the portfolio of investment improve. Following the amortisation/divestment period of the IIW Equity Portfolio, if the value of the portfolio increases compared to the initial investment, the resulting revenues will be attributed to the Union. As of 30 June 2016, 18 equity-type operations had been approved. Signed operations amounted to EUR 267 million. No guarantee calls were made by the EIB in relation to EIB equity-type financing operations under the EFSI. The Union paid EIB funding costs in relation to disbursements made in 2015 (EUR 2 160). 3.2SME Window (SMEW) As of 30 June 2016, under the SMEW the EU Guarantee had been used for two guarantee sub-windows and was aimed at frontloading guarantee operations under the COSME and InnovFin financial instruments. The EFSI has enhanced the COSME Loan Guarantee Facility (LGF) - which guarantees loans to SMEs with a higher-risk profile – and the InnovFin – Horizon 2020 SME Guarantee (SMEG) facility - which guarantees loans to innovative and research-intensive SMEs and small mid-caps. Thanks to the guarantee provided by the EFSI, the EIF could sign transactions with financial intermediaries earlier than it could have done with the COSME and InnovFin budgets alone. The frontloading of COSME LGF and InnovFin SMEG budgets in the period 2016-2020 amounts to EUR 500 million and EUR 750 million, respectively. The frontloading entails a right for the EIF to draw from the EIB (under a guarantee granted to the EIF as set out in the EFSI Agreement and the back-to-back EIB-EIF EFSI Agreement) any such amounts as may be needed to pay guarantee calls in excess of the amounts cumulatively received from the Commission under the annual EU budget appropriations of COSME LGF and InnovFin SMEG. The EIB in turn is covered by the EU Guarantee. As of 30 June 2016, 186 operations (71 equity projects – financed from the EIB’s EUR 2.5 billion contribution to the SMEW, 43 COSME and 72 InnovFin guarantee operations) had been approved under the SMEW. Those operations total EUR 3.4 billion in EFSI financing, of which EUR 3.3 billion had been signed by 30 June 2016, and will support an estimated amount of investments of EUR 48.4 billion. It is expected that around 180 000 SMEs and mid-caps will benefit from those operations. 4.The functioning of the EU Guarantee Fund under EFSI The Guarantee Fund under the EFSI ("the Guarantee Fund') was established under Article 12 of the Regulation and it is funded from payments from the Union general budget and revenues originating from EFSI-guaranteed operations. The Guarantee Fund constitutes a liquidity cushion from which the EIB is to be paid in the event of a call on the EU Guarantee. The Guarantee Fund has to be maintained at a certain percentage (the “Target Rate”) of the total amount of the EU-guaranteed obligations, currently 50%. Thus, the liquidity cushion is intended to provide an appropriate safety margin and to avoid exposing the Union budget to sudden guarantee calls, which would entail spending cuts or budget amendments when honoured. Therefore, it contributes to the transparency and predictability of the budgetary framework. In accordance with the EFSI Agreement, calls are paid by the Guarantee Fund if their amount is in excess of the funds at the disposal of the EIB on the EFSI Account. The EFSI Account, managed by the EIB, has been established for the purposes of collecting the Union revenues resulting from EFSI-guaranteed operations and recovered amounts and, to the extent of the available balance, for the payment of calls under the EU Guarantee and for the payment of EIB recoverable administrative costs and recovery costs. 4 4.1The provisioning mechanism of the Guarantee Fund The Guarantee Fund is provisioned through: I.Contributions from the general budget of the Union; the budget allocated for the EFSI contributions amounts to EUR 8 billion; II.Returns (interests) on guarantee fund resources invested in the financial markets; III.Amounts recovered from projects for which the EU Guarantee was called (i.e. defaulting debtors); IV.Revenues and any other payments received by the Union in accordance with the EFSI Agreement (i.e. projects benefitting from EFSI support). The Guarantee Fund is provisioned progressively taking into account the increase in exposure borne by the EU Guarantee and it is directly managed by the Commission; its resources are invested in accordance with the principles of sound financial management and appropriate prudential rules. In the event of a call on the EU Guarantee during the initial constitution of the Guarantee Fund, endowments to the Guarantee Fund provided by the four sources will contribute to meeting the target amount up to a total equal to the call.

In the event that the EU Guarantee is fully restored up to its maximum initial amount of EUR 16 billion, any amount in the Guarantee Fund in excess of the target amount will be paid back to the general budget of the Union. 4.2Annual flows 4.2.1Payments from the Union budget The payment schedule of the budget item provisioning the Guarantee Fund is being revised to ensure a sound management of payment ceilings over the Multiannual Financial Framework (MFF) period. In its draft budget 2017, the Commission proposes to frontload EUR 500 million from 2019 to 2017. Table 1 summarizes both the initial and revised payment profiles: EUR million/year 2015 2016 2017 2018 2019 2020 2021 2022 Total Commitments 1350 2030 2641 1979 8000 Payments: Current profile 500 1800 1600 1750 1750 200 400 8000 Revised profile 500 2300 1600 1250 1750 200 400 8000 Revised cumulated 500 2800 4400 5650 7400 7600 8000 Outstanding Commitments: Current profile 1350 2880 3721 4100 2350 600 400 Revised profile 1350 2880 3221 3600 2350 600 400 0 Source: Commission services The 2016 payment appropriation of EUR 500 million was paid to the Guarantee Fund in periodic tranches according to the schedule set out in Table 2. EUR million April May June July Total Payments: 140 100 140 120 500 Source: Commission services As of 30 June 2016, an amount of EUR 380 million was paid and invested in bonds. 4.2.2Revenues and interests The value of the Guarantee Fund stood at EUR 382.5 mn at the end of June 2016. The performance of the Guarantee Fund between 9 April 2016 and 30 June 2016 was 1.28%. As of 30 June 2016, risk-sharing revenues attributable to the Union amounted to EUR 5.71 million, of which EUR 1.55 million has been paid to the EFSI Account in respect of revenues received by the EIB for the last quarter of 2015 and the first quarter of 2016, whereas EUR 4.16 million represents accrued revenue corresponding to the second quarter of 2016. A negative interest of EUR 2 260 was debited to the EFSI Account during the same period. 4.2.3Guarantee calls in relation to defaulted operations As of 30 June 2016, no guarantee calls were made in relation to defaulted operations.

No reversals have yet been made to the Guarantee Fund. 4.2.4Recovered amounts Following any call in relation to an EFSI-guaranteed operation under the IIW, the Union delegates to the EIB the administration and work-out of such EFSI-guaranteed operations so as to reduce losses or maximise expected recoveries, including an eventual appointment of external consultants and advisors. In relation to the SMEW, the same holds true, mutatis mutandis, for the EIF, unless the COSME Delegation Agreement or the H2020 Delegation Agreement determines otherwise. Whenever the Union has made a payment under the EU Guarantee and is subrogated to the rights and remedies of the EIB, the EIB must without delay initiate recovery proceedings on behalf of the Union, unless it determines in accordance with its professional judgment and in line with the care and diligence applied in respect of operations at its own risk that the possible recovery proceedings are unlikely to result in recovery of sums in excess of the costs of such recovery. As of 30 June 2016, no recoveries had taken place since no defaults had taken place either. 4.2.5Guarantee calls in relation to EIB funding costs As of 30 June 2016, an amount of EUR 2 160 was paid to cover the EIB's funding costs. The amount was paid out of the EFSI Account. 4.2.6Guarantee calls in relation to other EIB costs (recovery costs, recoverable administrative costs) The recovery costs per operation, paid by the Union to the EIB, are calculated through a flat-fee; the rate is fixed at 1% of the outstanding commitments of the affected debt-type operation or equity-type operation, subject to an overall aggregate cap of 0.50% of the EU Guarantee. As of 30 June 2016, no recovery costs had been paid to the EIB. The recoverable administrative costs are determined as per the EFSI Agreement. As of 30 June 2016, no recoverable administrative costs had been paid to the EIB. 5.Risk analysis and scenarios 5 5.1IIW – Debt products As referred to in section 3.1.1, it is expected that the first-loss piece buffer provided by the EU Guarantee represents around 25 % of the exposure under the IIW debt sub-window as originally constructed by the Commission and the EIB. However, the recently amended and restated EFSI Agreement allows distinct sub-portfolios to be introduced, in which case, the percentage may differ depending on the risk and capital charges related to such sub-portfolios. EFSI operations are characterised by a higher level of risk compared to standard EIB operations. For example, the typical rating of an EFSI operation ranges between Baa3 (BBB-) and B2 (B) with an average rating between Ba1 (BB+) and Ba2 (BB). The average rating of a standard EIB operation is BBB+ (Baa1). EFSI operations also typically present higher loss given defaults compared to standard EIB operations. For example, subordinated operations have a very high loss given default given the low expected recovery. Moreover, as opposed to EIB standard operations, the EFSI does not focus on public sector borrowers which present typically a higher recovery rate. The risk model used for the purpose of the evaluation is a one-factor credit risk model to simulate the credit loss distribution generated by the EFSI portfolio under the following simplified conservative assumptions: -The first-loss piece amounts to EUR 10.5 billion and supports an amount of EUR 42 billion EIB financing. Losses are split between the Union budget (first-loss piece or 25%) and the EIB (residual risk); -The portfolio is composed of 100 identical linear amortizing transactions with a maturity of 15 years, instantaneous recoveries, instantaneous portfolio ramp-up with a 20 % correlation for the defaults of individual transactions; -Average counterpart rating is 50% Ba1 and 50% Ba2;

-The loss given default is ranging from 40 % to 90 %; -The haircut between signatures and disbursements is 10 %. Revenues generated by the EFSI portfolio are determined in accordance with the EIB standard risk pricing model and are shared between the two institutions in line with the EFSI Agreement. The expected loss of the EFSI portfolio on average corresponds to 8.1 % of the total amount of financing. The amount of revenues under the simplified assumptions is expected to outweigh the expected losses at portfolio level. However, it is considered that an adequate level of provisioning needs, following deduction of the expected revenues, based on the value-at-risk of the first-loss piece tranche under the EFSI portfolio after 15 years, is 38.3% of the EU Guarantee allocated to the IIW debt sub-window. 5.2IIW – Equity instruments Under the IIW equity sub-window, the EIB may invest up to EUR 2.5 billion of funds under the EU Guarantee pari passu with its own funds. EIB financing may be delivered through infrastructure funds or other types of funds (indirect financing) or through direct EIB investments in individual companies or projects. The EIB's activity has to date focused on indirect intervention through funds but it is expected that the volume of direct equity or equity-type investments will also increase. A more precise expected distribution may become available when the EIB agrees on an equity strategy later in 2016. Irrespective of the final distribution between direct and indirect operations, it is important to note that the overall amount of EIB equity-type operations under the EFSI, i.e. EUR 5 billion to be deployed in three years, represent a tenfold increase compared to previous years. In any event, for the purpose of the evaluation it may be assumed that, given the size of the overall portfolio expected to be generated, the behaviour of the portfolio of direct equity investments follows the pattern of a portfolio of indirect investments through equity funds (e.g. the EIB portfolio of direct investments could be considered an equity fund). In line with the Regulation, EIB equity investments are made at market terms. Hence, it is expected to be a profitable activity with ultimately – under normal circumstances – limited or no recourse to the EU Guarantee. In order to simulate losses under stressed scenarios, a conservative assumption was applied such that the portfolio's performance mirrors the pattern of the portfolio of EIF investments in equity funds for SMEs and mid-caps. As a result, it is considered that an adequate level of provisioning needs, taking into account the effect of reflows, funding costs and possible exchange rates, under the IIW equity portfolio is 17.9 % of the EU Guarantee allocated to the IIW equity sub-window. 5.3SMEW – Debt products During the reporting period, the use of the EU Guarantee under the SMEW was limited to an amount equivalent to EUR 2.5 billion. EUR 1.25 billion of the Union-backed EFSI guarantee capacity is used to enhance the speed of implementation of Union financial instruments that support lending to SMEs, the COSME Loan Guarantee Facility and the InnovFin SME Guarantee Facility (frontloaded instruments with progressive release of the EU guarantee when the Union budget becomes available). The remaining margin under the overall limit of EUR 2.5 billion backed by the EU Guarantee is to be used for a recently developed SMEW Equity Product described under section 5.4. As explained before, given the strong uptake of the SMEW, the EFSI Steering Board decided to adjust the limit of the SMEW up to the maximum of EUR 3 billion by reassigning EUR 500 million from the IIW Debt Portfolio to the SMEW, after which up to EUR 1.73 billion is now foreseen for the SMEW debt window. Moreover, the Commission and the EIB have agreed to gradually convert the release of the EFSI guarantee covering the frontloaded amounts to second-loss exposure or mezzanine tranches as the annual Union budget contributions become available (the so-called "top-up", see also section 6). The use of the EU Guarantee would be expanded to cover not only the COSME Loan Guarantee Facility and the InnovFin SME Guarantee Facility, but also the EaSI guarantee instruments and a securitisation instrument. While those changes will significantly add value to the EFSI contribution to the SMEW, the risk profile of the EFSI intervention will also change. Under the current set-up estimated losses for EFSI are negligible, whereas the risk of EFSI incurring losses increases under the new setup. Table 3 summarises the expected loss of the EFSI exposure of different debt products envisaged under the SMEW on the basis of the expected loss of the underlying portfolio of loans of financial intermediaries to SMEs and mid-caps. Instrument Allocation (EUR m) Expected Loss (%) Expected Loss (EUR m) InnovFin SME Guarantee Enhancement (including top-up)* 880 5.6% 49 COSME Loan Guarantee Facility Enhancement (including top-up)* 550 77.3% 425 EaSI Guarantee Enhancement (including top-up)* 100 80.4% 80 Uncapped guarantee for EaSI* 100 70.0% 70 Securitisation** 100 14.9% 15 TOTAL 1730 37.0% 639 * Assuming 10 % haircut on final usage of the guarantees by financial intermediaries. ** 10-year B2 expected loss. As described above, the expected losses will primarily be covered by the Union budget (first loss) but the baseline is that approximately EUR 639 million of guarantee calls could be triggered under the SMEW debt products (37% out of EUR 1.73 billion). 5.4SMEW – Equity products

The SMEW Equity Product is an equity facility pursuant to which the EIF will provide equity-type investments and co-investments in or alongside financial intermediaries that target SMEs and small mid-caps, as well as social enterprises. It uses EUR 1.27 billion of funding provided by the EIB. It is split into two sub-windows that are expected overall to support approximately EUR 24.8 billion of investment: -Under sub-window 1, the EIF will invest up to EUR 1 billion of EIB-provided funding (with a 5 % pari passu co-investment from the EIF's own resources for alignment of interest) into financial intermediaries targeting expansion-stage companies. EUR 12.6 billion of investment is expected to be mobilised under that sub-window. -Under sub-window 2, EIB funding of EUR 270 million under the EFSI will be combined with financial resources of the Union budget-supported InnovFin Equity Facility (EUR 458 million) and the EIF's own resources (EUR 290 million), to create a pool of EUR 1.018 billion to be invested in financial intermediaries targeting early-stage companies. It is foreseen that the InnovFin Equity Facility is used as a first-loss piece, thus providing a protection to the EFSI investment. EUR 12.2 billion of investment is expected to be mobilised under that sub-window. The EIB funding (and related funding cost) will be reimbursed from revenues generated by the investments. The EU Guarantee under EFSI can be called by the EIB to cover any irreversible capital losses – as calculated by the EIF – and unpaid funding cost for the EFSI-attributable part of sub-window 1. For sub-window 2 the initial risk is borne the Union budget contribution and only irreversible capital losses above the volume of the Union budget contribution are borne pari passu and pro rata by the EU Guarantee and the EIF's own resources. EIF equity investments are made at market terms. Hence, it is expected that there will be– under normal circumstances – limited or no recourse to the EU Guarantee. In order to estimate the provisioning needs under more stressed scenarios, the potential loss of the EFSI exposure has been estimated based on the historical performance of early-stage and later-stage equity investments together with assumptions about funding costs and foreign currency variations. In that context, it is considered that an adequate level of provisioning needs, taking into account the effect of reflows, funding costs and possible exchange rates, under the SME equity portfolio is 17.9 % of the EU Guarantee allocated to that sub-window. 6.Evaluation findings 6.1 Effectiveness 6.1.1 IIW Under the IIW, the EU Guarantee allowed the EIB to expand significantly the volume of its special activities. In the first year of the EFSI, including the operations approved under the transitional "warehousing" system, the volume of approved operations was EUR 11 billion. It is forecast that around EUR 17-18 billion will be signed by the end of 2016, which compares with an annual amount of special activities in the EU amounted of around EUR 4 billion in 2014. While the broad objective of allowing the EIB to finance higher-risk operations was attained, the experience acquired under the EFSI showed that some adjustments to the original set up were needed in order to develop new models of cooperation with national promotional banks or financial intermediaries, as well as to deploy new financing products for corporates. In particular, in order to make it possible for the EIB to co-finance operations with national promotional banks under a delegated model and to support securitisation deals, it was necessary to introduce in the amended EFSI Agreement (under the Regulation) the possibility to segment the first-loss piece coverage in different sub-portfolios. Moreover, in order for the EIB to provide subordinated financing to corporates (including hybrid debt-equity products), which is a clear objective of the EFSI, the EFSI Agreement was revised to better cater for that possibility. Given that the ability of the EIB to implement risk-sharing instruments and take subordinated positions is key to enhance the capacity of private sector investors to support riskier and more innovative projects as well as SMEs, a strong emphasis should be put on that aspect. Another main finding after one year of implementation is that the requirement under the Regulation that debt operations must be priced in line with the EIB's pricing policy and that equity-type operations must be priced in line with market terms, implies that the EU Guarantee is not designed to cover excessive risks as their pricing would not be acceptable from a market perspective. The EIB and the Commission have so far dealt with that limitation by developing instruments, including investment platforms, that rely on the Union budget programmes, like the European Structural and Investment Funds (ESIF), InnovFin or the Connecting Europe Facility (CEF), to take the riskier tranches, with the EIB (supported by the EFSI) bearing the risk on the mezzanine tranches. 6.1.2 SMEW The SMEW has seen a very strong uptake, exceeding expectations and demonstrating a high market demand for the products available under it. After one year, the EFSI has supported EIF transactions expected to mobilise a total investment value of EUR 48.4 billion, which is already about 65% of the target of EUR 75 billion to be reached under the SMEW over three years. As announced in the Commission's Communication "Europe investing again. Taking stock of the Investment plan for Europe and next steps", given its success, it was decided to scale up the SMEW under the current framework for the benefit of SMEs and small mid-cap companies in all Member States, using all the existing possibilities under the Regulation. As foreseen in the Regulation, the EFSI Steering Board has thus decided to adjust the limit of the SMEW up to the maximum of EUR 3 billion by reassigning EUR 500 million from the IIW Debt Portfolio to the SMEW, after which up to EUR 1.73 billion is now foreseen for SMEW debt products. The main impact of the EFSI on COSME and InnovFin under the current set-up is faster implementation, but the volumes of support are the same as would have been achieved with the Union budget, only at a later point in time. Given the higher than expected demand for those instruments and their successful implementation, the EIF is likely to exhaust the support capacity by end-2017. That high speed of implementation creates a risk of a gap in implementation in 2018-2020, as no Union budgetary resources are currently foreseen to top up those instruments in 2018-2020 above the volumes already planned. 6.1.3. Guarantee calls and the Guarantee Fund So far, there have been no calls due to defaults or value adjustments of EIB and EIF operations. The EU Guarantee has only been called to cover funding costs which were paid out of existing revenues stemming from IIW operations. Therefore, it was not possible to assess the effectiveness of the call procedure or the monitoring of calls. The procedures for the management of the Guarantee Fund and the monitoring of its results have been developed. Moreover, a liquidity agreement was concluded with the EIB (see section 6.2.3). It will be possible to assess the effectiveness of the management of the Guarantee Fund starting from 2017. As regards the provisioning mechanism, the Guarantee Fund was endowed with initial resources in April 2016 and will be progressively fed during 2016-2022.

6.2. Efficiency 6.2.1. IIW The availability of the EU Guarantee proved to be an efficient tool to considerably increase the volume of special activities by the EIB. The reliance on the EIB's rules and procedures allowed a swift start of the EFSI. For debt operations, the EU guarantee is expected to represent around 25 % of the overall EIB financing (with provisioning representing around half of it). The EIB intervention under that initial phase focused on long-term (riskier) senior loans, investments in infrastructure funds and, through financial intermediaries, in SMEs and mid-caps. In parallel, the EIB developed new subordinated products and forms of cooperation with national promotional banks and financial intermediaries. In order to allow the coverage of such operations, the EFSI Agreement had to be adapted within the framework of the Regulation, which was allowed by the flexibility of its provisions in that respect. The efficiency of the coverage of those new types of operations can only be assessed after their implementation. 6.2.2. SMEW The availability of the EU Guarantee was the only way to frontload guarantee activities under COSME and InnovFin. The reliance on existing products developed by the Commission and the EIF and on well-tested EIF rules and procedures allowed a very fast implementation, which required an increase of the SMEW envelope. At the current speed of implementation, even with the increase of the SMEW recently decided by the EFSI Steering Board, the current level of the EU Guarantee would only be sufficient to cover EIF operations after 2017 to a certain extent. 6.2.3. Guarantee calls and the Guarantee Fund Given the lack of calls due to defaults or value adjustments of EIB and EIF operations, it was not possible to assess the efficiency of the call procedure. However, during the period under review it was possible to ascertain the positive role played by the EFSI Account as a first layer to absorb calls of a limited size such as those arising from funding costs under equity products. The newly concluded liquidity agreement between the Commission and the EIB should also allow calls of a larger size to be managed efficiently where the amount of liquidity in the Guarantee Fund is insufficient to cover the full amount of the call and it is deemed preferable to make recourse to the EIB liquidity on a temporary basis rather than divesting longer-term placed assets. As regards the budgetary procedure related to the provisioning of the Guarantee Fund, all contributions from the budget were received in good time and after agreement with the management of the Guarantee Fund on the timing of those payments (EUR 380 million corresponding to 17 cash transfers from 11 April 2016 to 27 June 2016). 6.3. Relevance 6.3.1 The EU Guarantee The EU Guarantee enabled the EIB to undertake riskier activities in line with expectations. Moreover, it was essential to allow the EIF to enhance its intervention in support of SMEs and mid-caps. The need to strengthen the investment environment by providing loans, guarantees and equity to economically viable projects presenting a higher risk profile still persists. However, the EU Guarantee is not a panacea for all types of financing. For example, it is not designed to support first-loss pieces in investment platforms addressing serious market failures as the pricing of such interventions would need to respect EIB or market-based pricing and would probably be too high for the platform to be financially viable. In that case, the use of the Union budget (e.g. ESIF, COSME InnovFin and CEF) and, in some limited cases, of the national budget, has been necessary to cover the riskiest tranches. In addition, the EU Guarantee was not designed to cover the potential impact of currency fluctuations. That gap has a bearing on the capacity of the EIB to deliver long-term fixed-rate financing in certain non-euro countries with less developed financial markets. 6.3.2 The Guarantee Fund and the provisioning mechanism The Guarantee Fund is intended to provide a liquidity cushion for the general budget of the Union against losses incurred under the EU Guarantee by the EIB for EFSI operations. In particular, pursuant to Article 9 of the EFSI Agreement, calls made under the EU Guarantee have to be honoured within 20 business days (in certain specific cases within 40 business days) after demand by the EIB, while both the time and size of potential calls are uncertain. The investment strategy for the Guarantee Fund takes into account the projected inflows (budget contributions and income) and the projected outflows to arrive at the best results while guaranteeing the ability to honour calls. The period over which the investment process is planned to attain the investment objectives (the investment horizon) must in particular reflect cash-flow projections, such as expected calls and revenues resulting from the EFSI operations. The estimates have to be reviewed overtime and improved on the basis of an improved knowledge of the projects guaranteed. Since there have been no calls on the Guarantee Fund, it was not possible to test the appropriateness of the investment strategy. However, the professional management of the Guarantee Fund, together with the liquidity arrangements foreseen with the EIB, provide for an adequate framework to produce a satisfactory yield (that can be used as assigned revenue to increase the provisioning) and handle guarantee calls. The managed assets are expected to provide sufficient liquidity in relation to the potential guarantee calls, while still aiming at optimising the return and risk level. The risk assessment of the different products supported by the EU Guarantee shows that overall the Union budget would also be adequately shielded from potential calls under the EU Guarantee with an adjusted target rate for provisioning the Guarantee Fund, taking into consideration recoveries, revenues and reflows from EIB operations. Table 4 summarises the findings in section 5.

7.Conclusions Despite the fact that the EFSI has started only one year ago, it is already possible to draw some initial conclusions on the use of the EU Guarantee and partly on the provisioning mechanism feeding the Guarantee Fund. As regards the use of the EU Guarantee, the first year of experience shows that it has been an efficient and effective way of considerably increasing the volume of EIB special activities and EIF guarantees in favour of SMEs and mid-caps. Moreover, the high profile of the initiative and related market expectations have represented a continuous stimulus for the Commission and the EIB Group to closely monitor the implementation of the EFSI and adapt it to support new emerging needs. In that context, within the parameters of the Regulation, some changes to the initial set up have already been implemented after the cut-off date of this evaluation, e.g. the reinforcement of the SMEW by EUR 500 million or, under the IIW debt sub-window, the possibility to have different portfolios and the clarification of the guarantee treatment of subordinated debt. Some other changes that can be implemented under the Regulation as it stands are expected to take place before the end of 2016, the most important of which is the restructuring of the guarantee/securitisation part of the SMEW to avoid disruption of support from Union financial instruments in favour of SMEs during the second part of the Multiannual Financial Framework. That restructuring will involve the gradual conversion of the release of the EU Guarantee covering the frontloaded amounts to second-loss exposure or mezzanine tranches as the annual Union budget contributions become available, thereby topping up the COSME and InnovFin guarantee products under SMEW. The first-loss piece will be taken by the Union budget, and in case of InnovFin guarantee where the EFSI takes a mezzanine tranche, residual risk will be covered by the EIB Group's own resources. Those changes lead to an increase in the overall size of the budgetary allocations for those instruments allowing the EIF to finance a significant extra volume of operations. New products to be supported under the SMEW in that second phase also include a topping-up of the guarantee instrument under the EU Programme for Employment and Social Innovation ('EaSI'), an uncapped guarantee instrument under EaSI targeting in particular social enterprises and a securitisation instrument mobilising additional finance for SMEs. Under the current set-up the combined Union budgetary allocation for COSME and InnovFin SMEG would by 2020 reach approximately EUR 1.7 billion (and the EFSI coverage would be fully released) and the instruments would eventually support an estimated EUR 34 billion of investment. Under the new set-up, the COSME and InnovFin SMEG instruments benefit from a combined budget of EUR 2.95 billion (EUR 1.7 billion of Union budget as first-loss and EUR 1.25 billion under the EFSI as second-loss/mezzanine). Those two financial instruments together with the newly EFSI-supported EaSI financial instruments and the securitisation instrument could mobilise just under EUR 60 billion of investment, indicatively broken down as follows (estimates): -InnovFin SME Guarantee Enhancement: EUR 22 200 million -COSME Loan Guarantee Facility Enhancement: EUR 31 600 million -EaSI Guarantee Enhancement: EUR 2 100 million -EaSI uncapped guarantee instrument: EUR 900 million -Securitisation instrument: EUR 2 600 million As regards the IIW, to enhance the impact of the use of the EU Guarantee, the EFSI should target investments and address market gaps at local level. As a result, a strong emphasis should be put on defining models of cooperation with national promotional banks and replicable patterns for the setting up of investment platforms and combination of the EFSI with Union budgetary instruments (both financial instruments and grant based). The legislative proposal issued by the Commission would provide for some adaptations of the Regulation aimed at increasing the effectiveness, efficiency and relevance of the EU Guarantee, such as: -an adjustment of the target provisioning rate; -a stronger focus on risk-sharing instruments and subordinated financing; -the possibility for the EU Guarantee to cover the potential impact of currency fluctuations, taking into consideration both losses and gains arising from such fluctuations.



Appendix A – Information sources

Legal framework: Regulation (EU) No 2015/1017 of the European Parliament and of the Council of 25 June 2015 on the European Fund for Strategic Investments, the European Investment Advisory Hub and the European Project Investment Portal and amending Regulations (EU) No 1291/2013 and (EU) No 1316/2013 – the European Fund for Strategic Investments, OJ L 169, 1.7.2015, p. 1. (the Regulation) Agreement on the Management of the European Fund For Strategic Investments and on the Granting of the EU Guarantee between the EU and the EIB (22 July 2015, the EFSI Agreement) "EFSI Amendment and Restatement Agreement" (21 July 2016) Data sources: Signed and approved EFSI operations as of 30 June 2016 provided by the EIB Group EFSI Annual Operational Reports (data as of December 2015) EFSI Risk Reports (incl. data as of 30 June 2016) EFSI Financial Reporting Other documents and reports: Report from the Commission to the European Parliament, the Council and the European Court of Auditors on the Management of the Guarantee Fund of the European Fund for Strategic Investments in 2015 (COM(2016)353, 31 May 2015) Commission Communication COM/2016/0359 final - "Europe investing again, taking stock of the Investment Plan for Europe and next steps" (1 June 2016)

 Appendix B – Abbreviations CEF Connecting Europe Facility COSME Programme for the Competitiveness of Enterprises and small and medium-sized enterprises EaSI EU Programme for Employment and Social Innovation EFSI European Fund for Strategic Investments EIAH European Investment Advisory Hub ESIF European Structural and Investment Funds IIW Infrastructure and Innovation Window InnovFin "InnovFin – EU Finance for Innovators", launched jointly by the Commission and the EIB Group with funds from the Horizon 2020 programme and EIB Group own resources LGF Loan Guarantee Facility MFF Multiannual Financial Framework SMEG SME Guarantee SMEW SME Window Appendix C – IIW – List of projects as of 30 June 2016