[pic] | COMMISSION OF THE EUROPEAN COMMUNITIES |

Brussels, 22.06.2006

SEC(2006) 789

COMMISSION STAFF WORKING DOCUMENT

Annex 2 to theREPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND TO THE COUNCIL On operations conducted under the External Lending Mandates of the EIB and future outlook Analysis of EIB operations under the External Lending Mandate 2000-2006 {COM(2006) 323 final}

COMMISSION STAFF WORKING PAPER

On operations conducted under the External Lending Mandates of the EIB and future outlook

Analysis of EIB operations under the External Lending Mandate 2000-2007

Table of contents

1. Introduction 4

2. Legal and institutional framework 5

2.1. Legislation in force 5

2.2. Guarantee system 6

2.2.1. Blanket guarantee 6

2.2.2. Risk-sharing 7

3. Overview of the Bank’s operations outside the EU under the mandate 7

3.1. Summary of operations 7

3.2. Progress towards the risk-sharing objective 9

3.2.1. Overview 9

3.2.2. Regional variations in risk-sharing within the framework of the mandate 2000-2007 9

3.3. Support for EU policies 11

3.3.1. Support for SMEs 11

3.3.2. Sustainable development and environment 12

3.3.3. Health and education 12

3.3.4. Regional cooperation 12

3.3.5. Reconstruction 13

3.3.6. Disaster relief 13

3.4. Cooperation with Community programmes and other financial institutions 13

3.4.1. South-Eastern Neighbours 15

3.4.2. Mediterranean 17

3.4.3. Latin America and Asia 18

3.4.4. Republic of South Africa 18

3.5. The EIB's instruments 19

4. Evaluation of EIB activity 20

4.1. South Eastern Neighbours 21

4.1.1 Operating environment and constraints 21

4.1.2 Evaluation of projects financed by the EIB 22

4.2. Mediterranean Partner Countries 22

4.2.1 Operating environment and constraints 22

4.2.2 Evaluation of projects financed by the EIB 23

4.3. Latin America and Asia 25

4.3.1 Operating environment and constraints 25

4.3.2 Evaluation of projects financed by the EIB 25

4.4. Republic of South Africa 27

4.4.1 Operating environment and constraints 27

4.4.2 Evaluation of projects financed by the EIB 27

5. Projections to the end of the mandate 28

Table of Annexes

Annex 1: EIB lending activity to the South-Eastern Neighbours 30

Annex 2: EIB lending activity in the Mediterranean countries 46

Annex 3: EIB lending activity in Latin America and Asia 61

Annex 4: EIB lending activity in the Republic of South Africa 76

Annex 5: EIB lending activity in Russia, Ukraine, Moldova and Belarus 80

1. Introduction

This Commission Staff Working Paper is an annex to the Report from the Commission to the European Parliament and the Council which is submitted in accordance with Article 2 of Council Decision 2000/24/EC adopted on 22 December 1999, as amended (the "Decision").

The paper, which covers the period from the beginning of the mandate to 31 December 2005, includes: information on the loan operations and progress made on risk-sharing; an assessment of the operation of the scheme and of co-ordination between the financial institutions operating in the areas concerned; as well as an assessment of the contribution of the lending under the Decision to the fulfilment of the Community's relevant external policy objectives.

The guarantees granted by the Community under the Decision are backed by a Guarantee Fund for external actions established by Council Regulation 2728/94 of 31 October 1994.

This Staff Working Paper is presented in four sections: the first section lists the legal bases and describes the guarantee system as foreseen in the Decision, the second section provides an overview of the operations of the European Investment Bank ("EIB" or the "Bank") under the mandate as at 31 December 2005, the third section gives an evaluation of EIB activity and the fourth section addresses the outlook for the remainder of the mandate period. The paper is complemented by annexes, providing details and assessment of the Bank's operations by region (South-Eastern Neighbours, Mediterranean countries, Latin America and Asia, Republic of South Africa).

The evaluation of EIB activity covers on the one hand the operating environment in the different regions and its impact on the Bank's operation. On the other hand, it present an evaluation of projects financed by the EIB, based on independent ex-post evaluations carried out by the EIB's Operations Evaluation Department.

This paper does not cover the EIB’s activities under its separate Mandates for selected environmental projects in the Baltic Sea basin of Russia under the Northern Dimension (Council Decision 2001/777/EC) and for loans for certain types of projects in Russia, Ukraine, Moldova and Belarus (Council Decision 2005/48/EC). Operations under these Decisions are reported annually to the European Parliament and the Council in the context of the report on borrowing and lending. For the sake of completeness, a list of projects financed under these Mandates is attached in Annex 5.

2. LEGAL AND INSTITUTIONAL FRAMEWORK

2.1. Legislation in force

The legal and institutional framework of the mandate given to the EIB is laid down in:

a) Council Decision 2000/24/EC of 22 December 1999 [1] granting a Community guarantee to the European Investment Bank 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);

b) Council Decision 1999/786/EC of 29 November 1999 [2] granting a Community guarantee to the European Investment Bank against losses under loans for projects for the reconstruction of the earthquake-stricken areas of Turkey;

c) Council Decision 2000/688/EC of 7 November 2000 [3] 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;

d) Council Decision 2000/788/EC of 4 December 2000 [4] amending Decision 2000/24/EC so as to establish a European Investment Bank special action programme in support of the consolidation and intensification of the EC-Turkey customs union;

e) Council Decision 2001/778/EC of 6 November 2001 [5] amending Decision 2000/24/EC so as to extend the Community guarantee granted to the European Investment Bank to cover loans for projects in the Federal Republic of Yugoslavia[6];

f) Council Decision 2005/47/EC of 22 December 2004[7] amending Decision 2000/24/EC to take into account the enlargement of the European Union and the European Neighbourhood Policy;

g) Decision by the EIB Board of Governors of 28 March 2000 authorizing the Bank to lend on the basis of the Council Decision of 22 December 1999, and successive decisions, most recently on 14 April 2005;

h) Guarantee agreement (Contrat de Cautionnement) signed by the Commission and the EIB respectively on 19 July and 24 July 2000 and amended by exchanges of letters signed by the Commission and the EIB respectively on 13 September 2001 and 8 October 2001, on 12 April 2002 and 6 May 2002, and most recently by the Amended and Restated Guarantee Agreement signed by the Commission and the EIB on 30 August and 2 September 2005.

2.2. Guarantee system

Based on the Decision, the current guarantee system has two components: a blanket guarantee and a risk-sharing scheme.

2.2.1. Blanket guarantee

The guarantee is restricted to 65% of the aggregate amount of the credits opened, plus all related sums[8]. Within this aggregate ceiling, defaults on individual loans are de facto covered up to 100%. The guarantee covers all credit risks unless the risk-sharing arrangements apply, in which case the Community Guarantee covers only specific political risks whereas non-political risks are borne and mitigated by the EIB (notably for loans to the private sector). The blanket guarantee refers to the total amount guaranteed without distinguishing between regions.

The overall ceiling of the credits opened is equivalent to EUR 20 060 million. Council Decision 2005/47/EC[9] amended the regional breakdown of the ceiling to create a South Eastern Neighbours region and to include Turkey within this region (including signatures in Turkey from 1 February 2000 onwards). The regional breakdown is as follows:

- South Eastern Neighbours (SEN) | EUR | 9 185 million |

- Mediterranean countries (MED) | EUR | 6 520 million |

- Latin America and Asia (ALA) | EUR | 2 480 million |

- Republic of South Africa (RSA) | EUR | 825 million |

- Turkey Earthquake Reconstruction and Rehabilitation Action (TERRA) | EUR | 600 million |

- EC/Turkey Customs Union Special Action Programme (Turkey SAP) | EUR | 450 million |

The guarantee covers a period of seven years beginning on 1 February 2000 for South Eastern Neighbours, the Mediterranean countries, Latin America and Asia, on 1 July 2000 for the Republic of South Africa, ending for all regions on 31 January 2007 and subject to an automatic extension of six months if, on 31 January 2007, the loans granted by the Bank have not attained the ceilings referred to above. For TERRA, the guarantee covered loans signed during a period of three years from 29 November 1999, to be automatically extended by six months if, on expiry of those three years, the loans signed by the Bank had not attained the ceiling. The commitment period for TERRA terminated on 29 May 2003.

The Bank’s operations within the framework of the Decision support “the Community’s relevant external policy objectives, for investment projects carried out in the South-eastern Neighbours, the Mediterranean countries, Latin America and Asia and the Republic of South Africa." While EU development policy covers a large range of issues, the EIB's lending under the mandate focuses on key areas in support of policy goals. This is considered further in section 3.3. below.

2.2.2. Risk-sharing

The risk-sharing scheme separates the commercial and political risks in the Community guarantee. As stated in the Decision, the EIB should secure where possible adequate non-sovereign third-party guarantees or other security for commercial risks, with the budgetary guarantee in that case covering only specific political risk (currency non transfer, expropriation, war or civil disturbance, and denial of justice upon breach of contract[10]).

The Decision (Article 1.3) invites the Bank “ to aim to cover the commercial risk on 30% of its lending under this Decision from non-sovereign guarantees as far as possible on an individual mandate basis. This percentage shall be expanded upon whenever possible insofar as the market permits .” In a letter dated 31 May 2000 addressed to the President of the Council, the EIB President stated: “ The Bank will, of course, seek to reach an overall level of 30%. However, the Bank cannot commit itself to achieving targets for the use of non-sovereign guarantees on an individual mandate basis, although it will do its best in this respect. ”

Section 3.2. below describes the risk-sharing situation as at 31 December 2005.

3. Overview of the Bank’s operations outside the EU under the mandate

3.1. Summary of operations

This chapter gives a summary and general assessment of all loans signed as of 31 December 2005 pursuant to the Decision, together with a regional and sectoral breakdown of loans. The results are presented separately for SEN (including Turkey SAP and TERRA), MED, ALA and RSA in Annexes 1 to 4.

Table 1 below shows that loan signatures as of 31 December 2005 (i.e. with little more than one year of the duration of the lending mandates to run) have reached 89% of the overall lending ceiling of EUR 20 060 million. Until the end of the mandate period, the EIB expects to utilise all the mandates fully (see table 5).

Table 1: Loans signed as at 31 December 2005

Mandate | Signatures |

Region | Ceiling EUR m | Total EUR m | % of ceiling | Number of loans | Average loan size EUR m |

SEN | 9 185 | 7 817 | 85 | 120 | 65 |

MED | 6 520 | 6 272[11] | 96 | 89 | 70 |

ALA | 2 480 | 1 942 | 78 | 43 | 45 |

RSA | 825 | 757 | 92 | 14 | 54 |

TERRA | 600 | 600 | 100 | 5 | 120 |

Turkey SAP | 450 | 450 | 100 | 5 | 90 |

Total | 20 060 | 17 838 | 89 | 276 | 65 |

The sectoral breakdown in Table 2 below shows that the Communications sector (Transport and Telecoms) accounted for 35% of total lending. Over half of the loans in this sector were granted in the SEN region, with Romania, Bulgaria and Turkey receiving the biggest amounts for the rehabilitation and upgrading of roads and railways, and the construction of motorways (see details in Tables 2 and 3 in Annex 1).

The Water and Miscellaneous sector (including areas such as urban rehabilitation) sector absorbed 20% of total lending, with lending distributed evenly between the SEN and Mediterranean regions. Details are given in Tables 2 and 3 in Annexes 1 and 2. Algeria, Morocco and Romania have been major beneficiaries of EIB lending in this sector.

The Energy sector accounted for 19% of loans granted during the period under review. A major part of this went to the following Mediterranean countries – Egypt, Morocco and Tunisia (see details in Tables 2 and 3 in Annex 2):

Table 2: Sectoral breakdown of loans signed at 31 December 2005

Region | Energy | Communi-cations | Water & Miscell. | Industry & Services | Global loans | Total |

Region | Ceiling EUR million | Total EUR million | Risk Sharing EUR million | Risk Sharing % achieved on mandate alone | Risk Sharing % achieved on mandate and non-mandate |

SEN | 9 185 | 7 817 | 830 | 10.6 | 65.3 |

MED | 6 520 | 6 272 | 601 | 9.6 | 14.6 |

ALA | 2 480 | 1 942 | 1 463 | 75.3 | 80.4 |

RSA | 825 | 757 | 80 | 10.6 | 10.6 |

TERRA | 600 | 600 |

Turkey SAP | 450 | 450 |

EU Mandate Total | 20 060 | 17 838 | 2 974 | 16.7 | 52.1 |

Pre-Accession Facility II | 14 000 | 12 304 | 12 304 |

Med Partnership Facility | 1 000 | 364 | 364 |

Article 18 project* | 500 | 500 |

Outside Mandate Total | 15 000 | 13 168 | 13 168 |

Overall Total | 35 060 | 31 006 | 16 142 |

* Beijing Airport Project

3.3. Support for EU policies

The Decision provides some guidance on specific EU policy goals to be addressed in the different regions through the mandate. Recital 18 makes clear that the principal focus of lending in the candidate countries should be support of the EU’s pre-accession strategy and the facilitation of the enlargement process. The Decision also provides that lending in Latin America should be directed towards projects that serve the interest of both the EU and recipient countries. In the Mediterranean, the policy framework is established by the Euro-Mediterranean Partnership, the Barcelona process and the European Neighbourhood Policy, and implemented under FEMIP. These regionally-specific approaches are considered in more detail in chapter 4 below as well as in the annexes to this paper.

The following broader contributions to EU policy objectives, which are new or more important than in the past, are summarised below.

3.3.1. Support for SMEs

Significant levels of banking sector reform across a number of countries have allowed the EIB to undertake global loan operations to support and promote long-term lending to SMEs, and subsequent job creation, and this form of financing has grown over time. These global loans help to promote industrial investments and the financing of smaller scale urban infrastructure projects promoted by municipalities. They also contribute to the financing of leasing activities and faster cooperation of local intermediaries with international banking groups.

Other initiatives where the EIB supported EU policies towards the SME sector are the Risk Capital Facilities for FEMIP and South Africa. They are considered in more detail in the annexes to this paper.

3.3.2. Sustainable development and environment

Sustainable development has become an important element in the implementation of the mandate, notably in financing investments that facilitate the efficient development and management of local natural resources. Examples include the construction of combined cycle thermal power plant in Albania in 2004 (EUR 40 million), the construction of two natural gas-fired combined-cycle power generation modules in Egypt in 2004 (EUR 160 million), the construction of a wind farm in Morocco in 2004 (EUR 80 million), the cleaning up of the polluted coastal area of Taparura, Tunisia in 2004 (EUR 34 million) and the planting of forests for producing pulpwood in Brazil in 2001 (EUR 33 million). The Bank’s policy was aligned with EU sector priorities (water, energy, health, agriculture and biodiversity) at the Johannesburg World Summit on Sustainable Development of 2002 and the Bank has since been developing instruments to support the Community’s climate change policies. More generally, environmental concerns have been systematically integrated into all projects throughout the project cycle based on EU principles and standards, encouraging promoters, including those from the European private sector, to apply international good practice. A first disbursement under any loan is made only when environmental conditions have been met, in cases where significant issues have been identified during appraisal.

3.3.3. Health and education

In some countries the Bank has recently extended its lending activities to operations in the health and education sectors. These sectors are important for social cohesion and economic development. Examples include the rehabilitation of around 1400 pre-university schools throughout Romania in 2003 (EUR 131 million), the modernisation and expansion of 30 Tunisian hospitals in 2003 (EUR 110 million), support for the educational component of Jordan’s “Plan for Social and Economic Transformation” in 2003 (EUR 40 million), the supply of IT teaching technology for primary schools in Turkey in 2002 (EUR 50 million), the modernisation of regional hospitals in Serbia in 2003 (EUR 50 million) and the construction of eight pre-university schools along with the modernisation of a special school in Serbia and Montenegro in 2005 (EUR 25 million). These operations potentially make a direct contribution to poverty alleviation. Because of the impact debt finance has on public expenditure and macroeconomic development planning, co-ordination with other donors, local counterpart funding and complementary sources of finance are essential. Such projects make it necessary to look at the integration of social and economic policies in a country.

3.3.4. Regional cooperation

While a common feature inside the EU, regional cooperation through large investment projects outside the EU is more difficult to achieve but is nevertheless a key element of sustainable development in any of the EIB’s geographical areas of intervention. Increasingly, regional cooperation is being used by developing countries in order to improve integration into the world economy by addressing trans-boundary problems. Examples include a EUR 100 million loan in 2004 for the construction of a gas pipeline across Jordan to bring Egyptian natural gas to power plants, industry and consumers throughout Jordan and a EUR 36 million loan in 2003 for the financing of the regional power inter-connection of six countries in Central America.

3.3.5. Reconstruction

The Bank's activity in the Western Balkans supports the smooth transition from immediate rehabilitation in the aftermath of conflict to reconstruction and sustainable development. Lessons learnt from past exercises in this field emphasise the prime importance of systematic donor co-ordination, and the work of the Infrastructure Coordination Group in the Western Balkans demonstrates how this can be achieved in practice.

3.3.6. Disaster relief

Following the devastating earthquake of August 1999 in Turkey, the Bank, under the TERRA mandate, has addressed the rehabilitation or reconstruction of basic infrastructure in the region, has supported small businesses that had lost their assets and has helped to prevent the region from further sliding into economic depression during this period of rehabilitation. Particular attention was paid to improving the region’s disaster preparedness by improving safety standards for new construction financed by EIB loans in this earthquake-prone region. Examples include a EUR 230 million loan (complemented by a EUR 2 million grant from the Technical Assistance Fund) in Algeria for the reconstruction of areas hit by the May 2003 earthquake, and an earlier EUR 45 million loan to finance the reconstruction of infrastructure in Algiers damaged by severe flooding in November 2001.

The Bank has also been active in 2005 in supporting projects assisting reconstruction after the Indian Ocean tsunamis of December 2004, against the background of the very large amounts of grants and concessional lending made available to the affected countries by the international community.

3.4. Cooperation with Community programmes and other financial institutions

Given the type of projects which the Bank supports, co-financing is a regular feature, and is usually a necessity, as EIB funding will not cover more than 50% of the project amount, which thus needs to be complemented by counterpart funding or by other donors and International Financial Institutions (IFIs). By these means, EIB financing helps to mobilise domestic resources and in many cases also serves to attract international sources of finance.

The Bank’s interventions in the public sector can require substantial policy changes in order to make large investment projects economically profitable and financially viable. In this case, close co-ordination with other bilateral or multilateral agencies engaged in sector reform in the country is indispensable in order to ensure the desired impact of a joint approach. Capital investment and technical assistance therefore go hand in hand.

By these means the Bank can also draw on the expertise of institutions that are specialised in dealing with broader sectoral and policy issues. Joint action in many cases ensures the positive impact of a sectoral reform and increases the viability of investment projects that, once completed, are then likely to operate within an improved regulatory framework.

In order to foster economic development in the new EU Member States and accession preparation in the EU Candidate and potential Candidate Countries a Memorandum of Understanding was first signed in 2000, and amended in 2003 and 2005, between the European Commission, the EIB, the European Bank for Reconstruction and Development (EBRD), the International Bank for Reconstruction and Development (IBRD), the International Finance Corporation, the Nordic Investment Bank (NIB), the Nordic Environment Finance Corporation and the Council of Europe.

For the Mediterranean countries , a joint Memorandum of Understanding was signed in May 2004 between the European Commission, the EIB and the World Bank to enhance coordination of their activities. In the context of the existing Framework Agreement between the EIB and the European Development Finance Institutions (EDFIs) on Financial Cooperation, a letter of intent aimed at promoting joint financing of projects and programmes within private sector was signed in May 2005. In December 2005, the EIB, the Agence française de développement (AFD) and the KfW Entwicklungsbank (KfW) concluded an agreement designed to strengthen their cooperation in the Mediterranean countries and African, Caribbean and Pacific States in which they operate.

A Memorandum of Understanding between the European Commission, the EIB and the African Development Bank on an enhanced strategic partnership for cooperation in the African countries, including the Maghreb countries and Egypt, was finalised in August 2005.

In December 2004, the EIB entered into a Memorandum of Understanding with the Inter-American Development Bank with a view to improving coordination of their respective activities in Latin America and the Caribbean . Furthermore, in 2005 the Bank also entered into a global guarantee framework loan with COFIDES for co-financing in both Asia and Latin America, a pilot innovative financing structure, which would be replicated with other EDFIs.

In December 2005, a Memorandum of Understanding was concluded between the European Commission, the Black Sea Trade and Development Bank, the EBRD, the EIB, the IBRD, and the NIB on Cooperation for Eastern Europe and Southern Caucasus , Russia and Central Asia .

Table 4 below provides information on the projects financed under the mandate where several financial institutions, in addition to promoters, contribute together to the financing of the total cost of the project. On a total loan amount of EUR 17 838 million granted by the EIB, EUR 7 879 million went to co-financed projects. Details of the cooperation described in Table 4 are given for each of the geographical regions in the annexes.

Table 4: Cofinancings as at 31 December 2005

(EUR million)

Region | Cost | EIB | PHARE/ ISPA | Multilateral Institutions | Bilateral and National Institutions | Balance[14] |

SEN | 9 344 | 3 214 | 1 122 | 1 330 | 881 | 2 797 |

MED | 9 041 | 2 787 | - | 1 292 | 1 182 | 3 780 |

ALA | 12 423 | 1 338 | - | 718 | 2 398 | 7 969 |

RSA[15] | 798 | 50 | - | - | 148 | 600 |

TERRA | 1 286 | 450 | 308 | - | 528 |

Turkey SAP | 96 | 40 | - | 51 | - | 5 |

TOTAL | 32 988 | 7 879 | 1 122 | 3 699 | 4 609 | 15 679 |

3.4.1. South-Eastern Neighbours

In the countries that are candidates for EU membership, the Bank's activities are conducted within the framework of the EU programme to help them prepare for accession, in particular by financing investment aimed at integrating their infrastructure with that of the EU and by assisting SMEs. This paper, and the dedicated annex (Annex 1), largely concentrate on activities within the SEN for the current accession and candidate countries, together with the Western Balkans.

The co-ordination of the Bank's efforts and the Commission's Instrument for Structural policies for Pre-Accession (ISPA)[16] has been particularly important in the past five years in achieving successful implementation of transport and environmental projects through the structuring of appropriate financing plans. Similarly, cooperation with the Commission's PHARE[17] instrument has been strengthened, particularly in the areas of regional development and SME financing. In addition to PHARE assistance during the pre-investment phase to ensure that the necessary studies and technical assistance are implemented in support of EIB projects, the Bank also cooperates with PHARE in co-financing infrastructure projects, as may be seen from table 4 in Annex 1.

The Commission and the Bank are currently co-operating in the implementation of three co-financing schemes (the SME Finance Facility, the Municipal Infrastructure Facility and the Municipal Finance Facility). These schemes combine EIB lending and EU grants (PHARE) to encourage financial institutions active in the new Member States and Accession countries to increase their lending activity for SMEs and municipal investment projects.

In the Western Balkans, close cooperation with IFIs has been key to the EIB’s involvement. There is good co-ordination amongst EU institutions to ensure the best blend of grants and EIB loans, in the framework of the Community Assistance for Reconstruction, Development and Stabilisation Programme (CARDS) of the EU and of the European Agency for Reconstruction (EAR). Most EIB operations in the Western Balkans benefited from the support of the Commission and the EAR for the co-financing of investments – together with other IFIs – and in particular for the funding of the required technical assistance component which is essential to ensure the satisfactory design and implementation of the projects concerned, in view of the difficult institutional and economic context and the relative weaknesses of promoters. Cooperation with the Commission and EAR has been very effective and recent examples are the Apex Global Loans, the European road and Emergency Health project in Serbia and Montenegro (see Annex 1, para. 1.2). The EIB also cooperates closely with the World Bank and EBRD within the framework of the Stability Pact, as well as in identification, appraisal and co-financing of priority projects and sector studies. Within the framework of the Infrastructure Steering Group, a donor co-ordination body, the EIB has taken a lead role.

The combined efforts of the Commission, the Stability Pact and the Infrastructure Steering Group have achieved a high level of co-ordination, in particular as regards projects of regional interest, aimed at facilitating the integration of the countries of the region in a wider European context. In particular, the three main IFIs working in the region, the EIB, EBRD and World Bank, have combined their individual resources and expertise to reach common targets.

Over the past years several projects have been co-financed with World Bank, in different sectors of activity in particular energy (e.g. Electric Power Reconstruction project in Bosnia and Herzegovina) and urban infrastructure (e.g. Municipal Water Infrastructure, Albania). Of particular relevance was the cooperation in the human capital sector, crucial for the improvement of quality of life of the population in the region (e.g. Emergency Health and School upgrading projects in Serbia).

Cooperation with EBRD has been particularly successful over the past few years, not only in terms of volume of co-financing but also in view of the mutual support in monitoring activities. This close cooperation facilitated in several cases satisfactory project implementation, thereby mitigating difficulties deriving from promoters’ weaknesses or uncertain political and economic contexts.

Box 1

Whilst EIB’s bulk of lending has been clearly on infrastructure (transport and energy) and EBRD tended to focus on private sector, the two institutions have combined their expertise in favour of projects in several sectors. Key co-financed operations include:

European Roads project, consisting in the improvement of sections of corridor X motorway between Belgrade and Novi Sad in Serbia and the motorway between Podgorica and Bar in Montenegro ;

An energy project in Albania , consisting of the construction of a new thermal power station in the South (Vlore Thermal Power Station, co-financed also with World Bank);

The construction of a motorway in the South of Albania towards the Greek border (Fier-Tepelene Road project);

I n Serbia and Montenegro , Air Traffic Control project aiming at upgrading and modernizing the air navigation system of the country.

In the Balkans, the EIB has also contributed to supporting the overall planning process. In particular, the EIB was given responsibility for managing several projects and three regional studies, in close cooperation with the European Commission, namely: the Air Traffic Infrastructure Regional Study (ATIRS), the Transport Infrastructure Regional Study (TIRS) and the Adriatic Sea Environmental Master Plan (ASEMP).

3.4.2. Mediterranean

In the Mediterranean, and especially within the framework of FEMIP, the Bank has developed an approach which combines financing with contributions to institution building and policy dialogue to establish favourable conditions for private sector investment, through close co-ordination with other institutions (notably the Commission with programmes such as MEDA[18], and the World Bank).

In order to improve cooperation, the EIB, the World Bank, the Commission and the International Monetary Fund set up the “Luxembourg process” in 2000 and hold bi-annual consultations on lending policies and strategies in the Mediterranean region. Moreover, meetings are organised jointly e.g. the forum on the investment climate in the MED region organised by the EIB, the European Commission and the World Bank in November 2005. In addition, international financial institutions (IFIs) and the European bilateral institutions operating in the Mediterranean are invited to FEMIP meetings.

Recently, the EIB has opened external offices in three Mediterranean Partner Countries (a regional office in Egypt, and local offices in Tunisia and Morocco) with a view to improving cooperation with the host countries as well as with other Multilateral Development Banks and bilateral agencies active in the region and to bring the EIB closer to the borrowers.

Box 2

Over the last few years, relations between the World Bank and the EIB in the Mediterranean region have evolved from ad-hoc cooperation towards a more structured partnership. Detailed work has started on two countries – Jordan and Tunisia - with regular coordination meetings and joint missions.

The following projects have been co-financed by the EIB and the World Bank:

Jordan Education project /Education Reform for the Knowledge Economy (ERfKE). This comprehensive project aims to increase the educational quality and cost-efficiency, and align basic education to the Knowledge Economy by creating life-long learning possibilities. The project assists the educational reform at the levels of governance and administrative organisation, programme and curriculum development as well as education facilities. At facility level, the project comprises the rehabilitation of existing classrooms and the construction of 160 new basic education schools; the EIB loan is to finance 45 new schools throughout Jordan. The USD 380 million project cost is financed through the Jordanian budget, the World Bank, the EIB, the Arab Fund and several bilateral donors. To evaluate project progress and outcome, the EIB liaises on a regular basis with the World Bank and other donors.

Construction of a section of the Amman ring road The Amman Ring Road project /Amman Development Corridor consists in the construction of the first phase of the Amman Ring Road (41km linking the airport highway in the South of Amman to the northern industrial area of Zarqa). The project, which pays a central role in the national road system, will alleviate traffic congestion in downtown Amman and improve safety. The project will also allow for the development of a new area of greater Amman. The project is co-financed through the Jordanian budget, the World Bank, the EIB and the Arab Fund. The EIB and the World Bank project teams have regular contacts to exchange information on project implementation.

In Tunisia , for a global loan in favour of local authorities, the EIB has required the satisfactory compliance with World Bank conditions in terms of performance and reporting fixed under a similar financing scheme with the same intermediary. The intermediary is a public institution, Caisse des Prêts et de Soutien aux Collectivités Locales (CPSCL), which provides long term funding to municipalities. In that context, CPSCL committed in the EIB finance contract to inform all the donors involved (WB, AFD and EIB) of the progress of the WB's project, in particular regarding the financial situation of the municipalities and of the progress in implementing the respective conditions of all the donors as well as to organise an annual joint evaluation meeting of the project.

3.4.3. Latin America and Asia

Projects in ALA are financed within the broad framework of cooperation agreements but are not linked to specific Community assistance programmes.

The Bank has actively promoted co-financing of projects in ALA, both as a means of mobilising additional private capital and as a way of achieving greater leverage from the use of its own resources. EIB's operations are structured, whenever possible, in partnership and in complementarity with IFIs, regional development banks and the banking sector with a view to optimising added value (see Table 5 in Annex 3).

3.4.4. Republic of South Africa

In South Africa the Bank works actively in cooperation with other banks and long-term financing institutions, by means of co-financing (notably with local banks) and lines of credit (notably with local banks and institutions such as the Development Bank of Southern Africa, the Industrial Development Corporation and the Infrastructure Finance Corporation). Close cooperation is maintained with the European Commission, in particular regarding the funding of Black Economic Empowerment (BEE)/SME sectors.

3.5. The EIB's instruments

The EIB’s operations under the mandate have been conducted mainly using the following instruments:

Standard senior loan: this is the EIB’s main product in all regions, with stringent guarantee requirements, as per its Statute. Of particular value are the long maturities of up to 25 years for the financing of infrastructure projects unavailable in local markets. The vast majority of EIB interventions in the Mediterranean Partner Countries (MPCs), the Western Balkans and ALA have been based on such loans.

Global loans: In addition to its standard senior loans and for smaller scale projects with an investment cost of less than EUR 25 million equivalent, the Bank channels long term loans (generally 6-8 years) to small and medium sized enterprises (SMEs), or to local authorities for infrastructure investments, through local intermediary banks and leasing institutions which assume the project risk.

Special FEMIP Envelope (SFE:) In order to support more effectively the private sector needs in the MPCs the SFE was established in 2003 to finance selected private sector operations with a higher risk-profile. In these cases, the Bank accepts on its books relatively higher commercial risks, not covered by a highly rated third party outside the MPCs. The SFE can be used for both standard senior loans and global loans, but so far EIB activity has taken only the form of global loans.

EIB activity under mandate has been complemented by EU budgetary resources, managed by the EIB:

Interest subsidies: In the context of its objectives relating to the environment in the Mediterranean Partner Countries, the European Commission subsidises FEMIP interest rates for environmental projects, thereby enhancing the economic and financial impact of projects. Such subsidies have provided an incentive to MPCs to take appropriate action towards the protection and rehabilitation of the environment, leading to a substantial increase in EIB lending levels in the region’s environmental sector. Through project conditionality, they have further offered the leverage to encourage gradual policy reform.

Technical assistance: In the Mediterranean, loan operations for environmental projects have been supplemented by interest subsidies and limited grants for technical assistance under the Mediterranean Environmental Technical Assistance Programme (METAP)[19]. These activities have been boosted by the establishment of the Technical Assistance (TA) FEMIP Support Fund in 2003, funded by EU budgetary resources, to provide FEMIP with a strong instrument to improve the quality and development impact of its lending operations and by the establishment of the FEMIP Trust Fund in 2004, with commitments from EU Member States, including a contribution from the EU budget.

Risk capital: Provided in the form of equity and/or quasi-equity financing to strengthen private companies’ capital structures and act as a catalyst for joint venture projects. The EIB can also participate in selected venture capital / private equity funds, support micro-finance and help develop the local financial sector. In the Mediterranean, the EIB has also been able to use risk capital from the Community's budget to extend credit and capital investment lines to banks and also to directly invest in private equity funds. In South Africa, the Commission - in consultation with the South African authorities - asked the EIB in 2001 to manage part (EUR 50 million) of its grant-aid programme in the form of a risk-capital financing facility to assist emerging entrepreneurs from the historically-disadvantaged persons ("HDPs") communities, in particular through the provision of equity capital. The results of this scheme, channelled principally through the Industrial Development Corporation of South Africa, have been very encouraging.

In general, a particular effort has been made to develop EIB funding in local currencies, notably in Hungary, Poland, the Czech Republic and South Africa. The EIB's AAA credit rating, together with a relatively well-advanced local currency markets, have enabled the Bank to issue Euro-local currency bonds and to mobilise a corresponding treasury operation, thereby permitting it to denominate its loans to local borrowers in the local currency. This has proved to be particularly useful for projects serving the local market - typically utilities with local currency revenues – that borrow from the EIB for long maturities and are thus able to avoid any foreign exchange risk.

In view of increasing hedging exposure for transactions in several ALA countries, the EIB is also considering issuing bonds denominated in local currencies of the ALA countries. The EIB is also examining the possibility of issuing Euro-local currency bonds in certain Mediterranean countries.

4. EVALUATION OF EIB ACTIVITY

THE OPERATING ENVIRONMENT OF THE BANK’S operations in different regions presents characteristics which impact the development of its activities. The Bank is regularly assessing the economic and social environment of the various countries and regions concerned.

Furthermore, the EIB's Operations Evaluation Department (EV) conducts independent ex-post evaluations of EIB activities. Based on the evaluation of projects financed by the EIB, thematic reports or reports on EIB mandates are prepared. EIB operations are assessed using internationally accepted criteria: relevance, effectiveness, efficiency and sustainability[20]. For each of these criteria, a set of indicators is defined.

EV reports, grouped under thematic heading or under a mandate heading, are presented to the Board of Directors for discussion and posted on the EIB website. This independent mechanism provides accountability, transparency and lessons learned to the public at large. For its activities, EV coordinates with the Evaluation Network of the Commission.

At this stage, it is too early to give a full evaluation of the loans approved under the current mandate as a large number of the underlying projects is currently being implemented or still to be implemented. This is also reflected in the progressive disbursement of the signed loans in line with the evolution of the projects. Nevertheless, in the last two years, EV has published reports on loans (individual loans and global loans) in the Mediterranean region as well as one report on activities under the ALA mandate. EV is currently drafting a report on EIB activities in the Rand area (mainly the Republic of South Africa), the results of which should be available by mid-2006.

The most important features regarding the operating environment as well as the key findings of the EV evaluations are summarized below for each of the regions.

4.1. South Eastern Neighbours

4.1.1 Operating environment and constraints

Four main factors are considered by the Bank to have affected its lending:

- Weaknesses in the institutional framework and administrative, institutional and organisational bottlenecks have limited the absorption capacity of the local markets. Nevertheless, these institutional and structural constraints are viewed as short to medium term problems and the EIB is seeking to support the local administrations so as to reduce their impact over time.

- Budgetary restrictions have led to a selective approach on the part of the authorities when assuming additional borrowings.

- This constraint was exacerbated by the global economic downturn in the 2000-2002 period which has impacted upon growth rates in some new Member States and accession countries, though this situation has improved in recent years.

- Finally, further difficulties have also arisen from the continuing shortage of guarantees for sub- sovereign segments in a context of untested legal/regulatory structures, and from the often protracted arrangements when loans are combined with grant resources.

- With the exception of Slovenia, EIB activities in the Balkan successor states to former Yugoslavia resumed in the late 1990s and early 2000s: in 1998 for the FYR of Macedonia, in 2000 for Bosnia and Herzegovina and in 2001 for the two major countries - Croatia and the Federation of Yugoslavia (Serbia and Montenegro). After an almost 10 year absence – EIB operations in former Yugoslavia were suspended in 1991 – the Bank's new operations under the SEN Mandate have continued to focus primarily on the reconstruction and rehabilitation of public sector infrastructure, as outlined in the context of the Stability Pact between beneficiary states and the so-called international donors' community (mainly composed of bilateral donors, other IFIs and the European Commission). This activity built a solid basis for enhanced EIB lending in the region in 2003 and 2004.

The investment climate in the Western Balkans remains very volatile with a number of unresolved issues at hand (notably a lack of the rule of law), which represent considerable obstacles to investment. Local public sector institutions are still weak and projects have been difficult to initiate for this reason.

The Bank’s ability to finance private sector operations has been constrained somewhat by the nature of its financing instruments (no risk capital, senior loans only) and the stringent guarantee requirements resulting from the Bank’s Statute. As governments are not willing or able to back up private sector borrowing with sovereign guarantees, prospective private sector promoters are frequently unable to offer a guarantee that meets the Bank’s standards. At the same time, due to the difficult economic situation and the difficulty in finding appropriate intermediaries in poorly functioning banking sectors of the countries in the region, the support of SMEs through global loans has been limited in the early years of the mandate.

Nevertheless in 2002, the Bank started its first risk sharing operation for an industrial sector project in Bosnia and Herzegovina and first SME credit facilities (global loans) in Croatia. A further global loan for SMEs (EUR 45 million) was signed in Serbia and Montenegro in 2004. Further risk-sharing loans have been made in 2005 in Bosnia and Herzegovina and in Serbia and Montenegro.

4.1.2 Evaluation of projects financed by the EIB

The lending activities in the Western Balkans are too recent (very few completed projects) for any in-depth evaluation to have taken place. As mentioned above, EIB activities in this region focused on projects in infrastructure sectors that are essential to stimulate economic activities and ensure the development of the Pan-European corridors crossing the region. Support to SMEs through global loans showed satisfactory results in terms of job creation and economic benefits.

Projects in Turkey have been included in the EV reports on the Mediterranean region.

4.2. Mediterranean Partner Countries

4.2.1 Operating environment and constraints

The objective underlying FEMIP, for which the Bank has reinforced its organisation and human resources in recent years, is to help the Mediterranean Partner Countries (MPC) meet the challenges of economic and social modernisation and enhanced regional integration, with a view to the planned creation of a free-trade area between Europe and the MPCs by 2010. FEMIP has focused primarily on developing the private sector and projects that help to create an environment that is conducive to private investment. FEMIP also continued to finance infrastructure projects that will encourage economic development and improve the quality of life, by extending its remit to cover the health and education sectors. Lastly, FEMIP has provided technical assistance for the design of projects and reforms in different economic sectors.

In most MPCs, a very substantial share of investment in infrastructure, natural resources and even industry remains in the hands of governments. There are a number of factors to be overcome to develop private sector lending: the weaknesses of local financial markets, the inadequate business environment, the threat of social and political unrest and the lack of guarantees meeting the EIB’s requirements. In some cases, MPCs have preferred to reserve EIB resources for public sector projects where risk-sharing is not possible, leaving private sector projects to be funded by the EIB totally outside the mandate or simply from other sources. Resources under the mandate are limited and it is hard to find funds of this magnitude with financial conditions as favourable as those of the EIB on the market. This has meant that private sector operations under mandate (the key objective under FEMIP) make up a smaller proportion of total operations than would be desired.

There are a number of areas or circumstances (financing of projects by local and/or small-scale promoters; local-currency operations; guarantees; lines of credit to private banks; ...) where risk capital, applied to a varied range of instruments, and grants for technical assistance and investment support are particularly useful in meeting the needs of the private sector and thus contribute significantly to broadening the range and further enhancing the added value of EIB operations in MPCs. This is achieved through the risk capital financing managed by the Bank using EU budget resources.

4.2.2 Evaluation of projects financed by the EIB

The following evaluation is based on two EV reports available on the EIB website:

- EIB financing with own resources through individual loans under Mediterranean mandates: http://www.eib.org/Attachments/ev/ev_individual_loans_med_en.pdf

- EIB financing with own resources through global loans under Mediterranean mandates: http://www.eib.org/Attachments/ev/ev_global_loans_med_en.pdf

The EV evaluation examined a sample of 22 individual loans for projects and 10 global loans to financial intermediaries, implemented between 1994 and 2002. The sample was selected ensuring a reasonable spread of the operations across sectors financed and the countries of the region. Due to recent introduction of FEMIP (in 2002), the evaluation could not take stock of the initiatives launched under this framework. A review of FEMIP activities is currently being prepared by the Commission in cooperation with the EIB.

The evaluation analysed the early operational results of the individual projects financed following the four main criteria mentioned above: relevance, effectiveness, efficiency and sustainability. The overall rating of four operations was “good”; 15 were rated “satisfactory”; three were rated “unsatisfactory” while none were rated “poor”. In a nutshell, the results were the following:

Good / Satisfactory | Unsatisfactory / Poor |

Relevance | 22 | - |

Effectiveness | 18 | 4 |

Efficiency | 21 | 1 |

Sustainability | 16 | 6 |

The main evaluation criteria for relevance in the Mediterranean region were the extension and/or reinforcement of national or regional infrastructures as well as the development of the private sector. All the projects evaluated were considered relevant; the infrastructure projects have contributed to covering the basic needs of the population or overcoming substantial bottlenecks for the economic development of the country. Industrial projects supported the development of the private sector in the region. In general, the projects financed have contributed to promoting economic growth and to employment creation.

Four projects were rated "unsatisfactory" regarding effectiveness : two water projects, one energy project and one industrial project. The reason for the unsatisfactory rating of the water projects was that some key project components were not carried out and thus the expected reductions of pollution were only partially met. This shows that the EIB needs to ensure that the key parts of the programme are carried out, even if they are not part of the works financed by the Bank.

For almost all of the projects, the efficiency , measured as the economic rate of return (ERR), was rated as "good" or "satisfactory", only one water project was considered to be "unsatisfactory". The ex-post ERR for most of the energy projects was estimated to be higher than the ex-ante due to the higher than initially expected oil prices, combined with the fact that gas or electricity demand has been similar or higher than expected.

The sustainability of the projects was a major concern in many of the water projects. This is reflected in the less than "satisfactory" rating in four out of the six projects evaluated. The major areas of concern were related to the financial sustainability (low tariffs) and weak managerial and institutional capacity. This shows that quality and impact of EIB activity could be improved by increased transfer of knowledge and experience to borrowers during project design and implementations, and undertaking early corrective action of projects encounter difficulties. This requires closer contacts between EIB and borrowers as well as increased staffing. The EIB already made a step in this direction, with the help of EU budget technical assistance.

Sustainability was rated "satisfactory" or "good" in practically all (except one) energy and transport projects evaluated, mainly due to competent promoters. One industrial project was rated as "poor" because of significantly lower proven reserves of a mine project than expected.

For the evaluation of the global loans, EV looked at their relevance, the performance of the Financial Intermediaries (FI) and at the performance of the global loans.

All global loans were consistent with the objectives of the EU mandates, as well as with national objectives and beneficiaries' requirements and thus rated "good" in terms of relevance . The six global loans targeting SMEs have supported the development of the private sector in the region. The other four global loans targeted small public infrastructures, environment, agricultural development and energy savings projects.

The FI performance was satisfactory in 6 cases out of 8 (while no rating was established for two apex operations signed with multiple FIs). The main problems facing the banking sector in the region is the high proportion of non-performing loans; with one exception, these represented between 22 and 45% of loan portfolios. Despite the challenges faced, all FIs react quickly and positively to economic changes. All except one FI were considered sustainable, the exception being a state-owned, mono-sectoral bank, with heavy, unsustainable, government-driven policies (this bank has now been completely restructured).

The global loan performance is uneven: only half of the operations were good or satisfactory. In two cases, the allocation period had to be significantly increased together with sector eligibility. One specialised global loan (financing environmental projects) was not utilised, the loan product being replaced by grants. In one case, the Bank stopped its disbursements when the FI’s difficulties became too severe (see above).

Both evaluation reports make a number of recommendations in all areas analysed. A recent review of these recommendations showed that most of them had been implemented in the framework of the FEMIP and, more recently, with the effective launch of the reinforced FEMIP (e.g. increased cooperation with other IFIs and with the EC, technical assistance, new financial products, etc.).

4.3. Latin America and Asia

4.3.1 Operating environment and constraints

In spite of the aftermath of the Asian crisis in the early-2000s and the difficulties experienced in Argentina, the ALA mandate has been heavily committed (78% by the end of December 2005). This is a clear indication of a high level of demand for EIB loans, which, due to the limited amounts available under the Mandate, has forced the Bank to ration access to its financing in ALA and in many cases to keep loans substantially below the amount that was requested. The increasing cost of hedging exposure to foreign currencies in countries with medium-high political risk has led the Bank to consider issuing bonds denominated in the local currency in several ALA countries, to enhance the financial value added of its operations with private sector borrowers.

4.3.2 Evaluation of projects financed by the EIB

The following evaluation is based on the EV report available on the EIB website:

- Evaluation of projects financed by the EIB in ALA: http://www.eib.org/Attachments/ev/ev_ala_en.pdf

In 2004, EV published an evaluation of 26 operations (including 24 projects and 2 global loans) financed under the ALA mandates since their start in 1993 until end of 2002. The scope of the mandate was from the outset to finance projects of "mutual interest". Although the term "mutual interest" was not defined precisely, it gave to the ALA Mandate the nature of an instrument of economic cooperation.

Given the nature of the Mandate EIB lending concentrated on countries where there was most Foreign Direct Investment from the EU (Brazil, Argentina, Indonesia and the Philippines). The largest part of the lending has gone to public private partnerships (PPPs), especially in energy and water, followed by industrial and telecom projects. This resulted in a very high proportion of risk-sharing loans.

To assess compliance of the Bank operations with the terms of reference of the Mandates, EV considered that to contribute to mutual interest projects should involve a reciprocal direct and measurable flow of benefits between the EU and one or more ALA Partner Countries.

Based on this interpretation, the EV report concluded that 21 operations out of the 26 reviewed had met the mutual interest criterion as they all involved European companies..

The remaining five operations (all of which in the public sector and signed before 1998), had limited relevance as regards the mutual interest criterion because the EU benefits appear remote and indirect. These five operations can be better classified as contributing to development cooperation rather than to economic cooperation. This reflects the Bank's broader interpretation of the objectives of the mandate that had prevailed in the initial stages of the implementation.

In terms of benefits to the EU, 18 projects out of 26 significantly fostered the development of new business opportunities for European companies and 15 resulted in a substantial transfer of technology and equipment to the partner countries. Concerning the benefits to the Partner Countries concerned, most of the projects contributed significantly to overcome a bottleneck for the economic development and to transfer of know-how and managerial skills (19 out of 26). In addition, about 50% of the projects contributed directly and substantially to greater competition and competitiveness to the improvement of the environment and/or the country living standards, particularly for the poor population.

The evaluation found significant differences in the extent to which projects were effective in achieving their specific objectives, in particular between projects in competitive markets and those in the public sector, including PPPs. Out of the 11 public sector projects, only three achieved or exceeded their initial objectives, while for projects in competitive markets, nine out of 13 achieved the objectives. Concerning the two global loans evaluated, only one achieved its main objectives in terms of financing projects of mutual interest.

As regards efficiency and sustainability , the analysis, based mainly on economic rate of return and on return on equity, shows that the ex-ante assessment was biased towards high returns. The ex-post figures are more evenly distributed, with 38% of projects evaluated rated less than satisfactory in terms of efficiency and four projects considered as non sustainable at the time of the evaluation.

Taking into account the four core evaluation criteria, seven operations were rates "good", ten "satisfactory", eight "unsatisfactory" and one "poor". While project implementation was in general satisfactory, the sustainability rating was quite low, driven mainly by macro-economic downturns in a few countries.

Looking at the EIB's contribution, the report highlighted that the EIB has significantly improved the financial terms of the operations evaluated, mainly thanks to the political risk cover offered by the Community Guarantee, as well as by offering long maturities, low all-in costs, quality stamp, and a non-bureaucratic approach. However, the limited size of the ALA mandates has allowed for covering of only a small part of the potential needs. The access to finance in the ALA countries has experienced significant changes in the period covered by this evaluation. The Bank has had difficulties to adapt its lending strategy to these changes particularly in the private sector, due mainly to product limitations (one important limitation has been recently removed with the extension of political risk cover to breach of contract cover)

4.4. Republic of South Africa

4.4.1 Operating environment and constraints

Since its first democratic election in 1994, South Africa has experienced a stable political environment and has made considerable progress in social and economic transformation. Average GDP growth has improved to 3.4% over the last five years, compared with 2.5% in 1995-99, and the strong domestic demand growth shown in the last few years suggests that the living standards of a larger share of the population are finally improving.

But South Africa’s status as middle-income country (about 2800 USD GNI per capita in 2003) still hides huge disparities in wealth, revenues and access to basic infrastructure. These can only be overcome through stronger sustainable GDP growth of at least 6% p.a. and a continuation of the Government’s Black Economic Empowerment policy. This will require important investments, notably in infrastructure, and the supply of adequate financial resources to finance them.

Despite a well functioning and large financial market, supply of long-term funding is still constrained by the short-term nature of local banks' domestic resources and the constraints they face in accessing international markets due to the risk rating of the country. In those circumstances, the ability of EIB to lend longer term, and in South African rand, explains the strong demand for the Bank's funding. In many instances the Bank’s presence in the financing of a major project has not only given comfort to other more commercial sources of funding, but has also helped to lower the cost of the service provided to the final beneficiaries.

The high demand for the Risk Capital Facility, managed by the Bank on behalf of the Commission, suggests that there is a considerable potential for resources of this type to be used to support the development of small and medium sized enterprises, unable to provide the guarantees required for access to the Bank’s own resources, but fully capable of servicing junior debt or quasi equity funding.

4.4.2 Evaluation of projects financed by the EIB

As mentioned before, an in-depth evaluation of the Bank’s operations in South Africa is currently under way, and final results will be available in due course. The initial findings of the ongoing evaluation show both a positive contribution to the equitable economic development of South Africa, and value-added by the Bank, as summarized below.

Road infrastructure : In 1999, the EIB provided financing for the upgrading and extension of the N3 toll road between Johannesburg and Durban. The project has had a large development impact in boosting economic activity in communities adjacent and near to the highway; it also reduced journey times and improved road safety. The Bank provided a significant part of the funding, at a time when the project was having difficulty raising the necessary funds in the local market: the Bank provided a longer-term loan than available elsewhere, and at a lower cost.[21] There was also some skills transfer from the Bank’s PPP experience in the road sector in Europe. The EIB presence also appears to have been helpful in creating some competition for local banks, and hence keeping their pricing under control. Last not least, the EIB presence helped to mitigate the political risk, i.e. of arbitrary action by the Government.

Global loans/credit lines : The three operations evaluated comprised two with a focus on small and medium scale infrastructure investments and one targeted at SMEs. Two global loans in the sample were to State-owned development banks and one to privately owned commercial banks. The development impact of credit lines was assessed at five levels: macro-economic, financial sector development, institutional development, sub-sector development and at the final beneficiary level. At the macro-economic level, the global loans have increased medium and long-term capital flows to the country, thereby contributing to some strengthening of local financial markets and to private sector development.

The sub-loans used to finance infrastructure projects and programmes were generally successful, particularly those involved in the provision of basic infrastructure that benefits the lower income and disadvantaged communities in South Africa - leading to first-time access to services, SME and micro-enterprise development, and employment. The global loans targeted at SME development and black economic empowerment achieved their objectives and helped make possible projects that might either not have taken place otherwise or would have taken longer to implement: the 10-15 year tenor and denomination in local currency were important aspects of the EIB financing.

5. PROJECTIONS TO THE END OF THE MANDATE

TABLE 5 SHOWS PROJECTIONS MADE BY THE EIB OF LENDING TO THE END OF THE MANDATE PERIOD. The EIB expects that the mandates will be fully utilised. This will imply careful project selection in those mandates which have been heavily used to date (Mediterranean countries, ALA, South Africa) and an expansion of lending under the SEN mandate. The Turkey SAP and TERRA mandates have already been fully used.

Table 5: Projections of lending activity by region

(EUR million)

Region | Signature 2000-2005 | Projections 2006* | Total utilization | Ceilings |

SEN | 7 817 | 1 368 | 9 185 | 9 185 |

MED | 6 272 | 248 | 6 520 | 6 520 |

ALA | 1 942 | 538 | 2 480 | 2 480 |

RSA | 757 | 68+ | 825 | 825 |

TERRA | 600 | 0 | 600 | 600 |

Turkey SAP | 450 | 0 | 450 | 450 |

Total EIB loans under Mandate | 17 838 | 2 222 | 20 060 | 20 060 |

* in fact 31 January 2007

+ to be noted that if necessary for operational reasons, cancelled amounts may be re-utilised. Under no circumstances, however, will overall signatures, net of such cancellations, exceed the mandate ceiling.

ANNEX 1

EIB lending activity to South-Eastern Neighbours

1.1 Objectives and priorities

1.1.1 Accession and Candidate Countries

For the period under review, EIB lending in the Accession[22] and Candidate Countries[23] is operated under

a) the EU-guaranteed mandate, and

b) the Pre-Accession Facility without EU guarantee,

both on EIB own resources.

The emphasis on pre-accession support and European integration is common to both of these lending envelopes. Project eligibility is basically the same under both.

On the basis of Recital 18 of the Decision, the Bank’s lending activity in the Accession and Candidate Countries has effectively supported the Community’s pre-accession policy and hence facilitated the enlargement process. To this end, the Bank’s approach at country and sector level has been closely linked to the EU’s policy priorities and to the needs of the countries concerned with regard to compliance with the acquis communautaire and links with EU infrastructure. The Bank’s activities have been aligned with the appropriate Accession Partnerships and checked against the Commission reports on the progress of the countries. Close cooperation with the Commission has ensured consistency and synergy with the EU’s main financial instruments, including PHARE and ISPA.

EIB lending in support of the enlargement process is focused on the following priorities:

- Regional development;

- Communications infrastructure;

- Natural and urban environment;

- Rational use of energy;

- Private-sector development;

- Health and education.

- The Bank also lends under the TERRA Programme (Turkey Earthquake Reconstruction and Rehabilitation Action) and under the Turkey Special Action Programme (SAP).

1.1.2 Western Balkans

After an initial focus in the early 1990s on urgent rehabilitation of basic infrastructure, EIB activity in the Western Balkans has been centred on the modernisation and upgrading of the infrastructure network, with the particular aim of removing bottlenecks in the national/regional road and rail networks. Transport projects (mainly in road, but also railways, aviation and air traffic facilities), accounted for more than 50% of total loans while energy projects represented some 20% of total lending over the past few years, underlining the strong need for improving basic infrastructure in the countries of the region.

Close cooperation with the European Commission, its European Agency for Reconstruction, the other IFIs active in the area - including in particular the World Bank, the EBRD and Council of Europe Development Bank - as well as bilateral donors, traditionally represents a key feature of EIB activities in the region.

In 2000/2001 the EIB participated in the Quick-Start and Near-Term programmes, in which the European Commission, World Bank and EBRD are also involved. In the following years, the Bank continued to contribute to key investments at national and regional level as a major player in the Regional Infrastructure Steering Group, with special emphasis placed on cross-border regional projects in transport and energy.

1.2 Results and assessment of the operations as at 31 December 2005

Under the mandate, the Bank has signed 130 loan contracts in the South-Eastern Neighbours and Western Balkans for an aggregate amount of EUR 8 867 million by 31 December 2005. There was a strong concentration of lending in a few countries: Romania and Turkey accounted for nearly 60% of EIB lending under mandate in the region; lending in Bulgaria, the Slovak Republic and Croatia accounted for 17%, while Serbia and Montenegro and Bosnia and Herzegovia received 13%. For the other countries, the “pre-accession effect” and the Community aid instruments established since 2000 (SAPARD and mainly ISPA) contributed to slow down the rhythm of signatures of loans guaranteed by the Community. This was accentuated by the creation of the Pre-Accession Facility (outside the mandate and not guaranteed by the Community) and the specific facilities for SMEs and municipalities.

Table 1: Geographical breakdown of EIB lending as at 31 December 2005

LOANS SIGNED |

Country | Number of loans | Amount EUR million | % |

Accession and Candidate Countries |

Bulgaria | 14 | 507 | 6 |

Croatia | 13 | 491 | 5 |

Hungary | 1 | 40 | 0.5 |

Lithuania | 2 | 60 | 1 |

Romania | 30 | 2 782 | 31 |

Slovakia | 9 | 498 | 6 |

Slovenia | 1 | 35 | 0.5 |

Turkey | 16 | 2 035 | 23 |

TERRA | 5 | 600 | 7 |

Turkey SAP | 5 | 450 | 5 |

Subtotal | 96 | 7 498 | 85 |

Western Balkans |

Albania | 6 | 183 | 2 |

FYROM | 1 | 13 | 0 |

Bosnia and Herzegovina | 7 | 296 | 3 |

Serbia and Montenegro | 20 | 877 | 10 |

Subtotal | 34 | 1 369 | 15 |

TOTAL | 130 | 8 867 | 100 |

Table 2: Breakdown by country and sector of EIB lending in the SEN

Regions | Energy | Communi-cations | Water & Miscell. | Industry & Services | Global loans | Total loan signatures |

Country | Year | Description | EUR million | Risk sharing |

Bulgaria | 2000 | Construction of two motorway sections on Pan-European Corridor VII between Sofia and Black Sea | 100 | No |

2000 | Construction of combined (road and rail) bridge on Pan-European Corridor IV between Vidin (Bulgaria) and Calafat (Romania) | 50 | No |

2000 | Global loan for financing of small and medium-scale ventures | 10 | No |

2001 | Rehabilitation of priority national roads | 30 | No |

2001 | Upgrading of Plovdiv-Dimitrovgrad-Svilengrad railway line | 70 | No |

2001 | Financing for small and medium-scale ventures (2 loans) | 30 | Yes |

2002 | Reconstruction and modernisation of port infrastructure and equipment | 17 | No |

2002 | Rehabilitation of electricity distribution sector | 60 | No |

2002 | Financing for small and medium-scale ventures | 10 | Yes |

2003 | Upgrading of main transit roads throughout the country | 60 | No |

2004 | Construction of combined (road and rail) bridge on Pan-European Corridor IV | 20 | No |

2004 | Financing of small and medium-scale ventures | 20 | Yes |

2005 | Financing of small and medium-scale ventures | 30 | Yes |

Total | 507 |

Croatia | 2001 | Rehabilitation and modernisation of Croatian railway section of Pan-European Corridor Vc | 40 | No |

2001 | Technical upgrading of priority sections of national road network | 60 | No |

2001 | Financing for small and medium-scale ventures (3 loans) | 46 | Yes (on 36m) |

2002 | Construction of two stretches of motorway | 60 | No |

2002 | Rehabilitation of motorways | 50 | No |

2002 | Modernisation of air traffic control | 20 | No |

2003 | Expansion and modernisation of Croatian gas transmission system and onshore section of new gas line linking existing network of gas fields in Adriatic Sea and, ultimately, to Italian network | 90 | No |

2003 | Financing for small and medium-scale infrastructure schemes | 50 | No |

2003 2003 | Financing for small and medium scale ventures Financing for small and medium scale ventures | 20 10 | Yes Yes |

2004 | Construction of Zupanja-Lipovac motorway section (Pan-European Corridor X) | 45 | No |

Total | 491 |

Hungary | 2001 | Rehabilitation and upgrading of railway network | 40 | No |

Total | 40 |

Lithuania | 2000 | Renovation and modernisation of port infrastructure at Klaïpeda | 10 | No |

2001 | Construction and upgrading of road sections of Pan-European Corridors (Via Baltica, Via Hanseatica and Vilnius-Klaïpeda motorway) | 50 | No |

Total | 60 |

Romania | 2000 | Upgrading of power transmission network | 96 | No |

2000 | Upgrading of waste collection, processing and disposal facilities and of electricity supply equipment at Port of Constanta | 15 | No |

2000 | Rehabilitation and upgrading of around 650 km of roads | 245 | No |

2000 | Modernisation of 60 trains within Bucharest’s metro system, and safety improvements to partially constructed tunnel | 115 | No |

2000 | Modernisation of tram network in Bucharest | 7 | No |

2000 | Modernisation of ticketing and seat-reservation system and of railway maintenance equipment | 15 | No |

2000 | Rehabilitation and modernisation of urban infrastructure in Bucharest | 110 | No |

2000 | Reconstruction of basic infrastructure damaged by heavy floods and implementation of watercourse management and flood prevention schemes | 250 | No |

2001 | Financing for small and medium-scale ventures (2 loans) | 40 | Yes |

2002 | Reinforcement and upgrading of 745 km of national roads | 240 | No |

2002 | Upgrading of water supply and sewage networks in five municipalities | 55 | No |

2002 | Improvement of navigation conditions in the Danube delta | 38 | No |

2002 | Financing of small and medium-scale ventures and contribution to modernisation of Bank (3 loans) | 50 | Yes |

2003 | Construction of section of new motorway in western Romania, linking towns of Arad and Timisoara, on Pan-European Corridor IV | 200 | No |

2003 | Rehabilitation of around 1400 pre-university schools throughout the country | 131 | No |

2003 | Rehabilitation and equipping of some 100 schools in Bucharest | 112 | No |

2003 | Construction of saw-mill at Sebes (2 loans) | 35 | Yes |

2004 | Upgrading and expansion of sewerage and water supply networks | 29 | No |

2004 | Financing of small and medium-scale ventures (2 loans) | 50 | Yes |

2005 | Investments in support of a comprehensive strategy for health care reform | 66 | No |

2005 | Support for programme to develop the infrastructure in small and medium sized towns | 13 | No |

2005 | Renewal and modernisation of a stretch of railway on TEN IV | 300 | No |

2005 | Reconstruction of flood damaged roads | 300 | No |

2005 | Construction of a motorway section and bypass on TEN IV | 250 | No |

2005 | Financing of small and medium-scale ventures | 20 | No |

Total | 2 782 |

Slovakia | 2000 | Construction of motor vehicle production plant in Bratislava | 160 | Yes |

2000 | Modernisation of telecommunications network | 50 | Yes |

2000 | Global loan for financing of small and medium-scale ventures | 20 | Yes |

2001 | Construction of road bridge over Danube and several sections of urban access roads in Bratislava | 45 | No |

2001 | Realignment and technical upgrading of Hronsky Benadik-Nova Bana and Nova Bana-Rudno and Hronom sections of I/65 | 34 | No |

2002 | Construction and/or rehabilitation of water supply and sewerage infrastructure | 30 | No |

2003 | Nationwide improvements of road infrastructure | 68 | No |

2003 | Modernisation and increase of production capacity of a paper mill in Ruzemberok (Northern Slovakia) | 64 | Yes |

2003 | Construction of motorway section (D61) in south Bratislava | 27 | No |

Total | 498 |

Slovenia | 2001 | Expansion and modernisation of fixed telecommunications network | 35 | Yes |

Total | 35 |

Turkey | 2000 | Extension and modernisation of sewerage network in Bursa, west of Ankara - Bursa su ve Kanalizasyon Isletmesi Buski | 80 | No |

2000 | Industrial pollution abatement schemes, mainly involving upgrading of wastewater treatment plants and reduction of atmospheric pollution | 70 | No |

2000 | Global loan for financing of small and medium-scale ventures | 50 | No |

2001 | Wastewater treatment and sewerage networks in city of Mersin on Mediterranean coast | 60 | No |

2001 | Urban development in Eskisehir | 110 | No |

2001 | Financing for small and medium-scale ventures | 125 | No |

2002 | Upgrading and doubling of some 500km of roads along two priority corridors | 225 | No |

2002 | Supply of IT teaching technology for primary schools | 50 | No |

2003 | Financing for small and medium-scale ventures | 100 | No |

2004 | Construction of tunnel including section under Bosphorus and upgrading of rolling stock and existing rail network | 80 | No |

2004 | First phase of construction of light rail transit system in Bursa | 55 | No |

2004 | Financing for small and medium-scale ventures | 150 | No |

2004 | Financing for small and medium sized ventures | 150 | No |

2005 | Construction of a wastewater treatment plant and rehabilitation of the storm water drainage system. | 30 | No |

2005 | Construction of a tunnel under the Bosphorus | 450 | No |

2005 | Financing of small and medium-scale ventures | 250 | No |

Total | 2 035 |

TERRA | 2000 | Reconstruction of earthquake-damaged urban infrastructure (2 loans) | 300 | No |

2000 | Rehabilitation and reconstruction of earthquake-damaged industrial installations | 75 | No |

2001 | Rehabilitation and reconstruction of industrial installations in earthquake-damaged regions | 75 | No |

2003 | Rehabilitation and reconstruction of earthquake-damaged urban infrastructure | 150 | No |

Total | 600 |

Turkey - SAP | 2002 | Conversion of gas storage installations | 90 | No |

2002 | Improvement of water and sewerage services in medium-sized towns | 40 | No |

2003 | Financing for small and medium-scale ventures | 100 | No |

2004 | Construction of tunnel including section under Bosphorus and upgrading of rolling stock and existing rail network | 120 | No |

2004 | Financing of small and medium-scale ventures | 100 | No |

Total | 450 |

TOTAL ACCESSION AND CANDIDATE COUNTRIES | 7 498 |

Western Balkans |

Country | Year | Description | EUR million | Risk sharing |

Albania | 2000 | Rehabilitation and upgrading of around 86 km of roads on Albania's main north-south corridor | 34 | No |

2001 | Upgrading of power transmission and distribution networks | 30 | No |

2001 | Rehabilitation of basic infrastructure of port of Durrës and reconstruction of breakwater | 17 | No |

2003 | Extension and rehabilitation of water supply and sewerage networks serving 5 municipalities | 27 | No |

2004 | Construction of combined cycle thermal power plant in Vlore | 40 | No |

2005 | Realisation of a new single carriageway road (37 km new alignment and 33 km rehabilitation of existing road) | 35 | No |

Total | 183 |

FYROM | 2003 | Upgrading of several electricity substations and transmission lines | 13 | No |

Total | 13 |

Bosnia and Herzegovina | 2000 | Rehabilitation of electricity transmission and supply networks | 60 | No |

2002 | Modernisation of a cement factory and construction of a new production line | 25 | Yes |

2005 | Financing for small and medium-scale ventures | 20 | Yes |

2005 | Financing for small and medium-scale ventures | 10 | Yes |

2005 | Construction of several sections of railway on the north-south and east-west axes | 86 | No |

2005 | Construction of a stretch of 4-lane highway | 65 | No |

2005 | Financing for small and medium-scale ventures | 30 | Yes |

Total | 296 |

Serbia and Montenegro | 2001 | Rehabilitation of transport infrastructure in Serbia and Montenegro; road repair, reconstruction of breakwater at port of Bar and infrastructure works at Belgrade International Airport | 66 | No |

2002 | Rehabilitation of 860 km of roads and motorways | 95 | No |

2002 | Rehabilitation of principal railway axes. | 85 | No |

2002 | Rehabilitation and modernisation of electricity infrastructure | 70 | No |

2002 | Financing of small and medium-scale ventures | 20 | No |

2003 | Upgrading of urban transport (tramway) and road networks in Belgrade | 90 | No |

2003 | Modernisation of twenty regional hospitals and state-owned Torlak Institute in Serbia | 50 | No |

2003 | Modernisation of power control system of state-owned electricity utility | 22 | No |

2004 | Rehabilitation of existing carriageway between Belgrade and Novi Sad (Pan-European Corridor X) and repair of road section between Podgorica and Bar (Adriatic Coast) (2 loans) | 144 | No |

2004 | Urgent rehabilitation and modernisation of Podgorica and Tivat airports | 12 | No |

2004 | Rehabilitation and upgrading of water supply and wastewater collection and treatment networks in Novi Sad and Nis | 25 | No |

2004 | Financing of small and medium-scale ventures | 45 | No |

2005 | Rehabilitation and modernisation of Air Traffic Control infrastructure | 34 | No |

2005 | Construction of eight pre-university schools and modernisation of a special needs school | 25 | No |

2005 | Financing of small and medium-scale ventures | 20 | Yes |

2005 | Financing of small and medium-scale ventures | 10 | Yes |

2005 | Financing of small and medium-scale ventures | 30 | Yes |

2005 | Financing of small and medium-scale ventures | 25 | Yes |

2005 | Upgrading of roads and bridges | 9 | No |

Total | 877 |

TOTAL WESTERN BALKANS | 1 369 |

TOTAL ACCESSION AND CANDIDATE COUNTRIES, WESTERN BALKANS | 8 867 |

Table 4: Cofinancings (EUR million)

Country | Year | Project | Cost | EIB | PHARE/ ISPA | Multilateral Institutions | Bilateral Institutions | Other |

Accession and Candidate Countries |

Bulgaria | 2002 | Rehabilitation of electricity distribution sector | 153 | 60 | 41 | 52 |

2004 | Construction of combined (road and rail) bridge on Pan-European Corridor IV | 180 | 70 | 70 | 25 | 15 |

Croatia | 2002 | Construction of two stretches of motorway | 177 | 60 | 60 | 57 |

2002 | Rehabilitation of motorways | 112 | 50 | 47 | 15 |

2002 | Modernisation of air traffic control | 47 | 20 | 20 | 7 |

Lithuania | 2001 | Construction and upgrading of road sections of Pan-European Corridors | 153 | 50 | 65 | 38 |

Romania | 2000 | Upgrading of power transmission system | 200 | 96 | 21 | 54 | 29 |

2000 | Rehabilitation of 650km of roads | 491 | 245 | 72 | 174 |

2002 | Reinforcement and upgrading of 745 km of national roads | 480 | 240 | 25 | 215 |

2002 | Upgrading of water supply and sewage networks in five municipalities | 253 | 55 | 163 | 35 |

2003 | Rehabilitation of around 1400 pre-university schools throughout the country | 175 | 131 | 44 |

2004 | Upgrading of sewerage and water supply networks | 120 | 29 | 79 | 12 |

2005 | Investment in support of a comprehensive strategy for health care reform | 168 | 66 | 65 | 37 |

2005 | Support for programme to develop the infrastructure in small and medium sized towns | 39 | 13 | 14 | 7 | 5 |

2005 | Renewal and modernisation of a stretch of railway on TEN IV | 820 | 300 | 500 | 20 |

2005 | Construction of a motorway section and bypass on TEN IV | 680 | 250 | 100 | 330 |

Slovakia | 2002 | Construction and/or rehabilitation of water supply and sewerage infrastructure | 120 | 30 | 60 | 30 |

Slovenia | 2001 | Expansion and modernisation of fixed telecoms network | 75 | 35 | 40 |

Turkey | 2001 | Urban development in Eskisehir | 232 | 110 | 28 | 48 | 46 |

2002 | Upgrading and doubling of some 500km of roads along two priority corridors | 927 | 225 | 315 | 387 |

2005 | Construction of a wastewater treatment plant and rehabilitation of the storm water drainage system | 75 | 30 | 18 | 27 |

2005 | Construction of a tunnel under the Bosporus | 2 000 | 450 | 625 | 925 (inc. 200 EIB loan) |

TERRA | 2000 | Rehabilitation and reconstruction of earthquake-damaged urban infrastructure | 493 | 150 | 79 | 264 |

2000 | Rehabilitation and reconstruction of earthquake-damaged industrial installations | 493 | 150 | 79 | 264 |

2003 | Rehabilitation and reconstruction of earthquake-damaged urban infrastructure | 300 | 150 | 150 |

Turkey SAP | 2002 | Improvement of water and sewerage services in medium-sized towns | 96 | 40 | 51 | 5 |

Total Accession and Candidate Countries | 9 059 | 3 105 | 1 069 | 1 205 | 691 | 2 989 |

Western Balkans |

Albania | 2000 | Rehabilitation and upgrading of about 86km of roads | 71 | 34 | 8 | 20 | 9 |

2001 | Upgrading of power transmission and distribution networks | 191 | 4 | 45 | 96 | 46 |

2001 | Rehabilitation of basic infrastructure of port of Durrës and reconstruction of breakwater | 35 | 17 | 1 | 13 | 2 | 2 |

2004 | Construction of combined-cycle thermal power plant in Vlore | 96 | 40 | 50 | 6 |

2005 | Upgrading and modernisation of a 70km strech of road on the north-south axe | 101 | 35 | 3 | 35 | 28* |

Bosnia and Herzegovina | 2000 | Rehabilitation of electricity networks | 223 | 60 | 70 | 62 | 31 |

2002 | Modernisation of a cement factory and construction of a new production line | 75 | 25 | 25 | 25 |

Serbia and Montenegro | 2001 | Rehabilitation of transport infrastructure | 132 | 66 | 25 | 41 |

2002 | Rehabilitation of 860 km of roads and motorways | 191 | 95 | 75 | 2 | 19 |

2002 | Rehabilitation of principal railway axes | 171 | 85 | 61 | 8 | 17 |

2002 | Rehabilitation and modernisation of electricity infrastructure | 140 | 70 | 53 | 17 |

2005 | Rehabilitation and modernisation of air traffic control system | 112 | 34 | 34 | 44 |

2005 | Construction of eight pre-university schools and modernisation of a special school | 50 | 25 | 13 | 9 | 3 |

2005 | Upgrading of roads and bridges | 79 | 9 | 3 | 14 | 53* |

Total Western Balkans | 1 667 | 599 | 53 | 484 | 190 | 341 |

TOTAL ACCESSION AND CANDIDATE COUNTRIES, WESTERN BALKANS | 10 726 | 3 704 | 1 122 | 1 689 | 881 | 3 330 |

* Could include some further EIB financing

ANNEX 2

EIB lending activity in the Mediterranean countries

2.1 Objectives and priorities

In order to give a new impetus to growth in the Mediterranean Partner Countries (MPCs), the EU Council, in March 2002 in Barcelona, called for a new major initiative for the Mediterranean Region. The EIB answered this call by expanding and restructuring all its operations in the Mediterranean region, and integrating them into the Facility for Euro-Mediterranean Investment and Partnership (FEMIP), launched by the Finance Ministers of the then 15 EU Member States and 12 MPCs[25] at a meeting held in Barcelona on 18 October 2002.

FEMIP’s objective is to help the MPCs meet the challenges of economic and social modernisation and enhanced regional integration, with a view to the planned creation of a free-trade area between Europe and the MPCs by 2010. FEMIP is primarily focussing on development of the private sector, both by providing direct support to private sector enterprises in the region and creating the necessary “enabling environment” for private sector investment. In addition to the more traditional infrastructure and industry sectors, FEMIP has also addressed regional cooperation projects and investment in health and education. It has provided technical assistance for the design of projects and reforms in different economic sectors, and this aspect is being reinforced by a recently established Trust Fund.

The EIB has implemented FEMIP in close cooperation with all participants in the region’s development: the European Commission and the MPCs, the international and local banking community, and multi- and bilateral financial institutions.

All activities of the Bank in the region have taken place under the FEMIP umbrella comprising (for the MED element[26]) of the following financial envelopes:

1. Continuation of EIB's own resources operations under the current guaranteed lending mandate. The EIB’s lending under mandate takes place mainly within the framework of the Euro-Mediterranean Partnership, in support of the economic development of the countries concerned. EIB lending supports individual investment projects and, through the global loan mechanism, smaller projects and SMEs, while at the same time strengthening the financial sector in the various countries.

2. In addition to its lending under mandate and at the request of the Council, the EIB has implemented a programme of lending from its own resources (undertaken under Article 18 of the EIB's Statute), without budgetary guarantee, to finance projects of mutual interest between the EU and MPCs. This financial envelope (EUR 1 billion over the period 2002-2006) was entrusted to the Bank by the Nice European Council in 2000 and is known as the Euro-Mediterranean Partnership Facility (or “Nice Facility”). Until mid-2005 the Bank has lent approximately EUR 400 million under this Facility, with the expectation that operations will accelerate so that the full envelope of EUR 1 billion will be utilised by end-2006. At the Barcelona summit in November 2005, the Heads of State/Government welcomed the EIB’s initiative to create an additional facility (“FEMIP Interim Facility”) of up to EUR 1.5 billion from its own resources to bridge the funding of FEMIP, if needed, in order to guarantee continuity of operations in the region until the renewal of the external mandates.

3. EIB own resources lending is complemented by interest subsidies (for loans in the environmental sector), risk capital and technical assistance funds, all granted by the European Commission under the MEDA budget and managed by the Bank.

In addition to the above-mentioned instruments, in 2003 a “Special FEMIP Envelope” (SFE) was introduced to allow the EIB to undertake selected investments of a greater risk profile than would otherwise have been the case. This envelope is aimed at reinforcing the EIB’s support for the private sector. In 2005, two operations were signed for an amount of EUR 80 million. A third SFE operation was approved in Jordan in 2005 but has not yet been signed, due to hesitations by the Jordanian authorities on the applicability of the Framework Agreement between Jordan and the Bank to purely private sector operations. With a project pipeline up to EUR 80-90 million in estimated capital utilisation, it is foreseen that the first EUR 100 million SFE tranche will be soon fully depleted. A request for an additional EUR 100 million for SFE operations is being submitted to EIB governing bodies.

In 2004, with voluntary contributions from several donors, a FEMIP Trust Fund was established with the goal of contributing to private sector development in the region through the financing of risk capital and technical assistance projects.

2.2 Results and assessment of the operations as at 31 December 2005

The 2nd lending mandate for MED (EUR 6 520 million for the period 2000 to 2007, i.e. annual average of EUR 930 million per year) was a considerable reinforcement (increase of more than 20%) compared to the first lending mandate (EUR 2 310 million for the period 1997-1999, i.e. annual average of EUR 770 million per year).

Global performance under the 2nd mandate, measured by loans signed, has been very satisfactory. The high take-up of loans under the 2nd mandate has been accompanied by a considerable change in the relative share of beneficiaries. The Table 1 below (geographical breakdown of lending during the reference period) shows that loans on own resources were signed in 8 countries, i.e. all of the applicable Mediterranean countries except Israel. Egypt and Tunisia, with a total share of 50%, have been the main beneficiaries of lending under the mandate. The other main beneficiaries are Algeria and Morocco, which were also among the main beneficiaries under the first mandate.

Table 1: Geographical breakdown of EIB lending as at 31 December 2005

LOANS SIGNED |

Country | Number of loans | Amount EUR million | % |

Algeria | 9 | 787 | 13 |

Egypt | 15 | 1 609 | 26 |

Gaza-West Bank | 3 | 58 | 1 |

Jordan | 5 | 226 | 4 |

Lebanon | 6 | 320 | 5 |

Morocco | 20 | 1 078 | 17 |

Syria | 6 | 690 | 11 |

Tunisia | 25 | 1 504 | 24 |

TOTAL | 89 | 6 272 | 100 |

Regarding the sector composition of EIB lending, Table 2 below shows that Water and Miscellaneous, Communications (including road infrastructure) and Energy represent the most important targets for EIB support. The Energy sector already accounted for more than 21% of total lending under the first mandate, but the Communications sector, representing 6% under the first mandate, has increased considerably.

Table 2: Breakdown by country and sector of EIB lending under mandate in the Mediterranean countries

Country | Energy | Communi-cations | Water & Miscell. | Industry & Services | Global loans | Total loan signatures |

Algeria | 2000 | Completion of three sections of east-west motorway, south-west and south-east of Algiers - Banque Algérienne de Développement | 95 | No |

2001 | Completion of drinking water supply network between Taksebt dam and Algiers | 225 | No |

2002 | Construction of a motorway section | 70 | No |

2002 | Construction and operation of a new cement factory (2 loans) | 60 | Yes |

2002 | Improvement of the roadway network in the Algiers neighbourhood | 50 | No |

2002 | Reconstruction following flood damage | 45 | No |

2003 | Reconstruction and repair of infrastructure in areas hit by earthquake | 230 | No |

2004 | Increase in capacity of M'silia cement plant | 12 | Yes |

Total | 787 |

Egypt | 2000 | Rehabilitation and extension of agricultural land drainage networks in Nile valley and delta | 50 | No |

2000 | Global loan for financing of small and medium-scale ventures | 50 | No |

2001 | Construction of natural gas-fired combined-cycle power plant in Cairo | 150 | No |

2001 | Financing for small and medium-scale ventures | 30 | No |

2002 | Construction of a natural gas power plant | 150 | No |

2002 | Extension of the Cairo metro-line | 50 | No |

2003 | Construction of liquefied natural gas plant in Idku, east of Alexandria. | 153 | Yes |

2003 | Construction of second 650MW module for natural gas-fired combined-cycle power plant | 150 | No |

2003 | Modernisation and extension of wastewater collection and treatment network | 55 | No |

2004 | Construction of liquefied natural gas plant (LNG) | 94 | Yes |

2004 | Construction of two natural gas-fired combined-cycle power generation modules | 160 | No |

2004 | Acquisition of Airbus aircraft for fleet renewal | 290 | No |

2004 | Financing for small and medium-scale ventures | 60 | No |

2005 | Construction of a second liquefied natural gas plant | 117 | Yes |

2005 | Construction of two gas pipelines | 50 | No |

Total | 1 609 |

Gaza-West Bank | 2000 | Global loan for financing of small and medium-scale ventures | 10 | No |

2000 | Port Construction | 3 | No |

2005 | Technical improvement and reinforcement of the electricity distribution network | 45 | No |

Total | 58 |

Jordan | 2000 | Construction of manufacturing facilities for bromine and bromine derivatives at Safi, on southern shore of Dead Sea | 30 | No |

2000 | Development of Eshidiya phosphate mine in south-eastern Jordan | 30 | No |

2003 | Construction of Amman ring road | 26 | No |

2003 | Reform of elementary education system and schools in Jordan | 40 | No |

2004 | Construction of gas pipeline across Jordan | 100 | No |

Total | 226 |

Lebanon | 2002 | Extension of port infrastructure | 45 | No |

2004 | Upgrading and extension of sewerage networks | 45 | No |

2004 | Financing of small and medium-scale ventures | 60 | No |

2005 | Two new road investments of national and regional priority | 60 | No |

2005 | Construction of a water purification plant | 60 | No |

2005 | Financing of small and medium-scale ventures | 50 | Yes |

Total | 320 |

Morocco | 2000 | Construction and improvement of rural roads in northern provinces | 53 | No |

2000 | Development of a gold mine in Akka, southern Morocco | 30 | Yes |

2001 | Construction of pumped storage power plant, south-east of Casablanca | 90 | No |

2001 | Construction of two motorways between Sidi El Yamani and Tangier and between Casablanca and El Jadida | 100 | No |

2001 | Improvement of drinking water supply in several Moroccan towns | 50 | No |

2001 | Rehabilitation of hydro-agricultural equipment belonging to Regional Agricultural Development Agencies | 40 | No |

2002 | Increase in the electricity interconnection capacity between Morocco and two of its neighbours (Spain and Algeria) | 120 | No |

2002 | Environment protection | 20 | No |

2003 | Construction of Settat-Marrakesh motorway, completing Casablanca-Marrakesh link constituting first section of North-South route | 110 | No |

2003 | Rehabilitation and extension of sewerage network and construction of first sewage treatment plant in city of Oujda, eastern Morocco | 30 | No |

2003 | Creation and extension of professional training centres in tourism, textiles and information and communications technologies sectors | 30 | No |

2003 | Upgrading of infrastructure of 5 Moroccan ports (Tangiers, Larache, El Jadida, Essaouira and Sidi Ifni) | 14 | No |

2004 | Modernisation and environmental upgrading of thermal power plant | 40 | No |

2004 | Construction of wind farm | 80 | No |

2004 | Upgrading of wastewater collection and treatment works | 20 | No |

2004 | Upgrading of wastewater collection and treatment works | 20 | No |

2004 | Upgrading of areas of unsanitary social housing | 71 | No |

2005 | Improvement of rural roads throughout the country | 60 | No |

2005 | Construction of a section of the Settat-Marakesh motorway, which will form part of the Casablanca-Marakesh link constituting the first section of the North/South link. | 70 | No |

2005 | Financing of small and medium-scale ventures | 30 | Yes |

Total | 1 078 |

Syria | 2002 | Construction and equipping of regional hospitals | 100 | No |

2003 | Upgrading and development o