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
Date: 1998-12-15
Institutions: European Commission
Subjects: EFTA countries, EIB loan, European Economic Area, development aid, interest rate subsidy

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. 

to  financial,  economic  and 

The  Mechanism  is  administered  by  the  EIB.  The  EEB appraises  each  project 
its 
according 
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. 

technical  criteria  as  well  as 

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 
Ireland 
Northern Ireland 
Portugal 
Spain 
TOTAL 

61.1 
35.5 
11.0 
523 
227.0 
386.9 

1 

Sectorial distribution 

Transport 
Environment 
Education 
Other 

ECU 
59 600 000 
244162 200 
82 045 000 
1071000 

Total 
15.4% 
63.1% 
21.2% 
0.3% 

The  grant  allocations  for  Ireland,  Northern  Ireland  and  Spain  have  been  fully 
committed. 

to 
Portugal  has  submitted  project  proposals  which  have  been  subject 
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 

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 
APPROVED LOANS 

Greece 
Ireland 
Northern  Ireland 
Portugal 
Spain 
TOTAL 

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% 

3 3 , 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: 

Iceland 

Norway. 

Liechtenstein 

Austria 

Finland 

Sweden 

Total 

Community budget from 1995 

1994 

1.078 

18.436 

0.187 

29.348 

20.526 

40.425 

110 

ECU million 

(0.98 %) 

(16.76 %) 

(0.17%) 

(26.68 %) 
Total: 

1995 

1.111 

19.063 

0.198 

(1.01 %) 

(17.33 %) 

(0.18%) 

1996 

1.122 

21.604 

0.198 

(1.02 %) 

(19.64 %) 

(0.18%) 

1997 

1.300 

25.935 

0.247 

(1.00%) 

(19.95 %) 

(0.19%) 

1998 

1.296 

27.916 

0.2565 

(0.96 %) 

(20.16%) 

(0.19%) 

Total 

4.907 

112.254 

1.0865 

(36.75 %) 

(18.66%) 
(82.09 %) 

89.6281 

(81.48%) 

87.076 

(79.16%) 

102.518 

(78.86 %) 

106.2315 

(78.69 %) 

475.7525 

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 
337 377 385.34 

Balance as of 30 June  1997 

Crediting 

Accrued interest 

6 491813.77 

Debiting 

Interest subsidies 
Grant disbursements 
Liaison Officer  function  cost 

- 23 888 846.55 
- 38 750 500.55 
- 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 
281 003  164.01 

Balance as of 31 December 1997 
Crediting 

Fifth  instalment in  1998 
Accrued interest up to 30.06.98 

Debiting 

Interest subsidies 
Grant disbursements 

135 000 000.00 
7 223 206.51 

- 7 433 788.14 
-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. 

11 

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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