Proposal for a Council Decision amending Decision 97/256/EC so as to extend the Community guarantee granted to the European Investment Bank to cover loans for projects in Bosnia and Herzegovina
Date: 1998-05-18
Institutions: European Commission
Subjects: Bosnia and Herzegovina, EIB loan, credit guarantee, economic reconstruction, financial cooperation

COMMISSION  OF THE EUROPEAN  COMMUNITIES 

Brussels,  18.05.1998 
COM(1998) 315  final 

98/0175 (CNS) 

Proposal for a 
COUNCIL  DECISION 

amending Decision 97/256/EC so as to extend the Community  guarantee 
granted to the European Investment Bank to cover loans 
for projects  in Bosnia and Herzegovina 

(presented by the  Commission) 

* ^  f 

•H\ 

i A* 

V  m 

EXPLANATORY  MEMORANDUM 

1.,  The  attached  proposal  has  been  drawn  up  at  the  request  of  the  Ecofin  Council  on 
9 March  1998.  It  deals  with  the  granting  of  a  Community  guarantee  to  the 
European Investment  Bank  (EIB) for  lending in Bosnia and Herzegovina,  out of its 
own resources, by means of amending the framework  Council Decision  97/256/EC 
of 14 April  1997. 

2. 

3. 

4. 

5. 

The proposal follows  the guidelines outlined in the report to the Council  addressing 
the  possibility  of  a  special  and  exceptional  Community  action  in  Bosnia  and 
Herzegovina based  on EIB  lending in this country  and which was presented  by the 
Commission  at  the  request  of  the  Ecofin  Council  on  16  February  1998 
(COM(98) 95 of 4 March  1998). 

In particular,  the proposal recommends  that  an amount  of ECU  100 million  in EIB 
loans  for  a  two-year  period,  as  from  the  date  the  Decision  takes  effect,  be 
underwritten  by the  Community.  EIB  loans will  be  granted  out  of the Bank's  own 
resources and according to the Bank's lending criteria. 

Given the low GDP of Bosnia and Herzegovina, for the EEB to intervene  effectively 
in  this  country,  Bank  loans  would  need  to  be  combined  with  a  substantial  grant 
element  from  the  Community  budget  which  could  take  the  form  of  a  2% 
interest-rate  subsidy  and/or  outright  grants  as  project  co-financing  and  to  be 
determined  on a case-by-case basis by the  Commission  and the Bank. The  level  of 
the  proposed  interest-rate  subsidy  is  the  same  as  that  already  granted  to  other 
ex-Yugoslav  republics,  and  most  recently  the  Former  Yugoslav  Republic  of 
Macedonia  (1998-2000). 

in  Bosnia  and  Herzegovina  and/or  outright  grants 

The  procedures  for  the  granting  of  interest-rate  subsidies  for  loans  made  by  the 
Bank 
intended  as 
project  co-financing  are  those  laid  down  under  Regulation  (EC)  No  1628/96  of 
25 July  1996 relating  to  financial  assistance  for  Bosnia  and  Herzegovina,  Croatia, 
the  Federal  Republic  of  Yugoslavia  and  the  former  Yugoslav  Republic  of 
Macedonia. These procedures ensure that the Committee referred  to in Article  12 of 
the Regulation is duly consulted by the Commission  on every project  on which it is 
proposed to grant an interest subsidy and/or to provide  co-financing. 

In  the  absence  of  a  protocol  on  financial  cooperation  between  Bosnia  and 
Herzegovina  and the  Community,  which  usually provides  the  framework  for  Bank 
activity  in  countries  outside  the  Community,  Bank  involvement  should  be 
consistent  with  the  policy  of  the  Union  in  this  country.  In  this  respect,  the  Bank 
will  operate  within  the  framework  of  the  reconstruction  programme  agreed  at  the 
in  close  cooperation  with  the 
various  donors'  conferences  and  will  work 
Commission.  The  reconstruction  programme  covers  a  wide  range  of  sectors 
including  the  traditional  sectors  for  Bank  intervention.  The  particular  sectors  that 
could  benefit  from  possible  Bank  financing  are  general  infrastructure,  including 
transport,  energy  and  the  environment,  with  the  focus  on  water,  waste-water  and 
sanitation  projects. 

6.  As  with  all  EIB  external  lending  guaranteed  by  the  Community  budget,  the 
proposed  lending  in Bosnia  and Herzegovina  is subject  to the arrangements  set out 
in Council  Regulation  (EC, Euratom) No  2728/94  of 31 October  1994  establishing 
a Guarantee Fund for the Community's  external lending activities. 

corresponding 

agreement 
shall 
The 
concluded between the  Commission  and  the  EIB  referred  to  in  Article  5  of 
Council Decision 97/256/EC. 

amendments 

be  made 

the 

to 

The  financial  impact  of  any  commitment  on  the  reserve  for  loans  and  loan 
guarantees  as  well  as  on  appropriations  for  operations  corresponding  to  the 
interest-rate subsidies is given in the attached financial  statement. 

7. 

The  Community  guarantee  for  the  Bank's  activities  in  Bosnia  and  Herzegovina  is 
subject  to  the  clearance  of  arrears  owed  to  the  Bank,  which  amounted  to  the 
equivalent  of  some  ECU  6  million  (including  penalties)  at  the  end  of  1997.  The 
settlement  of  arrears  is  expected  to  be  dealt  within  the  framework  of  the 
IMF-supported  programme. 

8. 

In view of the above, the Commission requests the Council: 

(i) 

to  amend  Council  Decision  97/256/EC  so  as  to  extend  the  Community 
to  cover  an  additional 
guarantee 
ECU  100 million  for  lending  out  of  its  own  resources  in  Bosnia  and 
Herzegovina  for a period of two years; 

the  European  Investment  Bank 

to 

(ii) 

to set the level of the interest-rate subsidy at 2% for  loans for projects  granted 
by  the  EIB  in  those  cases  in which  Community  financing  takes  the  form  of 
interest-rate  subsidies; 

(iii) 

to adopt the attached proposal. 

Proposal for a 
COUNCIL  DECISION 

amending Decision 97/256/EC  so as to extend the Community  guarantee 
granted to the European Investment Bank to cover loans 
for projects  in Bosnia and Herzegovina 

THE COUNCIL  OF THE EUROPEAN UNION, 

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

Having regard to the proposal from the Commission1, 

Having regard to the opinion of the European  Parliament2, 

Whereas  it  is  necessary  to  increase  efforts  to  ensure  a  stable  political  environment  in 
Bosnia  and Herzegovina;  whereas, within  the regional  approach  defined  by  the  Council, 
it  is  desirable  to  consider  an  exceptional  action  aimed  at  rebuilding  infrastructure  in 
Bosnia  and Herzegovina;  whereas, in order to  finance  this action, it is appropriate  to call 
on  the  European  Investment  Bank,  hereinafter  referred  to  as  "the  EIB";  whereas  the 
Council  has  invited  the  Commission  to  present  a  proposal  concerning  the  extension  to 
Bank 
laid  down  by 
in  Bosnia  and  Herzegovina  of  the  arrangements 
Council Decision  97/256/EC  of  14  April  1997  granting  a  Community  guarantee  to 
the European  Investment  Bank  against  losses  under  loans  for  projects  outside  the 
Community 
(Central  and  Eastern  Europe  countries,  Mediterranean  countries, 
Latin American and Asian countries and South  Africa)3; 

lending 

Whereas  the  involvement  of  the  EIB  in  Bosnia  and  Herzegovina  should  be  consistent 
with the policy of the Community  in this country; whereas the EIB should operate within 
the  framework  of  the  reconstruction  programme  agreed  at  the  various  donors' 
conferences  and  should  finance  projects  which  are  of  interest  to  the  Community  and  to 
Bosnia and Herzegovina; 

Whereas the loans granted by the EIB, from its own resources under conditions  laid down 
by  it  in  accordance  with  its  Statute,  would  need  to  be  combined  with  a  grant  element 
from  the  Community  budget  for  the  EIB  to  intervene  effectively;  whereas,  on  a 
case-by-case basis, this grant could take the form  of interest-rate  subsidies and/or outright 
grants  as  project  co-financing;  whereas,  in  the  case  of  interest-rate  subsidies,  it  is 
appropriate  that  the  subsidy  rate  should  be  the  same  as  that  already  granted  under  the 
protocols on financial  cooperation to other ex-Yugoslav republics; 

2 
3  OJL  102, 19.4.1997, p. 33. 

WTiereas Council Regulation  (EC) No  1628/96 of 25 July  1996 relating to aid for  Bosnia 
and  Herzegovina,  Croatia,  the Federal  Republic  of Yugoslavia  and  the  former  Yugoslav 
Republic  of  Macedonia4,  as  last  amended  by  Regulation  (EC) No  851/985,  provides  for 
aid measures; whereas  Article  8 of that  Regulation  states that  operations  referred  to  in it 
may  cover  expenditure  relating  to  interest-rate  subsidies  for  loans  granted  by  the  EIB; 
whereas  the  procedures  of  that  Regulation  for  the  financing  decisions  relating  to 
operations covered by it should apply to these new arrangements; 

Whereas the provision of interest-rate subsidies is of an exceptional nature and should not 
set a precedent  for Community  financial  assistance to Bosnia and  Herzegovina; 

Whereas  the  capacity  of  Bosnia  and  Herzegovina  to  service  its  external  financial 
obligations  should  be  secured  by  the  implementation  of  macroeconomic  reform 
programmes  supported by the international  financial  institutions; 

Whereas EIB lending should be conditional upon the discharge of all due and outstanding 
financial  obligations  of  all  public  entities  in  Bosnia  and  Herzegovina  towards  the  EIB 
and  the  Community  and  upon 
the  acceptance  by  Bosnia  and  Herzegovina  of 
responsibility by way of guarantee for such of those obligations as are not yet due; 

Whereas Decision 97/256/EC should therefore be amended  accordingly; 

Whereas,  the  Treaty  does  not  provide,  for  the  adoption  of  this  Decision,  powers  other 
than those set out in Article 235, 

HAS DECIDED AS FOLLOWS: 

Article 1 

Council Decision 97/256/EC  is hereby amended as follows: 

1. 

the 

In 
and  South  Africa" 
"... Asian countries, South Africa  and Bosnia and Herzegovina". 

"...Asian 

countries 

title, 

is 

replaced  by 

2 

Article  1 is replaced by the  following: 

(a) 

paragraph  1  is replaced by the  following: 

"l.The  Community  shall  grant  the  European  Investment  Bank  a  global 
guarantee  in  respect  of  all  payments  not  received  by  it  but  due  in  respect 
of credits  opened,  in  accordance  with  its  usual  criteria  for  investment 
projects carried  out  in  the  Central  and  Eastern  Europe  countries,  in  the 
Mediterranean  countries,  in  the  Latin  American  and  Asian  countries,  in  the 
Republic of South Africa  and in Bosnia and Herzegovina. 

4  OJ L 204,  14.8.1996, p. 1. 
5  OJL  122, 24.4.1998, p. 1. 

This gurantee  shall be restricted  to 70% of the gurantee  amount  of the credits 
opened, plus  all related  sums. The  overall  ceiling  of the credits  opened  shall 
be equivalent to ECU 7 205 million, broken down as follows: 

-  Central and Eastern Europe countries 
-  Mediterranean  countries 
-  Latin American and Asian countries 
-  Republic of South Africa 
-  Bosnia and Herzegovina 

ECU 3 520 million, 
ECU 2 310 million, 
ECU  900 million, 
ECU  375 million, 
ECU  100 million 

That ceiling  shall cover a period of three years beginning  on 31 January  1997 
for  Central  and  Eastern  Europe,  Mediterranean  and  Latin  American  and 
Asian  countries,  and  on  1 July  1997  for  the  Republic  of  South  Africa.  For 
Bosnia  and  Herzegovina  it  shall  cover  a  period  of  two  years  beginning  on 
[...  (date  of publication  of  amending  decision)  ...].  If,  on  the  expiry  of  each 
of  these  periods,  the  loans  granted  by  the  EIB  have  not  attained  the  overall 
to  above,  the  relevant  period  shall  be  automatically 
amounts  referred 
extended by six months." 

(b) 

the following  sixth indent is added to paragraph 2: 

-  Bosnia and  Herzegovina." 

The following  Article  la  is inserted: 

"Article  la 

1. 

2. 

3. 

4. 

The  provisions  of  paragraphs  2  to  7  shall  apply  to  EIB  lending  in  Bosnia 
and Herzegovina. 

The  Community  guarantee  shall  be  conditional  upon  clearance  in  full  by 
Bosnia  and  Herzegovina  of  its  outstanding  financial  obligations  towards  the 
EIB and the Community and upon the acceptance by Bosnia and Herzegovina 
of responsibility  by way of guarantee  for  such of those  obligations  as are not 
yet due. 

EIB  lending in Bosnia and Herzegovina  shall be consistent with the policy of 
the  Community 
in  this  country.  The  Bank  shall  operate  within  the 
framework of  the  reconstruction  programme  agreed  at  the  various  donors' 
conferences  and  shall  finance  projects  of  mutual 
in  general 
infrastructure,  including  transport,  energy  and  the  environment,  with  the 
focus  on the water,  waste-water  and  sanitation  projects  designed  to  speed  up 

interest 

- the reconstruction process. 

The  Commission  shall  ensure  appropriate  coordination  and  consistency 
between  operations  undertaken  pursuant 
those 
undertaken pursuant to Council Regulation (EC) No  1628/96*. 

this  Decision  and 

to 

Contributions  from  the  Community  budget  for  projects  in  Bosnia  and 
Herzegovina  covered by this Decision  shall  also take the form  of  interest-rate 
subsidies  for  loans  granted  by  the  Bank  and/or  outright  grants  intended  as 
project  co-financing.  The subsidy rate shall be 2%. 

Financial  decisions  relating  to  interest-rate  subsidies  on  EIB  loans  and/or 
project  co-financing  shall be  adopted  in  accordance  with  the  procedures  laid 
down in the Regulation (EC) No  1628/96. 

Article  1(3) shall not apply. 

The  Commission  and  the  EIB  shall  cooperate  whenever  appropriate  with  all 
international  financial  institutions  active in fields  similar to its own in Bosnia 
and Herzegovina. 

OJ L 204,  14.8.1996, p. 1." 

4. 

The following paragraph is added to Article 2: 

"The  Commission  shall  submit  to the  Council  and the European  Parliament,  at the 
latest  by  the  end  of  1999,  a  report  on  the  implementation  of  this  Decision.  This 
report  shall  in  particular  take  into  account  the  evolution  of  the  economic  and 
financial  situation  in  Bosnia  and  Herzegovina  and  the  commitment  level  of  EIB 
loans  and  shall  make  appropriate  recommendations.  To  this  end,  the  EIB  shall 
transmit to the Commission the appropriate  information." 

Article 2 

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 OPERATION 

Community  guarantee  granted  to the European  Investment  Bank  to cover  loans  for 
projects  in Bosnia and Herzegovina 

2. 

BUDGET HEADING  INVOLVED 

Article  BO-220:  European  Community  guarantee  for 
European Investment Bank to third countries in the Mediterranean Basin. 

loans  granted  by  the 

These  loans will receive  an interest-rate  subsidy  covered  by Article  B7-541,  which 
corresponds  to  aid  for  Bosnia  and  Herzegovina,  Croatia,  the  Federal  Republic  of 
Yugoslavia  and  the  former  Yugoslav  Republic  of  Macedonia  (Council  Regulation 
(EC) No  1628 of 25 July  1996). 

3. 

LEGAL BASIS 

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

4.  DESCRIPTION  OF  OPERATION 

The budget  entry  BO-220  is  intended  to provide  budgetary  back-up  for  guarantees 
offered  by  the  European  Community  to  the  European  Investment  Bank  to  cover 
loans of up to ECU  100 million which the EIB has been  asked to finance  in Bosnia 
and  Herzegovina  for  a  two-year  period.  The  involvement  of  the  EIB  should  be 
consistent  with  the policy  of the Community  in this  country.  In particular,  the EIB 
will  finance  infrastructure  projects  that  are  of  interest  to  the  Community  and  to 
Bosnia and Herzegovina. 

The  loans  granted  by  the  EIB  would  need  to  be  combined  with  a  grant  element 
from the  Community  budget  for  the  EIB  to  intervene  effectively.  This  grant  could 
take  the  form  of  a  2%  interest-rate  subsidy  and/or  outright  grants  intended  as 
project  co-financing.  Appropriations will be entered in B7-541. 

In  the  case  of  interest-rate  subsidies,  the  indicative  schedule  is  given  below 
(in ECU million): 

1998 

1999 

2000 

Maximum commitment  appropriations 
Payment  appropriations 

1.9 
— 

11.5 
1.4 

5.7 
2 

Appropriations  for  outright  grants  for  project  co-financing  are  as  yet  not 
foreseeable  given that they depend on the identification  of appropriate projects. 

5. 

CLASSIFICATION OF EXPENDITURE 

Compulsory 

6. 

TYPE OF EXPENDITURE 

A Community budget guarantee to the European Investment  Bank. 

7. 

FINANCIAL IMPACT  ON APPROPRIATIONS  FOR  OPERATIONS 

Only if the guarantee is called. 

7.1  Method of calculation 

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

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 

In the event  of a default,  payments would be made direct from the  Guarantee  Fund 
to the creditor. 

If  there  are  insufficient  resources  in  the  Guarantee  Fund  to  cover  a  default, 
additional resources may be released by drawing on the budget: 

-  any margin remaining in the reserve would be the first  resort; 

-  any  margin 

Financial Perspective  or 
second resort; 

available  beneath 
following 

ceiling 
the 
redeployment 

of  heading 4  of 
therein  would  be 

the 
the 

- 

- 

in  the  last  resort  the  Financial  Perspective  may  be  adjusted  in  accordance 
with the Interinstitutional  Agreement;  this may  involve redeployment  within  the 
other headings. 

In  order  to  honour 
the  Commission  may  draw  on  its 
cash resources  to  service  the  debt  provisionally.  In  this  case,  Article  12  of 
Council Regulation  (EEC, Euratom) No  1552/89 of 29 May  1989 will apply. 

its  obligations, 

9.  ANTI-FRAUD PROVISIONS PROVIDED FOR IN THE PROPOSAL 

Normal controls of the Commission 

10.  COST-EFFECTIVENESS  ANALYSIS 

10.1 

(i)  Quantifiable  objectives: See point 4 above, 
(ii)  Population: Bosnia and Herzegovina 

10.2  Grounds for the operation: 

To  support  the  economic  development  of  Bosnia  and  Herzegovina,  to 
reinforce  the  relationship  between  that  country  and  the  Community  and  to 
contribute to regional  cooperation. 

10.3  Monitoring and evaluation of the operation 

An  evaluation  report  will  be  submitted  to  the  Council  and  to  the  European 
Parliament before the end of 1999. 

11.  FINANCIAL IMPACT ON STAFF COST AND  OPERATIONS 

Not applicable. 

12. 

IMPACT ON THE GUARANTEE  RESERVE 

12.1  Estimated  schedule  of  loans  to  be  signed  while  the  Decision  is  in  force 

(in ECU million) 

1998 
10 

1999 
60 

2000 
30 

12.2  Estimated  use  of  the  guarantee  reserve  to  provision  the  Guarantee Fund 
(in ECU million): rate of provisioning:  14%; extent of guarantee: 70%». 

1998 
0.98 

1999 
5.88 

2000 
2.94 

12.3 

Estimated  use of the guarantee reserve including the loans  already  approved 
by Council and the present proposal (in ECU million).6 

1998 

1999 

Amount in the reserve 
Margin within the reserve 

338 
91.51 

346 

90.82 

2000 

n.a.7 

Situation as at 27 March  1998. 

6 
7  To be decided in the Financial Perspective 2000-2006. 

10 

ISSN 0254-1475 

COM(98) 315 final 

DOCUMENTS 

EN 

06  09  11 

Catalogue  number  :  CB-CO-98-318-EN-C 

ISBN  92-78-36131-3 

Office  for  Official  Publications  of the European  Communities 

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