DG ECFIN - 2012/ECFIN/002

May 2013

Disclaimer: This report commits only the Commission's services involved in its preparation and does not prejudge the final form of any decision to be taken by the Commission.

Table of Contents

1........... Section 1: Procedural issues and consultation of interested parties. 9

1.1........ Organisation and timing. 9

1.2........ Consultation and expertise (public and internal) 10

1.3........ Main outcome of the consultation and lessons. 11

1.4........ Impact Assessment Board. 15

2........... Section 2: Problem definition. 15

2.1........ Framework and legal constraints: 15

2.1.1..... Requirements of Decision 1080/2011/EU for a proposal for next MFF. 15

2.1.2..... 2014-2020 MFF budgetary framework and ceilings. 16

2.1.3..... The general environment in which the EIB operates. 18

2.2........ The problems requiring action. 19

2.2.1..... The risk of sub-optimal use of the EU guarantee. 19

2.2.2..... The impossibility for EIB to finance all type of microfinance operations with the EU guarantee 21

2.2.3..... The insufficient level of funding for climate action and the difficulty for EIB to increase its lending in this area 22

2.2.4..... Unclear EIB positioning as a delivery tool of EU external financial support 23

2.3........ The underlying drivers of the problems. 24

2.4........ The consequences of the status quo – the base line scenario. 25

2.5........ Analysis of subsidiarity and justification for EU action. 26

3........... Section 3: objectives: 26

3.1........ General policy objectives of the new EU guarantee EIB external operations and other specific objectives 26

3.2........ Operational objectives of a new EU guarantee. 27

4........... Section 4: Policy options. 28

4.1........ Description of policy options. 28

4.2........ Discarded policy options at an early stage of the assessment 36

4.3........ Retained policy options. 37

5........... Section 5: Analysis of impacts of retained policy options. 38

5.1........ Definition of the criteria for main impact analysis. 38

5.2........ Main impact analysis of each retained policy option. 40

5.2.1..... Option 1 - baseline scenario (no change) 40

5.2.2..... Option CLOSE. 43

5.2.3..... Option MICRO.. 49

5.2.4..... Option FOCUS. 50

6........... Section 6: Comparing the retained options. 50

6.1........ Weighing of positive and negative impacts per option. 50

6.2........ Preferred option. 50

7........... Section 7: Monitoring and evaluation. 50

7.1........ Core indicators of progress towards objectives. 50

7.2........ Monitoring. 50

8........... Annex 1: Development of EU budget guarantee to EIB loans in third countries. 50

9........... Annex 2: Stakeholders involved in the consultations on EIB external mandate. 50

9.1........ The Steering Committee of Wise Persons. 50

9.2........ Stakeholders consulted by the external evaluator (COWI) 50

9.3........ The Group of Experts on EU Platform for External Cooperation and Development and the stakeholders consulted 50

9.4........ Stakeholders consulted by the Commission in 2012 during the preparation of the Impact Assessment 50

10......... Annex 3 – OECD list of ODA recipients. 50

11......... Annex 4 – Follow-up of recommendations of SCWP and external evaluator 50

12......... Annex 5: Background information on Myanmar 50

12.1...... Political Situation and bilateral relations with the EU.. 50

12.2...... Democracy, Human Rights and Fundamental Freedoms situation. 50

12.3...... Macroeconomic situation and investment needs. 50

12.4...... Presence of other IFIs. 50

13......... Annex 6 – Guaranteed portfolio by country. 50

List of Acronyms

ACP African, Caribbean and Pacific

AECID Agencia Española de Cooperación Internacional para el Desarrollo

AFD Agence Française de Développement

AIF Asian Investment Facility

ALA Asia and Latin America

BRICs Brazil, Russia, India and China

CEB Council of Europe Development Bank

CGAP Consultative Group to Assist the Poor

COFIDES Compañía Española de Financiación del Desarrollo

COP Corporate Operational Plan

CSP Country Strategic Paper

DCI Development Cooperation Instrument

EaP Eastern Partnership

EaPIC Eastern Partnership Integration and Cooperation

EFI European Financial Institution

EBRD European Bank for Reconstruction and Development

EC European Commission

ECOFIN Economic and Financial Affairs Council

EEAS European External Action Service

EFSE European Fund for Southeast Europe

EFTA European Free Trade Association

EIB European Investment Bank

EIDHR European Instrument for Democracy and Human Rights

EIF European Investment Fund

EN Eastern Neighbourhood

ENC Eastern Neighbouring Countries

ENP European Neighbourhood Policy

ENPI European Neighbourhood Policy Instrument

EP European Parliament

ESF Energy Stability and Security of Supply Facility

ESIAF Economic and Social Impact Assessment Framework

EU European Union

EUBEC EU Platform for Blending in External Cooperation:

EWBJF European Western Balkans Joint Fund

FEMIP Facility for Euro-Mediterranean Investment and Partnership

FINNFUND Finnish Fund for Industrial Cooperation

FYROM Former Yugoslav Republic of Macedonia

GDP Gross Domestic Product

GF Guarantee Fund

GFM Green Financing Mechanism

GHG Green House Gas

GoE Group of Experts

IA Impact Assessment

IASG Impact Assessment Steering Group

ICJ International Court of Justice

IFC International Finance Corporation

IFCA Investment Facility for Central Asia

IFI International Financial Institution

IMF International Monetary Fund

IPA Instrument for Pre-Accession

JASPERS Joint Assistance to Support Projects in European Regions

KfW Kreditanstalt für Wiederaufbau

LAIF Latin America Investment Facility

MDB Multilateral Development Bank

MDG Millennium Development Goal

MENA Middle East and North Africa

MFA Macro Financial Assistance

MFF Multiannual Financial Framework

MIC Middle Income Country

MIP Multiannual Indicative Programme

MIPD Multi-Annual Indicative Planning Document

MIV Microfinance Investment Vehicle

MoU Memorandum of Understanding

MRI Mutual Reliance Initiative

MS Member States

MSME Micro, Small and Medium-sized Enterprise

NGO Non-Governmental Organisation

NIB Nordic Investment Bank

NIF Neighbourhood Investment Facility

OCT Overseas countries and territories

ODA Official Development Assistance

OeEB Oesterreichische Entwicklungsbank

OECD Organisation for Economic Co-operation and Development

PIDG Private Infrastructure Development Group

PPP Public-Private Partnership

RCF Risk Capital Facility

ReM Results Measurement framework

SCWP Steering Committee of Wise Persons

SIMEST Società Italiana per le Imprese all'Estero

SME Small and Medium-sized Enterprise

S&P Standard & Poor's

SOFID Sociedade para o Financiamento do Desenvolvimento

TEN-T Trans-European Transport Network

TEU Treaty on European Union

TFEU Treaty on the Functioning of the European Union

UfM Union for Mediterranean

UfMS Secretariat of UfM

UNSCR United Nations Security Council Resolution

WB World Bank

WBG World Bank Group

WBIF Western Balkans Investment Framework

WTO World Trade Organisation

Introduction

Description of EIB external mandate and of the EU guarantee

The European Investment Bank (EIB) activities outside the European Union (EU) traditionally made up around 10% of its total activities. The Bank undertakes operations outside the EU in support of EU external policies partially on the basis of a mandate from the EU with an EU budgetary guarantee allocated in the framework of each Multi-annual Financial Framework (MFF), referred to as the “(EIB) external mandate”. This activity is complemented by activities carried out at EIB own risk (limited to investment grade operations), or under other specific mandates such as, in ACP countries, under the Cotonou Agreement with European Development Fund resources or with a guarantee of Member States. On average, EIB activity under the external mandate accounted for 62% of total EIB activity outside the EU since 2007. This share has been gradually decreasing until the end of 2011, although it is expected that it has increased in 2012.

The EU budgetary guarantee to the EIB covers risks of a sovereign and political nature in connection with its financing operations carried out outside the EU. Over the years, the external mandate has been granted through a series of Decisions of the Council and, since 2009, of the EP and the Council. The overall scope and general conditions of the EU guarantee coverage for EIB external operations are set out currently in Decision 1080/2011/EU (the "Decision" or the "mandate").

From an historical point of view, the need for an EU budget guarantee stemmed on the one side from EIB's obligation under its Statute to ensure adequate security for all its lending operations and, more broadly, from the need to safeguard EIB's creditworthiness in order not to compromise its task of contributing to the balanced and steady development of EU internal market in the interest of the Union. The EU guarantee has been the key instrument ensuring the compatibility between the EIB's highly leveraged financial structure (different from other International Financial Institutions (IFIs)), the significant highly inherent risk of lending to third countries, the need to avoid a deterioration of the Bank's AAA rating whilst limiting the EIB capital consumption. The EIB does not remunerate the EU for this guarantee. According to EIB estimates[1], additional regulatory capital would be consumed by the EIB to support current exposures to the external mandate regions without EU guarantees. In total, capital absorption would increase by more than 140% (from a current capital use of around EUR 2bn to around EUR 5bn). Therefore, a loss of the mandates’ guarantees would either significantly reduce the EIB’s capacity to lend outside the Union or absorb significant capital to the detriment of EIB financing within the EU. For more details on history and rationale of the mandate, see Annex 1.

EIB operations eligible for EU guarantee are currently loans and loan guarantees within the eligible countries (as defined in the Decision – see below) in the support of any of the following objectives: (i) local private sector development, in particular support to SMEs; (ii) development of social and economic infrastructure, including transport, energy, environmental infrastructure and information and communication technology; and (iii) climate change mitigation and adaptation.

The geographical coverage of EIB external mandate is divided into various regions: Pre-Accession region (Candidate Countries and Potential Candidates), Neighbourhood and Partnership Countries (with Mediterranean countries on the one side and Eastern Europe, Southern Caucasus and Russia on the other), ALA region (Asia – including Central Asia – and Latin America) and South Africa (which includes only the Republic of South Africa[2]).

Decision 1080/2011/EU establishes a General Mandate ceiling of EUR 27.484 bn and a Climate Change Mandate ceiling of EUR 2bn for EIB loans and loans guarantees for the period 2007-2013. The General Mandate ceiling is broken down into regional ceilings. Within these ceilings for individual regions, the EIB shall progressively ensure a balanced country distribution[3]. The current breakdown of the General Mandate into regional ceilings is presented in the table below. As a comparison, the amounts allocated to the EU external financial instruments (Instrument for Pre-Accession – IPA, European Neighbourhood Policy Instrument – ENPI, and Development Cooperation Instrument – DCI) under the current MFF 2007-2013 are also presented below. All figures are in EUR bn.

The EUR 2bn envelope for climate action was one of the novelties introduced by Decision 1080/2011/EU following the mid-term review of the implementation of the mandate. Operations in other sectors like e.g. environmental or biodiversity infrastructure were already eligible for EU guarantee coverage but, in light of the challenges of financing global climate action, the legislators decided to put a particular emphasis on climate change operations while maintaining a broad spectrum of eligibility for infrastructure financing.

The climate change envelope is global and does not present any regional pre-allocation even if the EIB is requested to strive to ensure a balanced distribution across regions over the mandate period. It should be noted, as described below in section 2.1.3, that there is an increasing uncertainty about the ability of the EIB to fully reach the ceilings established under the current mandate due to financial constraints that led its governing bodies to significantly reduce the Bank's external activity in the recent years and the limited absorption capacity in some key regions, such as the Mediterranean one.

EIB external mandate, EU financing mechanism for external action and other actors:

It should be recalled that EIB activity in the regions covered by the mandate is also implemented in co-financing with other European Financial Institutions (EFIs) - notably the EBRD, CEB, and other national/bilateral agencies[4] – or other IFIs. Co-financing also takes place with EU budgetary funds stemming from the other EU external financial instruments mentioned above. In 2011, co-financing with EU budgetary contributions represented 26% of EIB total signatures under the mandate. This co-financing is notably implemented in the context of the various facilities set-up in the recent years, i.e. mainly the Western Balkans Investment Framework (WBIF), the Neighbourhood Investment Facility (NIF), the Investment Facility for Central Asia (IFCA), the Asia Investment Facility (AIF), and the Latin America Investment Facility (LAIF) which also involve the other EFIs and IFIs. The table below illustrates the size of these facilities.

By the end of 2011, the NIF has supported 52 projects representing a total investment cost in excess of EUR14 billion. The total grant contribution awarded under the facility amounts to EUR 417.7m and the financial institutions' loan resources leveraged is EUR 6.3 billion. The EIB is the largest financier in terms of volumes lent for NIF projects. It has co-financed more than 2/3 of the projects (35 out of 52) approved by the NIF Board up to date.

By the end of 2011, WBIF has supported 111 projects representing a total investment cost in excess of EUR10 billion. The total grant contribution awarded under the facility amounts to EUR 220m and the financial institutions' loan resources leveraged is EUR 5.5 billion. EIB co-financed almost 47% of WBIF approved by the WBIF Steering Committee to date.

While the external mandate is only open to EIB, in line with the new Financial Regulation, complementary financial instruments under other EU external instruments - such as IPA II, ENI or DCI – are also open to other EFIs alongside the EIB. In this context, the EU Platform for Blending in External Cooperation (EUBEC) has recently been created to improve the quality and efficiency of EU development and external cooperation blending mechanisms, taking due account of the policy frameworks that govern EU relations with the different partner countries, notably EU Development, Neighbourhood and Enlargement policies. This includes promoting cooperation and coordination between relevant actors thereby increasing the impact and visibility of EU external cooperation. The launch of the EUBEC provides an opportunity to develop a deeper partnership with European Financial Institutions, including the EIB, and deepen cooperation with other international institutions.

Improved coordination and cooperation between EFIs and enhanced efficiency of co-financing between all actors of external funding has been an on-going call of several key stakeholders including the Council, the European Parliament and civil society. During the last years, the EIB and the Commission have put in place several mechanisms, notably in the form of Memoranda of Understanding (MoU), to facilitate cooperation, promote synergies, exploit comparative advantages and avoid duplication of efforts between the EIB and other financial institutions active in the external field (e.g. the tripartite MoU between the Commission, the EIB and the EBRD, or the Mutual reliance Initiative between the EIB, KfW and AFD). These issues, however, will not be addressed in the current IA report as not strictly (and solely) related to the external mandate legislative proposal and in particular are not related to the proposed modifications under any future Decision compared to the current mandate. Moreover, these questions are expected to be tackled under a separate framework as the Commission is invited by the Council and the Parliament to submit by end 2015 a report assessing the effectiveness of the existing system of European public financing institutions promoting investment in Europe and its neighbourhood.[5]

1. Section 1: Procedural issues and consultation of interested parties

1.1. Organisation and timing

The drafting of the Impact Assessment (IA) has been coordinated by an Impact Assessment Steering Group (IASG) composed of representatives of the relevant European Commission (EC) Directorates General (ECFIN (drafting team), DEVCO, ELARG, FPI, BUDG, ENTR, ENV, CLIMA) and the Secretariat General as well as of the European Action External Service (EEAS). The EIB also attended the IASG meetings as observer.

The content of this report duly takes account of the consultations, reviews and studies mentioned in Section 1.2.

The IASG was launched on 9 March 2012. Three meetings of the IASG were organised on 29 March, 11 May and 19 July 2012. Between each meeting, frequent exchanges occurred between the IASG members and the drafting team to provide written comments at the various stages of the drafting. The IA report was endorsed by the IASG following its meeting of 19 July 2012.

The IA was submitted to the IA Board on 27 July 2012. The review of this Impact Assessment by the Impact Assessment Board took place on 5 September 2012. The positive opinion of the Impact Assessment Board was delivered on 29 January 2013. A more detailed discussion on the outcome of the Board is provided in point 1.4 below.

In line with Article 27 of the Financial Regulation (Council Regulation (EC, Euratom) No 1605/2002) and Article 21 of the Implementing Rules of the Financial Regulation (Commission Regulation (EC, Euratom) No 2342/2002), the present impact assessment is the ex-ante evaluation of the EU guarantee to EIB external operations.

1.2. Consultation and expertise (public and internal)

The mid-term review of the current EIB external mandate was completed with the adoption of Decision 1080/2011/EU on 25/10/2011. In this context, an evaluation of the mandate was carried out by an external contractor (COWI). In addition, the EIB external activity was subject to a report of a Steering Committee of Wise Persons (SCWP). Both documents were concluded in 2010 and made available to the public[6]. In the context of these evaluations, several stakeholders were consulted including EU officials, Non-governmental Organisations (NGOs), other International Financial Institutions (IFIs), Member states (MS) representatives, EIB loan beneficiaries, etc. On the basis of these two reports and in line with the requirements of the mandate decision in place, the Commission also issued its own evaluation[7] on which the proposal for the current mandate was based.

This impact assessment draws on these consultations as well as on the outcome of the inter-institutional negotiations that led to the adoption of Decision 1080/2011/EU. Moreover, the impact assessment takes into account the recent reflections on the EU financial architecture for external cooperation and development, in particular in the context of the Group of experts on the EU Platform for Cooperation and Development[8]. In addition, this report also hinges on the implementation of the current and previous mandates as of mid-2012. Key figures and facts regarding the implementation of the current mandate are available in the recently issued Commission Report to the European Parliament and Council on the Activity under the EIB External Mandate in 2011 and the accompanying Commission's staff working document[9].

Finally, informal exchanges of views with key external stakeholders including representatives of Member states and main relevant NGOs representatives were organised through meetings and seminars in June and October 2012 in order to take stock of the state of play of respective reflections. In particular, exchanges of views were undertaken on the problems identified in this report as well as on the options envisaged to address them.

The recent widespread consultations of key stakeholders (those affected by the Decision, those involved in its implementation and of the legislators) in the context of the revision of the current mandate concluded at end-2011 and the recent informal exchanges of views provided sufficient ground to form a view on position of external stakeholders. Therefore, in view of the limited period by which a new Decision has to be adopted to avoid an interruption in EIB lending signatures, it was estimated that there was no need for a formal open 12-week internet public consultation.

The list of stakeholders consulted for the Mid-Term evaluation, the informal consultation and the GoE are included in Annex 2.

1.3. Main outcome of the consultation and lessons

The SCWP and the external evaluation showed that EIB financing under the mandate contributed to the achievement of EU policy objectives. The EU guarantee proved to be an essential tool allowing the EIB to intervene in the countries covered by the mandate. In particular, the SCWP underlined that "the EU guarantee enables the Bank to be involved in a wider range of countries and of borrowers within them than would otherwise be the case, both because it enables the Bank to intervene in higher risk countries and operations, and because it can make the financial conditions more attractive to borrowers. This is particularly valid for sub-investment grade sovereign operations under the comprehensive guarantee and for sub-investment grade private sector operations under the political risk guarantee. In such cases, the guarantee adds significant value to what would be possible without it".

However, the SWCP underlined that the objectives were broadly defined and diversified by region, which called for a streamlining/rationalisation of the objectives across regions and the development of appropriate operational guidelines to ensure a suitable link with implementation. The SWCP also stressed that the additionality of EIB lending under the EU guarantee was less clear for operations in countries with well-developed banking markets and in support to FDI.

The chart below illustrates EIB exposure by source of funds and income groups and shows the value-added of EIB lending under mandate, particularly in lower and upper middle income countries according to the OECD list of ODA recipients (see table in Annex 3).

Source: EIB (excludes OCT, EFTA and EU).

The following graph shows the breakdown of 2008-2011 EIB total activity in the regions covered by the external mandate, including both operations at own risk and operations under guarantee, in relation to level of country income and rating (as at 31 December 2011).

Annex 4 details the main recommendations of the SCWP and of the external evaluator linked to the external mandate and outlines the follow-up in the implementation of the current mandate, highlighting in particular what was realised in the current mandate and what remains to be done.

The key elements on the status of implementation of these recommendations are the following:

First, as mentioned, the current decision streamlined EIB intervention in all regions setting out three horizontal objectives:

a) Local private sector objectives, in particular support to SMEs;

b) Development of social and economic infrastructure, including transport, energy, environmental infrastructure[10], and information and communication technology;

c) Climate change mitigation and adaptation.

There are no sectoral ceilings as envelopes are determined on a regional basis. However, in order to reinforce EIB support to climate change activities, Decision 1080/2011/EU introduced a specific cross-regional mandate dedicated to climate change activities, which can therefore be financed both under the dedicated envelope and under the regional ceilings. The weakness perceived under the current setup is that it does not provide sufficient incentives to EIB to step-up its climate change activity under the mandate, which was the ultimate aim of the creation of a dedicated climate change envelope while other sectors like environment or biodiversity seemed adequately covered.

Second, while the current mandate aims to enhance EIB contribution to development objectives, it is perceived that the development impact of EIB activity under mandate could be further strengthened by focusing it on poorer countries and beneficiaries which are most in need of EIB financing. In addition, it does not provide the EIB with the possibility to support all type of microfinance operations which belong to the usual toolkit of instruments available to financial institutions active in third countries. The legislators recognised this weakness and requested the Commission to analyse the possibility to introduce all type of microfinance operations coverage in the future Decision.

In addition, the SCWP and the external evaluators encouraged the EIB to pursue own risk activities, limit the application of the EU guarantee to non-investment grade borrowers and limit concentration risk in specific countries/operations. This Recommendation was partly implemented in the current mandate by asking the EIB to prepare – in consultation with the Commission - an allocation policy. The latter will indicate how the EIB intends to allocate operations under EU guarantee or at its own risk activities. However, it is felt that a further step is needed to ensure that EIB financing under mandate focuses on less creditworthy operations in a transparent and orderly manner, whilst respecting concentration risks by country/beneficiary.

Finally, following the SCWP and external evaluators' recommendation, under the current mandate, the Commission and the EIB are asked to jointly prepare technical regional operational guidelines and the EIB is requested to prepare, in consultation with the Commission, a climate change strategy as well as multiannual financing strategies. These documents have been finalised respectively on 7 November 2012 (guidelines) or and on 12 December 2012 (climate change strategy). However, the recommendation and the subsequent implementation did not spell out a process to update these documents in an informed and transparent manner, to take into account the evolution of the EU priorities and policies in the external field.

As regards consultation with other stakeholders in June and October 2012, MS and NGOs representatives acknowledged the Commission's analysis of the problems to be addressed by the new legislation. In particular, NGOs representatives found legitimate to reconsider the value added of some EIB external activity under the EU guarantee. In this context, they underlined the most recent changes which occurred in the context in which EIB currently operates, including the implications of the economic and financial crisis both on the beneficiaries and the Bank's capacity to operate, as well as the relative limitations of EU budgetary grants. In this respect, they insisted on the need to ensure an adequate division of labour between all actors, including with other IFIs and on the need to focus the priorities of the mandate by setting clear guidelines for action.

Other main points raised by NGOs during the two rounds of consultations:

- They questioned the need to explicitly expand the scope of the EU guarantee to microfinance given the existence of other actors in the field. More in general, they questioned the activity in support of the private sector carried out through financial intermediaries.

- The EIB should focus on neighbouring countries and the EU guarantee should be used for lower income countries rather than emerging middle income ones.

- While expressing concerns on some energy operations (fossil fuel based), they welcomed an increased support to certain climate change related action such as energy efficiency and renewable energy. Appropriate parameters to define climate change action should be defined and methods to assess the carbon foot print of the overall EIB external activity notably under the mandate should be developed.

- They stressed the need for EIB to be closely aligned with EU priorities and suggested to develop coherent (possibly joint) programming between EIB activities and Commission managed instruments. The development of regional guidelines is a positive step forward. As regards the climate change strategy, they would favour an enhanced process including e.g. public consultation for the next Decision.

- The need to further enhance EIB transparency, due diligence on certain development aspects (e.g. human rights, conflict prevention) and results measurement.

1.4. Impact Assessment Board

The draft Impact Assessment report has been discussed at the IAB meeting of 5 September 2012. In its opinion of 7 September 2012, the IAB requested a resubmission of the report, with the following recommendations for improvements: (1) strengthen the context and problem definition, (2) widen the scope of the analysis, (3) significantly strengthen the analysis of impacts and the comparison of options, and (4) better present stakeholders' view.

The report was accordingly reorganised and a revised version was submitted on 20 December 2012. In particular, the context of the proposal was clarified in order to better highlight the strengths and weaknesses of the current mandate, by including further data and analysis, and the problem definition was fine-tuned in order to clarify the link with the objectives of the proposal. The scope of the analysis was widened notably to cover the setting of regional ceilings. The analysis of impact was strengthened through the integration of the economic, social and environmental impacts into the main impact analysis which was furthermore enriched by the clarification of the criteria used and of the rating applied. Finally, the stakeholders' view and consultation process was better presented throughout the report.

The IAB delivered a positive opinion on the revised draft on 29 January 2013. The IAB requested further clarifications on the status of implementation of the recommendations of the mid-term review and on EIB's role within EU financing for external action and in complementarity to other actors' activity, further improvements of the assessment of impacts and comparison of options sections, as well as more details on the stakeholders' view presentation. The report was further improved accordingly and has been hereby finalised.

2. Section 2: Problem definition

2.1. Framework and legal constraints:

2.1.1. Requirements of Decision 1080/2011/EU for a proposal for next MFF

Article 16 of Decision 1080/2011/EU states that the Commission shall present to the European Parliament and the Council a new proposal for the next MFF (2014-2020). It further foresees that, "when submitting the proposal on the EU guarantee under the next multiannual financial framework, the Commission should be invited in particular to examine, in close cooperation with the EIB and taking into account the implications of the provisioning of the Guarantee Fund, the ceilings covered by the EU guarantee, the list of potentially eligible countries and the possibility for the EIB to provide micro-credit financing and other types of instruments. The Commission and the EIB should also examine the possibilities of enhancing in the future synergy between the financing through the Instrument for Pre-Accession (IPA), the European Neighbourhood Policy Instrument (ENPI), the Development Cooperation Instrument (DCI), the European Instrument for Democracy and Human Rights (EIDHR) and the Instrument for Stability and the external mandate of the EIB".

Under the terms of Decision 1080/2011/EU, the EU guarantee covers EIB financing operations signed between 1 February 2007 and 31 December 2013. Therefore, a new Decision has to be adopted under the ordinary legislative procedure by 31 December 2013 before the current mandate expires[11].

2.1.2. 2014-2020 MFF budgetary framework and ceilings

It is important to describe the budgetary mechanism underpinning the EU guarantee provided under the EIB external mandate, as this has implications on some of the options analysed further in this IA.

A Guarantee Fund (GF) aims to shield the EU budget against shocks due to possible default from the lending activity under the EIB external mandate and other external action, i.e. Macro Financial Assistance and Euratom loans (the EIB mandate representing more than 90% of the portfolio covered by the GF). The GF must be maintained at a target level of 9% of the total outstanding disbursements[12] on all these actions. In 2010, an external evaluation of the functioning of the Guarantee Fund concluded that the 9% provisioning rate was deemed appropriate.

The GF is endowed by one annual payment from the EU budget. Based on the technical input from the European Commission to the negotiation of the individual programmes implementing the next Multiannual Financial Framework sent by the Commission on 27 March 2013, the envisaged EU budget amount for the provisioning of the GF over the period 2014-2020 will amount to EUR 1.193 bn (in current prices). The provisioning mechanism of the GF which aims at maintaining the GF at a level of 9% of outstanding loan disbursements creates therefore de facto a limit in the size of the EIB external mandate covered by EU budget guarantee. According to Decision 1080/2011/EU, the EU budget guarantee covers up to 65% of the EIB outstanding loan disbursements. See Annex 1 for more details on the evolution of the EU guarantee coverage over the years.

For reference, the guarantee has been historically called only three times: Former Yugoslavia (amount fully recovered), Argentina (amount fully recovered), and recently Syria.

Based on expected patterns of disbursements and reimbursements of guaranteed loans, this assumption would allow for a fixed ceiling of around EUR 25 billion (vs. EUR 29.5 billion under Decision 1080/2011/EU). Possible negative developments such as any new defaults leading to calls on the GF were not taken into consideration in this calculation. However, it accounts for the recent call on the Guarantee in the context of loans to Syria for an amount equivalent to approximately EUR 21.5mn in 2012 (which will affect the GF provisioning needs in 2014 as the latter will have to be increased accordingly) as well as calls expected in the coming years if the Syrian default situation persists. The calculation also integrates assumptions regarding the expected activities related to Macro Financial Assistance and Euratom loans.

As mentioned above, the Decision provides a breakdown of this General Mandate ceiling into regional ceilings. The current regional ceilings were increased by Decision 1080/2011/EU compared to the previous Decision[13]. The legislators decided to exceptionally increase the regional ceiling for the Mediterranean region by EUR 1bn and to increase by the same proportion (+4%) all other ceilings. The legislators clearly stated in the recitals of the Decision that these increases were temporary and exceptional with the view to deal with the Arab Spring and account for EIB increased support to EU partners in the 2009-10 crisis context.

This shows their intention to maintain the overall regional balance that was negotiated with difficulty in 2009 and was the outcome of a delicate policy compromise. Hence, since the 2009 overall regional balance was confirmed during the mid-term review (beyond these exceptional increases), it is assumed that the 2009 regional balance should form the basis for the new legislative proposal. The regional balance of the 2009 Decision was the following:

The above approach would also be in line with the thrust of the Commission 2014-2020 MFF proposals for external financial instruments, where the relative percentage of DCI - which covers Asia/Latin America/South Africa - did not change compared to IPA II (Pre-Accession) and ENI (Neighbourhood).

2.1.3. The general environment in which the EIB operates

The context in which the Bank operates has significantly evolved and the legislative proposal for the EU guarantee under the next MFF has been drafted in a fundamentally more difficult context than the one prevailing e.g. at the time of the mid-term review of the mandate which preceded the Decision 1080/2011/EU, including the Wise Persons Steering Group reflections.

In particular, the financial crisis had a significant impact on the funding conditions of EIB and entailed possible threats to the EIB's AAA rating[14]. Due to its very high leverage, the progressive deterioration of its asset quality (with a correspondingly declining capital adequacy ratio) and of the ratings of its shareholders, the EIB was rated by Standard & Poor's Moody's and Fitch "AAA with negative outlook"[15]. Against this backdrop, the Corporate Operational Plan (COP) 2012-2014 endorsed by the EIB Board of Directors end 2011 envisaged a significant reduction in lending volumes back to pre-crisis levels in particular in the external field.

Similarly, the current economic and financial context is also having an impact on the quality of the external lending portfolio. However, such impact was diverse by country/region. While the credit ratings of some countries, such as Turkey which represents the highest exposure under the EIB external mandate, have recently been upgraded, other countries, particularly in the Southern Neighbourhood region, are experiencing difficulties. Under the current circumstances, the EIB external mandate and the EU guarantee play a crucial role that allow the EIB to operate outside the EU and maintain its top credit-rating by bringing concrete benefits to the EIB capital adequacy through substantially lowering the risk weighting of EIB external operations, particularly for higher risk countries and borrowers.

While the recently approved EIB capital increase would allow increasing EIB lending inside EU, EIB external activity should not be affected. Moreover, the EIB Board of Governors' approval of the current external mandate stressed that the Bank should endeavour to mitigate the impact on human resources for its implementation.

In this context, as a result of EIB governing body decisions and the lower absorption capacity of beneficiaries in key countries of operations, it is anticipated that EIB may under-use the amounts available under the current mandate. At project level, the EIB activity will particularly depend on the identification of sound and bankable projects, grants-loans blending opportunities, level of indebtedness of the beneficiary countries, risk analysis, economic and political context, quality of project preparation, capacity of the project promoters, etc.

Another element which has been incorporated in the reflections on the proposal for a new mandate is inter alia the extension of European Bank of Reconstruction and Development (EBRD) geographical scope to the Southern and Eastern Mediterranean. While EBRD's activity in four countries in the Mediterranean region was initially implemented through cooperation funds (i.e. mainly technical assistance operations), the EBRD is now able to deploy the full range of its product through a Special Shareholders Fund and, in a second stage, through its own resources, once the ratification process of the changes in its Articles of Agreement Establishing the EBRD is implemented. In the coming years, EBRD could eventually reach an annual business activity of up to EUR 2.5 bn in the Southern and Eastern Mediterranean (which would be more than total combined EIB financing - under the mandate and at own risk).

2.2. The problems requiring action

Four problems have been identified:

2.2.1. The risk of sub-optimal use of the EU guarantee

The chart below shows that although, on average, more than 60% of EIB external operations have been carried out with the EU guarantee in the regions covered by the mandate between 2007 and 2011, this repartition differs significantly from one region to another.

In this context, there are creditworthy countries/beneficiaries notably in ALA where the additionality of EIB lending with the EU guarantee is less palpable than in others. For those operations, EIB financing could be provided at own-risk and do not necessarily require an EU-budget guarantee as borrowers can more easily access commercial funding.

For instance, it should be noted that, in 2011, investments in sub-investment grade countries under the guarantee in ALA represented less than half of the overall lending of 310 mn in the region. On the contrary, the remaining operations were carried out in creditworthy countries (Brazil and Mexico). This issue was identified in the context of the mid-term review and was also raised by most of the NGOs consulted. However, other stakeholders, in particular the EEAS, stressed the need to maintain a broad eligibility to the guarantee coverage in order to limit the risk of having some EU partners becoming "orphans" from EU financial assistance following the graduation of some countries from EU bilateral financial assistance in the future DCI.

Moreover, the general crisis context, in which the role of emerging market economies on the global scene has significantly increased, including as fund providers, has raised questions from some stakeholders including Commission services, some MS and some NGOs on how to further focus EIB resources devoted to partner countries on higher value added and result-oriented activity. In particular, EU taxpayers have become more sceptical about funding wealthier Middle Income Countries (MICs) notably the BRICs (Brazil, Russia, India and China). In this context, it should be noted that almost half of EIB financing operations in the BRICs are already done at own-risk although this figure ranges from 95% for China to less than 20% in Russia. If EIB own-risk activity outside the Union were to be reduced (as it is currently foreseen by EIB governing bodies), there is therefore a risk that operations in these countries will compete for the EU guarantee coverage with operations in less creditworthy countries.

The Decision on EIB external mandate provides the framework for EIB operations under the EU budget guarantee while it does not frame EIB own-risk facilities which are decided by EIB Board of Governors (which is the same as the ECOFIN). Nevertheless, given interactions and complementarities between the two types of activities, a clearer focus of the mandate should allow a better use of the mandate and influence EIB own-risk activity, thereby ensuring efficient use of the guarantee in terms of financial value added.

The following graph shows the breakdown of 2008-2011 operations at own risk and under guarantee in the regions covered by the mandate (EUR bn).

2.2.2. The impossibility for EIB to finance all type of microfinance operations with the EU guarantee

Decision 1080/2011/EU requests the Commission to assess whether the EIB Mandate should be extended to cover all type of microfinance operations.

The EU guarantee does not explicitly cover EIB lending for micro-credit financing operations. While the EU guarantee could cover microfinance operations linked to an economic/business activity (supply side), i.e. e.g. micro-credit to small producers/micro-enterprises that need access to financial services to invest, generate income, and build assets, the EU guarantee does not cover operations linked to consumption behaviours (demand side) or other type of financial services provided to micro-entities (see below point 2.4 for more details). With this type of operations, EIB's financing could potentially have a substantial impact on poverty alleviation and on economic and social development in partner countries.

The impact of microfinance activity on poverty reduction is the subject of intense (and still open) debate in the academic literature. Recent research identifies both positive and negative impacts from microcredit within a heated and complex debate over the methodological reliability of the findings of many of the key studies involved[16].

At the same time, an estimated 2.5 billion working-age adults (more than half of the total number of working-age adults in the world) remain without formal financial services such as a savings or check account. A growing body of empirical evidence shows that access to the right financial product at the right time helps poor households build assets, generate income, smooth consumption, and protect themselves from risks. An inclusive financial system allows for more effective and efficient social policy interventions, for example through conditional payment transfers in health and education. And at the macro level, deeper financial intermediation in an economy leads to more growth and less inequality. Access to financial services is an important element for the success of an economy and the wellbeing of its citizens[17]. Moreover, anecdotal evidence and report from various NGOs underline significant market gaps for medium sized borrowers despite a reported oversupply in some regions.

In this context, the EIB has been one of the latest entrants in the microfinance business. Although its portfolio still represents a very small fraction of the total budget, it has been growingly steadily through the years. Since the first operations in Morocco, back in 2003, the average deal size has been increasing constantly and is now expected to top 10 to 50 million euros. It is therefore legitimate to investigate whether EIB external mandate should be extended to cover all type of microfinance operations.

2.2.3. The insufficient level of funding for climate action and the difficulty for EIB to increase its lending in this area

In the current economic and financial environment, there is a risk that global financing for Climate Change operations will fall short of needs and expectations. The EU has committed to work with other developed countries in a constructive manner towards the identification of a path for scaling up climate finance from 2013 to 2020 from a wide variety of sources of finance, to reach the international long term committed goal of mobilizing jointly US$100 billion per year by 2020 in the context of meaningful mitigation actions and transparency on implementation with a view to reducing global greenhouse gas emissions so as to keep the increase in global average temperature below 2°C compared to preindustrial levels. In this context, the Council recently "acknowledged the important role of Multilateral Development Banks and other public financial institutions, including the EIB in facilitating the mobilisation of these flows"[18].

EIB's climate action is carried out both under the EU mandate and at own risk. The focus on climate action has been introduced by Decision 1080/2011/EU while other more traditional sectors like support to environmental or biodiversity infrastructure were maintained as they were.

It is estimated that around 15% of EIB operations carried out since 2007 with the EU guarantee could be qualified as climate change operations. This global figures hides however disparities across regions/countries as it ranges from less than 5% in the Mediterranean region to almost a third of operations in the Eastern Neighbourhood and around 20% in Pre-Accession and ALA region as described in the chart below.

Source: EIB

Notes:

· The volumes per objective represent the cumulative gross signatures over the period corresponding to the actual implementation to-date of the External Mandate (i.e. 01/08/2007-14/05/2012).

· The percentages refer to the objective’s proportion of total volume in each region. The objectives are not mutually exclusive (one operation may simultaneously contribute to more than one objective), therefore the volumes or percentages for a single region cannot be added.

· The Climate Action indicator was defined late 2009. Volumes relating to operations signed prior to 2010 are indicative.

· In addition to the above volumes on EIB own resources, private equity was provided in the Mediterranean in an amount of EUR 162m on EU budget resources.

While EIB activity in support of climate action in the external field has proportionally grown in recent years, this is not yet matching the needs arising from EU and global commitments in this area. One of the reasons for this could be the necessary time-lag between the moment a project is being identified as "bankable" and its materialisation. As mentioned, the climate change dimension was introduced in the 2011 Decision. This constitutes a significant evolution of EIB activity which requires times for implementation, both in terms of client identification and project preparation. In addition, pipeline of projects tend to be "sticky" in some sectors as the Bank needs to gradually diversify its traditional client base.

Nevertheless, some of the NGOs consulted questioned whether the EIB had sufficient incentives to substantially step-up this activity under the current mandate despite the fact that the latter stated that:

"in line with EU and international climate change objectives, the EIB shall, in cooperation with the Commission, present by 2012 a strategy on how to gradually and steadily increase under its external mandate the percentage of projects promoting the reduction of CO2 emissions and phase out financing projects detrimental to the achievement of the EU climate objectives". In line with the Decision requirements, this strategy was presented by the Bank in December 2012.

2.2.4. Unclear EIB positioning as a delivery tool of EU external financial support

EIB external activity is an integral part of EU financial support to third countries. As mentioned above, despite significant improvements introduced by Decision 1080/2011/EU to align better EIB financing with EU external policy objectives, there have been cases in the recent years where it has proven complex to translate EU policy developments into EIB activity. These examples include EIB's activity in Russia where a series of trade related questions prevented the Commission from providing a favourable opinion to EIB support to projects in a number of sectors in Russia which are eligible under the mandate (e.g. transport). Similarly, despite the increase of the ceiling for the Mediterranean region and a clear political call to step up its support to the region in the aftermath of the Arab spring, EIB has encountered, as all other IFIs, difficulties to close deals in the region in the very short term.

All these examples illustrate the need to strike a balance between the predictability of EIB activity in order for it to build a viable pipeline of bankable projects and the need to align with the latest policy developments.

The so-called Article-19 procedure[19], whereby the EIB submits a project proposal to the Commission for an opinion, ensures policy coherence by preventing any inconsistencies between EIB activity and policy developments. Nevertheless, the submission under Article 19-procedure occurs when EIB project are already relatively well prepared and identified. Therefore a process for interaction between the EC/EEAS and the Bank at an earlier stage of the project cycle would allow to save resources.

It should be noted that this problem is also identified by the stakeholders consulted (EP, NGOs)[20] who also asked for increased synergies with EU budgetary fund. A review of the latter was also requested in Decision 1080/2011/EU.

More recently, the EP has also studied the implications of EIB and EBRD co-financing with EU budget notably in relation to the extent to which such activity helps delivering on of EU policy objectives[21]. In this context, it should be noted that, despite the introduction in the current mandate of the regional technical operational guidelines, the alignment with EU policies and the coherence and synergies with EU instruments within the timeframe of the new mandate could be further improved. In this respect, the recent creation of the EEAS should contribute to achieve this goal of overall policy orientation, coherence and synergies. Nevertheless, there is not yet for instance any mechanism that clarifies how to ensure the effective and timely mirroring of the differentiation principles (e.g. "more for more" whereby incentives are provided to support more those partners who implement Action Plan priorities) established in e.g. the revised European Neighbourhood Policy.

2.3. The underlying drivers of the problems

The following underlying drivers to the problems identified in section 2.2 have been identified:

· The problem of non-optimal use of the guarantee which would not be reserved for operations with most value added is due to unclear criteria in the current mandate to decide whether operations are to be financed or not with the support of the EU guarantee and the lack of process to review them. There is no reason for any evolution of this situation in the next MFF if no action is taken.

· EIB inability to support all type of microfinance operations is due to the current design of the EU guarantee as not all types of operations are currently eligible. This situation will not change in case of status quo.

· The insufficient level of funding for climate action and the difficulty for the EIB to increase its lending in this area are due to the lack of sufficient incentives in the mandate and/or provisions for enhanced and more efficient allocation of funds in this area. There is no particular reason to assume that this underlying driver and the resulting problem would evolve favourably in the next MFF in case of status quo.

· The problem of unclear positioning of EIB as a key delivery tool of EU external financial support is due to lack of a dynamic process to provide upstream political impetus to EIB project identification business with the view to allow continued alignment of EIB activity with EU policies and to capture for the evolving environment in which it operates. There is no reason for any particular positive evolution of this situation in the next MFF period if no action is taken.

2.4. The consequences of the status quo – the base line scenario

The base line scenario would entail the replication of the current Decision under the next MFF, i.e. from 01/01/2014 until 31/12/2020.

· Given the recent strategic shift by the Bank to significantly lower own-risk operations outside the EU to cater for the riskier environment in which it operates and maintain its top credit rating, there is a significant risk that the EU Guarantee will be increasingly reserved for creditworthy operations which have easier access to commercial funding and for which the value added of an EU budget guarantee is questionable. In particular, this may reduce the impact of this budgetary instrument on most needful countries/beneficiaries which display a more difficult operating environment than richer countries given e.g. their less developed financial infrastructure. Therefore, in the absence of a clearer method in the mandate to decide whether operations are to be financed or not with the EU guarantee, the less creditworthy potential beneficiaries, in particular local private sector and sovereign beneficiaries in lower income countries, would be negatively affected.

The following graph shows the breakdown of EIB 2008-2011 activity in regions covered by the mandate according to end of 2011 (groups of) rating levels split by operations at own risk and operations under guarantee. It should be noted that the vast majority of operations at own risk in the Ba category are private sector operations in the Pre-Accession region, and in particular Turkey. The graph shows that there is a significant correlation between the level of creditworthiness of a country and the capacity of the Bank to carry out operations at own risk. Moreover, for private sector operations in Pre-Accession countries, the Bank is capable to bear the risk even when such country has not yet reached full investment grade. However, there seems to be still scope for rationalisation.

· EIB can support only a limited type of operations under the EU guarantee as specified under Decision 1080/2011/EU. However, the EU guarantee does not cover microfinance operations which be linked to consumption behaviours (demand side). These refer to households' need to smooth consumption in the face of irregular income and expense streams and manage risks. Moreover, the EU guarantee in the current set-up does not cover some financial services provided to micro-entities/SMEs other than micro-credit operations but often also referred to as "microfinance operations" such as savings, insurance, and fund transfers. Finally, the EU guarantee could not cover the financing of activities linked to the development of an inclusive financial system, the creation of an enabling environment and the capacity building of regulatory institutions and financial intermediaries. The continuation of the EU guarantee in the current set-up therefore entails the risk not to reach part of the most in need population in EU partner countries through the financing of these "demand side" microfinance operations. This could be detrimental for individuals which would not have access to a potential additional source of financing.

· Despite the presence of a specific envelope of EUR 2 billion (i.e. 7% of the total mandate) for climate action, the lack of sufficient incentives in the mandate and/or provisions for enhanced and more efficient allocation of funds in this area does not guarantee that such a relatively small envelope will allow the EIB to sufficiently prioritise climate action in its external activity. Moreover, the presence of a dedicated amount does not ensure that an adequate climate impact is achieved in particular in terms of GHG emission reduction. Therefore, there would be no particular incentive for EIB to increase its climate action both in terms of financed volumes for climate specific projects (see chart in section 2.2.3) and in terms of mitigating the potentially negative climate impact of its activity.

· The continuation of the EU guarantee in the current set-up bears risks that EIB activity under the mandate is not fully integrated in the EU financial toolkit to support its external policy objectives due to unclear guidance provided to the Bank in the absence of lack of a dynamic process to provide upstream political impetus to EIB project identification and to capture for the evolving environment in which the EIB operates. Moreover, there is a reputational risk for the EU/EIB if EIB support is granted albeit not being fully in line with EU policies or of waste of resources if after preparatory work, some projects are then objected under article 19 procedure.

2.5. Analysis of subsidiarity and justification for EU action

The proposal falls under the exclusive competence of the EU. The subsidiarity principle therefore does not apply.

The specific legal bases for EU action in granting an EU guarantee to the EIB against losses under loans and loan guarantees for projects outside the EU are Articles 209 and 212 of the Treaty on the functioning of the EU. In particular Article 209(3), in conjunction with Article 208, provides that the EIB is to contribute, under the terms laid down in its Statute, to the implementation of the measures necessary to further the objectives of Union development cooperation policy.

The EIB is the Bank of the Union established under Article 309 of the Treaty. The Statute of the EIB is laid down in a Protocol annexed to the Treaties. Article 16 of EIB Statute states that the Board of Governors – consisting of Ministers from the Member states – may decide to grant financing for investment carried out, in whole or in part outside the territories of Member states.

3. Section 3: objectives:

3.1. General policy objectives of the new EU guarantee EIB external operations and other specific objectives

With a view to supporting Union external action, and in order to enable the EIB to finance investments outside the Union without affecting the credit standing of the EIB, part of its operations in external regions benefit from an EU budgetary guarantee under the external mandate.

The objective of EIB activity outside the EU under the EU guarantee should be to support the Union's external policies by financing relevant projects in partner countries or at regional level through the combination of EU budgetary funds (via the provisioning of the Guarantee Fund for external action which backs the EU guarantee) with EIB own resources.

Through its financing operations outside the EU under the EU guarantee, the EIB should support the economic, social and environmental sustainable development of EU partner countries, and their partnership with the EU. Moreover, EIB financing operations under the EU guarantee shall be consistent with the wider Union regional policy framework e.g. the Accession and European Partnership and the Stabilisation and Association process, the new European Neighbourhood Policy, the Eastern Partnership and the Partnership for Democracy and Shared Prosperity. The new mandate should also be consistent with the recent "Agenda for Change"[22].

Other specific objectives of the new EU guarantee should include to:

· Better exploit EIB expertise and resources (objective a). As mentioned, EIB governing bodies have recently expressed concerns regarding EIB activity outside the EU as opposed to its core activity inside the EU, in particular in terms of resources allocated to this activity. In this context, ensuring that EB external activity builds upon EIB's existing and recognised expertise and resources should ensure that EIB has the capacity to fully implement the mandate in the most efficient manner.

· Improve the effectiveness of the EU guarantee whilst preserving a sound budgetary cover (objective b). One of the main conclusions of the recent World Bank Development challenge series: "The Future of the Global Aid Architecture and Europe’s Role in It"[23] was that European aid must continue to be rooted in democratic legitimacy, which (at a time of austerity) requires a focus on needs and results. This would also be coherent with relevant principles of the European Consensus on Development and the principles of aid effectiveness outlined in the Paris Declaration of 2005, the Accra Agenda for Action of 2008 and the Busan Partnership Agreement of 2011. In a context of scarce EU budgetary resource, it is therefore important to ensure effectiveness of the mandate without exposing the EU budget to excessive risks.

3.2. Operational objectives of a new EU guarantee

In this context, the operational objectives of the new EU guarantee should be to:

· Focus the scope of the EU guarantee on beneficiaries where its use would display highest value added (objective 1). Given the anticipated non-negligible reduction of EIB external activity carried out at own-risk, there is a potential risk that, without any specific incentives, the EU guarantee may be used by the EIB for an increased number of operations with most creditworthy beneficiaries (which were previously carried out at own-risk) to the expense of less creditworthy potential beneficiaries (where the EU guarantee's value added would have been higher) with the view to preserve the EIB's good credit stance.

· Explicitly extend the EU guarantee to all microfinance operations (objective 2) to reach out the poorest.

· Reinforce the climate change dimension of the EU guarantee in order to incentivise EIB operations in this key sector of EU external action (objective 3) to meet the international commitments while maintaining traditional support to infrastructure development, including environmental.

· The core objective of the EIB external mandate is that EIB financing operations support EU external policies. In this context, the operational objective is to increase the impact of EIB financing through better alignment with EU policies and coherence and synergies with EU instruments (objective 4) to more satisfactorily mirror policy developments in a timely manner.

The diagram below illustrates the link between the identified problems and the specific and operational objectives of the new legislative proposal.

4. Section 4: Policy options

4.1. Description of policy options

Option 0: no new decision – i.e. no new EU budget guarantee extended to any new EIB operations outside the EU.

Under this option, EIB could potentially partly continue its activity at own risk, subject to EIB governing bodies' decision, in accordance with Article 16 of EIB Statute. Financing contracts signed under Decision 1080/2011/EU would continue to benefit from the EU Guarantee, but no new EIB activity would be carried out outside the EU with the EU Guarantee. As a result, EIB overall external activity would substantially decline from a current level of EUR 6bn a year to probably less than a third of it.

Option 1: no change (as in Decision 1080/2011/EU but extended until 31/12/2020 and with an overall ceiling of EUR 25 bn) – base line scenario.

Under this option, the geographical scope of the EU guarantee and the regional balance would remain unchanged compared to Decision 1080/2011/EU (i.e. covering Pre-Accession, Neighbourhood, Russia and Central Asia, Asia and Latin America and South Africa) (objective 1).

Microfinance operations would not be explicitly eligible for benefitting from the EU budget guarantee under this option (objective 2).

Under this option, climate action would remain one of the three general objectives of the mandate (alongside the development of social and economic infrastructure and local private sector development, in particular support to SMEs). A specific EUR 2bn global envelope (without any particular geographical allocation) would remain pre-allocated for climate change operations (objective 3).

The link of EIB external activity under the EU guarantee with EU policies would be principally ensured through the elaboration of the regional technical operational guidelines (although no regular revision is foreseen), the possibility for the Commission to amend the list of eligible countries through delegated act to reflect political developments and the submission for an opinion to the Commission of EIB financing requests in accordance with Article 19 of EIB Statute (objective 4).

Option 2: amend the existing guarantee, as follows:

Acronyms were given to the 3 following sub-options according to their main feature. Each of the three sub-options has been defined as an articulated combination of 4 types of amendments with the view to address in particular the 4 operational objectives identified in Section 3.2. The selection of the various combinations has been widely debated within the IASG and with the stakeholders consulted informally in order to ensure that each sub-option stands as a logical combination of amendments. The selection of the parameters under each sub-option is determined on the basis of the mutual interaction and spillover of the modifications of such parameters.

Sub-option 2.1 "CLOSE".

Under this option, the geographical scope would be amended to exclude all ALA countries and South Africa in order to focus the guarantee on regions neighbouring (/CLOSEst to) the EU and where EIB activity provides the highest impact. Therefore only Pre-Accession and Neighbourhood would remain eligible under this option. This option should be regarded as a step forward in the direction given by Council and the EP and more recently stressed by the EIB Board of Directors to focus external activity on Pre-Accession countries and Neighbours in the East and the South. Under this option, a similar balance of the regional ceilings distribution as in the 2009 Decision between Pre-Accession and Neighbourhood would lead to e.g. 42% of the general mandate for Pre-Accession and 58% for the Neighbourhood (42% for the South and 16% for the East) (objective 1).

This policy option also entails that all type of microfinance operations would become eligible under the general mandate as one of the main objectives of the EU guarantee (objective 2). It should however be noted that the current structure of the EU guarantee may not be sufficient to allow EIB support to all type of microfinance operations due to the presence of an excessively high residual commercial risk. Hence, to become effective this option would require reducing the risk for the Bank to an acceptable level. This could be achieved either by (i) providing financing through a public entity – either a sovereign or a sub-sovereign presenting an "appropriate EIB credit risk assessment" in line with Article 10(1) of the current Decision -, which intermediates or guarantees microfinance operations carried out by public or private operators (NB: in this specific case, and by extension of the EU budget guarantee, the EIB would be exposed only to the credit risk of the sovereign/sub-sovereign entity and not to the risk of each microfinance intermediary or operation. The application of the EU comprehensive guarantee to the sovereign/sub-sovereign entity would apply in line with current provisions set out in the current legal basis and in the corresponding guarantee agreement); or (ii) obtaining an accompanying grant component from EU budget or other sources, e.g. to fund a first loss guarantee instrument supporting microfinance operations. However, the level of EU grants would ultimately depend on the means available under other external financial instruments for such purpose and on their respective underlying policy objectives.

Under this option, the climate change dimension would be reinforced by a substantial increase of the specific global envelope reserved for climate change operations (e.g. from EUR 2bn in the current Decision to e.g. 4 bn[24]) which should ensure an expansion in the amounts financed by EIB to support climate action. This specific envelope would still complement the general mandate for which climate action would remain one of the general objectives (alongside the development of social and economic infrastructure and local private sector development, in particular support to SMEs and microfinance) (objective 3).

Better alignment of EIB financing with EU policies and coherence and synergies with EU instruments would be ensured under this policy option through the drafting annual country strategy papers. This would in particular allow revisiting e.g. eligibility of countries on a yearly basis and thereby ensuring a strict alignment of EIB external lending activity with EU external policy developments and ensuring coherence and synergies with EU financial instruments. Although this annual adjustment would require mobilising significant resources in the Commission and the Bank, this would be possible as the number of EIB countries of operation outside the EU would be significantly smaller under this option (25 countries) than when EIB could operate also in ALA and South Africa under the EU mandate (more than 65 currently) (objective 4).

It should be noted that the stakeholders consulted presented diverse views on this option. On the one hand, while some NGOs – in particular those mostly concerned on the development impact of EIB activity – favoured the exclusion from the guarantee coverage of the further regions, other stakeholders such as the member states, the EEAS or even other NGOs more focused on climate impact preferred maintaining the current regions of operation. Finally, as mentioned, most of the NGOs expressed reservation on the explicit extension of the guarantee coverage to all type of microfinance operations.

Sub-option 2.2: "MICRO"

Under this option, all MICRO-finance operations would benefit from the EU guarantee through the creation of a specific envelope pre-allocated for this type of operations (e.g. EUR 2 bn). This specific envelope could also benefit to local SMEs, particularly the smaller ones. The creation of a specific envelope should be accompanied by a modification of the current guarantee structure in order for the allocated amount to be actually invested by the EIB. As mentioned above, currently the EU guarantee provides a comprehensive coverage for sovereign/public operations while it only provides a political risk coverage for private sector ones. Given that microfinance operations undertaken by the private sector typically present an excessively high residual commercial risk for the EIB, in order for the allocated envelope to be deployed by the EIB, the latter would require that all microfinance operations benefit from a comprehensive guarantee from the EU budget to bring down the risk to an acceptable level for the EIB. While the structure of the guarantee would remain unchanged compared to the current set-up for other type of operations, this increased exposure of the EU budget to private sector risks would constitute a complete change of the nature of the EU Guarantee compared to the current model and would have implication for the provisioning of the GF (objective 2).

The geographical scope of EU guarantee should remain unchanged compared to Decision 1080/2011/EU, in particular as potential needs from this type of operation can be significant in ALA region, which in turn justifies a meaningful size of the envelope. (objective 1). Under this decision, the regional balance should be similar to the one of the 2009 Decision as described in section 2.1.1, whereby the ceilings for Pre-Accession and the Neighbourhood account for more than 80% and ALA and South Africa for the rest.

The creation of the specific envelope for micro-finance operations would entail the emergence of a specific risk profile of EIB lending portfolio under EU guarantee. In this context, in order not to over-expose EU budget to significant additional risks, the specific climate change envelope which existed under Decision 1080/2011/EU would have to be absorbed/integrated into general mandate (climate change remaining one of the three high-level horizontal objectives of the general mandate). The reinforcement of the climate change dimension could be envisaged through the introduction of targets for regional envelopes which would imply more volumes than in current trends (e.g. 50% in the ALA (and South Africa) and 20% elsewhere) (objective 3).

A better alignment with EU policies and increased coherence and synergies with EU instruments would be ensured under this policy option through:

· the update of technical operational regional guidelines consistently with initial and periodically reviewed multiannual indicative programming (MIP) of the EU external financial instruments as simplified in the recent legislative proposals (e.g. in particular the Single Support Framework for neighbouring countries or multi-country strategy papers in Pre-Accession),

· the suspension of a country eligibility under Delegated Act, which is already foreseen under the current mandate and already applied for Syria, would affect not only the signature of new operations but also the disbursements on existing ones. This has a particular relevance for those cases where the suspension is caused by the violation of human rights. The EIB should include specific provisions in its financing contracts to this effect, and.

· the application of the differentiation ("more for more") principle in the Neighbourhood through periodical reviews by the Commission services and the EEAS of the EIB countries/sectors of operations and at the project level during Article 19 appraisal (objective 4).

As mentioned above, the legislators requested to assess the possibility for the EU guarantee to support all type of microfinance operations. However, most of the NGOs expressed reservation on the explicit extension of the guarantee coverage to all type of microfinance operations (including with a comprehensive coverage). Moreover, the stakeholders consulted mentioned the need not to focus only on the amounts invested in climate action but rather on the effectiveness of these investments, in particular in terms of CO2 emissions.

Sub-option 2.3: "FOCUS". As mentioned, the Commission's legislative proposal on the next generation of DCI[25] foresees that several countries in ALA region will graduate from development bilateral assistance. Under this sub-option, the proposal is to maintain all countries in principle eligible for EIB financing operations under EU budgetary guarantee while introducing a mechanism to FOCUS the geographical scope in particular in the ALA region. The principle could also be considered in the Pre-Accession region and Neighbourhood whilst taking into account EIB exposure limits by country. A mechanism would be defined in the legislative act whereby (i) the use of EU budget guarantee would be defined on the basis of the creditworthiness of the beneficiaries and other credit related criteria (in order to focus the guarantee on operations where value added would be highest, while ensuring that there would be no 'orphan' countries from EU financial support). The mechanism would allow to review the concrete application of such criteria on a regular basis in order to take into account the evolution of financial creditworthiness of potential beneficiaries of EIB loans and of EIB balance sheet; (ii) differentiation could be introduced depending on the beneficiary/type of operations (sovereign/sub-sovereign or private) and on the region concerned (Pre-Accession vs. others). With such a mechanism, all countries would still remain "eligible" for own-risk operations (as recommended by SCWP). It would also allow to take into account risk implications for the EIB and to keep eligible under the EU guarantee the beneficiaries/countries not yet eligible for own-risk operations under EIB credit assessment rules. For instance, some operations with creditworthy beneficiaries (e.g. a loan to a well rated emerging economy public entity) would not benefit from the guarantee coverage unless specific justifications can be applied. On the contrary, the use of the guarantee would be reserved for operations with less creditworthy beneficiaries, in particular in LDCs. In this context, it should be noted that, in light of the recent developments which allowed the EU to open a new chapter in its relations with Myanmar and to support the on-going political and economic reforms in the country, the Commission should propose in the upcoming legislative proposal to extend the list of eligible countries in Asia to Myanmar. More details on the rationale for this is provided in Annex 5. (objective 1). Under this option, as in option MICRO, the regional balance should be similar to the one of the 2009 Decision as described above, whereby the ceilings for Pre-Accession and the Neighbourhood account for more than 80% and ALA and South Africa for the rest. A specific sub-regional ceiling should be identified for Central Asia within the ALA region to reflect enhanced EU cooperation with the area. Finally, the introduction of a dynamic mechanism to focus the use of the EU guarantee on operations where it displays the highest value added may potentially lead the EIB over the 7-year period of the Decision to reach certain sub-regional ceilings earlier than the end of the period while other may remain underutilised. Therefore, to cater for this potential problem, it would be important to enhance the flexibility to re‑allocate amounts within sub-regions compared to the current Decision.

Under this option, microfinance operations would continue not to be specifically eligible under the EU guarantee as the three general objectives would remain the same as in Decision 1080/2011/EU. The main underlying rationale of this option is to focus on key value added activities where the EIB presents a significant comparative advantage (including through a more financially targeted scope). In this context, further developing microfinance support seems difficult to justify given the fact that this activity would be significantly resource-intensive. In this case, resources could be maintained in areas of strong EIB expertise (infrastructure, SMEs, climate action) whilst enhancing e.g. its climate impact (objective 2).

Under this policy option, the reinforcement of the climate change dimension of the EU guarantee would be through the introduction of a an overall target (e.g. of 25% of total lending which would represent a substantial increase in financing compared with the current level for climate change operations) with no specific regional differentiation. In addition, this overall target would be accompanied by the introduction of a tracking system allowing to monitor absolute and relative GHG emission reduction of EIB significant projects supported under the EU guarantee throughout the project lifecycle and report accordingly (objective 3).

Eligibility for climate change operations would be clarified against agreed criteria building on - and if needed tightening - existing EIB definitions to track climate change expenditure (e.g. introducing benchmarks related with Green-House Gas (GHG) emission reduction, improving if appropriate the definitions for energy efficiency and adaptation), which would also be used in the monitoring phase.

A better alignment with EU policies and increased coherence and synergies with EU instruments under this policy option would be ensured, as in option MICRO through:

· the update of technical operational regional guidelines consistently with initial and periodically reviewed multiannual indicative programming (MIP) of the EU external financial instruments as simplified in the recent legislative proposals,

· the suspension of a country eligibility under Delegated Act, which is already foreseen under the current mandate and already applied for Syria, would affect not only the signature of new operations but also the disbursements on existing ones. This has a particular relevance for those cases where the suspension is caused by the violation of human rights. The EIB should include specific provisions in its financing contracts to this effect, and

· the application of the differentiation ("more for more") principle in the Neighbourhood through periodical reviews under the COM/EIB/EEAS MoU of the EIB countries/sectors of operations and at the project level during Article 19 appraisal (objective 4).

Most of the stakeholders consulted expressed interest in this policy option allowing to focus the use of the EU guarantee on most value added operations. They also appreciated positively the idea to further incentivise EIB climate action support albeit not at the expense of other more traditional sector support. This option would probably not entirely satisfy certain stakeholders, notably some members of the European Parliament, which seemed to be in favour of extending the EU guarantee to all type of microfinance operations.

Option 3: provide the guarantee to other financial institutions.

This option would entail opening the coverage of the EU guarantee to other European Financial Institutions eligible in the various blending facilities (such as WBIF, NIF, LAIF, IFCA, AIF etc.) to the extent that they promote projects supporting EU priorities.

4.2. Discarded policy options at an early stage of the assessment

Option 0: no new decision – i.e. no guarantee

In light of the crucial role played by the EU guarantee to EIB external operations in supporting EU external policy objectives and in light of the global economic crisis which emphasises the significant investment needs, it seems essential to continue preserving an adequate investment flow to EU partner countries. With EIB operations outside the EU without the EU guarantee being more and more limited in the current risk environment, the discontinuation of the EIB external mandate under the EU guarantee would lead to a withdrawal of the EIB from a number of countries and a significant increase in funding costs for projects located in these countries. This is deemed not to be politically desirable in particular in the closest regions outside the EU (i.e. Pre-Accession and Neighbourhood) where EU influence has to be preserved and EU policy objectives promoted.

Moreover, as stated already, Article 16 of Decision 1080/2011/EU states that the Commission shall present to the European Parliament and the Council a new proposal for the next financial framework (2014-2020).

Therefore, policy option 0 is disregarded without any further assessment.

Option 3: provide the guarantee to other financial institutions.

Option 3 could be attractive to enhance the outreach of EU guaranteed financing to a larger spectrum of projects/areas. In addition, given the current limitations on overall EIB external lending imposed by the EIB governing bodies, this would allow a potentially higher volume of lending to be achieved. However, there are a few potential drawbacks to this proposal.

On the one side, the opening of the EU guarantee to other institutions would correspondingly decrease the share of EIB guaranteed lending, which could have a negative impact on the visibility of EU action, given the EIB EU institutional standing. Following the “graduation” of the middle- income and emerging countries out of most of the EU bilateral development funding, it is all the more important to make sure that EIB lending operations carrying an EU flag can fill the void of largely reduced development aid budgets.

A generalised opening of the EU guarantee to other intermediaries on a level playing field would strongly limit EIB external activity. In turn, a significant risk would arise that the EIB will not be able to reach the necessary critical mass for its external operations to justify their continuation. This is politically undesirable from an EU perspective, taking into account the long standing presence of EIB in the external field and above mentioned reduced aid budgets.

In addition, the EU budget would assume additional contingent liabilities on financing operations conducted by financial institutions which are not strictly part of the EU institutional constellation and do not have the same shareholders (as it is the case for the EIB), which could be contested by the budgetary authority. In line with the new Financial Regulation, other multilateral and bilateral financial institutions are eligible – alongside the EIB - to implement complementary financial instruments under other EU programmes such as IPA II, ENI or DCI (e.g. EU grants may cover the first loss piece of a debt instrument established by one or more financial institutions).

Lastly, contrarily to the EIB, whose activity is politically and legally solely determined by and accountable to EU institutions (Council, EP, Commission with the involvement of the EEAS), the other institutions have their own strategies agreed by the respective governing bodies which could limit the influence of the EU through its guarantee. In this context, it is worth recalling that – according to Article 19 of the EIB Statute, which is part of the EU Treaty - all EIB operations are submitted to the Commission for an opinion. A Commission negative opinion under the Article 19 consultation would require an unanimous decision by the EIB Board of Directors to be overruled and, in any case, such operation cannot benefit from the EU guarantee. Such a mechanism would not be in place if the external mandate were to be extended to non-EU institution(s).

In this context, if should be mentioned that all stakeholders consulted (including potential beneficiaries of the mandate) did not show any interest for this option.

Therefore, policy option 3 is disregarded without any further assessment.

4.3. Retained policy options

Following the disregard of these two policy options, option 1 (base line scenario –as specified in Decision 1080/2011/EU but extended until 31/12/2020), and sub-options CLOSE, MICRO and FOCUS of option 2 will be analysed. The table below summarises the main changes incorporated in options CLOSE, MICRO and FOCUS compared to the base line (no change) scenario.

Main differences between the retained policy options compared to the "baseline - no change" policy option

Responses to the operational objectives || Option CLOSE || Option MICRO || Option FOCUS

(i) focus on most value added countries/ operations || Exclusion of ALA and South Africa || No change || Focus on less creditworthy beneficiaries (in a dynamic way)

(ii) provide explicit guarantee for all microfinance operations || All microfinance operations specifically eligible but no commercial risk borne by the EU guarantee || Pre-allocated envelope of EUR 2bn for microfinance operations with comprehensive EU guarantee || No change

(iii) reinforce the climate change dimension || Increase of the pre-allocated envelope for Climate change operations to EUR 4bn || Setting up of regional targets and absorption of the pre-allocated envelope into the overall ceiling || Overall lending volume target + tracking GHG emission reduction

(iv) Increase the impact / policy coherence || Drafting of annual country strategy papers || Update of technical operational regional guidelines in line with MIP of EU external financial instruments || Update of technical operational regional guidelines in line with MIP of EU external financial instruments

5. Section 5: Analysis of impacts of retained policy options

It should be noted that it is not possible to provide throughout quantitative estimates of the impacts of each option as the latter will depend on the implementation of the Decision by the EIB and in particular on the selection and implementation of each project benefiting from the EU guarantee. Indeed, as stated in the legal basis, the regional ceilings mentioned in section 4 are indicative. They do not represent target volume. While, as mentioned in section 2, the implementation of the Decision heavily depends on EIB governing bodies decision and on the absorption capacity of the beneficiaries, at project level, EIB activity will also particularly depend on the identification of sound and bankable projects, grants-loans blending opportunities, level of indebtedness of the beneficiary countries, risk analysis, economic and political context, quality of project preparation, capacity of the project promoters, etc. Nevertheless, a qualitative analysis has been carried out while references to data and figures have been provided where possible.

In agreement with the IASG, it has therefore been decided that the core of the assessment would be based on a qualitative analysis of the main impact of each option.

5.1. Definition of the criteria for main impact analysis

A list of criteria has been established by the IASG to assess each option with the view to highlighting their main impacts.

The impacts highlighted below have been defined in relation to operational and specific objectives highlighted in Section 3.

· Support priority policy areas of the EU, including enlargement, neighbourhood and the development of third countries and political impact (objectives a, b and 4).

· Coherence and complementarity with EU external financial instruments and need for co-financing (objectives a and 4).

· Leverage of EIB experience and expertise (objective a).

· Social impact, support to SMEs, local private sector development and microfinance in partner countries (objectives a, 2 and 4).

· Support EU climate action and environmental impact (objectives a, 3 and 4).

· Impact on the Guarantee Fund and on EU budget (objective b).

· Impact on EIB credit risk stance/rating and resources (objectives a, b and 1).

It should be noted that the last two criteria (Impact on the GF and on EU Budget and Impact on EIB credit risk stance and resources) are probably the most important ones as they de-facto set the boundaries within which the Decision can be implemented.

The diagram below summarises le link between these criteria and the specific and operational objectives set out in section 3.

On the basis of the analysis below, the report provides an assessment of the impact of each option in terms of effectiveness, efficiency and coherence in comparison with the baseline scenario. The different options have been qualitatively assessed based on the Commission Services' qualitative appreciations of the likely impact.

Effectiveness means doing the right things, that is setting the right goals and objectives and making sure they are accomplished.

Efficiency means doing things right, in other words it is getting the most from EU resources, taking into account EIB constraints. This encompasses organisational aspects.

Coherence means possibilities to exploit complementarities and synergies in terms of delivery towards achieving the agreed objectives and to avoid negative consequences and overlaps which would adversely affect the implementation of policies.

From the Commission's side, the administrative cost of implementing the options analysed in this section should be equivalent to that of implementing the baseline scenario.

5.2. Main impact analysis of each retained policy option

5.2.1. Option 1 - baseline scenario (no change)

|| Analysis and Assessment

Support priority policy areas of the EU, including enlargement, neighbourhood and the development of third countries and political impact || Following a mid-term review, Decision 1080/2011/EU already enhances the coherence of the EU guarantee and the link with EU policies by notably establishing horizontal high-level objectives, a wider Regional Policy Framework (Annex 4 of the Decision) and technical regional operational guidelines. In addition, Decision 1080/2011/EU mentions that EIB should strive to support indirectly the achievement of the Millennium Development Goals (MDGs) and that an EIB financing objective in developing countries shall be to contribute indirectly to development objectives such as reducing poverty through inclusive growth and sustainable economic and social development. As experience of implementation of the previous decisions has witnessed, this option would however not allow sufficient flexibility to adequately/satisfactorily mirror recent policy developments in a timely manner for instance to align with differentiation policy in the Neighbourhood ("more for more"). Further alignment with EU policy orientations under next MFF could be developed, including through more regular updating of the guidelines in line with the evolution of EU policies throughout the Decision period. The continuation of the EU guarantee as under Decision 1080/2011/EU would not allow for any focus on most value added or less developed countries/regions. The advantage would however be the continuity in EU relations with its external partners and the preservation and support of investment flow to these countries. Finally, the Decision foresees a significantly enhanced reporting and monitoring of development impact, including through the establishment of appropriate performance indicators.

Coherence and complementarity with EU external financial instruments and need for co-financing || Following the mid-term review, Decision 1080/2011/EU emphasised the need to enhance complementarity and coherence of EIB activity under the EU guarantee with EU external instruments. Moreover, it mentions the need to complement the resources of the EIB, where possible, and appropriate, with concessional funds available under the EU budget, both for climate change and development financing. It should be noted that Decision 1080/2011/EU provides the legal basis for the EU guarantee underpinning EIB external financing. However, EU grants which can be combined with EIB financing originate from other legal bases (external instruments such as IPA II, ENI or DCI). In this context, the EU has devoted resources to various facilities in the regions covered by the Decision, such as the WBIF, the NIF, the LAIF, the IFCA and the AIF, where it cooperates with the EIB and other IFIs to promote investments supporting EU policy objectives. The grant resources available under these facilities may be used to leverage EIB loan resources.

Leverage of EIB experience and expertise || The mid-term review of the EIB external mandate, including the report of the SCWP and the external evaluation, concluded that the EIB provides financial value-added mainly through offering large lending amounts with longer maturities and grace periods at attractive conditions which are not available in the market. The additionality was found by the evaluation to be particularly high in public sector operations, notably for infrastructure investments. In the private sector, the longer maturities of EIB loans make them additional particularly in countries with less developed financial markets. Beyond the significant financial contribution provided to borrowers, the EIB contributes positively through its appraisal process, which is based on compliance with EU standards (notably environment and procurement) and the technical and economic expertise of the EIB project staff. However, Decision 1080/2011/EU does not cover potentially relevant areas, where the EIB has some experience, particularly within the EU or in ACP countries, such as explicit support to microfinance. Moreover, the implementation of the mandate shows that particularly in the Neighbourhood, the support to local private sector development and PPPs is challenging due to insufficient creditworthiness of potential beneficiaries. On the latter, several joint Commission-EIB risk sharing initiatives have been developed recently within the EU.

Social impact, support to SMEs, local private sector development and microfinance in partner countries || In line with the objectives of the Decision, EIB external activity under the guarantee has historically mainly provided support to basic infrastructure investments, such as transport, energy and water sanitation – sectors that are key for promoting economic growth and poverty reduction. More recently, support to local private sector development, including SMEs has become one of the three high-level horizontal objectives of Decision 1080/2011/EU, whereas before 2011 it was an explicit priority only for the Southern Neighbourhood region. This sector is key to alleviate unemployment and contribute to a more equal income distribution. Moreover, EIB financing helps attracting increased foreign direct investment, research, innovation and technology transfer, stimulating innovation and job creation in partner countries. Maintaining the status quo does not alleviate the risk of under-development of support to new innovative investment schemes and to micro-SMEs which are a significant source of job creation in Partner countries. Moreover, the current Decision does not envisage any provision for the explicit support to microfinance operations which could support improve households' l