Proposal for a COUNCIL DECISION amending Decision 2000/24/EC so as to extend the Community guarantee granted to the European Investment Bank to cover loans for projects in Croatia

(presented by the Commission)

EXPLANATORY MEMORANDUM

1. Introduction

On 6 March 1995, the General Affairs Council adopted negotiation directives, put forward by the Commission on 24 February 1995 [1], for the conclusion of an economic and trade agreement including a financial protocol with Croatia. Subsequently, on 10 April 1995 Council authorised the Commission to open negotiations.

[1] SEC(95) 180 of 24.2.1995.

The financial protocol consisted of a special EUR 230 million EIB loan facility for Croatia covering a five-year period from 1 January 1996 to 31 December 2000.

Following the Commission proposal of November 1994 [2], Council on 12 June 1995 adopted Regulation (EC) No 1366/95 [3] amending Regulation (EEC) No 3906/89 in order to extend Phare assistance to Croatia.

[2] COM(94) 526 final of 23.11.1994.

[3] OJ L 133, 17.6.1995, p. 1.

On 4 August 1995, the EU presidency on behalf of the Council announced the suspension of both the negotiations with Croatia on the economic and trade agreement as well as Phare assistance to Croatia due to the start of military operations in Krajina.

Recent developments, following the results of the parliamentary and the presidential elections in early 2000, have fundamentally changed the political scenario in Croatia. The new Croatian leadership is seriously committed to put Croatia on a democratic path and to implement the necessary political and economic reforms, in line with the conditions of the EU Stabilisation and Association process for the countries of South-Eastern Europe, to establish a closer relationship with the EU.

These developments have lead to a reassessment of the EU/Croatia relations. The General Affairs Council on 24 January 2000 adopted a specific statement on Croatia and re-iterated its readiness to help Croatia meeting the challenges it faces in developing a closer relationship with the EU.

On 14 February 2000, after meeting the newly appointed Prime Minister of Croatia, the General Affairs Council invited the Commission to prepare a report on the feasibility of opening negotiations for a Stabilisation and Association Agreement with Croatia. The Commission intends to adopt such a feasibility report by June 2000.

As an important step towards the dynamic development of future relations between the EU and Croatia, the joint EU/Croatia Consultative Task Force (CTF) on 15 February 2000 held its inaugural meeting and endorsed specific recommendations regarding progress on the rule of law and respect for minorities rights, the return of refugees, the cooperation with the International Criminal Tribunal for the former Yugoslavia (ICTY), the democratisation of the media as well as economic policy and reform.

The economic outlook for Croatia in the medium term provides significant policy challenges, which are inter alia reflected in the slight contraction of GDP in 1999 (minus 1%), a significant budget deficit contained only due to revenue from privatisation, a substantial current account deficit and a lack of enterprise restructuring. The government will be called to adopt a coherent and comprehensive economic reform agenda, which among other things will require major changes in the policy mix, with a substantial and painful restructuring of the government budget.

International Financial Institutions supporting the transformation in Croatia include:

- the World Bank Group, which in Croatia currently holds a portfolio of 24 projects amounting to EUR 850 million;

- the European Bank for Reconstruction and Development, which currently holds a portfolio of 33 investments amounting to EUR 560 million;

- the Council of Europe Development Bank, which currently holds a portfolio of two projects amounting to EUR 31 million.

The International Monetary Fund, of which Croatia is member since 1992, provided assistance from 1992 to 1997. Croatia's inoperative extended fund facility arrangement to support the government's medium-term economic reform program for 1997-1999 expired in March 2000. Negotiations on a Stand-By Arrangement failed in 1999, but have been recently resumed and developments are expected by June.

Apart from significant humanitarian aid via ECHO (1995-1999: EUR 293.8 million) and assistance through "Media", "Democracy and human rights", "Demining" and "Customs" (altogether 1995-1999: EUR 9.39 million), financial assistance by the Union to Croatia up to now has rested on Council Regulation (EC) No 1628/96 of 25 July 1996 ("Obnova") relating to aid for Bosnia and Herzegovina, Croatia, the Federal Republic of Yugoslavia and the former Yugoslav Republic of Macedonia [4] (under Obnova, allocations to Croatia between 1995-1999 were EUR 45.61 million). The Commission is presently preparing a new framework for extending grant assistance to the Western Balkans, the so-called Community Assistance for Reconstruction, Development and Stabilisation Programme ("CARDS") [5], which shall establish a single legal basis for assistance and replace the present Obnova and Phare programmes for these countries.

[4] OJ L 204, 14.8.1996, p. 1.

[5] COM(1999) 661 final of 8.12.1999 and COM(2000) 281 final of 10.5.2000.

Contractual relations governing trade and economic cooperation as well as financial assistance are yet to be established with Croatia. Subject to a positive outcome of the abovementioned feasibility report, the Commission will recommend to the Council to authorise the opening of negotiations with Croatia on a Stabilisation and Association Agreement on the basis of negotiating directives. Following the adoption by Council of these negotiating directives, and after the preparation by the Commission of a draft agreement, negotiations with Croatia could commence. The actual process of negotiations is expected to be long-drawn-out due to the complexity of the issues.

Despite the early stages of the renewal of the EU/Croatia relations, it is under the above described conditions crucial to demonstrate the Union's support to Croatia not only in political but also in financial terms, in order to encourage and concretely help the new leadership to implement its political and economic reform programme against the background of a difficult economic and financial situation. The resumption of EIB lending would give a clear political signal in addition to mitigating the initial hardship of economic reform by assisting the country's investment activities in infrastructure and private sector development. Clearly, support by the Community is of the essence for the new leadership to be able to successfully implement the necessary reforms and to achieve increased political stability.

2. The proposal

The present communication puts forward a Commission proposal for the extension to Croatia of the general EIB mandate for lending outside the Union laid down in Council Decision 2000/24/EC of 22 December 1999 [6].

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

In order to make Croatia eligible for lending under the general EIB mandate, the mandate and its eastern European envelope shall be increased by EUR 250 million. The mandate for Croatia shall therefore be of the same order as the one originally set out in the financial protocol adopted by Council in the framework of the negotiation directives in 1996 [7] plus an adjustment allowing for inflation since then (in line with the adjustment made for real stabilisation at the renewal of the 1997 general lending mandate).

[7] This amount came about by splitting the former Yugoslavia Protocol between the different successor states.

The guarantee mandate for Croatia shall, however, be fully integrated into the Central and Eastern European envelope of the general EIB mandate, which includes the Western Balkans, and no specific regional envelope with a precisely earmarked amount shall be established. Croatia will receive EIB loans as one of the countries entitled to benefit from the CEEC envelope. The target amount for Croatia shall be EUR 250 million; the final amount of lending to Croatia will depend upon the availability of suitable investment projects. This approach will help avoiding that parts of specific regional mandates remain unused at the expiry of the regional mandate, eventually resulting in the lapse of such residual amounts - even when taking account of the automatic extension of the mandate by six months. This is in line with the approach pursued for Bosnia and Herzegovina and the Former Yugoslav Republic of Macedonia at the renewal of the 1997 general lending mandate in December 1999.

Accordingly, the overall ceiling of the credits to be opened under Decision 2000/24/EC, currently fixed at EUR 18 410 million, together with the ceiling for Central and Eastern Europe, currently fixed at EUR 8 680 million, shall be increased by EUR 250 million to EUR 18 660 million and EUR 8 930 million, respectively. The durations of the Central and Eastern European mandate and of the overall mandate shall remain unchanged, as shall all the other provisions of the general EIB lending mandate.

As part of the Socialist Federal Republic of Yugoslavia, Croatia in the framework of the former Yugoslavia Financial Protocols benefited from EIB loans amounting to a total of EUR 200 million from loans extended in 1977 and 1990. This amount refers to Croatia's share of large Yugoslavian projects in the power and transport sectors, which after the Yugoslavian split-up were assigned to Croatia.

As of the end of February 2000, the outstanding amount from these loans is EUR 94 million. Croatia is presently regularly servicing its financial obligations from these loans in a timely manner and is fully current on all payments. There are no arrears. Croatia's capacity to service its debt should continue to be good, given its relatively high income level, its record on the capital markets including the fact that it is regularly servicing all its foreign debt, and assuming the implementation of a comprehensive reform programme.

The Bank has indicated its ability and willingness to extend loans in Croatia, applying the usual EIB loan conditions according to its Statute.

The perspectives for the EIB's operations under the current proposal in terms of infrastructure and private sector development are in basic infrastructure and environmental investments, industrial and SME development, housing reconstruction and urban renewal as well as tourism. These perspectives are coherent with the infrastructure projects put forward for Croatia at the Regional Funding Conference of 29/30 March 2000 which was organised by the Commission and the World Bank in liaison with the Stability Pact [8].

[8] For details see the following website: http://www.seerecon.org.

The proposal is intended to assist Croatia in implementing the necessary political and economic reforms by supporting the country's investment activities in infrastructure and private sector development. The new Croatian leadership is committed to democracy and economic reform and the Commission does not have reason to believe that their political line would change in a way which would necessitate the reassessment of the approach chosen by this proposal. However, Article 1 of Decision 2000/24/EC specifying that the EIB's lending under it is "in support of the Community's relevant external policy objectives" gives the Community safeguard in the event that Croatia would not honour its commitments to make substantial progress regarding political and economic conditionality under the EU Stabilisation and Association process [9].

[9] See conclusions of the General Affairs Council of 29 April 1997.

3. Budgetary implications

The present proposal for increasing by EUR 250 million the overall ceiling of the credits, together with the ceiling for Central and Eastern Europe, to be opened under Decision 2000/24/EC, in order to extend the Community guarantee granted to the EIB under this Decision to Croatia, will have a total impact on the guarantee fund for external actions of EUR 14.63 million.

The duration of the mandate, as for any other country in the general mandate, will end on 31 January 2007. The provisioning for this amount, however, will be spread over the four years 2000 to 2003 to take account of the probable scheduling of loans.

The action for Croatia was introduced in the outlook for the provisioning of the guarantee fund following the adoption by Council of the negotiation directives for the conclusion of an economic and trade agreement with Croatia in 1996. The action was suspended before it was completed in Council, but it has still been carried over in the outlook for the guarantee fund since.

Currently and before taking into account the present proposal, the margin remaining in the reserve for the Guarantee Fund for 2000 stands at EUR 27.84 million, taking into account all external actions already decided or proposed as well as those that can be foreseen with some certainty. The current proposal will bring this margin down to EUR 20.53 million. This leaves still some room for manoeuvre for other external actions during the year.

As for the following years, the yearly provisioning required for the current proposal in light of the reserve available in the guarantee fund is manageable, other things being equal.

2000/0122 (CNS)

Proposal for a COUNCIL DECISION amending Decision 2000/24/EC so as to extend the Community guarantee granted to the European Investment Bank to cover loans for projects in Croatia

THE COUNCIL OF THE EUROPEAN UNION,

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

Having regard to the proposal from the Commission [10],

[10] OJ C

Having regard to the opinion of the European Parliament [11],

[11] OJ C

Whereas:

(1) On 6 March 1995, the General Affairs Council adopted negotiation directives for the conclusion of an economic and trade agreement including a financial protocol with Croatia. The financial protocol consisted of a special EUR 230 million European Investment Bank (EIB) loan facility for Croatia covering a five-year period. On 4 August 1995, the presidency of the Council announced the suspension of the negotiations with Croatia on the economic and trade agreement due to the start of military operations in Krajina.

(2) Recent developments, following the results of the parliamentary and the presidential elections in early 2000, have fundamentally changed the political scenario in Croatia. The new Croatian government is fully committed to implementing a political and economic reform programme in line with the conditions of the European Union Stabilisation and Association process for the countries of South-Eastern Europe.

(3) The General Affairs Council of 24 January 2000 adopted a specific statement on Croatia and re-iterated its readiness to help Croatia meeting the challenges it faces in developing a closer relationship with the European Union.

(4) On 14 February 2000 the General Affairs Council invited the Commission to prepare a report on the feasibility of opening negotiations for a Stabilisation and Association Agreement with Croatia. The Commission intends to adopt such a feasibility report by June 2000.

(5) It is crucial to demonstrate the European Union's support to Croatia at this moment in implementing a political and economic reform programme elaborated after the elections of early 2000 in line with the European Union Stabilisation and Association process, by supporting Croatia's investment activities in infrastructure and private sector development.

(6) It is therefore appropriate to provide a guarantee mandate to the EIB to allow it to sign loan operations in Croatia. The EIB has indicated its ability and willingness to extend loans from its own resources in Croatia, in accordance with its Statute.

(7) On 31 October 1994 Council adopted Regulation (EC, Euratom) No 2728/94 establishing a Guarantee Fund for external actions [12], amended by Regulation (EC, Euratom) No 1149/1999 [13].

[12] OJ L 293, 12.11.1994, p. 1.

[13] OJ L 139, 2.6.1999, p. 1.

(8) Council Decision 2000/24/EC [14] grants the EIB a Community guarantee against losses under loans for projects outside the Community (Central and Eastern Europe, Mediterranean countries, Latin America and Asia and the Republic of South Africa).

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

(9) That global guarantee covering the general EIB external lending mandate laid down in Decision 2000/24/EC should be extended to Croatia. The loan ceilings should be increased in order to allow for the extension of corresponding loan facilities to Croatia. Decision 2000/24/EC should therefore be amended accordingly.

(10) The Treaty does not provide, for the adoption of this Decision, powers other than those under Article 308,

HAS DECIDED AS FOLLOWS:

Article 1

Article 1 of Decision 2000/24/EC is hereby amended as follows:

(1) The second sentence of the second subparagraph of paragraph 1 shall be amended as follows:

(a) in the introductory part, "EUR 18 410 million" shall be replaced by "EUR 18 660 million";

(b) in the first indent "EUR 8 680 million" shall be replaced by EUR 8 930 million".

(2) In the first indent of paragraph 2, "Croatia" shall be inserted after "Bulgaria".

Article 2

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

Done at Brussels,

For the Council

The President

FINANCIAL STATEMENT

1. Title of operation

European Community guarantee for European Investment Bank loans in Croatia.

2. Budget heading(s) involved

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

3. Legal basis

Article 308 of the Treaty.

4. Description of operation

4.1 General objective

The action is intended to demonstrate the Union's support to Croatia after the elections of early 2000, in order to encourage Croatia to implement its political and economic reform programme in line with the conditions of the EU Stabilisation and Association process for the countries of South-Eastern Europe, by supporting the country's investment activities in infrastructure and private sector development.

4.2 Description

The budget entry is intended to provide budgetary back-up for a budget guarantee granted by the Community to the European Investment Bank to allow for the extension of loan facilities corresponding to EUR 250 million in Croatia.

4.3 Period covered and arrangements for renewal

The duration of the general EIB external lending mandate laid down by Decision 2000/24/EC shall remain unchanged.

5. Classification of expenditure or revenue

Compulsory expenditure/Non-differentiated appropriations.

6. Type of expenditure or revenue

A guarantee to the European Investment Bank.

7. Financial impact

Only if a call is made on the guarantee.

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

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

7.2 Itemised breakdown of cost

Not applicable.

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

Not applicable.

8. Financing of expenditure for operations

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

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

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

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

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

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

9. Measures to verify that guarantee arrangements have been implemented

In accordance with the EIB's usual procedures including appropriate control arrangements.

10. Elements of cost-effectiveness analysis

10.1 Specific and quantified objectives; target population

- Quantifiable objectives: see point 4 above.

- Population: Croatia.

10.2 Justification of the operation

- To assist Croatia in implementing its political and economic reform programme in line with the conditions of the EU Stabilisation and Association process for the countries of South-Eastern Europe after the elections of early 2000, by supporting the country's investment activities in infrastructure and private sector development.

- Choice of ways and means: the EIB under the Yugoslavia Financial Protocols already extended loans to Croatia. It can start operations as soon as exploratory talks with Croatia will have been completed successfully.

- Main factors of uncertainty which could affect the specific results of the operation: if Croatia would change its political line in a way which would put at risk the honouring of its commitments to make substantial progress regarding political and economic conditionality under the EU Stabilisation and Association process, the action would be suspended or deferred.

10.3 Monitoring of the operation

Performance indicators selected

The Commission information to be submitted to the European Parliament and the Council annually shall include an assessment of the contribution of the lending under the present Decision to the Community's relevant external policy objectives, taking into account the operational objectives and appropriate measurements of their fulfilment to be established by the European Investment Bank for lending under Decision 2000/24/EC.

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

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

12. Impact on the reserve for guarantees

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

>TABLE POSITION>

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

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

>TABLE POSITION>

12.3 Estimated use of the guarantee reserve by the present proposal [15]

[15] Situation as of 1 April 2000.

>TABLE POSITION>

* Annotation: as regards the year 2001 onwards, this statement does not take into account the assumptions of EUR 400 million per year for macro-financial assistance [16] as indicated in recital 21 of Council Decision 97/256/EC. The full realisation of the assumptions of EUR 400 million per year for macro-financial assistance with yearly provisioning requirements of EUR 36 million would result in a remaining margin within the reserve of EUR 3.14 million in 2001, EUR 0.0 million in 2002 and EUR 18.44 million in 2003. For the sake of comparison, macro-financial assistance in 1997 amounted to EUR 460 million, in 1998 to EUR 150 million and in 1999 to EUR 390 million. Furthermore, Council Decision 94/179/EURATOM of 21 March 1994 empowers the Commission to contract borrowings to finance projects to increase the safety and efficiency of nuclear power stations in certain non-member countries or projects relating to the decommissioning of such installations. The authorisation of projects under this Decision could require additional provisioning of up to EUR 36.77 million over the period 2001-2003. Finally, the statement does not take into account the vetoed 1995 EIB special action programme under the Turkey customs union.