Proposal for a COUNCIL DECISION granting a Community guarantee to the European Investment Bank against losses under loans for projects in South Africa
Date: 1994-12-02
Institutions: European Commission
Subjects: EIB loan, South Africa, credit guarantee, development plan, fund (EU), investment project

COMMISSION OF THE EUROPEAN  COMMUNITIES 

COM(94) 543 final 
Brussels, 02.12.1994 

94/ 0276  (CNS) 

Proposal for a 

COUNCIL DECISION 

granting a Community guarantee to the European Investment Bank against losses under 
loans for projects in South Africa 

(presented by the Commission) 

?ài 

EXPLANATORY  MEMORANDUM 

1. 

Introduction. 

Following  the  Council  Decision  of  last  December  d) on  a joint  action  concerning 
support  for  the transition  towards  a  democratic  and  multiracial  South  Africa,  the 
Council adopted on  19 April  1994 a package of immediate measures to be presented 
and discussed with the new South African  government <2>.  The Union thus sends a 
strong  signal  to  the  political  authorities  and  to  the  South  African  population  as 
regards  the  Union's  determination  to  support  the  emerging  democracy  and  its 
willingness  to  contribute to  the  reconstruction  and  economic  development  of  the 
country. 

The  package  of  immediate  measures  includes  among  its  main  features  trade  and 
economic  cooperation  and,  in  particular,  it  calls  for  a  consultation  with  the 
European Investment Bank regarding the expansion of its activities to South  Africa. 
The package also included an offer to conclude a Co-operation Agreement. 

On 4 October  1994, the Council  approved  a Co-operation  Agreement  between the 
Community and the Republic of South Africa  providing thus the legal base for  the 
Union  to  develop  general  and  specific  co-operation  programmes  with  the  New 
South  African  government.  The  Agreement,  signed  on  10  October  1994,  is  a 
further  step  in the  development  of  the  Union's  long-term  relationship  with  South 
Africa. 

The  present  Communication,  in  whose  preparation  the  EIB  has  been  fully 
associated,  concerns  loans  by  the  Bank  for  capital  investment  projects  in  South 
Africa. 

2.  Objective and utility of EIB lending 

South  Africa  benefits  from  good  physical  infrastructure,  an  advanced financial 
system  and  relatively  low  foreign  debt.  There  is,  however,  still  much  need  for 
infrastructure  investment  requiring external financing, in both urban and rural areas 
where large sections of the population lack basic facilities. 

The EIB intervention aims to provide finance for specific infrastructure  projects and 
for  projects  in the energy and industrial  sectors  (including  small and medium scale 
enterprises)  and to  contribute in this manner to  the  economic rehabilitation  of the 
new  South  Africa.  When  providing finance, the  EIB  also  serves  to  ensure  the 
overall  quality  of  the  projects  concerned.  Its  terms  and  conditions  demand  that 
projects contribute to an increase in economic productivity in general and in the case 
of  projects  in  the  productive  sector,  debt  service  must  be  covered  by  operating 
revenues.  This  drive for  quality  is  particularly  important  given  the  need  for  new 
investment.  Furthermore,  the  Bank's  staff  have  long  experience  and  proven 
expertise in this area. 

Where  appropriate  EIB  lending  can  be  made  in  conjunction  with  budgetary 
expenditure  specified  in  the  package  of  immediate  measures.  The  EIB  and  the 
Commission  will  cooperate  in  all  cases  where  this  complementarity  would  be 
appropriate. 

( 1 )  Council Decision 93/678/CFSP of 6 December 1993 
(2) 

Bull. UE 4-1994. 

3.  Volume of lending and guarantee. 

It is proposed  that  the total value of the loans granted  by the EIB in South  Africa 
should not exceed  ECU 300 million over an indicative period of two years. 

The EIB is bound  by its Statutes to  take adequate guarantees.  In particular, when 
the Community invites the Bank to intervene in third countries, loans are guaranteed 
by the general budget of the Community <•).  Given the nature of the economic and 
political changes in South Africa  and the Bank's lack of previous experience in this 
country,  it  is  sensible  that  a  full  coverage  should  be  granted  to  the  Bank's 
operations.  Similar  measures  have been  undertaken  with  respect  to  EIB  loans in 
Central  and  Eastern  European  countries  &  and  Latin  American  and  Asian 
countries <3>-

The  EIB  loans  to  South  Africa  are  subject  to  the  arrangements  set  out  in  the 
Regulation  <4> establishing  a guarantee  Fund  for  the  Community's  external  lending 
activities. 

4.  Conclusion. 

The Commission proposes to the Council: 

to  invite  the  EIB  to  extend  its  lending  operations  to  investment  projects  in 
South Africa under its usual terms and conditions; 

to  decide that,  subject  to  the approval  of the  EIB Board  of Governors,  EIB 
loans  for  a  maximum  sum  of  ECU  300  million  over  an  indicative  period  of 
two  years  should  be  made  available  to  South  Africa.  These  loans  will  be 
covered in full by the Community guarantee. 

to adopt the attached Decision. 

(1)  Except in the case of ACP countries where the guarantee is provided by the Member States. 
(2)  Council Decision 93/115/EEC of 23 February 1993 
(3)  Council Decision 93/696/ECof 23 December 1993 
(4)  Council Regulation... 

CONDITIONS OF EIB LOANS 

In general terms, the EIB operates in third countries as it does in the Community. The 
Bank issues bonds and makes loans, passing on to the borrower, following the customary 
rides,  the conditions obtained by the Bank. 

I. 

Currencies:  disbursements  are made  in  one or several currencies, following  the 
customer's requirements and  the  Bank's  resources.  In  all  cases,  the  credit  is 
denominated in ECU. 

Duration: this is a function of the type of projects and the nature of the borrowing. 
In general: 

- industrial projects: 
- infrastructure projects: 

8 to 10 years; 
12 to 20 years. 

3. 

Interest rate: the rate of borrowing from  the market incremented by a small margin 
to cover administrative expenses. 

This is regardless of  the nationality of  the customer,  the project's location or the 
project's risk. 

The interest rate is conditioned by the currency requested for  disbursement and is 
normally fixed  for  the  duration  of  the  Contract; other  formulae  could  be 
considered. 

Payment: in  the  same  currency as  the  loan;  usually  in  6  month instalments 
(following a grace period determined according to the project characteristics). 

Call for tender: international competition procedures apply. 

Guarantee:  the guarantee of the State concerned is requested,  although other first 
class guarantees could be envisaged 

Proposal for a 

COUNCIL DECISION 

granting a Community guarantee to the European Investment Bank against losses under 
loans for projects in South Africa 

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  of  the  Treaty  establishing  the  European  Community,  and  in  particular 
Article 235 thereof, 

Having regard to the proposal from the Commission, W 

Having regard to the opinion from the European Parliament,  <2> 

Whereas  the  Council  approved  on  4  October  1994  a  Co-operation  Agreement  between 
the  Community  and  the  Republic  of  South  Africa,  that  aims  to  promote  harmonious, 
balanced  and  sustainable  social  and  economic  development  and  that  commits  the 
Contracting  Parties to  step up co-operation  in all areas within their respective  spheres  of 
competence; 

Whereas South Africa is undertaking major political,  social and economic reforms; 

Whereas  these  economic  reforms  will  make  a  decisive  contribution  to  the  rapid 
establishment  of  mutual  beneficial  economic  and commercial  links between  South  Africa 
and the Community; 

Whereas the European Investment Bank is able to grant loans out  of its own resources  to 
help achieve this objective; 

Whereas, in particular, there is a great need for capital investment in this country; whereas 
this  investment  requires  external  finance;  whereas  the  European  Investment  Bank 
(hereinafter referred to as "the Bank") could make an important contribution; 

Whereas the Council  on  6  December  1993  decided  on  a joint  action  concerning  support 
for the transition towards a democratic and multiracial South Africa; 

Whereas the  Council  adopted  on  19  April  1994  a package  of  immediate  measures  to  be 
presented to the South African government  emerging from the democratic and multiracial 
elections of 26-28  April  1994; 

Whereas  the  Council  is  calling  on  the  Bank  to  begin  its  operations  in  support  of 
investment projects carried out in South Africa by offering  it the guarantee provided for in 
this Decision; 

Whereas  this  guarantee  is  subject  to  the  conditions  set  out  in  the  Regulation  <3> 
establishing a guarantee Fund for the Community's external lending activities; 

(1)  OJNo. C 
(2)  OJ No. C 
(3)  OJ No. 

Whereas  the  Bank  and  the  Commission  will  adopt  the  procedures  for  granting  the 
guarantee; 

Whereas,  for the purposes  of adoption  of this Decision,  the only  powers  provided  for by 
the Treaty are those given under article 235, 

HAS DECIDED AS FOLLOWS: 

Article  1 

The  Community  shall  guarantee  in  full  vis-à-vis  the  European  Investment  Bank  any 
payments  not  received  by  it  but  due  under  loans  granted,  in  accordance  with  its  usual 
criteria, in respect of investment projects carried out in South Africa. 

The guarantee  shall  be  restricted  to  an  overall  loan  ceiling  of  ECU  300  million  over  a 
period of two years beginning on the date this Decision takes effect.  If,  on expiry of this 
period,  the  loans granted  by the  Bank  have  not  attained  the  overall  amount  referred  to 
above, the two-year period shall be automatically extended by six months. 

Article 2 

The Commission  shall inform  the European Parliament  and the Council every six months 
of the situation regarding loans signed.  To that end, the Bank shall regularly transmit  to 
the Commission the appropriate  information. 

Article 3 

The Commission  shall inform  the European  Parliament  and the Council  each year of the 
loans operations and shall at the same time submit an assessment  of the operations of the 
scheme and of coordination between the financial institutions operating in that area. 

Article 4 

The Bank and the Commission shall fix the terms on which the guarantee is to be given. 

Article 5 

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

Done at Brussels, 

For the Council 

The President 

FINANCIAL STATEMENT 

1. 

TITLE OF THE OPERATION 

Guarantee of the European  Community to  loans of the European  Investment  Bank 
in South Africa. 

2.  BUDGET HEADING CONCERNED 

Article  BO-224.  Guarantee  of  the  European  Community  to  the  European 
Investment Bank for loans in South  Africa. 

3. 

LEGAL BASIS 

To be provided by the proposed decision, on the basis of Article 235 of the Treaty. 

4.  DESCRIPTION OF THE OPERATION 

The budget  entry  is intended to  provide budgetary back-up  for  guarantees  offered 
by the European Community to the European Investment Bank to cover loans for a 
maximum  of  ECU  300  million  over  a  two-year  period  which  the  Bank  has  been 
asked to extend to finance projects in South Africa. 

5.  CLASSIFICATION OF EXPENDITURE 

Compulsory. 

6.  NATURE OF EXPENDITURE 

A guarantee to the European Investment Bank. 

7 

FINANCIAL IMPACT ON APPROPRIATIONS FOR OPERATIONS 

Only in case of a call on the guarantee. 

7.1  Method of calculation 

A token entry is proposed, given that the amount and timing of any call on this 
budget  heading cannot be calculated  in advance and,  furthermore,  it is to be 
hoped that this entry will not be called on. 

7.2  Cost distribution by elements of the operation: 

Not applicable. 

7.3  Operational expenditure relating to studies, expert meetings, etc. 

Not applicable. 

8. 

FINANCING OF EXPENDITURE FOR OPERATIONS 

- 

As from the creation of the Guarantee Fund, any call on the guarantee will be 
covered by the Fund. 

If the  amount  of  the  call  on  the  Community  guarantee  exceeds  the  amounts 
available in the Fund, the article will be endowed  with funds via transfers,  via 
re-utilisation  of  amounts  repaid  (under  article  27(3)  of  the  Financial 
Regulation) or via a supplementary and/or amending the budget. 

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

9. 

COST-EFFECTIVENESS  ANALYSIS 

9.1 

i) 

Quantifiable objectives:  See point 4 above, 

ii) 

Population:  South Africa. 

9.2  Justification of operations: 

To  support  the  emerging  democracy  and  to  contribute  to  the  reconstruction 
and economic development of the country. 

9.3  Follow-up and evaluation of the action: 

Not applicable. 

10.  FINANCIAL IMPACT ON STAFF COST AND OPERATIONS 

Not applicable. 

11. 

IMPACT ON THE RESERVE FOR GUARANTEES. 

11.1  Estimated  schedule of loans to  be  signed while the decision is in force  (ECU 

million). 

1994 

1995 

1996 

125 

175 

11.2. Estimated use of the guarantee reserve to provision the guarantee Fund (ECU 

million)*1). 

1994 

1995 

1996 

— 

175 

24.5 

The Commission's proposal for a guarantee Fund determines a provisioning rate of  14% of the 

0) 
amount in principal for the operations decided on by the Council as from 1  January 1993.  Payments into 
the Fund for the type of operation indicated in the present proposal are to be made on the basis of the 
annual amounts indicated in the estimated schedule of operations. 

9 

11.3  Estimated  use  of  the guarantee  reserve  (including  the  present  proposal)  <•> 

(ECU million). 

1993 

1994 

1995 

1996 

1997 

1998 

1999 

Amount of reserve 

Margin within reserve 

313 

313 

318 

82 

323 

329 

335 

95.5 

87 

300.5 

341 

311 

347 

324 

(I)  Situation at 30 II 94 

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