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lift* )4 COMMISSION OF THE EUROPEAN COMMUNITIES 
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, :•(',« i Brussels, 27.11.1997 
COM(97) 567 final 
THIRD ANNUAL REPORT FROM THE COMMISSION 
;* ",vi' TO THE COUNCIL, THE EUROPEAN PARLIAMENT. 
THE ECONOMIC AND SOCIAL COMMITTEE 
AND THE COMMITTEE OF THE REGIONS 
"M! THE EUROPEAN ECONOMIC AREA 
FINANCIAL MECHANISM 

I. The Financial Mechanism 
With the objective of stimulating economic cohesion and development between 
the European Economic Area (EEA) regions, a Financial Mechanism to support 
development projects in Greece, Ireland, Northern Ireland, Portugal and parts of 
Spain (the objective 1 regions as defined in 1988) was established on 1st January 
1994 (article 115-116 of the EEA Agreement and Protocol 38). 
Over its five-year life-span, ending 31 December 1998, the Financial Mechanism 
will allocate funds to the beneficiary regions of ECU 500 million in grant aid and 
interest rebates of 2 percentage points per annum on ECU 1.5 billion in loans, 
from the European Investment Bank (EIB). 
Priority should be given to projects which place particular emphasis on the 
environment (including urban development), on transport (including transport 
infrastructure) or on education and training. Among projects submitted by 
private undertakings, special consideration is given to small and medium-sized 
enterprises. 
The Mechanism is administered by the EEB. The EIB appraises each project 
according to financial, economic and technical criteria as well as its compatibility 
with the EU objectives, sectorial policies and environmental regulations and 
standards. 
The EIB then submits proposals to the Financial Mechanism Committee, 
appointed by the participating EFTA States and the Commission, which decides 
on the allocation of the financial resources available under the Mechanism. 
The Mechanism was initially funded by the participating EFTA States. The role 
of the Commission was to give an opinion on the basis of the proposals before 
the approval of the EFTA Financial Mechanism Committee. 
From 1 January 1995, following the accession of the Republic of Austria, the 
Republic of Finland and the Kingdom of Sweden to the European Union, 
Articles 83, 111 and 136 of the act concerning the conditions of this accession 
and the modification to the treaties on which the European Union is founded 
provide that the obligations of the three acceding countries for financing the 
Mechanism as laid down in article 116 of the EEA Agreement are financed out 
of the general budget of the European Communities. 
In consequence, the Commission has become co-responsible for the Mechanism 
in line with Art. 205 of the Treaty whereby the Commission shall implement the 
budget. The Communication by the Commission,adopted on the 30 march 1995 
(C(95) 753), established the operational aspects for dealing with the Financial 
Mechanism within the Commission. 
Following entry into force of the EEA Agreement for the Principality of 
Liechtenstein on 1 May 1995, the Principality now fully participates in the 
Mechanism. 
II. The third annual report 
A first annual report was presented by the Commission to the Council in June 
1995, concerning the activity of the Mechanism during the period from 01.01.94 
to 31.05.1995. 
The second annual report presented the activity concerning the Mechanism 
during the period from 01.01.95 to 30.06.96. 
This third annual report presents the activity from 01.07.96 to 30.06.97. 
1. The activity of the Mechanism up to 30.06.1997 
In June 1997, the Financial Mechanism Committee has adopted the 
Operational Guidelines for the Implementation of the Financial Mechanism in 
agreement with the European Investment Bank. 
Since the creation of the Mechanism up to 30.06.97 the Financial 
Mechanism Committee has approved grant applications to a total of ECU 
309.218 million and interest rebates on a total loan portfolio of ECU 1037.40 
million as follows : 
(MECU) 
APPROVED GRANTS APPROVED 
s LOANS 
Greece 51.498 199.4 
Ireland 22.5 40.0 
Northern Ireland 8J0 0 
Portugal 52_3 260.6 
Spain 174.87 537.4 
TOTAL 1 309.218 | 1037.4 
Grant applications: 
1 ECU Total 
Transport 59 600 000 19.3% 
Environment 179 452 000 58% 
Education 69 045 000 22.4% 
Other | 1071000 0.3% 
22,4% 0.3% 
Loan applications: 58% 19,3% 
H Transport 
• Environment 
E3 Education and training 
E> Other 
I ECU I Total 
Transport 626 260 000 60.4% 
Environment 411 140 000 39.6% 
Education _0 -
o% 
39,6% 
0 Transport 
H Environnement 
• Education and training 
60,4% 
The activity from 01.07.96 to 30.06.97 
The following grant applications, amounting to ECU 161.05 million, were 
approved: 
Greece: 
The Marine Monitoring Network "Poseidon" project: For a marine 
environment monitoring and surveillance system, a grant of 12.5 million 
ECU. The project aims to prevent marine pollution and contribute to the 
protection of the marine ecosystem ; thus encouraging the optimisation of 
commercial fishing and of aquaculture farming production. Tourism will also 
benefit by avoiding possible ecological hazard in waters and particularly 
along the coastal areas where most of the country's tourism infrastructure 
exists. Furthermore, through the fast and effective actions to be taken by the 
port authorities in combating the sea pollution, the project will contribute 
significantly in improving the overall sea transport security. 
The Fire-fighting Equipment: ECU 6.13 million for heavy duty vehicles and 
equipment as a part of a large modernisation programme of the National 
Fire Service. The interest of the project lies in the prevention of damage as 
result of the more rapid and efficient intervention of the Fire Service. 
Urban and Environmental Development in Kalamata: ECU 10.35 million 
for urban improvements, including introduction of an environmentally 
friendly light rail system. The project addresses specific aspects of 
pedestrianisation, limiting traffic in the town centre, improving public 
transport and encouraging tourism. 
Ireland: * 
Technical Education: ECU 22.5 million for investments in 13 educational 
institutions at tertiary level in cofinancing with the European Regional 
Development Fund (ERDF). The project covers the construction of new 
buildings, extensions and modification of existing facilities and provision of 
new equipment at 13 locations in eight cities and towns. The purposes of the 
investments are to meet vocational education and training needs ; provide 
local and national industries with a pool of technically qualified workers and 
technicians; enhance the validity of industrial and business training and to 
improve the capacity of the institutions to assist industry through active 
R&D. 
Portugal: 
Urban Rehabilitation by Local Municipality Councils: ECU 26.8 million 
for rehabilitation of deprived urban areas in 11 local municipalities. 
Spain: 
Environmental Monitoring: ECU 8.27 million for field equipment, 
laboratories and training centre of Spain's nation-wide environmental 
surveillance organisation "Seprona". 
Urban Renewal and Protection of Historical Heritage in Castilla y Lean: 
ECU 33.8 million for urban rehabilitation, including the restoration of the 
cathedrals of Leon, Salamanca and Burgos which are amongst the country's 
historic and cultural landmarks. 
Transport and Urban Environment in Jerez: ECU 15.8 million for 
expansion of existing railway capacity and environmentally motivated re­
routing of tracks, pedestrianisation and landscaping works. It will improve 
the main link from Cadiz to Jerez and its regional airport and is therefore the 
backbone of the regional public transport system. The Jerez project takes 
advantage of the railway works to develop the areas close to the railway 
track. This will bring significant benefits to most of the urban areas adjacent 
to the railway track. 
Urban Renewal in Oviedo: ECU 17.9 million for environmentally motivated 
re-routing of railway tracks, rehabilitation of the main railway station and its 
adjacent areas in co-financing with the ERDF. 
Canary Islands Airports: ECU 7 million for upgrading and expansion of 
facilities at Lanzarote Airport. The project concerns mainly the investment in 
a new terminal of 40 500 m2 and landside access. The capacity of the new 
terminal will allow for 5 million passengers per annum. This investment is 
crucial to the island with its economy depending essentially on tourism. 
The following interest rebate applications, amounting to a total loan 
amount of ECU 488.5 million were approved: 
Greece: 
'ESSI" Motorway: interest rebate on a loan of ECU 156.5 million for the 
Athens ringroad which will connect the new Spata airport. Thé project is 
part of the Patras-Athens-Thessaloniki (PATHE) North South main road 
axis (a TEN priority project) and it will also link the Athens city centre with 
the new Airport. It will also reduce traffic congestion in the Athens 
metropolitan region that has seen extremely rapid growth in vehicle traffic. 
Ireland: 
Irish Roads: Interest rebate on a loan of ECU 40 million for four road 
improvements schemes of the National Roads Authority and local 
authorities. The project covers four important schemes on the national 
primary road network which will improve traffic conditions through greater 
safety and time savings, and help communications between economic 
regions of Ireland and with ports and tourism areas, as well as reducing 
urban traffic congestion. 
Portugal: 
Urban rehabilitation Schemes by Local municipality Councils: Interest 
rebate on a loan of ECU 13.4 million for deprived urban areas in 11 
municipalities, as supplement to the grant assistance mentioned above. 
Oil Products Storage and Multi-Product Distribution Pipeline: Interest 
rebate on a loan of ECU 27.1 million for new storage and distribution 
infrastructure for Central Portugal including .the Lisbon metropolitan area. 
The present project will allow the replacement of an obsolete storage 
complex located in central Lisbon by a new facility located in a low density 
population area. 
Solid Waste Disposal "Valorsul": Interest rebate on a loan of ECU 46.2 
million for a municipal waste incineration plant on the outskirts of Lisbon. It 
will be sited on underdeveloped land in an industrial area alongside the river 
Tagus. Steam produced will be used for electricity generation. 
Solid Waste Disposal "Lipor": Interest rebate on a loan of ECU 46.2 
million for a municipal waste incineration plant on the outskirts of Porto. 
The plant will supply proven incineration technology and comprise two 
incineration lines with large dimension grills, conventional flue gas cleaning 
systems and equipment for steam production and production of electricity. 
Spain: 
Water Infrastructure and Forestry Projects in Galicia: Interest rebate on a 
loan of ECU 26.5 million for 60 water treatment and distribution projects, as 
well as reforestation after forest fires and afforestation of a total of 55000 
ha. 
Urban Renewal in Oviedo: Interest rebate on a loan of ECU 13.0 million for 
the main railway station and its adjacent areas, as supplement to the grant 
assistance mentioned above in co-financing with ERDF. 
Canary Islands Airports: Interest rebate on a loan of ECU 68 million for 
extensions at the airports of Tenerife, Lanzarote and Fuerteventura islands. 
Air transport is obviously vital for Canary Islands, either for access from 
outside or for internal communications. Any bottleneck in this sector would 
therefore have significant repercussions on the whole economy and specially 
on tourism which requires a good/ efficient access by air. 
ICO Environmental Global Loan II: Interest rebate on a loan of ECU 51.6 
million for Instituto de Crédito Oficial, for financing of private and public 
sector small and medium-sized environmental projects. This new global loan 
to ICO would contribute to the protection of the environment and the 
reduction of pollution in Objective 1 areas in Spain. 
2. The Community contribution 
The Act of Accession (Articles 83, 111, 136) specifies that the shares of the 
new Member States in the Mechanism are to be met from the general budget 
of the Communities. On a proposal from the Commission (COM(94) 398), 
the financial perspective has already been reworked accordingly by adding a 
new heading under "Structural Activities". The budget adopted for 1997 
contains a heading with the relevant comments (B2-401). The amount 
forecast for each year is ECU 108 million. 
As far as the actual payments are concerned, taking over the shares of the 
new Member States means complying with the terms of Article 4A of the 
Cooperation Agreement between the EFTA countries and the.EIB_dated 
30 June 1992, as amended by the amending protocol of 18 June 1993. 
In line with these procedures, the contribution for 1997 and the shares 
between the participating EFTA countries and the Commission were decided 
respectively by the Financial Mechanism Committee, in consultation with the 
EIB, on 17 December 1996. These contributions were calculated in 
accordance with the gross national product at market prices using data for the 
last three calendar years and assuming a total annual contribution of ECU 130 
million. 
a)- A total contribution of ECU 130 million for 1997 
At the creation of the Financial Mechanism a first estimate was made 
corresponding to an annual instalment of ECU 130 mill, but during the 
years 1994-1996 initial funding and replenishment of ECU 110 mill, of 
the Financial Mechanism took place as shown in the table below together 
with the aggregated contributions during the same period. 
Article 4 of the Cooperation Agreement states that the EFTA States and 
the Community budget shall deposit the amounts necessary to meet the 
commitment schedules, the consequent disbursements and the associated 
administrative costs of the interest payments and the grants. The Bank 
and the Committee shall review the amount of grants and the interest 
subsidies disbursed in order to determine the amounts of the subsequent 
instalments to be deposited by the EFTA States and the Commission. 
Any amount outstanding at the time of termination of operations shall be 
repaid to the EFTA States and the Community budget. 
On 17 December 1996 the Financial Mechanism Committee decided that 
the contributions from the donors would have to rise accordingly in order 
to meet the final obligations. Even though all the contributions have not 
been used it is important to keep a reasonable contribution to the 
Mechanism account each year in order to be able to match reasonably the 
future final obligations in terms of commitments at the end of 1998. 
An increase from ECU 110 mill, to ECU 130 mill, in the replenishment 
for 1997 will alleviate the final replenishment in 1998. 
b)- The Community contribution 
The cost sharing of the initial funding and replenishment of the Financial 
Mechanism calculated in accordance with the gross national product at 
market prices using data for the last three calendar years is the following: 
Iceland Norway Uechtçnsteîn 
tllllllllMIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIHII 
1 Cotamiinï^ budget from 1^95 Austria Finland Sweden Total 
WM 
MMjujum,;,;,;,! 
Iliiil 1.078 
(0.98 %) 18.436 
(16.76 %) 0.187 
(0.17%) 29.348 20.526 40.425 
(26.68%) (18.66%) (36.75%) 
Total: (82.09%) 110 
1.111 
(1.01 %) 19.063 
(17.33 %) 0.198 
(0.18%) 89.628' 
(81.48 %) 110 
m 1.122 
(1.02 %) 21.604 
(19.64 %) 0.198 
(0.18%) 87.076 
(79.16%) 110 
mm 1.300 
(1.00%) 25.935 
(19.95 %) 0.247 
(0.19%) 102.518 
(78.86 %) 130 
Total 4.611 85.038 0.83 369.521 460 
ECU mill ion 
In consequence, the Commission approved on 27 February 1997 the 
Community budget contribution for 1997 of ECU 102 518 000. 
The credit outstanding at the Mechanism account at the EIB, which has 
not been used yet, bears interest at a monthly rate. 
1 The Commission did not request a transfer of Liechtenstein's reimbursement in August 1995. 
Accordingly, this amount was deducted from the third instalment in 1996. 
10 
3. The Mechanism account at the EIB 
As of 31 December 1996, the balance of the Financial Mechanism account 
was ECU 276 640 719. In summary, the account transactions during the 
second semester of year 1996 were as follows: 
ECU 
Balance as of 30 June 1996 302 326 080 
Crediting 
Accrued interest 
Debiting 
Interest subsidies 
Grant disbursements 
Liaison Officer function cost2 6 100 090 
-14 497 183 
- 16 901 894 
-386 374 
Balance as of SI December 1996 276 640 719 
As of 30 June 1997, the balance of the Financial Mechanism account was ECU 
337 377 385. In summary, the account transactions up to 30.06.97 have been 
the following: 
ECU 
Balance as of 31 December 1996 276 640 719 
Crediting 
Fourth instalment in 1997 130 000 000 
Accrued interest up to 30.06.97 6 499 752 
Debiting 
Interest subsidies - 37 075 188 
Grant disbursements - 38 687 898 
Balance as of 30 June 1997 337 377 385 
2 In the accession agreements for Austria, Finland and Sweden, it is agreed that the budget of the 
European Communities takes over the obligations of the acceding States towards the Financial 
Mechanism. Accordingly, the sharing of the Liaison Officer function costs between the three EFTA 
States and the Commission applies retroactively as from 1995. However, during the first six months 
in 1995 the Liaison Officer function was funded by an intermediate arrangement under which the 
former EFTA States, including the three States acceding to the European Union, covered the costs. 
The new cost sharing arrangements thus applies as from 1 July 1995. 
The Financial Mechanism Committee approved the cost statement for 1995 amounting to 109 680 
ECU and the cost estimate for 1996 amounting to 276 694 ECU. The total amount of 386 374 ECU 
was debited by the EB on 12 July 1996. 
11 
4. Coordination and complementarity with other financial instruments of 
the European Union 
The Commission ensures, within the framework of the partnership, 
coordination and consistency between the projects carried out under the 
Financial Mechanism and measures undertaken by the Structural Funds, the 
Cohesion Fund, the European Investment Bank and the other financial 
instruments of the European Union. 
In that respect, operating rules concerning the combination and overlapping 
of the Financial Mechanism aid with other Community assistance, have been 
clearly defined in the "Operational arrangements" concluded between the 
Commission and the European Investment Bank, on 9 March 1994. 
12 


ISSN 0254-1475 
COM(97) 567 final 
DOCUMENTS 
EN 09 17 
Catalogue number : CB-CO-97-583-EN-C 
ISBN 92-78-26769-4 
Office for Official Publications of the European Communities 
L-2985 Luxembourg 
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