COMMISSION OF THE EUROPEAN COMMUNITIES 
Brussels, 15.12.1998 
COM(1998) 758 final 
FOURTH ANNUAL REPORT FROM THE COMMISSION 
TO THE COUNCIL. THE EUROPEAN PARLIAMENT. 
THE ECONOMIC AND SOCIAL COMMITTEE 
AND THE COMMITTEE OF THE REGIONS 
THE EUROPEAN ECONOMIC AREA 
FINANCIAL MECHANISM 

I. The Financial Mechanism 
With the objective of stimulating economic cohesion and development between 
the European Economic Area (EEA) regions, a Financial Mechanism to support 
development projects in Greece, Ireland, Northern Ireland, Portugal and parts of 
Spain (the objective 1 regions as defined in 1988) was established on 1st 
January 1994 (article 115-116 of the EEA Agreement and Protocol 38). 
Over the five-year period ending 31 December 1998, the Financial Mechanism 
will allocate funds to the beneficiary regions of ECU 500 million in grant aid 
and interest rebates of 2 percentage points per annum on ECU 1.5 billion in 
loans, from the European Investment Bank (EEB). 
Priority should be given to projects which place particular emphasis on the 
environment (including urban development), on transport (including transport 
infrastructure) or on education and training. Among projects submitted by 
private undertakings, special consideration is given to small and medium-sized 
enterprises. 
The Mechanism is administered by the EIB. The EEB appraises each project 
according to financial, economic and technical criteria as well as its 
compatibility with the EU objectives, sectorial policies and environmental 
regulations and standards. 
The EIB then submits proposals to the Financial Mechanism Committee, 
appointed by the participating EFTA States and the Commission, which decides 
on the allocation of the financial resources available under the Mechanism. 
The Mechanism was initially funded by the participating EFTA States. The 
role of the Commission was to give an opinion on the basis of the proposals 
before the approval of the EFTA Financial Mechanism Committee. 
From 1 January 1995, following the accession of the Republic of Austria, the 
Republic of Finland and the Kingdom of Sweden to the European Union, 
Articles 83, 111 and 136 of the act concerning the conditions of this accession 
and the modification to the treaties on which the European Union is founded 
provide that the obligations of the three acceding countries for financing the 
Mechanism as laid down in article 116 of the EEA Agreement are financed out 
of the general budget of the European Communities. 
In consequence, the Commission has become co-responsible for the Mechanism 
in line with Art. 205 of the Treaty whereby the Commission shall implement the 
budget. The Communication by the Commission,adopted on the 30 march 1995 
(C(95) 753), established the operational aspects for dealing with the Financial 
Mechanism within the Commission. 
Following entry into force of the EEA Agreement for the Principality of 
Liechtenstein on 1 May 1995, the Principality now fully participates in the 
Mechanism. 
II. The fourth annual report 
A first annual report was presented by the Commission to the Council in June 
1995, concerning the activity of the Mechanism during the period from 01.01.94 to 
31.05.1995. 
The second annual report presented the activity concerning the Mechanism during 
the period from 01.01.95 to 30.06.96 and the third from 01.7.96 to 30.06.97. 
This fourth annual report presents the activity from 01.07.97 to 30.06.98. 
1. The activity of the Mechanism up to 30.06.98 
Since the creation of the Mechanism up to 30.06.98, the Financial Mechanism 
Committee has approved: 
grant applications to a total of ECU 386.928 million corresponding to 
77% of the total grant facility; 
interest rebates on a total loan portfolio of ECU 1330.60 million 
corresponding to 89% of the total EIB loan portfolio for which the interest 
rebate facility has been made available. 
In order to ensure full utilisation of funds by 31 December 1998, which is the 
deadline for new commitments, a letter was sent on 23 February 1998 to all 
beneficiary government reminding them of the deadline and informing them (i) 
of the possibility to decommit surplus funds by 31 July 1998 for recommitment 
in connection with new projects and (ii) of the deadline of 30 September 1998 
for submission of new applications or modifications. 
1.1. The progress of the grant activity up to 30.06.98 
The distribution by beneficiary country of the grants approved by the Financial 
Committee up to 30.06.98 and their sectorial distribution are shown below: 
Grants distribution by country 
MECU 
APPROVED GRANTS 
Greece 61.1 
Ireland 35.5 
Northern Ireland 11.0 
Portugal 523 
Spain 227.0 
TOTAL 1 386.9 
Sectorial distribution 
The grant allocations for Ireland, Northern Ireland and Spain have been fully 
committed. 
Portugal has submitted project proposals which have been subject to 
preconsultation with a positive result. Commitments are likely to be given for 
the remaining balance before the end of the year. 
Also Greece has produced proposals that would exhaust the available funds, 
provided that the Committee deems them eligible for granting commitments. 
However, uncertainties prevail in connection with several cases, and for that 
reason, the Committee has impressed on the Ministry of National Economy to 
process a sufficient number of proposals in order to ensure that the facility will 
be fully exhausted by end of 1998. 
As of 30 June 1998, the grant disbursement amounted to ECU 141.54 million 
(excluding the EEB's fee of 0.5%) corresponding to 28% of the total facility. 
4 ECU Total 
Transport 59 600 000 15.4% 
Environment 244162 200 63.1% 
Education 82 045 000 21.2% 
Other 1071000 0.3% 
1.2. The progress of the interest rebate activity up to 30.06.98 
The distribution by beneficiary country of the EIB loans benefiting from interest 
rebates approved by the Financial Committee up to 30.06.98 and their sectorial 
distribution are shown below: 
Loans distribution by country 
MECU 
Greece 
Ireland 
Northern Ireland 
Portugal 
Spain 
TOTAL APPROVED LOANS 
299.8 
106.5 
0.0 
260.6 
663.7 
1330.6 
Sectorial distribution 
Transport 
Environment 
Education ECU 
844 460 000 
447 140 000 
39 000 000 Total 
63.5% 
33.6% 
2.9% 
2,9% 
33,6%^^^^^^^^^^^^ ^^^^^^^|^^^^ 
Ireland has already fully absorbed the alloted interest rebates. It is expected that 
eligible projects in EIB's portfolio will absorb the remaining allotments in the 
other countries. In Northern Ireland, indications are that the interest rebates will 
be requested in support of EIB global loans. 
As of 30 June 1998, the EIB loans disbursement benefiting from interest rebates 
amounted to ECU 986.058 million, corresponding to 66% of the total facility. 
2. The approval of grants and interest rebates from 01.07.97 to 30.06.98 
The following grant applications, amounting to ECU 77.7102 million, were 
approved: 
Greece 
The Corfu Old Town Centre Renovation project 
ECU 4.13 million for renovation and development of the technical infrastructure 
in the old town including water distribution and sewage, telecommunication and 
electricity transmission and street pavement restoration. The area concerned 
comprises some 80% of the historical heritage of the city of Corfu. The project 
will allow the municipality to fully exploit its architectural and heritage assets. 
The Rehabilitation of Mount Athos Monasteries 
ECU 1.1502 million for rehabilitation and construction works at the 
Simonos Petras Monastery to supplement assistance already granted by the 
Financial Mechanism 
ECU 4.3 million for the reconstruction of important buildings in the 
monasteries of Aghiou Pavlou, Profitou Ilia and Xenophondos and for the 
Ormylia Convent for the further development of the Diagnostic Centre, 
safety and security measures for the ikons under survey or restauration as 
well as a pilot training programme for ikons researches and conservators. 
The realisation of the rehabilitations projects will contribute to the preservation 
of a unique cultural monument and will enable the development of the region's 
tourism potential and its diversification towards up-marked cultural tourism. 
Ireland 
The Technical Education project (secondphase) 
ECU 13 million for investments in 13 educational institutions at tertiary level in 
cofinancing with the European Regional Development Fund (ERDF). The 
project covers the construction of new buildings and extensions to provide 
teaching, training and general facilities at three national Universities and ten 
Technical Colleges. The project will help reinforce links between Colleges and 
industry through applied research and will meet industry and service demand for 
skilled staff and qualified professionals. 
Northern Ireland 
The Calgach Hotel Derry project 
ECU 3 million for construction of a 108 rooms three-star hotel in the central 
part of Derry. The promoter is a non-profit organisation. The project will 
complete a comprehensive reconstruction and revitalisation programme in Derry 
in the framework of the process of peace and reconciliation. 
Spain 
The Urban Renewal in Toledo 
ECU 22.94 million for renovation and urban rehabilitation works in the historic 
centre, pedestrianisation and construction of car parks. The project aims to 
contribute to the recovery of the historic centre for economic and social 
activities and draw back a part of the population that moved out of the area. 
The Via de la Plata (Extremadura) project 
ECU 15.7 million for the restoration of historical buildings and urban 
environment and construction of tourist facilities on several locations along the 
historical Via de la Plata. The project will contribute to protection and 
preservation of the region's valuable historical heritage. 
The Urban Renewal in Granada 
ECU 6.69 million for restoration or rehabilitation of roofs and facades in 
Albaicin in the old Moorish settlement, pedestrianisation and construction of an 
underground car park. The project aims to create a better urban environment, 
more conducive to the establishment of small artisan workshop and commerce 
and to develop tourism in the lower Albaicin and lower Alhambra areas of 
Granada. 
The Espacios Industrials (Las Palmas) project 
ECU 6.8 million for the rehabilitation of five small industrial areas within the 
city of Las Palmas. The project forms part of a larger programme for urban 
renewal, investment promotion and employment generation. 
The following interest rebate applications, amounting to a total loan amount 
of ECU 488.5 million were approved: 
Greece 
The South Pathe Motorway project 
Interest rebate on a loan of ECU 100.4 million for upgrading to motorway 
standard of the principal trunk road of the stretches connecting Yliki-Aghios 
Konstantinos and Raches-Aghii Theodori. 
Ireland 
The Irish Infrastructure Framework project 
Interest rebate on a loan of ECU 66.5 million for infrastructure improvements 
including road works, sewerage works and used water treatment facilities. The 
project forms part of the priority Trans European Network (TEN) infrastructure 
and receives cofinancing from the European Regional Development Fund 
(ERDF) and from the Cohesion Fund. 
Spain 
The BCL Environmental Global Loan II 
Interest rebate on a loan of ECU 18 million for the Banco de Credito Local 
(BCL) for financing of small and medium-scale environmental investments 
undertaken by private and public entities. This new global loan to BCL will 
contribute to the protection of the environment in objective 1 areas in Spain. 
The Technical Education project in Valencia 
Interest rebate on a loan of ECU 15 million for the extension of facilities and 
provision of new equipment for the University of Valencia. The project aims at 
meeting university based training needs and enhancing professionnal 
qualifications in various technical and business administration fields at the 
University. 
The Leon-Burgos Motorway project 
Interest rebate on a loan of ECU 24.3 million for the construction of a stretch 
motorway connecting Onzonilla-Santas Martas and Sahagun-San Marnes de 
Campos of the Leon-Burgos Motorway. 
The Regional Road Network project in Asturias 
Interest rebate on a loan of ECU 15 million for repair and upgrading of several 
road schemes in Asturias. 
The Reconstruction of Infrastructure in Andalucia 
Interest rebate on a loan of ECU 18 million for urgent restoration works located 
throughout the region following severe winter flooding. The project responds to 
an emergency situation and intends to repair existing roads, urban and 
environmental infrastructure. 
The Improvement to Education Infrastructure in Galicia 
Interest rebate on a loan of ECU 24 million for the construction and 
rehabilitation of mainly secondary and vocational school blocks at different 
locations in Galicia. These investments will bring Galicia's educational 
infrastructure up to the minimum Spanish legal requirements for educational 
institutions. 
The Extension of the Port of Valencia 
Interest rebate on a loan of ECU 12 million for the construction of a breakwater 
in the new area of the port, the construction of quays for container traffic, the 
landfilling and re-organisation of the road/rail network within the port. The 
project will provide additional capacity to one of the major Spanish and 
mediterranean ports which is also an important node in the Transeuropean 
Network. 
3. The funding of the Financial Mechanism 
The Act of Accession (Articles 83, 111, 136) specifies that the shares of the new 
Member States in the Mechanism are to be met from the general budget of the 
Communities. On a proposal from the Commission (COM(94) 398), the 
financial perspective has already been reworked accordingly by adding a new 
heading under "Structural Activities". The budget adopted for 1998 contains a 
heading with the relevant comments (B2-401). The amount forecast for each 
year is ECU 108 million. 
As far as the actual payments are concerned, taking over the shares of the new 
Member States means complying with the terms of Article 4A of the 
Cooperation Agreement between the EFTA countries and the EIB dated 
30 June 1992, as amended by the amending protocol of 18 June 1993. 
In line with these procedures, the contribution for 1998 and the shares between 
the participating EFTA countries and the Commission were decided respectively 
by the Financial Mechanism Committee on 16 December 1997. These 
contributions were calculated in accordance with the gross national product at 
market prices using data for the last three calendar years and assuming a total 
annual contribution of ECU 135 million. 
3.1. A total contribution of ECU 135 million for 1998 
At the creation of the Financial Mechanism a first estimate was made 
corresponding to an annual instalment of ECU 130 million. However, during the 
years 1994-1996, initial funding and replenishment of ECU 110 million of the 
Financial Mechanism took place as shown in the table below together with the 
aggregated contributions during the same period. 
Article 4 of the Cooperation Agreement states that the participating EFTA 
States and the Community budget shall deposit the amounts necessary to meet 
the commitment schedules, the consequent disbursements and the associated 
administrative costs of the interest payments and the grants. The Bank and the 
Committee shall review the amount of grants and the interest subsidies 
disbursed in order to determine the amounts of the subsequent instalments to be 
deposited by the participating EFTA States and the Commission. Any amount 
outstanding at the time of termination of operations shall be repaid to the 
participating EFTA States and the Community budget. 
On 17 December 1996 and on 16 december 1997, the Financial Mechanism 
Committee decided that the contributions from the donors would have to rise 
accordingly in order to meet the final obligations. Even though all the 
contributions have not been used it is important to keep a reasonable 
contribution to the Mechanism account each year in order to be able to match 
reasonably the future final obligations in terms of commitments at the end of 
1998. An increase Trom ECU 110 mill, to ECU 130 mill, in the replenishment 
for 1997 and a replenishment of ECU 135 million for 1998 have been decided. 
3.2. The share between the Commission and the participating EFTA 
countries 
The cost sharing of the initial funding and replenishment of the Financial 
Mechanism calculated in accordance with the gross national product at market 
prices using data for the last three calendar years is the following: 
ECU million 
1994 
1995 
1996 
1997 
1998 
Total Iceland 
1.078 
(0.98 %) 
1.111 
(1.01 %) 
1.122 
(1.02 %) 
1.300 
(1.00%) 
1.296 
(0.96 %) 
4.907 Norway. 
18.436 
(16.76 %) 
19.063 
(17.33 %) 
21.604 
(19.64 %) 
25.935 
(19.95 %) 
27.916 
(20.16%) 
112.254 Liechtenstein 
0.187 
(0.17%) 
0.198 
(0.18%) 
0.198 
(0.18%) 
0.247 
(0.19%) 
0.2565 
(0.19%) 
1.0865 Austria Finland Sweden 
Community budget from 1995 
29.348 
(26.68 %) 
Total: 20.526 
(18.66%) 
(82.09 %) 40.425 
(36.75 %) 
89.6281 
(81.48%) 
87.076 
(79.16%) 
102.518 
(78.86 %) 
106.2315 
(78.69 %) 
475.7525 Total 
110 
110 
110 
130 
135 
595 
In consequence, the Commission approved on 19 February 1998 the Community 
budget contribution for 1998 of ECU 106 231 500. 
1 The Commission did not request a transfer of Liechtenstein's reimbursement in August 1995. 
Accordingly, this amount was deducted from the third instalment in 1996. 
10 
4. The Mechanism account at the EIB 
As of 31 December 1997, the balance of the Financial Mechanism account was 
ECU 281 003 164.01. In summary, the account transactions during the second 
semester of year 1997 were as follows: 
ECU 
Balance as of 30 June 1997 337 377 385.34 
Crediting 
Accrued interest 6 491813.77 
Debiting 
Interest subsidies - 23 888 846.55 
Grant disbursements - 38 750 500.55 
Liaison Officer function cost - 226 688.00 
Balance as of 31 December 1997 281 003 164.01 
As of 30 June 1998, the balance of the Financial Mechanism account was ECU 
399 184 268.33. In summary, the account transactions up to 30.06.98 have been 
the following: 
ECU 
Balance as of 31 December 1997 281 003 164.01 
Crediting 
Fifth instalment in 1998 135 000 000.00 
Accrued interest up to 30.06.98 7 223 206.51 
Debiting 
Interest subsidies - 7 433 788.14 
Grant disbursements -16 608 314.05 
Balance as of 30 June 1998 399 184 268.33 
5. Coordination and complementarity with other financial instruments of the 
European Union 
The Commission ensures, within the framework of the partnership, coordination 
and consistency between the projects carried out under the Financial Mechanism 
and measures undertaken by the Structural Funds, the Cohesion Fund, the 
European Investment Bank and the other financial instruments of the European 
Union. 
In that respect, operating rules concerning the combination and overlapping of 
the Financial Mechanism aid with other Community assistance, have been 
clearly defined in the "Operational arrangements" concluded between the 
Commission and the European Investment Bank, on 9 March 1994. 
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ISSN 0254-1475 
COM(98) 758 final 
DOCUMENTS 
EN 09 10 01 17 
Catalogue number : CB-C0-98-758-EN-C 
Office for Official Publications of the European Communities 
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