REPORT FROM THE COMMISSION TO THE COUNCIL AND THE EUROPEAN PARLIAMENT CONCERNING INTEREST-RATE SUBSIDIES

TABLE OF CONTENTS

INTEREST-RATE SUBSIDIES

1. INTRODUCTION: COUNCIL REQUEST TO THE COMMISSION

2. PART I: PROBLEMS ASSOCIATED WITH INTEREST-RATE SUBSIDIES; POSITIVE AND NEGATIVE EFFECTS

2.1. Reasons for public intervention

2.2. Interest-rate subsidies: positive effects

2.3. Interest-rate subsidies: negative effects

3. PART II: THE LESSONS OF EXPERIENCE

3.1. Action at international level

3.1.1. Loans subsidised by the World Bank

3.1.2. Experience at the Council of Europe

3.2. Member States: measures involving interest-rate subsidies

3.3. Community measures involving interest-rate subsidies

3.3.1. A tentative classification

3.3.2. Community programmes

4. CONCLUSIONS AND RECOMMENDATIONS

ANNEXES: COMMISSION WORKING PAPER ON INTEREST-RATE SUBSIDIES

5. Annex I: INTEREST- RATE SUBSIDIES: COMMUNITY Programmes

5.1. Summary table of programmes

5.2. ECSC subsidised loans (Article 56: industrial conversion)

5.3. Trans-European Networks (TENs)

5.4. Interest-rate subsidies to help certain Member States to participate in the European Monetary System

5.5. Edinburgh facility (SMEs)

5.6. Subsidised loans in the ACP countries

5.7. Interest-rate subsidies linked to EIB loans in the Mediterranean

5.8. ERDF Programme

5.9. EAGGF Programme

5.10. Interest-rate subsidies in the central and eastern European countries - Phare budget

5.11. Exceptional aid for the regions of Italy devastated by the earthquake of 1980

5.12. Exceptional aid to the regions of Greece devastated by the earthquake of 1981

5.13. Exceptional aid for the reconstruction of Kalamata (Greece)

5.14. Aid for the reconstruction of Madeira after the cyclone in 1993

5.15. The Special Support Programme for Peace and Reconciliation in Northern Ireland and the Border Counties

5.16. Interest-rate subsidies under the Financial Mechanism of the European Economic Area

5.17. Interest-rate subsidies for projects in the western Balkans

6. ANNEX II: ANALYSIS OF OPERATIONAL ASPECTS

6.1. Management and control

6.2. Visibility

6.3. Evaluation of Community programmes

6.3.1. Reconstruction programmes

6.3.2. Other programmes

6.4. Compliance with the competition rules

6.5. Final remarks

7. Annex III: INTEREST-RATE SUBSIDIES: ExpErience IN MEMBER STATES

7.1. Italy

7.2. France

7.3. Germany

7.4. Spain

7.5. Sweden

7.6. United Kingdom

8. ANNEX IV: The use of subsidies in the context of EU policies with special reference to soft loans: theoretical considerations

8.1. Introduction

8.2. On the use of subsidies in general

8.3. On the equivalence of different forms of subsidy

8.4. On the suitability of different instruments for one and the same objective

8.5. On the implementation of soft loans

8.6. Conclusion

9. ANNEX V: Macroeconomic Effects of an Interest-Rate Subsidy fOr Firms in the EU

9.1. Introduction

9.2. Assumptions

9.3. Simulation results

INTEREST-RATE SUBSIDIES

1. INTRODUCTION: COUNCIL REQUEST TO THE COMMISSION

In response to the Court of Auditors' Special Report No 3/99 on the management and control of interest-rate subsidies by the Commission (OJ No C 217 of 29 July 1999), the Council "questioned more generally whether interest-rate subsidies are still justified [...] taking into account in particular the cost of effective control measures and the availability of other [...] financial instruments, such as loan guarantees" (doc. 6224/100 rev. 1). Accordingly, it asked the Commission to present as soon as possible "a comprehensive report on the general usefulness of interest-rate subsidies in terms of cost and economic efficiency, in the light of all relevant factors".

This report, which has been drawn up following numerous contacts with the EIB, the national authorities and the different Commission departments responsible for Community spheres of activity where interest-rate subsidies are used, is in two parts: (i) a Commission communication, and (ii) a Commission working paper attached as an annex.

The communication examines the question in its entirety and sets out some general guidelines for future use of interest-rate subsidies.

The Commission working paper is more empirical in nature, describing the operational aspects of the instrument and experience of interest-rate subsidy programmes within the European Union, making a tentative assessment of those programmes and, lastly, examining which financial instrument is more adapted to the objective being pursued.

2. PART I: PROBLEMS ASSOCIATED WITH INTEREST-RATE SUBSIDIES; POSITIVE AND NEGATIVE EFFECTS

2.1. Reasons for public intervention

Interest-rate subsidies are above all transfers of resources to natural or legal persons. Like any transfer, they are generally justified by the public interest, either as a sign of solidarity (e.g. in support of housing policy) or as an instrument of industrial or sectoral policy (e.g. to promote investment in infrastructure or R&D, to promote exports, etc.) or both (e.g. as support for regional policy). It is to be noted that, where the beneficiaries are enterprises, interest-rate subsidies fall within the definition of state aid, itself subject to Article 87(1) of the Treaty.

The point must be made that distortions caused by any form of public intervention may be justified (positive distortions).

Subject to the rules on monitoring aid, intervention by the public authorities may be considered justified where:

(a) the market is failing to provide the requisite financing for non-profitable activities or projects regarded by the public authorities as being necessary to the welfare of the population at large, e.g. TENs, R&D, agriculture and the environment. Also included here are measures to assist less-favoured regions and firms in difficulty.

(b) certain external shocks have to be dealt with, e.g. by way of measures to assist countries/regions affected by natural disasters, etc. or negative externalities.

While these principles justify intervention by the public authorities, they are silent as to the form such intervention should take: interest-rate subsidies, subsidies, guarantees, loans, equity participations, or a combination of all of them- Now, these instruments differ not only in nature and as regards their effects but also in terms of their costs, whether budgetary management or control costs. In view of these particular characteristics, the choice of instrument or form of intervention by the authorities must be a function of the objectives pursued and actual circumstances, even if recourse is had very often to two or more instruments at the same time.

SpECIAL CHARACTERISTICS OF THE INSTRUMENTS FOR PROMOTING INVESTMENT

* Direct grants: // Objective: public-interest projects in general

* Interest-rate subsidies: // Objective: to improve project profitability by reducing financing costs

Example: infrastructures

* Loan guarantees: // Objective: access to credit for high-risk projects

Example: SMEs at the start-up or development stage

* Equity participations: // Objective: risk-sharing and flexibility of return on capital

Example: innovative SMEs

* Tax breaks: // Objective: to improve the profit outlook

Examples: craft sector, SMEs, regions lagging behind

In all cases of such intervention, it is essential that certain conditions regarding control, transparency and effectiveness in relation to the objectives being pursued should be met. This imposes a range of obligations on the public authorities entailing additional administrative costs that must be taken into consideration when the decision to intervene is taken. It must be borne in mind that the follow-up of such operations extends throughout the life of the loan.

2.2. Interest-rate subsidies: positive effects

Ø Interest-rate subsidies have the direct effect of reducing financing costs; indirectly, they have a beneficial effect on the demand for credit, investment and, ultimately, employment. Given their specific characteristics, they are the ad hoc instrument for action by the public authorities to reduce costs, to ease the financing burden and thus to rectify any lack of profitability. They have only an indirect bearing on project risk, for which there are other, more appropriate instruments such as guarantees or risk capital.

Ø Since interest-rate subsidies are tied to loans, they have the advantage over other forms of intervention of imposing the management stringency or discipline that any bank loan requires. Viewed from this angle, there is, in principle, less risk of abuse or misuse of public money than in the case of grants or other forms of aid.

Ø Interest-rate subsidies have a significant financial leverage effect; for example, the EUR92.3 million of subsidies under the SME facility generated just under EUR 1 billion of investment credits. From a budgetary angle, they are therefore a relatively economic tool not simply because limited financial involvement allows substantial volumes of finance to be raised but also because the budgetary commitment can be spread over a fairly long period.

Ø One of the features of the instrument is that, from the outset, the body granting the subsidies knows for certain what its intervention will cost, something which is not the case with other instruments such as guarantees or equity participations.

Ø Although interest-rate subsidies are an instrument of micro-economic policy very different from macro-economic policy instruments such as the interest rate (monetary policy), the effects work through in the same way in both cases: the reduction in the cost of credit has a beneficial effect on economic activity, and in particular on investment and then employment.

Ø Using the Quest model, we have been able to estimate the impact on investment and employment of an interest-rate subsidy policy covering all enterprises (we were unable to use the model to carry out an econometric estimation for SMEs alone). The result (see Annex V: Tentative econometric simulation) is clear: an interest-rate subsidy of 0.5% in real terms reduces the cost of capital by 7% at the end of the period and increases industrial investment by 5%.

Ø These estimations are sufficiently robust to answer the criticism levelled in certain quarters ("windfall") to the effect that the investor receives the subsidies but his decision to invest is taken regardless of the measure in question.

Ø The instrument of interest-rate subsidies is used for various purposes: environmental projects, infrastructure projects, social policy projects, etc. We have not been able to undertake any quantitative estimations of the effectiveness of such intervention but few doubts remain as to the beneficial effect of interest-rate subsidies on such forms of investment: witness the level of financial charges in the business plans for such projects.

2.3. Interest-rate subsidies: negative effects

The undesirable effects of this instrument are well known.

Ø Like any public instrument, it may lead, macro-economically speaking, to an inefficient allocation of resources, with financial efficiency being defined as an allocation of resources to investment with the highest anticipated rate of return. This may in turn result in less profitable projects being undertaken or give rise to activities that the market would not have financed, etc.

Ø Other, more specific distortions of competition may, however, occur: on the demand side either because certain measures are not sufficiently publicised or because the complexity of the conditions imposed means that the scheme is not readily understandable to those eligible; on the supply side either because certain financial institutions reserve the instrument for their best clients or because the public authorities entrust management of the instrument to a preferred intermediary and exclude competitors.

Ø From an operational viewpoint, the instrument also has a number of pitfalls that are associated with similar instruments, in some cases to a greater degree:

(a) the passing on in full of the interest rebate to the final beneficiary sometimes lacks visibility and transparency and is not even always guaranteed;

(b) "public" control of interest-rate subsidies, which is essential in the case of such expenditure since it involves public monies, is not always easy. It is even difficult sometimes to ensure that all the conditions for granting subsidies have been met; abuses may occur;

(c) moreover, such controls and the management of the programme add significantly to the administrative costs. It is estimated, for example, that a posteriori documentary checks on the regularity of the operations of financial intermediaries cannot process more than 25-30 projects a day. For some programmes, the total management cost has been put at some 7-8% of the appropriations earmarked for the subsidies.

Ø It should be borne in mind that interest-rate subsidies have become much less attractive for promoters since interest rates in Europe have fallen. None the less, a given percentage subsidy still represents a large proportion of the interest burden.

Ø Lastly, it must be added that these positive and negative effects of interest-rate subsidies are not an exclusive feature of this instrument but are common to other instruments too.

3. PART II: THE LESSONS OF EXPERIENCE

The interest-rate subsidy instrument is commonly used at international level (by multilateral financial institutions), at national level (by the Member States) and at Community level (by the European Union). For the purposes of this report, use at international and national level is examined briefly and only by way of example.

3.1. Action at international level

We will confine our analysis to two cases: the initiatives undertaken by the World Bank and those undertaken by the Council of Europe.

3.1.1. Loans subsidised by the World Bank

The bulk of World Bank loans to its member countries are provided by the IBRD (International Bank for Reconstruction and Development) on market terms, i.e. without any interest-rate subsidy. A second group of World Bank loans is designed for direct project financing via the International Finance Corporation (IFC), which offers credit lines (without interest-rate subsidies) to local financial intermediaries for five priority purposes: infrastructure, SMEs, strengthening of financial structures, information technologies and social needs (education and health).

Subsidised loans for the poorest countries are disbursed under the IDA programme (International Development Association), which is administered by the IBRD. Finance is provided in the form of outright grants from the richest countries in line with a programme that is updated every three years. These resources and the redemption of earlier loans permit the disbursement of loans to the most heavily indebted countries at a rate of 0% (plus 0.75% loading) for a period of 30-40 years and with a grace period of ten years. [1]

[1] At the time of the first oil shock in 1975, the World Bank inaugurated a Third Window to act as a half-way house between the two previous facilities and financed by donations from the OECD and OPEC countries. The intention was to grant subsidised loans to Member States experiencing difficulties in the wake of the increase in interest rates. The experiment was short-lived (1976-77) because donors were reluctant to provide top-up financing.

Assessment

During the tax year 2000 (which ended on 30 June), the World Bank lent USD 15.3 billion, of which USD 10.9 billion in the form of commercial loans and USD 4.4 billion (29% of the total) in the form of subsidised loans. It had been much more active the previous year (USD 29 billion in total) in the wake of the Asian crisis. The assessment made by the World Bank of its assistance in the poorest countries is a function of how stringent financial management in the beneficiary country has been. According to the World Bank, in those countries that respect the fundamental equilibria and free trade, USD 1 in aid can be tripled thanks to the confidence it imparts to private investors. On average, however, USD 1 in aid is reckoned to generate USD 1.5 in investment. These estimates relate to aid as a whole (all types taken together) granted by the institution, and not merely to interest-rate subsidies.

3.1.2. Experience at the Council of Europe

Lending by the Council of Europe takes place through its Social Development Fund, which, under its statute, intervenes in two clearly defined situations: (i) aid to migrant workers (housing, healthcare, education, training, etc.) and (ii) reconstruction of areas affected by natural disasters. In the latter case, the Fund has in the past launched initiatives similar to those of the Commission in disaster areas in Greece and Italy. Its involvement is on a smaller scale than that of the World Bank, with funding of EUR2 billion a year for between 30 and 40 projects.

Concessionary assistance from the Fund is intended for initiatives concentrated in very needy areas (currently the CEECs) via financing obtained on the foreign exchange market and on the best terms available at the time (triple A). This results in a substantial interest-rate differential relative to the local market to which can be added an interest-rate subsidy of between 1.5% and 3% according to circumstances.

Assessment

The effectiveness of such lending must be assessed in the light of the social mandate entrusted to the Social Development Fund. The Charter's signatory states attach importance to such lending; clear and easily verifiable objectives ensure that the loans enjoy political visibility and are attractive. Intervention by the Fund signals support for the policy being implemented by the recipient country, thereby facilitating the inflow of private capital from abroad.

3.2. Member States: measures involving interest-rate subsidies

Ø Many Member States grant interest-rate subsidies for a variety of objectives: general aid schemes for productive investment by SMEs, the craft sector, etc. and specific measures (export promotion, fostering of innovation, help for young entrepreneurs, etc.) or social measures (housing policy).

These interest-rate subsidy schemes are sometimes part-financed by Community programmes under the Structural Funds (ERDF, EAGGF) with a view to promoting economic and social cohesion. The public authorities responsible for carrying out multiannual development programmes in eligible regions administer themselves the interest-rate subsidies for final beneficiaries or entrust their administration to financial institutions on a contractual basis.

Annex III reviews government measures in Italy, France, the United Kingdom, Spain, Germany and Sweden (for operational reasons, we have been obliged to limit the number of cases studied). Recourse to interest-rate subsidies is fairly widespread in the other Member States too (Finland, Portugal, etc.).

A number of examples will serve to illustrate the orders of magnitude involved in Member States:

- in Italy in the period 1995-99 subsidised loans totalled some EUR0.7 billion a year;

- in Germany in 1999 the Special ERP Fund, which centralises the management of interest-rate subsidies on behalf of the State, granted loans amounting to EUR6 billion for investment projects by SMEs totalling EUR15 billion;

- in France the interest-rate subsidy scheme administers loans amounting on average to EUR1.5 billion a year and costs the State some EUR250 million in subsidies;

- in Spain interest-rate subsidies administered by the ICO under the ERDF programmes for SMEs during the period 1994-99 totalled EUR194.6 million in respect of loans totalling EUR3.3 billion for investment projects costing some EUR6.1 billion;

- in the United Kingdom the Small Business Loan Scheme provided subsidies for loans totalling EUR70 million;

- in Sweden, where interest-rate subsidies are used largely for housing policy, state assistance amounted to only EUR80 million in 1999, sharply down following a reform undertaken in 1993 and the fall in interest rates.

Ø The main findings of our investigations, which were conducted primarily among enterprises, are the following:

(a) The objectives pursued by a policy on interest-rate subsidies are, generally speaking, fairly well targeted (purchase of equipment, business start-ups, etc.). The reduction in the cost of financing has fostered productive investment and thus strengthened productive capacity and competitiveness, notably in the regions assisted. The effectiveness of national measures and of Community measures administered by Member States is generally deemed to be satisfactory.

The Member States have also set in place an administrative and operational framework designed to guarantee the transparency of the operation. Announcements of these measures are made in the media in order to inform all potential beneficiaries. A particular point to be noted is that the monopoly of administration and indeed of allocation of interest-rate subsidies by preferred financial intermediaries is gradually being replaced by a system of competitive tendering.

(b) The policy of the Member States concerning interest-rate subsidies varies since they are attempting to find the most economic way of achieving their policy goals. Some are restructuring their interest-rate subsidy products to suit the changing enterprise landscape (France), some apply packages of loan conditions (Sweden), some make little, if any, use of interest-rate subsidies (United Kingdom), and some continue to use them to pursue their policy aims (Germany, Finland, Spain, etc.).

3.3. Community measures involving interest-rate subsidies

Annex I gives a concise description of EU measures and programmes providing interest-rate subsidies and of the resources devoted to them.

Unlike Member States' measures part-financed by the ERDF and EAGGF programmes, Community measures are implemented directly by the Commission, which in many cases entrusts their management to the EIB on a contractual basis.

3.3.1. A tentative classification

For the purposes of the analysis, these measures can be classified into two groups (see also table below):

(a) Measures designed to combat market failures, with the practical objective being:

(i) macro-economic, such as the Edinburgh facility, designed to create jobs in SMEs without distinction;

(ii) meso-economic: this includes measures to promote sectors such as the environment (MEDA) or infrastructures (Trans-European Networks), where projects are characterised by a clear public interest and poor profitability prospects. It also includes measures to assist sectors undergoing conversion (ECSC) and regions lagging behind, where there is a mix of social and development objectives. Subsidies tied to soft loans for developing countries also fall into this subgroup;

(iii) micro-economic: this includes Community measures in support of innovative firms, business start-ups, etc. where the entrepreneurial risk is considered by investors to be unduly high.

(b) Measures to deal with fairly unpredictable external shocks; this group includes:

(i) measures with a social or solidarity objective, such as the operations to assist regions devastated by natural disasters and the measures in favour of Madeira, Kalamata and southern Italy that were authorised by the Council and amounted respectively to EUR15.9 million, EUR100 million and EUR1 billion in loans, together with a 3% interest subsidy that was paid to the European Investment Bank or direct to the regional authorities as in the case of Madeira;

(ii) measures with a macro-economic objective, such as the former European Monetary System facility for countries facing external difficulties threatening their continued participation in the EMS as a result, for example, of a sharp increase in oil prices or an attempt by foreign-exchange markets to destabilise the currency. This facility was applied only once (for Italy and Ireland jointly) and has since been discontinued.

In aggregate, the EU's budgetary resources devoted to this instrument have been substantial, approaching EUR3 billion. With a subsidy rate of around 3%, this figure gives some idea of the volume of loans involved (leverage effect). Annex I provides a breakdown of the subsidies by instrument. It should be borne in mind here that the bulk of the subsidies have been granted and administered by the EIB, which also disbursed the corresponding loans.

Community programmes involving interest-rate subsidies

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3.3.2. Community programmes

The task of assessing the effectiveness of this instrument in the various programmes mentioned above (described in Annex I) is not easy; the small amounts involved, the difficulty of calculating accurately management and control costs, the lack in some cases of quantifiable objectives, the induced effects of the measures, etc. make any quantitative assessment of effectiveness unreliable.

Generally speaking, however, the analytical criteria described in Part I suggest that interest-rate subsidies are an appropriate intervention instrument particularly as:

- they are designed primarily to make up for poor project profitability and not to offset risk;

- they are properly targeted, thereby reducing the negative effects described above, with a resulting increase in effectiveness;

- ex post control and evaluation of the programmes are possible and reasonably guaranteed, as is transparency (the subsidies are passed on in full to the final beneficiaries).

By following this line of reasoning, the following observations can be made:

(a) As regards the Community measures described at point 3.3.1 ("solidarity measures"), interest-rate subsidies appear appropriate since, on the one hand, these measures are closely targeted and involve investments - notably in infrastructures - with low profitability and, on the other, the negative effects (discrimination, distortion of competition, etc.) are insignificant. [2] In some cases, however, there is still a problem of control because of the increase in the number of bodies intervening and the large number of recipients.

[2] It should though be pointed out that, since they are geared to enhancing solidarity, these Community measures must be evaluated by applying more than a simple economic calculation.

The same can be said of concessionary loans to public and private operators in the ACP countries, especially where tangible investment projects are being financed. Concessionality here often takes the form either of a separate financial allocation earmarked for specific technical assistance linked to the investment in question or of a reduction in the rate with a view to facilitating debt servicing. It is thus more than a simple matter of an automatic reduction in the rate and contributes to attainment of the development objectives.

(b) Interest-rate subsidies for transport infrastructures (excluding the telecommunications sector and certain energy sectors) and for environmental projects are especially appropriate, notably in the case of projects where the Community interest is in addition to the national interest (missing links). These are tangible investment projects that have poor profitability but are of considerable public utility, and the control of the public monies involved is relatively easy. What is more, not only are the negative effects of any distortion of competition very limited but, when completed, these major works are quite often an important factor enabling economic operators to participate fully in the internal market.

(c) In the case of competing enterprises, the way in which interest-rate subsidies are administered differs according to whether or not they are located in regions receiving assistance from the Structural Funds. Subsidies granted to enterprises in such regions are included in point 3.2. under subsidies administered by Member States.

In the other regions, a distinction must be made between newly established SMEs and SMEs requiring new investment in order to expand. In the former case, and notably where the enterprises are located in growth sectors, the problem is less one of poor profitability and more one of the high risk of failure associated with early-stage development; in many cases they do not have access to credit, irrespective of the interest rate they are prepared to pay. [3] By contrast, the rates of return of those enterprises which move beyond early-stage development and are located in growth sectors are often very high. Under the circumstances, therefore, it is evident that subsidised loans are not the appropriate tool here since, in addition to the rigid nature of loan redemption, it is highly probable that the subsidies will be redundant. In the event, other instruments such as guarantees or risk capital as well as horizontal measures such as tax reform and simplification of administrative procedures may possibly be more appropriate (although each instrument has its own limitations).

[3] Newly established SMEs have to invest heavily in production, distribution and marketing and do not make profits during the first few years. The breakeven point could be in five years, or even later. Banks are reluctant to extend financing under such circumstances.

(d) The granting of interest-rate subsidies to SMEs generally, e.g. under the Edinburgh facility, poses certain questions. Leaving aside the fact that the programme objective (job creation) was achieved at a very low budgetary cost, [4] the first remark concerns the size of the programme. Since they have a very limited budget, these measures benefit only a small number of enterprises, and the macro-economic objective (reduction in unemployment) cannot be achieved using the instrument. There is, therefore, something of a mismatch between the objective and the instrument.

[4] The average subsidy for each new job was only EUR1 716 and represented extremely good value for money (Commission report COM(2000) 376).

From an operational viewpoint, since the financial circuit through which the public aid is channelled is, of necessity, very long, transparency is not fully ensured, but this is a feature common to other programmes too.

4. CONCLUSIONS AND RECOMMENDATIONS

Ø Interest-rate subsidies are an instrument used widely in Community programmes in pursuit of various objectives:

- political objectives: natural disasters in the countries of the Union as a symbol of solidarity; subsidised loans in the CEECs (preparation for enlargement); the Balkan countries (regional stability) or the ACP countries (EU presence), etc.;

- economic objectives: structural problems, regional disparities, market failure, support for SMEs, launch of infrastructure projects, anti-cyclical instruments: unemployment, etc.

Ø The main conclusion of this report is that it is not possible to state definitively that interest-rate subsidies are an effective instrument; this depends not only on the nature of the objectives of a particular measure and the manner in which the subsidies are administered or utilised [5] but also on the scope for exercising strict control and, lastly, on the distribution chain for the subsidies and the quality of intermediaries.

[5] Interest-rate subsidy schemes differ greatly, e.g. between TENs and MEDA or other RELEX programmes; subsidies are paid and administered in the former case by the Commission according to its own control criteria and in the latter by the EIB according to a different arrangement.

The analysis made in this report has nevertheless brought to light a number of underlying trends regarding the merits or limitations of the instrument. With all the reservations that any attempt at simplification entails, the situation can be summarised as follows:

Strong points:

- Low budgetary cost; [6]

[6] However, where the choice of financial instrument for certain Community programmes (e.g. EAGGF) is left to the Member States, experience has shown that the choice made is not neutral from a financial viewpoint and in particular that it is unlikely to minimise the budgetary costs to the Community.

- Leverage effect (multiplier);

- Additionality;

- Linkage to a well-known form of general support (bank loan);

- Symbol of Community solidarity.

Weak points:

- Risk of inefficient allocation of resources;

- Cumbersome administration;

- Not-inconsiderable administration costs;

- Control and transparency not always ensured;

- Risk of discrimination;

- Low visibility.

Ø Management and control are of major importance. Since interest-rate subsidies are tied to loans, overall management is, in most cases, entrusted to the EIB under an agreement signed with the Commission. Given the number and type of beneficiaries (SMEs, etc.), other national financial institutions intervene in the distribution chain, and this necessarily complicates programme monitoring and control. It would seem that this constraint is, however, difficult to avoid.

The issue of administration costs should also be commented on. These are, it is true, significant in the case of interest-rate subsidy programmes or any other programmes that cover thousands and even tens of thousands of small beneficiaries. That said, the commercial nature of the intermediaries and competition between banking institutions help to keep down costs. Moreover, in some cases, the amount received by intermediaries has to be considered inadequate in relation to the costs incurred, especially in the case of intermediaries who set up procedures to handle small subsidies. [7]

[7] For instance, in the implementation of the SME facility, the EIB, the national agents and the intermediaries shouldered a not inconsiderable administrative burden. In many cases, the intermediaries created new internal procedures to accommodate the scheme and produced publicity material at their own expense. The intermediaries were remunerated and received fees amounting to 1% of subsidies disbursed (SME Facility Fifth Report).

Lastly, the constraint imposed by administrative costs must be set against the advantage of having access to a vast banking network allowing Community initiatives to be implemented within a reasonable time frame.

Ø The question as to which financial instrument is better adapted to the objective is discussed in detail in the report. [8] To sum up, this analysis suggests that interest-rate subsidies are appropriate for remedying serious deficiencies in the financial sector and for supporting projects with low profitability in special areas requiring assistance (developing countries, assisted regions, etc.). They are also appropriate when the project generates indirect positive effects (externalities) that cannot be reflected in the user price of the service (environment, transport links, etc.) as well as for dealing with external shocks (natural disasters, etc.).

[8] See Commission working paper, Annex IV "Theoretical considerations".

Ø The comparison between instruments does not permit any general clear-cut conclusions either.

Interest-rate subsidies and direct donations (lump-sum) are virtually identical. [9] Donations (discounted subsidy paid as a single amount anticipated at the time of the loan) also aim to reduce the cost of borrowed capital. But, unlike a donation, the beneficiary of a subsidy is still subject to the monitoring conditions imposed by banks throughout the loan redemption period. Such monitoring comes on top of that exercised by the public body granting the subsidy and thus complements it. However, donations are simpler to administer and more transparent [10] but they have a more adverse impact on the Community budget (concentrated in the first year).

[9] However, the implications for the beneficiary's cash flow differ.

[10] TENs financing is one example even though this project category also contains exceptions for interest-rate subsidies (see point 5.3 in Annex I).

Recourse to guarantee-type instruments seems more justified than recourse to interest-rate subsidies in cases where the financial system is reluctant to intervene because of the high risk of the project (risk aversion), where information is asymmetrical or where the small scale of the project does not justify the risk-assessment costs. In these cases, the guarantee allows SMEs access to credit by diversifying the risk among a large number of lenders. In some cases, however, guarantees may be prejudicial to the principles of sound administration (so much so that this possibility can be minimised by close project monitoring and control).

Risk capital is a more flexible instrument than bank loans (interest payments are not rigidly fixed) and very appropriate when it comes to risk sharing, notably in the earlier phases (start-up, early-stage, etc.) of firms with high growth potential. The clear advantages of the instrument are offset by the very small number of potential users and by the fact that the institutional investor (venture capitalist) does not have a guaranteed exit (small, fragmented stock market and regulatory barriers [11]).

[11] See Risk Capital Action Plan (COM (2000) 658 final).

It goes without saying that some of the advantages and disadvantages of interest-rate subsidies are also common to other financial instruments.

Ø A number of conditions have to be met if interest-rate subsidies are to remain effective:

- Strict compliance with state aid legislation in order to limit any undesirable side effects.

- Genuine competitive bidding between financial intermediaries can help to reduce administrative costs. Moreover, the lack of any real competition between intermediaries can create distortions on financial markets and jeopardise the transfer of the subsidy to the final beneficiary. In such cases, interest-rate subsidies must be avoided.

- Improved targeting of objectives/beneficiaries must be accorded priority (the allocation of interest-rate subsidies to enterprises in general can be criticised except in the case of specific regions, sectors or tangible investment projects). Such assistance must be for a limited period.

- The programmes should have a budget that will trigger a visible impact and amortise implementation costs.

- Public controls must be a requirement that is explicitly spelt out in contracts but any duplication should be avoided. The cost of controls must not outweigh their benefits. In the case of financial intermediaries, there is no manageable way to ensure to what extent an interest-rate subsidy is actually transferred to the intended final beneficiary and to what extent it benefits the intermediary. This is not a question of abuse that could be resolved by stepping up control operations; it is inherent to the nature of interest-rate subsidies and is due to the fact that the conditions for individual loans cannot be regulated by the Commission.

- Interest-rate subsidies must be accompanied by simple and clear rules. Complicated implementation and quantification conditions must be avoided.

- Programme implementation must generate value added for national measures (subsidiarity).

- The monitoring and assessment aspects must be reinforced. Any programme must be subject to an ex ante evaluation, a mid-term evaluation and an ex post evaluation.

Ø The fall in interest rates [12] and the availability of other financial engineering instruments have now reduced the relative importance of interest-rate subsidies. [13] Encouragement should, therefore, be given to the use of complementary or alternative instruments. What is more, a combination of two or more instruments may prove more beneficial than reliance on a single and exclusive financial instrument. Partnership (co-financing, etc.) between the public and the private sector should also be stepped up. It should, however, be pointed out that interest-rate subsidies are tied to bank loans, which were, and are still, the main source of financing for productive investments (it is a well-known fact that most SMEs are undercapitalised and depend to a large extent on bank finance).

[12] However, a fall in nominal rates does not necessarily mean a corresponding fall in real rates.

[13] It is important to recognise that interest-rate subsidies are becoming a less important part of overall loan conditions. For entrepreneurs and start-ups, it is much more relevant to obtain long-term finance (up to twenty years) and a grace period, which cuts capital costs in the early phase (up to three years). For commercial banks channelling promotional loans and quasi-equity to entrepreneurs, the built-in risk-sharing elements of such loan schemes are a relevant factor reducing their exposure. Currently, access to long-term finance at reasonable cost, and not merely the interest-rate subsidy, makes schemes attractive for entrepreneurs and start-ups in all sectors of the economy.

Ø For a full appraisal of the instrument, account also needs to be taken of the views of all those involved, particularly national intermediaries and final beneficiaries.

Financial intermediaries, which play the key role in the distribution chain, mostly take a positive view of interest-rate subsidies for the following reasons:

* The direct effect and simplicity of the instrument: banks provide interest-rate subsidies to firms to which they have granted credit. This is a more effective and more direct mechanism than a guarantee line, which requires a more complex and more uncertain procedure.

* The temporary and revocable delegation of responsibilities, with a posteriori control, allows banking networks to assume part of the distribution cost under optimum conditions. Value added stems from the dilution and transformation of the cost within an overall financial and commercial relationship.

Where financial beneficiaries are concerned, it is well known that bank loans (and hence interest-rate subsidies) are preferred to equity participations by outside shareholders on account of the partial loss of management control entailed by risk capital. However, for some enterprises representing a very small proportion of the total number of enterprises in the European Union, other forms of financial engineering have their attractions. Since enterprises learn as they go along, SMEs could abandon loan financing in favour of more sophisticated options.

Ø For the reasons given above, interest-rate subsidies have played an important role in the past. Generally speaking, given the historical context, their positive aspects can be regarded as having outweighed the constraints they impose. The question of abandoning them must not, therefore, be based on results (overall, the objectives have been achieved) but rather must be viewed in the context of the emergence of a new financial environment.

Under the circumstances, it would seem expedient for innovative firms facing high risks to opt, among the financial instruments available, for guarantee or risk capital arrangements when having to contend with market failure, notably in the start-up phase.

Elsewhere, the question of abandoning interest-rate subsidies in favour of other instruments should be examined closely. [14] This observation applies above all to programmes for areas where financial markets are not yet highly developed (developing countries, CEECs), for certain less-favoured regions in the European Union or for certain project categories (environment, TENs, etc.) that give rise to externalities.

[14] For example, risk capital schemes cover a very small number of enterprises. In 1999 only 3000 start-ups were financed by risk capital in the EU whereas some 1. 5 million SMEs had recourse to bank lending.

ANNEXES: COMMISSION WORKING PAPER ON INTEREST-RATE SUBSIDIES

5. Annex I: INTEREST- RATE SUBSIDIES: COMMUNITY Programmes

5.1. Summary table of programmes

Programme // Objective

Market failures: //

ECSC conversion (Art. 56) // Employment and access to credit for SMEs

Trans-European Networks (TENs) // Transport infrastructure

Edinburgh facility (SMEs) // Employment and access to credit

Development cooperation (ACP) // Infrastructures and access to credit for SMEs

Economic development (MEDA and Slovenia) // Environment and transport infrastructure

Economic and social cohesion (ERDF, EAGGF) // Access to credit for SMEs

Phare programme (CEECs) // Access to credit and privatisation

External shocks: //

Natural disasters (Italy, Greece, Kalamata, Madeira) // Reconstruction and restoration of productive capacity

European Monetary System // Infrastructures

Peace and reconciliation in Ireland // Access to credit for SMEs and infrastructures

Reduction in disparities (EEA) // Access to credit for SMEs and infrastructure

Reconstruction in the Balkans (FYROM and Bosnia) // Restoration of productive activity

5.2. ECSC subsidised loans (Article 56: industrial conversion)

A. Description

The purpose of subsidised conversion loans (Article 56 of the ECSC Treaty) is to assist in the economic conversion of regions affected by the decline of the coal and steel industries, by making a financial contribution to job-creating investment. The first loans were disbursed in 1961.

Amount of subsidies

Initial subsidies granted between 1993 and 1997

1993 EUR37 693 920 for 20 911 jobs created

1994 EUR26 275 492 for 13 213 jobs created

1995 EUR21 614 248 for 11 138 jobs created

1996 EUR13 732 288 for 7 249 jobs created

1997 EUR22 948 045 for 11 482 jobs created

Total : EUR122 263 993 for 63 993 jobs created

Since the ECSC Treaty will expire in July 2002, the last loan instalments were disbursed in May 1997, so that they can be repaid in May 2002, before the expiry of the Treaty.

Beneficiary industries/firms

Any firms located in an ECSC area, but particularly SMEs.

All industries are eligible, except those on a negative list, such as:

- the retail trade where the vendor does not process goods;

- hospitals;

- educational establishments;

- the steel industry, etc.

Criteria for granting interest-rate subsidies

- Investment

The amount invested must be at least twice the ECSC loan.

- Jobs

Jobs must be created not later than three years after disbursement of the loan (assessment date).

They must be maintained for at least the following two years.

B. Operational aspects

Management

The initial amount of the interest-rate subsidy is calculated on the basis of the number of jobs to be created and the loan amount requested.

The subsidy is paid in three equal instalments, on the following due dates:

1. First instalment: one year after disbursement of the loan.

2. Second instalment: three years and six months after disbursement of the loan, following verification of the business report demonstrating that the objectives of carrying through the investment and creating jobs (social clause) have been achieved.

3. Third instalment: five years after disbursement of the loan, following verification of the business report demonstrating that the jobs created have been maintained.

Control and procedures

Project control is decided on as part of the annual missions schedule laid down by DG ECFIN's Financial Operations Unit 01 (Budget and Financial Aspects).

Depending on the case, the unit member is accompanied by members of other units or institutions, such as:

- the European Court of Auditors;

- the European Commission's Financial Control Directorate-General (DG Audit);

- DG ECFIN's Evaluation and Internal Audit Unit;

- DG ECFIN's Project Management Unit.

Visits are made in the presence of an agent of the financial intermediary concerned by the projects to be checked.

Control is carried out on the basis of official documents or declarations, such as:

- monthly returns of social security contributions;

- wages book;

- annual balance sheets confirmed by the auditors' report, etc.

C. Evaluation

A report exists for the period 1981-90, and a new study is planned for the period 1991-2000. In answer to questions put to it on several occasions by the Court of Auditors and the European Parliament, the Commission has provided general replies on the effectiveness of the actions carried out.

The real impact on job creation of interest-rate subsidies paid by the Commission under Article 56 of the ECSC Treaty can be measured quantitatively as follows:

- the ECSC disbursed 15 000 loans and sub-loans in the period between 1982 and 1997, most of which were granted to small and medium-sized enterprises;

- these loans helped to create about 285 000 new jobs at a budgetary cost of ECU 490 million.

The ECSC has never claimed that these loans and interest-rate subsidies alone were responsible for creating these 285 000 new jobs; rather, they formed part of a package of measures at European, national and local level which stimulated job-creating investments.

According to information received from banks acting as the Commission's financial intermediaries and from beneficiary enterprises, the loans and interest-rate subsidies received under Article 56 of the ECSC Treaty for job creation have, in fact, played an important role in the investment decisions of the enterprises concerned.

5.3. Trans-European Networks (TENs)

A. Description

From 1995-99, legal basis: Council Regulation (EC) No 2236/95 of 18 September 1995 laying down general rules for the granting of Community financial aid in the field of trans-European networks.

From 2000, legal basis: European Parliament and Council Regulation (EC) No 1655/1999 of 19 July 1999 amending Regulation (EC) No 2236/95 laying down general rules for the granting of Community financial aid in the field of trans-European networks.

Amount of interest-rate subsidies committed in the last five budget years (EURm, approximate):

1995: 25

1996: 18

1997: 37

1998: 20

1999: 71.

Ø Objectives

Interest-rate subsidies are intended to assist in the launch of transport infrastructure projects, mainly by reducing the financial burden on implementing authorities in the pre-operational phase. They reduce the interest costs, or financing costs in general, of a loan. Some large TEN projects have been funded primarily by loans from public financing bodies (e.g. EIB, National Debt Offices, etc.) or from the international banking system.

Ø Criteria for granting interest-rate subsidies

To ensure agreement on the administrative procedures to be followed in the use of interest-rate subsidies, criteria were laid down by the Commission departments responsible for transport, subjected to inter-departmental consultation and agreed by the TEN Financial Assistance Committee in 1997.

Regulation (EC) No 2236/95 stipulated in Article 4(1)(b) that Community aid for projects may take the form of subsidies of the interest on loans granted by the European Investment Bank or other public or private financial bodies. In addition, a declaration attached to the minutes of the Council meeting at which this Regulation was adopted gave some further indication of the proposed use of this form of support; the Commission declared that the amount of interest-rate subsidy from the Community budget allocated to a project in a given year should always represent a fraction of the volume of interest payments actually borne by that project during the year in question.

The rules for interest-rate support for TENs proposed by the Commission in 1997 made a distinction between different types of promoter; in particular, between single-purpose authorities, on the one hand, and multi-purpose authorities, on the other.

Single-purpose authorities:

In the case of single-purpose authorities, all expenditure is effectively aimed at meeting the objectives of the project which the Commission seeks to support. It therefore seemed unnecessary and unjustifiable to demand that each individual loan taken out by the authority should be assigned to a physical objective. In such cases, loans are generally raised to meet overall liquidity needs and not to pay for individual actions at any event. Loans are swapped in some cases according to the conditions on international currency markets.

In such cases, the following rules apply:

- interest-rate subsidies not to exceed five years, this being the general rule laid down in Article 4(1)(b) of Regulation (EC) No 2236/95 (although loan repayment itself may need to be monitored over a longer period, depending on circumstances), and to be below actual accumulated interest expenditure in each eligible period;

- interest-rate subsidies only for amounts of over ECU 1 million per year (for cost-effectiveness reasons);

- support can be granted to either newly negotiated or existing loans;

- interest-rate subsidies would be paid after receipt of invoices showing that interest had been paid, and progress reports showing the achievement of physical milestones, and related payments, as set out in the relevant Commission decision and application form;

- interest-rate subsidies will be paid direct to the beneficiary, where possible;

- overall support under the Regulation will be below 10% of the total expenditure on the project during the entire period of support (i.e. within the spirit of the TENs Financial Regulation limits on the financing of construction). (This may give the Commission the flexibility to pay interest-rate subsidies of over 10% of expenditure for specific years, e.g. during the launch period, when financial costs may be especially high. This form of "accelerated" payment will in a way mirror the normal advance payment of 40% for direct grants.)

Multi-purpose authorities:

In the case of multi-purpose authorities, the above individual points still apply but it cannot be said in these cases that any loan is eligible for interest-rate support. Clearly, the loan or loans supported by the Commission must be earmarked for the specific projects (i.e. track sections, equipment installations, etc.) which it wishes to support. In practice, this specific link is more likely to exist when the loan has been taken out from an institution like the EIB, which itself demands regular reports on the achievement of physical objectives.

B. Operational aspects

Ø Control

Essentially, the two key principles of control are the same as those applying for traditional direct grant projects, i.e. (i) measuring physical progress and (ii) checking the eligibility of expenditure and verifying the correctness of accounts.

For both types of project authority (see above), the Commission needs to ensure as a condition of payment that proof of loan agreements and obligations, and the actual repayment of financial costs, is accompanied by satisfactory physical and expenditure progress on launching or continuing the project (according to the stage in its evolution). Payment of initial tranches of interest-rate support and of the final tranche is contingent on progress towards and achievement of the objectives respectively. Payments to contractors should be verified and audited.

Lack of physical progress, or failure to launch, will mean that interest-rate subsidy payments should be withheld by the Commission, as would be the case with payment tranches in a direct grant scenario.

Finally, the amount paid should be flexible, although linked to physical progress, and will not exceed 95% of the amount of the interest-rate subsidy specified in the decision so as to allow for an amount to be held back pending accounting controls and assessment of the achievement of physical objectives set out in the decision.

Ø Visibility

The exact nature of this concept is hard to define. TEN projects supported by interest-rate subsidies are essentially subject to the same general rules regarding physical progress as direct grant projects and hence to associated requirements (e.g. for publicity to be given through signboards, etc. showing the role of the European Union). Part of the purpose of control is to ensure visible progress in this sense.

C. Evaluation

As part of the mid-term evaluation of the TEN-T budget interventions, which the Commission departments responsible for transport commissioned and which was delivered by outside experts in 1999, the efficiency of interest-rate subsidies ("interest rebates") as a financial instrument was discussed. An extract from the evaluator's report follows:

"The instrument of interest rebates is seen as the second best solution and generally of more value with high and volatile interest rates. Nowadays nominal interest rates are lower and in some Member States some transport operators (such as railways) can receive high grants from their governments and interest-free loans making the instrument of interest rebates even less attractive.

In addition the duration of the interest rate subsidy is not always compatible with the loans and project duration. The present limit of five years is considered as a serious constraint for the development of this instrument.

However Member States do not reject the possibility of applying for interest rate rebates in the future in the light of PPP approaches. Therefore, the Commission should better explain and spread more information on the reasons and advantages for project promoters to apply for this instrument. More information on the existing TEN-T projects benefiting from interest rebates should be provided to other Member States.

Three projects have applied for this instrument to date : the Øresund fixed link, the Belgian HST, and Malpensa Airport. In these three cases, the choice of this form of intervention was suggested by the Commission and the three projects received loans from the European Investment Bank.

* Interest rebates function well for the Øresund connection but have otherwise not been applied in Sweden. This type of support has been discussed as a possibility for the third runway at Arlanda airport. The civil aviation administration did, however, not consider them as a feasible solution as loans for the runway will have to be raised by the national civil aviation administration proper, and not by the airport, which organisationally is only a division within the administration.

* Interest rebates helped to complete the financial plan of the Belgian HST project and launch the construction phase. As the Belgian Railways had to borrow the funds needed to build the HST, the financial return of the project was highly influenced by the interest charges. This instrument appeared to be the most adequate one in this particular case and at that particular moment in time. It allowed Belgian Railways to be provided with EU aid that was not directly linked to the stretches of routes for which the Belgian requests were originally made.

* The Malpensa 2000 project is an example of a project for which this kind of support can be well suited. It was the Commission itself who suggested this solution, believing that it was the most appropriate one for this project.

Some Member States suggested that the interest rate form of aid should be allocated to the promoter as a lump sum rather than be related to a specific loan. Railway companies do not always borrow money for a specific project, but loans are arranged to finance their global investment programmes. If the interest rate subsidy form of aid is granted provided that it is linked to a specific and well-defined loan scheme, then it can perturb its financial management or impose increased auditing procedures."

There are also advantages to interest-rate subsidies for TENs : they are good for private or semi-private project authorities which have to face high financial costs in the years before their project starts to yield revenue from tolls, etc. (this was certainly the case for the Øresund fixed-link project).

5.4. Interest-rate subsidies to help certain Member States to participate in the European Monetary System

A. Description

At the end of December 1978 the Council adopted Regulation (EEC) No 3181/78 relating to the European Monetary System (EMS). Previously, the Council had recognised the need to support the less prosperous Member States in their efforts to participate in the EMS. Support was to take the form of assistance in carrying out infrastructure programmes and projects financed by the EIB and by the recently established NCI (Decision 78/870/EEC of October 1978).

The Regulation implementing this support was adopted in August 1979 (Regulation (EEC) No 1736/79); it granted a 3% interest subsidy for loans relating to Commission-approved programmes of up to one billion units of account a year for a period of five years. It was also agreed that the discounted value of the subsidies to be entered in the general budget of the Community should not exceed 200 million units of account a year for a period of five years. At the same time, the Council designated Ireland and Italy as the Member States which were eligible for these subsidies. The implicit subsidy for them was: 200 million units of account in 1979, 197 million in 1980, 193 million in 1981, 210 million in 1982 and 200 million in 1983.

In accordance with the above-mentioned Regulations, eligibility depends on the execution of major infrastructure projects in Italy and Ireland that meet EIB and NCI operational criteria and are capable of anchoring these countries' economies more firmly in the European Monetary System. By financing individual projects of undisputed public utility, the aim was therefore to pursue an overall (macroeconomic) objective in parallel with other instruments with the same purpose. It will be remembered that at the time the oil crisis had destabilised the industrialised countries' balances of payments and exchange rates and Community solidarity had been mobilised on behalf of the weakest countries, i.e. Italy and Ireland, in the form of Community borrowings (Article 108 of the Treaty). The interest-rate subsidies for infrastructure projects thus reinforced measures to restore external equilibrium.

B. Operational aspects

The subsidies were managed by the EIB, which both selected the projects and disbursed the aid.

In view of the relatively large subsidy amounts decided by the Council, the EIB kept very large-scale projects separate from those it usually managed so that they could be monitored more easily. In some cases it selected tranches of programmes which had been started before or were to be completed after the eligible period (1979-83) because of the scale of the projects and the economic importance of the tranches in question.

The subsidies were paid to the project promoters only for the five-year period laid down by the Council. Each half year, the EIB presented the Commission with a refund application calculated on the basis of the subsidised amounts, updated at the beginning of each half year. Italy thus received aid totalling ECU 669 million in respect of a loan volume of ECU 3 336 million; the subsidies for Ireland totalled ECU 331 million in respect of a loan volume of ECU 1 470 million. Control was exercised by the EIB and the Commission, in cooperation with the central banks of the two countries concerned.

C. Evaluation

During its investigations, the Court of Auditors noted delays in the execution of the projects and increases in costs as compared with the original estimates. These overspends were covered by other sources of finance such as the ERDF and state aid.

These criticisms, relatively minor by comparison with the objectives, did not prevent the Court from acknowledging that the objectives had been attained. It stated that these projects had contributed to the development of the water supply and drainage infrastructure in Ireland in the context of the expansion of industrial, agricultural, tourist and urban activity. The Court's assessment of the extension of an aqueduct in Italy was more qualified because of the delays caused by the 1980 earthquake but it did not call into question the key importance of the work for the economy of the Mezzogiorno.

5.5. Edinburgh facility (SMEs)

Council Decision 94/217/EC of 19 April 1994

A. Description

Ø Description

The purpose of this programme was to help enterprises, in particular SMEs, to create jobs. It was decided on in the early 1990s, a period of severe recession, fairly high unemployment and interest rates, and deep pessimism on the part of various economic actors.

The programme is managed by the EIB on behalf of the Commission. In each Member State the EIB dealt with a national agent that coordinated the network of financial intermediaries which selected the individual projects.

The interest subsidy related to interest on a five-year loan financing a job-creating investment project. The financial intermediaries carried out the financial analysis of the credit provided by the EIB. The subsidy was based on the number of jobs created.

The SME facility is a temporary "one shot" facility which, at the request of the Council, had to be introduced very rapidly. The operational part, which began in 1995, was completed in 1997.

Ø Amount of subsidies

- Total amount of interest subsidies granted by the Council: ECU 100 million

The subsidy was tied to EIB loans of ECU 1 000 million to SMEs in the Community. On 8 June 1998 the amount distributed in interest subsidies totalled ECU 92 321 473.

At the end of 1997 subsidies paid totalled ECU 92.3 million. This amount corresponds to a 2% per year interest-rate reduction for a maximum of five years, which is equivalent overall to 10% of the loan amount, or an average of ECU 3 000 per job created.

Ø Beneficiaries

- SMEs, in particular those with no more than 250 employees and a turnover not exceeding ECU 20 million or assets not exceeding ECU 10 million;

- virtually all sectors of activity (some countries introduced exceptions);

- all Member States;

- The loans could not be combined with other subsidised loans granted by the EIB under other agreements or with ECSC-subsidised loans.

Ø Criteria for granting interest-rate subsidies

In its application for subsidies, the SME had to state the amount of financing required from the EIB, the capital cost of the investment and the number of jobs it planned to create; only jobs created after 28 April 1994 were eligible.

In order to qualify for a definite subsidy payment, the beneficiary had to submit a sworn statement concerning the actual net increase in the number of jobs and declaring that the additional jobs had been in existence for more than six consecutive months prior to the date of the declaration. If the number of jobs actually created was smaller, the proposed subsidies were reduced accordingly.

B. Operational aspects

Ø Management

The EIB shared out the facility among the national agents and its network of intermediary banks.

- The interest subsidy is generally paid in a single instalment (lump sum). In Germany it was used to reduce the last repayment of the borrowing.

- In its report the Court of Auditors criticised the fact that the rules were less clear in some countries than in others.

Ø Control

The national agents verified each beneficiary's entitlement to its respective subsidy on the basis of the declarations made by the intermediaries and beneficiaries. As well as the usual monitoring of its global loans, the EIB also made spot checks on the documentary evidence presented in support of the requests for subsidy payments. In 1996, 1997 and 1998 the EIB monitored the procedures applied by agents in eleven countries

In its Report No 6/2000 the Court of Auditors criticised the fact that the Commission did not monitor this facility in detail, despite the cooperation agreement.

Ø Community visibility

- The financial intermediaries' documentation generally referred to Community aid, at least that of the EIB; this aspect was criticised by the Court of Auditors in its report.

Ø Accounting

- The accounting and presentation of the accounts were criticised by the Court of Auditors and the Commission has undertaken to improve them.

C. Evaluation of the action

* Four reports have already been presented to the European Parliament, the last on 2 December 1997 (COM (1997) 645 final).

* The fifth report was being drafted at the same time as this report. It contains statistical tables and is more complete than the previous ones.

5.6. Subsidised loans in the ACP countries

A. Description

Successive European Development Funds have supported the action of the EIB and of local banks by granting general interest-rate subsidies in order to reduce the very high level of interest rates and to provide access to credit for small commercial and craft firms in the countries which are signatories to the Lomé Convention. Since the pressing need for finance is, however, very extensive, subsidies have also been allocated for infrastructure and sewerage works.

During the life of the most recent Conventions, the WTO expressed reservations about this general practice and about the risk of distorting competition in relation to neighbouring countries not eligible for EDF loans. It has so far been possible to circumvent this obstacle by granting loans to public enterprises at market rates, with the State receiving the interest-rate subsidy under a contract signed with the enterprise concerned.

Nevertheless, in the spirit of openness which will guide future international conventions, it has appeared essential to review the system as a whole in order to boost direct aid while reducing indirect aid tied to a loan spread over time. The new ACP-EC Partnership Agreement signed at Cotonou on 23 June 2000, which will replace the Lomé Convention, contains a new financial mechanism - the Investment Facility (IF) - that will make it possible to finance essentially private-sector investment. Like the risk capital funds under the old Convention, this Facility will be managed by the EIB. The main changes introduced by this Facility as compared with the former risk capital funds can be summarised as follows: unlike the risk capital funds, the Facility will function as a revolving fund, thus offering ACP countries a degree of security as to the finance available for private-sector development in the short, medium and long term. In addition, the operations financed by the Facility (essentially in the form of risk capital and loans) will be financed on conditions based on those of the local financial market. However, the agreement provides that interest-rate subsidies could be granted for certain specific operations, namely for:

(1) infrastructure projects in the least-advanced countries or in countries in a post-conflict situation that are essential for private-sector development. In these cases, the interest rate will be reduced by 3 percentage points, and

(2) projects involving restructuring operations in connection with privatisation or projects entailing substantial and clearly demonstrable social or environmental advantages. In these cases, loans may carry interest-rate subsidies the amount and form of which will be decided on the basis of the special features of the project and thus on a case-by-case basis, in line with predefined criteria. For this type of operation, the interest-rate reduction will not exceed 3 percentage points and will therefore be calculated on a case-by-case basis in line with the criteria jointly laid down by the EIB, the Commission and the Member States.

In all cases, the final interest rate on the loan will be no less than 50% of the reference rate, in order to avoid situations in which the final rate would be close to 0% or even negative.

The specific criteria for granting interest-rate subsidies will form part of the Facility's policy guidelines to be laid down jointly by the EIB and the Commission and submitted to the Investment Facility Committee, which will include representatives of the Member States.

The interest-rate subsidy will be financed by the EDF's long-term development resources. The funds necessary will not exceed 5% of the total amount allocated to finance investment by the Investment Facility and by the EIB out of its own resources, i.e. some EUR200 million.

B. Operational aspects

The EIB is currently managing the equivalent of 20.7% of the budget allocations of the 8th EDF, comprising EUR1 658 million in own resources (11.34% of the resources of the Convention) and EUR1 370 million in risk capital and interest-rate subsidies (19.36% of the Fund). As regards operations, the EIB has so far signed over 660 operations in the ACP countries, 190 out of its own resources and 470 out of EDF funds.

The activity of the new Investment Facility will be more targeted than in the past as far as interest-rate subsidies are concerned, but without the automatic aspect which existed in the past; it will still be possible for concessionary loans to be granted in some cases and on the basis of predefined criteria (see above).

The financial allocation for the Facility will be EUR2.2 billion for the First Financial Protocol (2000-05), which will be used to finance investment. To this will be added a further EUR200 million or so to finance interest-rate subsidies for projects financed both by the Facility and by the EIB out of its own resources.

C. Evaluation

It is fairly difficult to make a general evaluation of the impact of subsidies in the context of operations with 72 different ACP countries. Nevertheless, the purpose of the major changes concerning the Investment Facility is to correct the shortcomings of the past and to take into account the more open direction of international trade (WTO rules).

* The new Facility will have to take care not to generate distortions on local capital markets or to undermine local financial institutions. Instead, the financial resources provided should enable these institutions to mobilise other sources of finance.

* The Facility must not disrupt or conflict with national and regional financial and monetary policies or with policies advocated by international institutions.

* Unlike the public sector in the heavily indebted ACP countries, the private sector does not seem to consider the subsidy to be a determining factor in investment decisions, unlike other criteria, viz. provision of medium- and long-term financial resources, rapid disbursement, loans in local currency, etc.

* Concessionary loans may, however, be beneficial in the cases mentioned above since they encourage economic development and support investors in situations where the political and economic risks are particularly high.

5.7. Interest-rate subsidies linked to EIB loans in the Mediterranean

A. Description

Ø Protocols

From 1978 to 1992 EIB loans formed part of the cycle of five-year financial protocols that constituted an overall legal framework for financial and technical cooperation between the European Community and each Mediterranean country and territory; each protocol fixed a financial allocation indicating the origin of credits and the nature of the finance.

The beneficiary countries were then able to use the budget funds to subsidise all EIB loans by up to two percentage points, whatever the sector (infrastructure, water, industry, etc. ). The total amount of budget commitments for these interest-rate subsidies was EUR214 million

Ø Environmental protection: from 1992

In 1992, under the Renewed Mediterranean Policy, the EIB was instructed to implement a specific financing programme for projects to protect the environment; the corresponding Financial Regulation (outside the protocol) provided for an interest subsidy of three percentage points on these projects.

Subsequently, the Barcelona Declaration, adopted on 28 November 1995 at the Euro-Mediterranean Conference of Foreign Ministers, established the Euro-Mediterranean partnership, a joint initiative of the 15 members of the EU and 12 Mediterranean partners. The Council Regulation of 23 July 1996 laid down the financial and technical measures (MEDA) to accompany the reform of economic and social structures of the Mediterranean partners. It provides for a 3% interest-rate subsidy on EIB loans in the field of the environment.

In accordance with these provisions, interest-rate subsidies totalling EUR255 million were granted from 1992 to 1999 to 11 Mediterranean countries and territories and mobilised for 37 different projects. These projects concerned the treatment of waste water in order to reduce pollution in coastal rivers and in the Mediterranean, the reduction of industrial pollution and the treatment of solid waste.

Ø Financial and technical cooperation with the Palestinian territories

The July 1994 Regulation laying down the provisions for this cooperation was amended in December 1998, by providing in particular for the possibility of subsidising the loans granted by the EIB to these territories at the rate of three percentage points. Two subsidies totalling EUR8.6 million were decided in 1999. These subsidies are not restricted to the environment but cover the priority economic and social areas specified in the 1994 Regulation.

B. Operational aspects

Ø Area of intervention

The areas of intervention, which were extended under the protocol system, were restricted to the environment from 1992; the environment has therefore become the main eligibility criterion for the budget grant in the form of interest-rate subsidy, with the exception of the EIB loans granted to the Palestinian territories.

Ø Management

The EIB selects and prepares projects, draws up the financing proposal and then seeks both the opinion of the "Article 14 Committee" (MEDA), consisting of the representatives of the Member States, and the Commission's opinion. On the basis of this consultation, the EIB asks the Commission to take a decision to fund the granting of an interest-rate subsidy. Following an internal consultation process, the Commission submits to the MED Committee a draft decision authorising or, where appropriate, refusing the funding. The Commission decision is forwarded to the EIB; if the decision is favourable, the EIB may grant the subsidised loan.

The EIB and the Commission jointly see to the financial management of interest-rate subsidies on the basis of a management agreement signed between them.

No problem of repayment of EIB loans by the Mediterranean partners has been indicated.

In its Report 1/98 on the management of the protocols, the Court of Auditors referred to dormant commitments or commitments in excess of the needs of the operations concerned; the Commission replied that it had introduced a regular information system and that it had reexamined the dormant commitments as part of a periodic review.

C. Evaluation

Ø MEDA evaluations carried out in 1998 and 1999

In November 1998 the evaluation by external consultants of certain aspects of EU development aid for the Mediterranean region showed that coordination between the EIB and the Commission was working well and was the subject of regular consultations but that it could be improved by incorporating the EIB activities linked to the granting of budget funds into the national indicative programmes at an earlier stage.

In February 1999 the evaluation of the MEDA provisions carried out under Article 15(6) of the MEDA Regulation recommended that the procedure for deciding interest-rate subsidies should be simplified, alone the lines of the other operations managed by the Commission.

Ø Proposal for amending the MEDA Regulation

In its recent proposal to amend the MEDA Regulation (COM (1999) 494 final), the Commission stressed the need to streamline coordination with the EIB, i.e. in the preparation of strategies and at the programming stage; as far as interest-rate subsidies specifically are concerned, the Commission has followed the recommendation made in the evaluation and has proposed lightening the decision-making procedure by providing that, as interest-rate subsidies would be covered by approved national financing plans, they would not need to be submitted separately to the MED Committee; the "Article 14 Committee" approval procedure would require no modification.

The subsidy rate applied to each payment would be equal to half the interest rate relating to the payment in question, but in no case higher than the nominal rate of 3%.

The Commission proposal maintains the area in which interest-rate subsidies would apply, i.e. the environment; given the scarcity of water resources, the growing degradation of natural resources and the dense urbanisation of the region, the environment will become an even more important issue for all the countries bordering on the Mediterranean. Interest-rate subsidies constitute an incentive mechanism which has effectively enabled the Mediterranean partners to embark on specific environmental action programmes; the exception for the Palestinian territories is justified by the very special situation there in the context of the peace process.

Ø Evaluation of EIB activities in connection with the financing of the Community budget

An evaluation of the financial assistance to the Mediterranean countries managed by the EIB on behalf of the EC was launched at the beginning of this year; it covers the interest-rate subsidy and risk capital mechanisms. It will review the period 1979-99 and contain an analysis of the performance and impact of interest-rate subsidies and of the mechanisms and procedures; it will conclude by addressing recommendations to the Commission and the EIB. The results of this evaluation are expected shortly.

5.8. ERDF Programme

A. Description

Interest-rate subsidies part-financed by the Structural Funds, essentially the European Regional Development Fund, are managed not by the Commission but by the national and regional authorities in Member States charged with implementing multiannual regional development programmes within specific eligible areas.

B. Operational aspects

- SMEs in the less-developed areas of the EU face particular problems in terms of the cost of credit: although base interest rates charged by financial institutions are uniform and set nationally, a margin of additional interest is charged by banks to reflect the risks of a particular lending operation, these being higher for SMEs than for larger enterprises and often higher still for SMEs located in the less-developed regions.

- Applications for loans are vetted and granted in the normal manner by lending institutions, which agree the terms of the financing with the SME. The interest-rate subsidy is covered by a separate agreement and is paid to the SME during the term of the loan by the lending institution. The total financial cost to the SME is therefore the commercial interest rate paid to the lending institution, minus the interest-rate subsidy received from the managing authority under a regional development programme measure (such as a global grant) part-financed by the Commission.

C. Evaluation

In regional development terms, the interest cost of the finance required for an investment is reduced, enabling SMEs to invest and thereby to increase their production capacity and competitiveness. The subsidy is covered by a separate agreement from the loan agreement, thus ensuring a swift decision by the lending institution and reducing the administrative burden on the SME.

Interest-rate subsidies available under the Structural Funds are considered to be on an equal footing in terms of effectiveness with the several other forms of grant applied by the Funds. A number of lessons arising out of experience with interest-rate subsidies during the previous programming period are now being put into practice in the Commission's guidelines for the period 2000-06, in particular the need for an initial diagnosis of SME requirements, the need for prior consultation with intermediaries on the design of such schemes so as to avoid an unnecessary administrative burden on the banks and their information systems, and the fact that the targeting of interest-rate subsidies on particular SME sectors has generally enhanced their impact.

Article 29(4) [15] of the new Council Regulation laying down general provisions on the Structural Funds [16] explicitly encourages managing authorities to use forms of finance other than direct assistance, including interest-rate subsidies, by permitting an additional 10% for the maximum rate of contribution, in accordance with Article 28(3).

[15] Article 29 (4) (a) and (b) (iii).

[16] Council Regulation (EC) No 1260/1999 of 21 June 1999.

5.9. EAGGF Programme

A. Description of the action

- Amount of subsidies (statistics for the last five years):

Since the Agriculture Directorate-General does not grant interest-rate subsidies directly but only refunds the subsidies granted by the Member States for agricultural structures (see also the answers to point B below) and since Member States often combine different forms of investment aid (capital grants, interest-rate subsidies, guarantees for loans contracted, etc.) for the same aid scheme, the EAGGF Guidance Section does not possess any analytical statistics relating to the form of aid which it has helped to finance.

Nevertheless, by way of an example to indicate an order of magnitude, France declared for 1999 alone an amount of EUR244 million in interest-rate subsidies incurred in 1998, while each year the EAGGF Guidance Section refunds Member States' expenditure at variable rates set by the rules (25% to 60%) on the basis of various parameters such as the type of aid scheme, the status of the beneficiary or its location.

- Objectives

Interest-rate subsidies have so far been granted mainly in connection with the implementation of Objective 5a of the reform of the Structural Funds, namely the granting of official aid for investments made in agricultural holdings, and setting-up aid to young farmers (Articles 7, 10 and 11 of Regulation (EC) No 950/97).

The system of interest-rate subsidies has been extended for the new programming period 2000-06 (see Article 28(3) of Regulation (EC) No 1260/99 or Article 8(2) of Regulation (EC) No 1257/99).

- Criteria for granting subsidies

Numerous criteria and restrictive conditions have been laid down by Council Regulation (EC) No 950/97 in connection, for instance, with the economic conditions of the agricultural holding, the status of the farmer (practising farming as his main occupation, occupational skill, etc.) or with the type of production (no aid for surplus production).

B. Operational aspects

- Management: procedures for payment of subsidies

Within the fields of intervention of the EAGGF Guidance Section, it is up to the Member States to opt for the financial instrument they deem appropriate (interest-rate subsidies, grants, etc. or a combination of these instruments) in order to implement the aid scheme provided for in a multiannual programme of assistance decided on by the Commission.

Official aid is co-financed by the EAGGF Guidance Section and the Member States. The Community rules or the programme fix the rate of Community financial intervention. Payment by the EAGGF Guidance Section is made on the basis of a system of advances, followed by refund of the annual expenditure which each Member State declares to the EAGGF and which it has already financed in advance (system in force until 1999) or in the form of down payments/intermediate payments/payment of programme balance (system in force from 2000).

When Member States are responsible for choosing the financial instrument for implementing certain Community programmes, experience has shown that this choice has not been neutral from a financial point of view and in particular that it has been unlikely to minimise budget costs for the Community.

If there was genuine competitive bidding between financial bodies, the cost of managing these aid schemes could be partially reduced, but it should be remembered that the Commission disagrees with most of the Member States on the question of applying the public procurement Directives to financial services.

- Control: who is responsible and what are the procedures-

Under Council Regulation (EC) No 1260/99 (for instance, Article 38(1)), Member States take responsibility in the first instance for the financial control of programmes. The Commission, as part of its responsibility for the implementation of the general budget of the European Communities, ensures that Member States have smoothly functioning management and control systems so that Community funds are efficiently and correctly used (Article 38(2)).

The staff of the EAGGF Guidance Section regularly carry out on-the-spot checks, including sample checks, in the Member States.

- Visibility

As stated above, it is not up to the Commission to opt for any particular financial instrument to implement its programmes within the spheres of intervention of the EAGGF Guidance Section since this is a matter for the Member States (subsidiarity principle). Consequently, the question of desirability of choosing the system of interest-rate subsidies as such does not arise when it is a matter of implementing rules laid down by the Council.

C. Evaluation

- Do evaluation reports exist-

Evaluations are obligatory under the rules, but they chiefly cover the operational content of the programmes. However, there is as yet no properly targeted evaluation in terms of the type of financial instrument (e.g. the system of interest-rate subsidies).

Nevertheless, this lack of evaluation does not mean that there is no visibility as regards the system of interest-rate subsidies in this area. On the contrary, the on-the-spot checks we have carried out in the Member States have sometimes prompted hefty criticism of the economy of such a system for the Community budget, and in particular its cost effectiveness. The risk is that the Member States, in their subsidy statement, charge part of the cost of administering the scheme to the EAGGF Guidance Section by taking advantage of the reference rates, which diverge significantly from market interest rates.

5.10. Interest-rate subsidies in the central and eastern European countries - Phare budget

A. Description

Ø Historically, Community funds have provided two types of interest-rate subsidies for the central and eastern European countries: Slovenia benefited from the continuation of EIB subsidised loans to the former Yugoslavia, and the Phare programme has provided interest-rate subsidies for loans to SMEs in the applicant countries.

Ø From September 1993 to 1997 Slovenia benefited from a financial protocol with an EIB allocation of EUR150 million accompanied by interest-rate subsidies from the Community budget of EUR20 million for transport projects in the public interest.

An amount of EUR47 million was spent on repairing the main rail network in 1993; two loans totalling EUR41 million were signed in 1994.

A loan of EUR32 million was granted in 1995 in support of the existing motorway project, with a further EUR30 million being released in 1996 for the continuation of the project.

Subsequently, Slovenia reverted to the ordinary law applicable to the applicant countries, with pre-accession EIB loans which no longer included interest-rate subsidies but some of which enjoyed the Community budget guarantee. To a very large extent, these loans were made in the telecommunications sector.

B. Management

Ø Under financing provided by the Phare programme, interest-rate subsidies have been granted for loans to SMEs. These operations were carried out mainly in the early- or mid-1990s. Since inflation was high at the time, the beneficiary countries co-financed these operations (at very low rates) with banks which were to lend at the market rate. Of the total amount of the loan, the final beneficiary thus received a loan at a very advantageous rate. Once the operation had been carried out, it repaid both its bank and the State which had obtained the Phare funds and thus had funds available for allocation elsewhere.

Micro-loans were also granted at preferential rates to small firms under the Phare programme. They were often distributed by non-bank institutions.

C. Evaluation

According to various sources, these operations do not seem to have worked to the total satisfaction of the various players involved. There were repayment defaults. This can perhaps be explained in part by the difficulties that persisted while these operations were being carried out. It was also often difficult to find partners to disburse the loans. These operations were frequently organised in parallel with grants of guarantees, e.g. in the Czech Republic and Poland; the least encouraging experience was in Bulgaria.

The conclusions which can today be drawn from the provision of interest-rate subsidies for loans to SMEs are the following:

Ø The banking environment, coupled with the level of inflation, the weak involvement of the beneficiary States and the absence of specific policy objectives, adversely affected policy implementation, with it being impossible to obtain convincing results in several countries.

Ø However, relatively satisfactory results were obtained in Hungary because of the greater maturity of the banking system, the attitude of SMEs, and support of the Finance Ministry (possibility of co-financing, existence of an agency for SMEs) and of SME associations (which were members of the agency's board of management).

Ø A satisfactory rate of disbursement through the banking system depends less on the level of subsidy to the SME and more on other factors. The most important factors would appear to be the margin that can be earned by the bank compared to alternatives (e.g. using deposits), whether the risk is shared with or borne entirely by the bank, and who is responsible for exchange-risk losses. [17]

[17] Final synthesis report of the evaluation of Phare-financed programmes in support of SMEs (February 2000; pp. 46-48)

Ø See point 5.16 above for the FYROM and for Bosnia and Herzegovina.

5.11. Exceptional aid for the regions of Italy devastated by the earthquake of 1980

A. Description (Council Decision 81/19 of 20 January 1981)

The purpose of this action was to finance investments for the reconstruction of the means of production and the economic and social infrastructure in the areas affected by the earthquake of November 1980 which hit the Italian regions of Campania and Basilicata.

The Commission was empowered to contract loans in order to provide finance under the New Community Instrument (NCI). The amount of such loans could not exceed a principal equivalent to ECU 1 billion, subject to deduction of any operations of the same nature carried out by the EIB from its own resources.

Amount of the interest-rate subsidies

The budget of ECU 1 billion in loans authorised by the Council was covered up to an amount of ECU 613 million by NCI loans and up to an amount of ECU 353 million out of EIB own resources. In both cases, the loans carried an interest-rate subsidy of 3% per annum for a maximum of twelve years. The total amount in subsidies charged to the Community budget in respect of the NCI and EIB loans was ECU 240 million.

Objectives

To remedy the damage caused by the earthquake quickly and effectively by financing the investments required for the reconstruction of the means of production and the economic and social infrastructure.

Beneficiaries

Contractors of loans granted under the Council Decision on the basis of projects presented by the Italian authorities.

B. Operational aspects

Management

The Council had decided that the programme would be managed by the EIB on behalf of the Commission. An agreement was signed between the Italian Treasury, the Commission and the EIB on the procedures to be followed. Under this agreement, the loans were granted to state bodies, regional authorities, credit institutions and other bodies designated by the Italian Treasury.

Control

The agreement between the Treasury Minister, the Commission and the EIB specified that applications for subsidised loans were to be forwarded by the Italian Treasury with its favourable opinion; the loans were to be used exclusively to finance investment projects in accordance with the Council Decision.

The Court of Auditors pointed out that EIB checks were inadequate and that the Commission carried out no checks at all. In its replies, the Commission stated that the projects were eligible in accordance with the criteria laid down in the Decision and had been examined individually by the Commission in accordance with the procedure under Article 21 of the Bank's Statute.

C. Evaluation

Usefulness

The Italian authorities reported the estimated cost of the damage to be ECU 13 596 million. The Community contribution of ECU 1 billion accounted for just over 7% of that amount.

The breakdown of the loans per sector is as follows (in ECU million):

>TABLE POSITION>

Reconstruction of the damaged infrastructure and means of production was achieved by projects presented by the Italian authorities and declared eligible by the Commission in accordance with the Council Decision and the tripartite agreement.

However, in its reports, the Court of Auditors criticised:

- the time taken to complete the work, and

- the lower-than forecast number of jobs created.

Regarding the time taken to complete the work, there were various reasons for the delays: changes to the original projects, difficulties linked to expropriations, legal and administrative problems that arose in connection with the implementation of complex projects in difficult circumstances. Regarding job creation, the Commission indicated in its replies that this criterion was secondary to the main objective (reconstruction).

Cost-effectiveness analysis

No cost-effectiveness analysis was carried out. The reason for choosing interest-rate subsidies is the leverage effect: at a modest cost to the budget, they help to generate a high level of investment.

Did the beneficiaries gain from the financial advantages conferred by the interest-rate subsidies-

Almost all the projects were public-sector projects (water, railways, roads, public buildings, etc.). The effect of the subsidies was therefore to reduce the cost to the public authorities' budget.

Evaluation reports

The Bank produced progress reports on the work and summary reports by project and by group or economic sector (see above table). A general evaluation of the NCI was done internally by the Commission and sent to the Court of Auditors in 1994. Representatives of the Commission and the Bank were present at several on-site inspections by the Court of Auditors.

5.12. Exceptional aid to the regions of Greece devastated by the earthquake of 1981

A. Description (Council Decision 81/1013 of 14 December 1981)

The interest-rate subsidies concerned were intended for the reconstruction of the means of production and the economic and social infrastructure, including housing, in the affected regions.

Under the New Community Instrument (NCI), the Commission was empowered to contract borrowings of ECU 80 million on the capital market for financing loans in the affected regions. The loans carried an interest-rate subsidy of 3% per annum for a maximum of twelve years. The same subsidy was granted to recipients of EIB loans made for the same purposes.

The subsidies were granted in respect of projects in the western parts of Athens and Piraeus, in the towns of Corinth, Loutrakio, Megara, Thive, Kiato and Preveza and in 140 other localities.

The projects were presented by the Greek authorities. The EIB participated in the selection procedure.

B. Operational aspects

Borrowings were contracted by the Commission (NCI) and the EIB. The latter managed the loans according to the requirements of a cooperation agreement with the Commission and its usual loan criteria.

C. Evaluation

The subsidies, covering more than a third of t