REPORT FROM THE COMMISSION TO THE COUNCIL AND THE EUROPEAN PARLIAMENT relative to the implementation of Council Decision 98/729/EC of 14 December 1998 amending Decision 97/256/EC so as to extend the Community guarantee granted to the European Investment Bank to cover loans for projects in Bosnia and Herzegovina

1. Introduction

The present report is established in the framework of Council Decision 98/729/EC of 14 December 1998 [1] relative to the extension to Bosnia and Herzegovina of the general Community guarantee to the European Investment Bank (EIB) against losses under loans for projects outside the Community laid down in Council Decision 97/256/EC of 14 April 1997 [2].

[1] OJ. L 346 of 22 December 1998, p. 54f.

[2] OJ. L 102 of 19 April 1997, p. 33f.

According to Article 1 paragraph 5 of Decision 98/729/EC the Commission has to submit to the European Parliament and the Council, at the latest by the end of 1999, a report on the implementation of the decision, including an assessment of its impact, and taking into account the evolution of the economic and financial situation in Bosnia and Herzegovina as well as the commitment level of EIB loans.

Due to the reasons specified under point 3 below there was no activity under the Bosnia and Herzegovina envelope until the end of November 1999, at which time it became clear that one loan would be approved by the EIB's Board of Directors before the year-end. It was therefore considered advisable to slightly postpone the present report in order to being able to include this recent development in the implementation of the facility.

2. Legal framework

Council Decision 98/729/EC was made on an exceptional basis and conceived as a special action, in order to enable the EIB to contribute to the international efforts for the reconstruction and improvement of infrastructure in Bosnia and Herzegovina by supporting projects of mutual interest to the Community and the country in general infrastructure, including transport, energy and the environment.

The Decision specifies that

- the Community guarantee to the EIB against losses under loans for projects in Bosnia and Herzegovina is restricted to 70% of the aggregate amount of the credits opened, plus all related sums;

- the overall ceiling for credits opened in Bosnia and Herzegovina is equivalent to EUR100 million.

- the overall ceiling covers a period of two years as from 22 December 1998; if on expiry of this period, the loans granted by the EIB have not attained the ceiling, the period shall be automatically extended by six months.

On 24 March 1999 the EIB's Board of Governors authorised the Bank to lend on the basis of the Council Decision. The guarantee contract between the Commission and the EIB on the general Community guarantee to the EIB against losses under loans for projects outside the Community covered by Council Decision 97/256/EC was correspondingly adapted.

3. Implementation

Article 1 paragraph 4 of Decision 98/729/EC lays down that the Community guarantee shall be conditional upon clearance in full by Bosnia and Herzegovina of its outstanding financial obligations towards the EIB and the Community. In October 1999 Bosnia and Herzegovina settled all its arrears (EUR7.7 million) on the 2 EIB loans granted to Bosnia in 1977 and 1982, within the framework of the former Yugoslavia Financial Protocols [3].

[3] These loans concerned the Power Transmission Network project of 1977 and the Electric Energy Management System project of 1982.

Following the clearance of the loan arrears, the EIB immediately concluded its initial appraisal of a project on the financing of a series of priority investment schemes to improve and rehabilitate Bosnia and Herzegovina's national road network.

The combined cost of the investment schemes submitted to the Bank amount to approximately EUR122 million, of which the Bank will finance EUR60 million. In accordance with Article 1 paragraph 4 of Decision 98/729/EC and pursuing the appropriate procedures, the loan could benefit from an interest rate subsidy of 2% financed from Community budgetary resources under Council Regulation 1628/96 of 25 July 1996 (OBNOVA) [4], as last amended by Regulation 2454/99 of 15 November 1999 [5], relating to aid for Bosnia and Herzegovina, Croatia, the Federal Republic of Yugoslavia and the former Yugoslav Republic of Macedonia.

[4] OJ. L204 of 14 August 1996 p. 1f.

[5] OJ. L299 of 20 November 1999, p.1.

The financing proposal for the project envisages, at this stage, the financing of four sub-projects:

Federation of Bosnia and Herzegovina:

(1) the building of an expressway by-passing Sarajevo to channel traffic in a north-south direction along the E 73 (Pan-European Corridor V) connecting the port of Ploce, Mostar, Sarajevo and Tuzla. Particularly in the summer months, transit traffic is hindered by local city traffic;

(2) the reconstruction of the Capljina bridge located on the Neretva river linking the town of Capljina with the E 73 (Pan-European Corridor V) connecting Mostar to Ploce. The bridge was destroyed during the hostilities, and the provisional single-lane wooden-decked bridge would be replaced by a bridge made of pre-stressed concrete elements;

Republika Srpska:

(3) the building of a portion of an expressway on road E661 (access to Pan-European Corridor X) north of Banja Luka, between Klasnice and Gradiska, providing a link with Croatia and Central and Western Europe. The expressway will replace an existing, overburdened narrow road; or

(4) the rehabilitation of various stretches of roads in the Republika Srpska of primary national and international importance, essentially on Pan-European Corridor V.

The project, in accordance with Article 1 paragraph 4 of the Decision, is of mutual interest to the Community and to Bosnia and Herzegovina in the area of transport infrastructure. It is implemented within the framework of the reconstruction and recovery programme agreed for Bosnia and Herzegovina for the period 1996-99. It strongly assists the reconstruction process in Bosnia and Herzegovina, as it adds additional international very long-term finance which otherwise Bosnia and Herzegovina would be unable to attract.

The financing proposal for the project, an EIB framework loan of EUR60million for Bosnia and Herzegovina's national road network, has been approved by the EIB's Board of Directors on 7 December 1999. Subject to the successful completion of due diligence, the signature of the corresponding loan contracts is expected to take place in early 2000.