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

(presented by the Commission)

EXPLANATORY MEMORANDUM

1. Introduction

The attached proposal deals with the granting of a Community guarantee to the European Investment Bank (EIB) for lending in the Federal Republic of Yugoslavia (FRY), out of its own resources, by means of amending Council Decision 2000/24/EC of 22 December 1999 [1].

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

Recent developments since autumn 2000 have fundamentally changed the political scenario in FRY and its relationship with the international community. The establishment of a new democratic Federal and Serbian Government, in January 2001, marks the beginning of political and economic reforms in the FRY.

The General Affairs Council agreed, on 9 October 2000, to lift the sanctions applied to Serbia; to extend the activities of the European Reconstruction Agency to Serbia and Montenegro; and to integrate the FRY fully in the Stabilisation and Association process, the political framework for EU relations with the Western Balkans region.

On 12 October 2000, an emergency assistance package of EUR 200 million for FRY/Serbia was announced at the Biarritz European Council. Its implementation by the European Agency for Reconstruction is near its completion. This is being followed by a support programme for FRY/Serbia for the year 2001, under the CARDS Regulation (Council regulation (EC) 2666/2000 [2]). The initial phase of that programme, amounting to EUR 150.8 million, has already been approved. This assistance is combining support for urgent needs with new elements of conditional assistance for medium to longer term development, with allocations mainly in the sectors of energy, health, agriculture and enterprise development, as well as to technical assistance.

[2] OJ L 306, 7.12.2000, p. 1

The next formal step, according to the Stabilisation and Association process, will be the establishing, when the FRY is ready, of a EU-FRY Consultative Task Force, which will assess the reforms and pave the way of an eventual Stabilisation and Association Agreement. In the interim, technical assistance and advice is already being provided, within the above mentioned 2001 CARDS assistance programme.

The new FRY authorities have already established links between the FRY and the IFI's. Membership in IMF was obtained in December 2000 and the FRY became a Member in EBRD in January 2001. After clearance of the FRY's share of outstanding financial obligations of the former Socialist Federal Republic of Yugoslavia (SFRY) with the World Bank, the FRY became a Member of that institution on 8 May 2001. In addition, the EIB has expressed its readiness to lend to the FRY, provided that the corresponding SFRY arrears to the Bank are settled.

The FRY is currently facing severe economic and financial challenges, with difficulties common to transition economies being compounded by the aftermath of armed conflicts and sanctions. As a result, its economy registered a negative annual growth of 9% between 1990 and 1999, reducing the estimated GDP in 1999 to less than half that of 1990. It therefore appears important to develop full EU support of the FRY's reform efforts in financial terms.

On 23 May, the Commission adopted a proposal for a Council Decision providing macro-financial assistance to the FRY. EIB lending would constitute an additional element of the Union's financial support by assisting investment in infrastructure and private sector development.

Following an invitation by the French Presidency of the Council of the EU, the EIB made a first assessment of the urgent needs for investment in the basic infrastructure of the FRY during a mission to the FRY in November 2000. Based on that assessment the Bank has concluded that those needs centre on the sectors of transport and energy. For the transport sector, the EIB has identified investment projects, amounting to in total EUR 447million, that could be part-financed by the Bank in the near term. Adding to this the financing of needed investments in the energy sector, as well as EUR 30 million for projects in Montenegro identified by the EIB earlier, the estimated financing needs of near-term investment projects in the FRY would amount to at least EUR 700 million.

A precondition for EIB lending is the acceptance and clearance of outstanding arrears, stemming from relevant old loans to this part of the former Socialist Federal Republic of Yugoslavia (SFRY). These arrears amounted, on 30 April 2001, to EUR 218 million. The FRY authorities have agreed to assume responsibility for those arrears, including those attributed, within FRY, to the Republic of Montenegro and to Kosovo. On 17 May 2001 a formal agreement between the FRY and the EIB was initialled, wherein the former guarantees the full and punctual fulfilment of the remaining obligations stemming from those old EIB loans to the former Socialist Federal Republic of Yugoslavia, which have been attributed to the FRY. The final signature of that agreement is foreseen to take place before 16 July 2001.

2. The proposal

The present communication puts forward a Commission proposal for the extension to the Federal Republic of Yugoslavia of the general EIB mandate for lending outside the Union laid down in Decision 2000/24/EC.

In order to make the FRY eligible for lending under the general EIB mandate, the mandate and its Central and East European (CEEC) envelope shall be increased by EUR 350 million. This amount corresponds to the estimated near-term need for the financing of investments in infrastructure in the transport and energy sectors in the FRY, recalling that EIB lending in general would amount to at most half of the total financing costs for projects. The amount also appears appropriate, if considering the country's relative size.

The guarantee mandate for the Federal Republic of Yugoslavia shall be fully integrated into the CEEC envelope of the general EIB mandate, which includes the Western Balkans, and no specific regional envelope with a precisely earmarked amount shall be established. The FRY will receive EIB loans as one of the countries entitled to benefit from the CEEC envelope. The target amount for the FRY shall be EUR 350 million; the final amount of lending to the FRY will depend upon the availability of suitable investment projects. This approach will help avoiding that parts of specific regional mandates remain unused at the expiry of the regional mandate, eventually resulting in the lapse of such residual amounts - even when taking account of the automatic extension of the mandate by six months. This is in line with the approach pursued for Bosnia and Herzegovina and the Former Yugoslav Republic of Macedonia at the renewal of the 1997 general lending mandate in December 1999, as well as that used for Croatia when the general mandate was amended in November 2000 [3].

[3] OJ L 285, 10.11.2000, p. 20. There was another amendment in December 2000 (Decision 2000/788/EC), but this concerned Turkey which is not a country under the regional CEEC envelope.

Accordingly, the overall ceiling of the credits to be opened under Decision 2000/24/EC, currently fixed at EUR 19 110 million, together with the ceiling for Central and Eastern Europe, currently fixed at EUR 8 930 million, shall be increased by EUR 350 million to EUR 19 460 million and EUR 9 280 million, respectively. The duration of the Central and Eastern European mandate and that of the overall mandate shall remain unchanged, as shall all the other provisions of the general EIB lending mandate.

As one of the constituent states of the former SFRY the FRY benefited, in the framework of the former Yugoslavia Financial Protocols, from 15 EIB loan contracts, entered into between 1977 and 1990 and concerning large SRFY projects in the power and transport sectors, which after the SFRY's dissolution were attributed to the FRY. As of the end of April 2001, the outstanding amount from these loans is EUR 299 million. Of this amount EUR 218 million constitutes arrears, including interest and penalties.

Pending FRY's assumption of responsibility for the above described arrears, through signing of the Guarantee Agreement between the FRY and the EIB, the Bank has indicated its ability and willingness to extend loans to the FRY, applying the usual EIB loan conditions.

The near-term perspectives for the EIB's operations under the current proposal are, according to the Bank's assessments of November 2000, in basic infrastructure investments, essentially in the transport and energy sectors. These perspectives are in line with, on the one hand, the need to rehabilitate existing infrastructure damaged by the recent conflict and by lack of maintenance in the past decade and, on the other hand, the Bank's comparative advantage in contributing to the financing of infrastructure investments.

The proposal is intended to assist the Federal Republic of Yugoslavia in implementing the necessary political and economic reforms by supporting investment activities in infrastructure and private sector development. The new leadership is committed to democracy and economic reform and the Commission does not have reason to believe that their political line would change in a way which would necessitate the reassessment of the approach chosen by this proposal. However, Article 1 of Decision 2000/24/EC specifying that the EIB's lending under it is "in support of the Community's relevant external policy objectives" gives the Community a safeguard in the event that the Federal Republic of Yugoslavia failed to honour its commitments and obligations to make substantial progress regarding political and economic reform under the EU Stabilisation and Association process [4].

[4] The relevant conditions were set out, under the Regional Approach, in General Affairs Council Conclusions of 29 April 1997 and confirmed, for the Stabilisation and Association process, in COM(99)235 of 26.5.99 and Council Conclusions of 21 June 1999.

3. Budgetary implications

The present proposal for increasing by EUR 350 million the overall ceiling of the credits, together with the ceiling for Central and Eastern Europe, to be opened under Decision 2000/24/EC, in order to extend the Community guarantee granted to the EIB under this Decision to the Federal Republic of Yugoslavia, will have a total impact on the guarantee fund for external actions of EUR 20.48 million.

The duration of the mandate, as part of the general mandate, will end on 31 January 2007. The provisioning for this amount, however, will be spread over the three years 2001 to 2003 to take account of the probable scheduling of loans.

Currently and before taking into account the present proposal, the margin remaining in the reserve for the Guarantee Fund for 2001 stands at EUR 16.80 million, taking into account all external actions already decided or proposed as well as those that can be foreseen with some certainty. The current proposal will bring this margin down to EUR 8.02 million. This leaves still some room for manoeuvre for other external actions during the year.

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

2001/0143 (CNS)

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

THE COUNCIL OF THE EUROPEAN UNION,

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

Having regard to the proposal from the Commission [5],

[5] OJ C , , p. .

Having regard to the opinion of the European Parliament [6],

[6] OJ C , , p. .

Whereas:

(1) Recent political developments in the Federal Republic of Yugoslavia have led to the establishment of democratic governments and the FRY has undertaken commitments to political and economic reform programmes in line with the conditions of the European Union's Stabilisation and Association process for the countries of south-eastern Europe.

(2) On 9 October 2000, the General Affairs Council agreed to lift the sanctions applied to Serbia and to integrate the FRY fully in the Stabilisation and Association process.

(3) The FRY is currently facing severe economic and financial challenges, with difficulties common to the transition economies being compounded by the aftermath of armed conflicts and sanctions.

(4) It is important to demonstrate the European Union's support to the Federal Republic of Yugoslavia at this moment in implementing its political and economic reform programme, by supporting the Federation's investment activities in infrastructure and private sector development.

(5) It is therefore appropriate to provide a guarantee mandate to the EIB to allow it to sign loan operations in the Federal Republic of Yugoslavia

(6) The EIB has indicated its ability and willingness to extend loans from its own resources in the Federal Republic of Yugoslavia, in accordance with its Statute.

(7) EIB lending should be conditional upon clearance in full of all outstanding due financial obligations of all public entities of the Federal Republic of Yugoslavia towards the European Communities and the European Investment Bank and upon the acceptance by the Federal Republic of Yugoslavia of responsibility by way of guarantee of those obligations that are not yet due.

(8) On 31 October 1994 the Council adopted Regulation (EC, Euratom) No 2728/94 establishing a Guarantee Fund for external actions [7], amended by Regulation (EC, Euratom) No 1149/1999 [8].

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

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

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

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

HAS DECIDED AS FOLLOWS:

Article 1

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

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

(a) in the introductory part "EUR 19 110 million" shall be replaced by "EUR 19 460 million";

(b) in the first indent "EUR 8 930 million" shall be replaced by "EUR 9 280 million".

2. In the first indent of paragraph 2, "Federal Republic of Yugoslavia" shall be inserted after Estonia.

3. The following Article shall be inserted:

"Article 1a

1. This Article shall apply to EIB lending in the Federal Republic of Yugoslavia.

2. The Community guarantee shall be conditional upon clearance in full by the Federal Republic of Yugoslavia of the outstanding due financial obligations of all public entities towards the Communities and the European Investment Bank and upon acceptance by the Federal Republic of Yugoslavia of responsibility by way of guarantee of those obligations that are not yet due."

Article 2

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

Done at Brussels,

For the Council

The President

FINANCIAL STATEMENT

1. Title of operation

European Community guarantee for European Investment Bank loans in the Federal Republic of Yugoslavia.

2. Budget heading(s) involved

B0-221. European Community guarantee for loans granted by the European Investment Bank to third countries in Central and Eastern Europe.

3. Legal basis

Article 308 of the Treaty.

4. Description of operation

4.1 General objective

The action is intended to demonstrate the Union's support for the new democratic authorities of the Federal Republic of Yugoslavia, in order to encourage the Federal Republic of Yugoslavia to implement its political and economic reform programme in line with the conditions of the EU Stabilisation and Association process for the countries of south-eastern Europe, in particular, by supporting investment in infrastructure and private sector development.

4.2 Description

The budget entry is intended to provide budgetary back-up for a budget guarantee granted by the European Community to the European Investment Bank to allow for the extension of loan facilities corresponding to EUR 350 million in the Federal Republic of Yugoslavia.

4.3 Period covered and arrangements for renewal

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

5. Classification of expenditure or revenue

5.1 Compulsory/Non-compulsory expenditure

Compulsory expenditure.

5.2 Differentiated/Non-differentiated appropriations

Non-differentiated appropriations.

6. Type of expenditure or revenue

A guarantee to the European Investment Bank.

7. Financial impact

Only if a call is made on the guarantee.

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

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

7.2 Itemised breakdown of cost

Not applicable.

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

Not applicable.

8. Financing of expenditure for operations

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

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

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

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

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

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

9. Measures to verify that guarantee arrangements have been implemented

Appropriate control measures will be put in place, in accordance with the EIB's usual procedures.

Appropriate arrangements will be made to allow the Court of Auditors of the European Community and the European Anti-fraud Office (OLAF) to exercise their mission in relation to this Decision in accordance with the applicable legislation.

10. Elements of cost-effectiveness analysis

10.1 Specific and quantified objectives; target population

- Quantifiable objectives: see point 4 above.

- Target population: The Federal Republic of Yugoslavia..

10.2 Grounds for the operation

- Need for Community financial aid: to assist the Federal Republic of Yugoslavia in implementing its political and economic reform programme in line with the conditions of the EU Stabilisation and Association process for the countries of south-eastern Europe, by supporting the country's investment activities in infrastructure and private sector development.

- Choice of ways and means: the EIB under the Yugoslavia Financial Protocols already extended loans to the Federal Republic of Yugoslavia. It can start operations with the FRY as soon as the FRY has cleared all outstanding and overdue debt obligations towards the Bank and accepted responsibility by way of guarantee of those obligations that are not yet due.

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

10.3 Monitoring and evaluation of the operation

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

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

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

12. Impact on the reserve of the guarantees

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

>TABLE POSITION>

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

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

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12.3 Estimated use of the guarantee reserve by the present proposal [9]

[9] Situation as of 1 June 2001.

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Annotation: The figures for EIB lending already take into account a small, positive correction with this year's first budgetary transfer from the reserve for loans and loan guarantees to the Guarantee Fund for external actions in pursuance of Council Regulation 2728/94 of 31 October 1994, as amended by Regulation 1149/99/EC of 25 May 1999, which stipulates that the Commission must start the payment procedure for lending under a framework facility spread over a number of years (such as EIB mandates and Euratom lending) at the beginning of the financial year. The provisioning for lending under these facilities must be made in annual tranches. The amounts paid into the Fund will be corrected by the difference recorded on 31 December of the previous year between the estimates that were taken as a basis for the previous payment and the actual figure of the loans signed during the year.