Special Report No 3/99 on the management and control of interest Prate subsidies by the Commission, with the Commission's replies (submitted pursuant to Article 248(4), second subparagraph, EC)
Date: 1999-06-16
Institutions: European Court of Auditors
Subjects: European Court of Auditors, budgetary control, interest rate subsidy, management, report

29.7.1999

EN

Official Journal of the European Communities

C 217/1

I

(Information)

COURT OF AUDITORS

SPECIAL REPORT No 3/99

on the management and control of interest-rate subsidies by the Commission, with the
Commission(cid:146)s replies

(submitted pursuant to Article 248(4), second subparagraph, EC)

(1999/C 217/01)

TABLE OF CONTENTS

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Purpose of the report and methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Audit field . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Paragraph
reference

1.1-1.7

1.3-1.5

1.6-1.7

CHARACTERISTICS OF THE MEASURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2.1-2.17

Temporary facility for SMEs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2.5

Subsidies under Article 56 of the ECSC Treaty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2.6-2.7

NCI/EIB earthquake loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Reconstruction of Madeira . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Programme for peace in Ireland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Trans-European networks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2.8

2.9

2.10

2.11

EEA financial mechanism. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2.12-2.13

Sixth and seventh EDFs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2.14-2.16

Financial cooperation with the Mediterranean countries, Cyprus, Malta and Slovenia . . . . . .

2.17

OBSERVATIONS CONCERNING THE MANAGEMENT, ENTRY IN THE ACCOUNTS AND
CONTROL OF INTEREST-RATE SUBSIDIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3.1-3.16

Amounts received by beneficiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3.2-3.5

Eligibility and follow-up of projects entrusted to the EIB. . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3.6-3.7

Effectiveness of the subsidies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3.8-3.11

Entry in the accounts of the subsidies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

3.12-3.16

CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4.1-4.4

Page

2

2

3

3

3

5

5

5

5

5

6

6

6

7

7

7

7

8

8

The Commission(cid:146)s replies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

11

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Official Journal of the European Communities

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INTRODUCTION

1.1. The Commission has granted aid in the form of interest-rate
subsidies since 1967 because of the considerable leverage effect
this financial instrument is thought to have. It is actually, in theory,
non-repayable aid which is intended to promote significant
amounts of investment at comparatively low cost to the budget
(see Table 1).

In practice, interest-rate subsidies are an accompaniment to
1.2.
certain loans. The loans concerned are granted by either the Com-
mission or banks, one of which is the European Investment Bank
(EIB), which also administers the corresponding subsidies as the
Commission(cid:146)s agent (except for Madeira and Ireland).

sures, accounting for approximately half of the indicative volume
(see Table 1). However, by virtue of Article 274 of the Treaty estab-
lishing the European Community, its responsibility for imple-
menting general budget expenditure remains unchanged. The
same is true of the implementation of the European Coal and
Steel Community(cid:146)s (ECSC) and the European Development Funds(cid:146)
(EDFs) operating budgets.

1.4. The purpose of this report is to evaluate the extent to which
the Commission is discharging this responsibility and, con-
sequently, carrying out controls to enable it to draw up reliable
accounts, ensure the legality and regularity of the underlying
transactions and evaluate the effectiveness of these subsidies. The
Court has thus examined the procedures applied within the rel-
evant Commission departments to manage and control interest-
rate subsidies.

Purpose of the report and methodology

1.3. The Commission is allowed to delegate the management of
interest-rate subsidies, and does so for the majority of the mea-

1.5. A number of measures in the form of interest-rate subsidies
have been the subject of specific audits and Court reports (see
Table 2). A horizontal approach has been adopted for this Report,
which focuses on aspects that are common to several measures of
this type.

Financial data concerning measures consisting of interest-rate subsidies

Table 1

(in million ECU)

Measures

Indicative overall
volume

Commitment period

Payments in 1997

Management of subsidies

TF SMEs

Article 56 of the ECSC
Treaty

NCI/EIB earthquakes

Madeira

Ireland

TENs

EEA-FM

Sixth EDF

Seventh EDF

100

620

240

4

28

1994 to 1996

1967 to 1997

1982 to 1999

1996 to 2007

1995 to 1997

Not applicable

1995 to 1999

145

210

286

1993 to 1997

1986 to 1990

1991 to 1995

MNCs/MEDA

Not applicable

1992 to 1999

SMCs

Not applicable

Since 1978

Cyprus and Malta

Not applicable

Since 1976

Slovenia

20

1993 to 1997

0

18,5

3,4

0,5

p.m.

10,1

p.m.

p.m.

53,1

4,5

21,2

1,4

4,2

Delegated to the EIB

Directly by the
Commission

Delegated to the EIB

Directly by the
Commission

Directly by the
Commission

Directly by the
Commission

Delegated to the EIB

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Summary of the Courts latest observations on measures consisting of interest-rate subsidies

Table 2

Measures

Court reports

TF SMEs

Observations currently being drafted

Article 56(2) of the ECSC Treaty

Annual reports concerning the ECSC for the financial years 1996 (OJ C 380,
15.12.1997), 1995 (OJ C 377, 13.12.1996) and 1993 (OJ C 346, 7.12.1994)

NCI/EIB earthquakes

Ireland

EDF

OCT

Annual reports concerning the financial years 1996 (OJ C 348, 18.11.1997, para-
graphs 18.7 to 18.24), 1994 (OJ C 303, 14.11.1995, paragraphs 8.3 to 8.23), 1993
(OJ C 327, 24.11.1994, paragraphs 10.3 to 10.19) and 1991 (OJ C 330, 15.12.1992,
paragraphs 12.12 to 12.48)

Observations currently being drafted

1996 EDF DAS (OJ C 348, 18.11.1997, paragraph 22.46), 1995 (OJ C 395, 31.12.1996,
paragraphs 3.9, 3.69 and 3.77) and 1994 (OJ C 352, 30.12.1995, paragraphs 3.9
and 3.29);
Annual reports concerning the financial years 1993 (OJ C 327, 24.11.1994, para-
graphs 15.87 et seq.) and 1991 (OJ C 330, 15.12.1992, paragraphs 17.42 et seq.)

Special Reports No 1/98 (OJ C 98, 31.3.1998, paragraphs 137 to 149) and No 3/91
(OJ C 252, 26.9.1991, paragraph 4.21 in particular)

Audit field

1.6. The aid examined comprises all
interest-rate subsidies
financed by the general budget (GB) of the European Union, the
ECSC operating budget or the EDF. The majority of the measures
concerned originated with a Council Decision. Measures relating
to non-member countries are generally included in the agree-
ments, conventions or protocols concluded with the latter. The
principle underlying this type of aid is to reduce the financial bur-
den in terms of the interest payable on certain loans contracted
by the beneficiaries by either paying part of the interest on their
behalf, or refunding it to them.

1.7. Some forms of interest-rate subsidy are not dealt with in this
report, inter alia:

(a) the majority of those relating to measures which have no
separate budget heading and are included indiscriminately
with other types of subsidy in the budget;

(b) those paid by national bodies under the Structural Funds, and
ERDF (cid:145)quasi-subsidies(cid:146) paid on the basis of loans contracted
by the beneficiaries, but in the form of subsidies.

CHARACTERISTICS OF THE MEASURES

2.2. For this reason, the methods of calculation, payment and
entry in the accounts vary widely between one measure and
another. The only interest-rate subsidies that show significant
similarities are those paid in connection with the EDF and in the
Mediterranean countries, Malta, Cyprus and Slovenia.

2.3. The annual subsidy rates range from 1,5 % to 4 % of the
subsidised amount of the loans, according to the case, over
periods ranging from five years to the entire life of a loan. Trans-
European networks constitute a special case, as the subsidy may
amount to 100 % of the interest payable over five years (see para-
graph 2.11).

2.4. The financial data relating to measures that comprise interest-
rate subsidies are summarised in Table 1 and set out in brief below.

Temporary facility for SMEs

2.5. The interest-rate subsidies accompanying loans granted to
small and medium-sized enterprises (SMEs) by the EIB under its
temporary lending facility (1) are intended to increase the com-
petitiveness of European SMEs and to encourage them to create
jobs. These subsidies amount to 2 % per annum over five years
and the loans are for a minimum of five years and cover no more
than 75 % of the investments. The ceiling on such subsidies is
ECU 3 000 for each job created.

2.1. Table 3 sets out the various aid measures in the form of
interest subsidies, categorised by their aims. Their objectives and
conditions, such as their eligibility criteria, are very diverse and
have few common characteristics, in particular because of the
divergent economic contexts within which they operate.

(1) Council Decision 94/217/EC of 19 April 1994 on the provision of
Community interest subsidies on loans for small and medium-sized
enterprises extended by the European Investment Bank under its tem-
porary lending facility (OJ L 107, 28.4.1994, p. 57).

Classification by objective of measures consisting of interest-rate subsidies

Table 3

Objectives

Measures

Loan sources

Origin of the
subsidies

Annual
subsidisation rates

Duration of the
subsidies

Specific limits

Intermediairies

Beneficiaries

Job creation

TF SMEs

EIB

EC

Five years

(cid:151) ECU 3 000 per job created
(cid:151) ECU 81 000 per small-

EIB, agents and
banks

SMEs in the EU

Commission

ECSC

EIB or Commis-
sion

EC

Reconstruction of
stricken regions

Article 56 of the
ECSC Treaty

NCI/EIB
earthquakes

Madeira

Peace-making in a
region

Ireland

EIB

EIB

2 %

3 %

3 %

3 %

scale SME

(cid:151) 7,5 % of the investment

(cid:151) ECU 2 000 per job created

Banks

10 years

Not applicable

EIB

12 years

Not applicable

EIB and the
Autonomous Region
of Madeira

National bodies and
banks

EC

4 % then 3 %

Five years

(cid:151) project cost < ECU 12 mil-

lion

(cid:151) loan < 50 % of the project
(cid:151) loans between ECU 15 000
and ECU 3 million in
Northern Ireland, and
between ECU 15 000 and
ECU 1 million in the
border counties

Development of the
trans-European
networks

Reduction of dispar-
ities within the EEA

TENs

EEA FM

Development of non-
member countries

Sixth and seventh
EDFs

EIB or other
banks

EIB

EIB

MNCs/MEDA/SMCs

Cyprus, Malta,
Slovenia

EC

Not applicable

Five years

(cid:151) Value of the interest over

EIB or other banks

five years

(cid:151) 10 % of the project(cid:146)s cost

EC via EEA FM

2 %

10 years

Not applicable

EDF

EC

Between 3 % and
6 %

25 years
maximum

Not applicable

Between 1,5 %
and 3 %

From 15 to 20
years on average

EIB

EIB

Enterprises in the
ECSC regions

Public bodies in
regions affected by
earthquakes

SMEs and other
enterprises investing
in the region
concerned

Public bodies and
private companies

Public bodies

ACP countries and
OCT

Non-member
countries concerned

C
2
1
7
/
4

E
N

O

f
f
i
c
i
a
l

J
o
u
r
n
a
l

o
f

t
h
e

E
u
r
o
p
e
a
n
C
o
m
m
u
n
i
t
i
e
s

.

.

2
9
7
1
9
9
9

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Subsidies under Article 56 of the ECSC Treaty

Reconstruction of Madeira

2.6. The conversion subsidies granted under Article 56(2)(a) of
the Treaty establishing the ECSC (2) are intended for enterprises
located in ECSC regions that make job-creation investments. In
recent years these subsidies have amounted to 3 % per annum
over five years, the maximum amount payable being limited to
ECU 2 000 for each job created.

2.9. The loan for the reconstruction of the regions stricken by
the cyclone which hit Madeira in October 1993 (8) is intended to
alleviate the cyclone(cid:146)s effects on the population(cid:146)s economic and
social well-being by financing projects for road infrastructure,
improving embankments, water distribution, hydroelectric power
and housing that were carried out from 1993 onwards. The related
subsidy amounts to 3 % per annum over 12 years.

2.7. As the ECSC Treaty will expire in 2002, the final commit-
ments (amounting to ECU 1,8 million) in respect of this measure
were entered into in 1997 and the Commission now only has to
make payments, cancellations or recoveries relating to past com-
mitments, the balance of which amounted to ECU 210 million on
31 December 1997. The Court has in recent years formulated
observations concerning this measure (3).

The NCI/EIB earthquake loans

2.8. The subsidies allocated to the regions affected by the earth-
quakes in Italy in 1980 (4) and in Greece in 1981 (5) and 1986 (6)
are intended for the reconstruction of the means of production
and economic and social infrastructures in these areas. They
amount to 3 % per annum for the life of the corresponding loans
(10 years on average), are paid to the EIB on a half-yearly basis by
the Commission and are in addition to the reduced-rate interest
payable by the beneficiaries. The Court has in recent years formu-
lated observations concerning this measure (7).

(2) Article 56(2)(a) of the Treaty establishing the European Coal and Steel

Community (ECSC).

(3) The Court(cid:146)s annual reports concerning the ECSC for the financial
years 1993 (OJ C 346, 7.12.1994), 1995 (OJ C 377, 13.12.1996) and
1996 (OJ C 380, 15.12.1997).

(4) Council Decision 81/19/EEC of 20 January 1981 on Community aid
granted by way of exception for the reconstruction of the regions
affected by the Italian earthquake in November 1980 (OJ L 37,
10.2.1981, p. 21).

(5) Council Decision 81/1013/EEC of 14 December 1981 on Community
aid granted by way of exception for the reconstruction of the regions
affected by the Greek earthquakes in February and March 1981 (OJ
L 367, 23.12.1981, p. 27).

(6) Council Decision 88/561/EEC of 7 November 1988 on Community
aid granted by way of exception for the reconstruction of the regions
affected by the Greek earthquakes in September 1986 (OJ L 309,
15.11.1988, p. 32).

(7) Court reports containing criticisms of the NCI/EIB earthquake instru-
ments: annual reports concerning the financial years 1996 (OJ C 348,
18.11.1997, paragraphs 18.7 to 18.24), 1994 (OJ C 303, 14.11.1995,
paragraphs 8.3 to 8.23), 1993 (OJ C 327, 24.11.1994, paragraphs 10.3
to 10.19) and 1991 (OJ C 330, 15.12.1992, paragraphs 12.12 to
12.48).

Programme for peace in Ireland

2.10. Among the 30 or so measures provided for in the Com-
munity initiative (9) relating to the (cid:145)programme of special support
for peace and reconciliation in Northern Ireland and the border
counties of Ireland, 1995 to 1999(cid:146), the measure comprising
interest-rate subsidies is more specifically intended to encourage
productive investment that will create and safeguard jobs. How-
ever, the number of jobs that are created or safeguarded is not
used as a basis for calculating the subsidies, which amount to 4 %
per annum from 1995 to 1997 and 3 % per annum in 1998 and
1999.

Trans-European networks

2.11. When this report was adopted, the interest-rate subsidy
component of Community aid in respect of trans-European net-
works (TENs) (10) represented only a minor proportion of the four
types of subsidy provided for under this measure, the aim of which
is to increase the interconnection and interoperability of the
national transport networks (11) and broaden access to them. It is
possible for 100 % of the interest paid by the beneficiary during
the first five years of the loan to be covered by these subsidies,
provided they do not exceed 10 % of the project(cid:146)s total cost.

(8) Council Decision 95/250/EC of 29 June 1995 relating to exceptional
Community aid for the reconstruction of the areas stricken by the
cyclone that hit Madeira in October 1993 (OJ L 159, 11.7.1995, p. 16).
(9) Commission Decisions C(96) 1592 of 23 July 1996 and C(95) 1789
of 28 July 1995 on the contribution of the ERDF, ESF, EAGGF-
Guarantee and FIFG to a Community initiative in the framework of a
special support programme for peace and reconciliation in Northern
Ireland and the border counties of Ireland.

(10) Council Regulation (EC) No 2236/95 of 18 September 1995 laying
down the general rules for the granting of Community financial aid
in the field of trans-European networks (OJ L 228, 23.9.1995, p. 1).
(11) Subsidies relating to networks other than those of transport, i.e. tele-
communications and energy, do not include interest-rate subsidies.

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EEA financial mechanism

2.12. The Commission(cid:146)s annual contributions to the financial
mechanism for the European Economic Area (EEA-FM) (12), which
account for approximately 80 % of the latter(cid:146)s receipts, corres-
pond to the contributions formerly paid by Austria, Finland and
Sweden. Since these countries became Member States the contri-
butions have been paid by the EU. The EEA-FM pays out subsidies
and interest-rate subsidies in order to reduce the economic and
social disparities between the regions of the EU. Projects imple-
mented in Greece, Ireland, Portugal and some regions in Spain are
eligible, with priority being given to the fields of environment,
transport, education and training (13).

2.13. The subsidy amounts to 2 % per annum for a maximum of
10 years. When the loan is paid out, the total present value amount
of the corresponding subsidy is withdrawn by the EIB from the
EEA-FM current account opened at the Bank. Either the EIB pays
this amount to the beneficiary, who will then pay the Bank inter-
est at the full rate, or it retains it, in which case the borrower will
pay the latter interest at a reduced rate.

The sixth and seventh EDFs

2.14. The interest-rate subsidies included in the sixth and sev-
enth European Development Funds (14) comprise one of the forms
of aid provided for by these Funds, the purpose of which is to
assist the development of African, Caribbean and Pacific (ACP)
countries and Overseas Countries and Territories (OCT). Priority
must be given to financing productive projects and programmes
in industry, agroindustry, tourism, mining, energy and in trans-
port and telecommunications linked to these sectors.

2.15. The rate of these subsidies is, in principle, 4 % for the life
of the loan, but it is adjusted in such a way that the interest rate
paid by the borrower amounts to between 3 % and 6 %. However,
the borrower is frequently an intermediary (a central bank or a
specialist body) which lends to final beneficiaries at rates that may
be very much higher, particularly in the light of the currencies
used (15).

(12) Part VIII - Financial Mechanism - of the Agreement on the European

Economic Area (OJ L 1, 3.1.1994, p. 28).

(13) Protocol 38 on the financial mechanism annexed to the agreement on

the European Economic Area.

(14) Third ACP-EEC Convention signed at LomØ on 8 December 1984 (OJ

L 86, 31.3.1986).

(15) Special Report No 24/98 concerning risk capital operations financed
from the resources of the European Development Funds (OJ C 389,
14.12.1998 paragraph 3).

2.16. For a given loan, the amounts paid by the Commission to
the EIB correspond to the present value total of the subsidies due
on each future interest maturity date for the loan concerned. The
portion relating to subsequent financial years is not indicated as
such in the EDF(cid:146)s financial statements, because of the cash-
accounting system which the Commission has decided to use.

Financial cooperation with the Mediterranean countries, Cyprus,
Malta and Slovenia

Interest-rate subsidies are provided for under the following:
2.17.
financial cooperation in respect of all Mediterranean non-member
countries (16) (MNCs), certain protocols relating to financial and
technical cooperation concluded by the Community with south-
ern Mediterranean countries (17) (SMCs), financial and technical
measures to support the reform of economic and social structures
in the framework of the Euro-Mediterranean partnership (18)
(MEDA, which replaced MNCs and SMCs as of 1 January 1997),
and certain financial protocols concluded by the Community with
Malta (19), Cyprus (20) and Slovenia (21). As is the case with the
EDF, they are paid and entered in the accounts on a present value
basis.

(16) Council Regulation (EEC) No 1763/92 of 29 June 1992 concerning
financial cooperation in respect of all Mediterranean non-member
countries (OJ L 181, 1.7.1992, p. 5), as amended by Regulation (EC)
No 1735/94 of 11 July 1994 (OJ L 182, 16.7.1994, p. 6).

(17) Council Regulation (EEC) No 1762/92 of 29 June 1992 on the imple-
mentation of the protocols on financial and technical cooperation
concluded by the Community with Mediterranean non-member coun-
tries (OJ L 181, 1.7.1992).

(18) Council Regulation (EC) No 1488/96 of 23 July 1996 on financial and
technical measures to accompany (MEDA) the reform of economic
and social structures in the framework of the Euro-Mediterranean
partnership (OJ L 189, 30.7.1996, p. 24).

(19) (cid:151) Council Regulation (EEC) No 939/76 of 23 April 1976 conclud-
ing the financial protocol and the protocol laying down certain
provisions relating to the agreement establishing an association
between the European Economic Community and Malta (OJ L 111,
28.4.1976, p. 1),

(cid:151) Council Decision 89/378/EEC of 12 June 1989 concerning the
conclusion of a protocol on financial and technical cooperation
between the European Economic Community and Malta (OJ L 180,
27.6.1989, p. 46).

(20) (cid:151) Council Regulation (EEC) No 2760/78 of 23 November 1978 on
the conclusion of the Financial Protocol between the European
Economic Community and the Republic of Cyprus (OJ L 332,
29.11.1978, p. 1),

(cid:151) Council Regulation (EEC) No 787/84 of 26 March 1984 on the
conclusion of a Protocol on financial and technical cooperation
between the European Economic Community and the Republic of
Cyprus (OJ L 85, 28.3.1984, p. 37),

(cid:151) Council Decision 90/153/EEC of 26 February 1990 on the con-
clusion of a protocol on financial and technical cooperation
between the European Economic Community and the Republic of
Cyprus (OJ L 82, 29.3.1990, p. 32).

(21) Council Decision 93/408/EEC of 19 July 1993 on the conclusion of a
protocol on financial and technical cooperation between the Euro-
pean Economic Community and the Republic of Slovenia (OJ L 189,
29.7.1993, p. 152).

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OBSERVATIONS CONCERNING THE MANAGEMENT, ENTRY IN
THE ACCOUNTS AND CONTROL OF INTEREST-RATE SUBSIDIES

3.1. Table 1 sets out 13 measures, nine of which are managed by
the EIB. The comments in paragraphs 3.2 to 3.7 only apply to the
subsidies for which the EIB acts as the Commission(cid:146)s agent.

ism does not guarantee that its margins are in accordance with
the regulations laid down in its statutes (23). This matter also has
a bearing on the volume of administrative expenditure that is
reinvoiced (24) by the EIB in respect of its management of opera-
tions under mandate from and on behalf of the Commission.
Observations were made in this regard in the Court(cid:146)s Annual
Reports concerning the financial years 1994 (paragraphs 8.36 to
8.43) and 1993 (paragraphs 10.26 to 10.30).

Amounts received by beneficiaries

Eligibility and follow-up of projects entrusted to the EIB

3.2. The amount of aid actually received by final beneficiaries is
determined by the behaviour of the financial intermediaries, who
may retain part of the subsidy by manipulating the level of the
interest rate or other features of the loans they propose (such as
fees, exchange rates or value dates). There is a risk that these inter-
mediaries(cid:146) remuneration will exceed that stipulated and that the
aid intended for beneficiaries will be reduced proportionately, in
contravention of the regulations.

3.6. The selection of projects for which subsidised loans will be
granted, and the checking of the projects(cid:146) eligibility, are tasks that
are usually entrusted to the EIB. The Commission, which on occa-
sion has no knowledge of the projects or the final beneficiaries, is
thus faced with a fait accompli. Decisions to grant subsidies may
also be taken by the Commission on the basis of information pro-
vided by the EIB, but in practice this merely involves the Com-
mission rubbber-stamping the proposals submitted to it by the
EIB (25).

3.3. However, where the Commission has delegated the manage-
ment of interest subsidies, it does not check the terms governing
the loans in cases where they are paid out by financial intermedi-
aries and, moreover, generally does not even possess the informa-
tion needed for this purpose. Furthermore, the fact that interest-
rate subsidies may not be paid out by all members of the banking
system, but only by a restricted number of intermediaries selected
by the EIB, is likely to affect competition within the sector.

3.7. Similarly, when the Commission receives reports from the
EIB concerning the progress of investments under way, which is
not always the case, they are not analysed. The Commission(cid:146)s
interest in these documents is all the less as it believes that it is
unnecessary to repeat the work already done by the EIB, that the
main risk connected with these operations is that of loans not
being recovered, a matter that is meticulously monitored by the
EIB and, lastly, that the cost to the budget in these cases is often
relatively low, especially in cases where subsidies are accompanied
by other more costly measures.

3.4.
In cases where loans are directly back-to-back with borrow-
ings, the spread between the rates needs to be checked. In the case
of ECSC loans, all the benefits the Commission gains in its capa-
city as a first-class borrower, including cases where it is able to
obtain more advantageous refinancing for operations already
under way, are passed on to its own borrowers. The EIB enjoys
margins on the loans it grants from its outside borrowings that
are not subject to auditing by the Court. No provision is made in
the contracts for the terms to be adjusted to enable borrowers to
benefit from more advantageous terms in the event that market
conditions improve.

3.5. As regards loans financed from the EIB(cid:146)s own resources, the
rates for such loans are not compared with those in the market.
Given that the EIB enjoys special privileges (22) and has a monopoly
over the allocation of certain subsidies, the competition mechan-

(22) Protocol on the privileges and immunities of the European Commu-

Effectiveness of the subsidies

3.8.
In the case of most measures the subsidy rates bear no direct
relation to market rates, which vary greatly over time and accord-
ing to the country concerned, and are not based on an analysis to
determine the threshold above which the subsidy is likely to be
truly effective.

(23) Article 2 of the Statutes of the EIB, which refers to Article 198, of the
Treaty establishing the European Community. It is stated that the EIB
shall, operating on a non-profit-making basis, grant loans and give
guarantees.

(24) The EIB is entitled to receive a management fee for administering cer-
tain operations to cover the actual managerial costs incurred. The
Court has never received satisfactory information enabling it to obtain
assurance on an independent basis that this regulation has been
respected.

(25) The Commission prepares the files itself when cooperation with

nities, annexed to the Treaty of Brussels of 8 April 1965.

Mediterranean countries is involved.

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3.9. As far as most of the measures involved are concerned, the
objectives are defined in an extremely general manner. This being
the case and in the absence of costed objectives, it is difficult to
evaluate the extent to which the objectives have actually been
achieved.

the EC or the EDF, for example, in the event of early repayment
of the corresponding loans. On the other hand, neither the EC
nor the EDF have any sort of indicator (for example, to denote
claims or forecast claims) which would require them to focus their
attention on what becomes of these subsidies once paid, as the
corresponding amounts are not entered on the assets side of the
EC (26) or EDF balance sheets.

In practice, the Commission is content to draw up a list of
3.10.
projects implemented and sums spent. In general, the Court
believes that a high utilisation rate is not synonymous with effec-
tiveness In fact, the success (which is different from effectiveness)
of this type of aid is not only dependent on, inter alia, its appeal
to final beneficiaries, but also its attractiveness to financial inter-
mediaries. But the latter promote such aid in the light of their
own interests (for example, to attract worthwhile new customers
or develop the loyalty of existing customers), which, while not
conflicting with them, are not necessarily the same as the EU(cid:146)s
objectives.

In connection with the TF SMEs, the problem is different,
3.14.
as the subsidies were paid globally in advance (ECU 93,5 million
between 1994 and 1996), basically for reasons of budgetary avail-
ability, and were paid over to the beneficiaries by the EIB (ECU
93,4 million) between 1995 and 1998. The time lag involved is
not discernible in the EU(cid:146)s financial statements. At 31 December
1997 subsidies that had still not been paid over to beneficiaries
amounted to ECU 0,1 million. In addition, the interest earnings
generated by the funds held on current account at the EIB (some
ECU 9 million) have not been established as budgetary revenue.

3.11. With regard to the two measures conceived specifically to
create jobs (TF SMEs and Article 56 of the ECSC Treaty), the num-
ber of jobs created is used as a criterion for judging their effi-
ciency. However, the Commission presents the results in statisti-
cal terms, without analysing the causal connection between the
jobs created and the subsidies paid out. The Court carried out
audits of both measures on the premises of the beneficiaries, from
which it has concluded that the subsidies had almost no real
impact and were more like a windfall for the beneficiaries who,
by virtue of investing in job creation, had received this Commu-
nity aid, even though their investments had been made for rea-
sons unconnected with the measures.

3.15. With regard to NCI earthquake loans, and Madeira, the
subsidies are paid over on each interest maturity date. Under the
cash-accounting system, accrued interest-rate subsidies not yet
due are not entered in the accounts. Furthermore, the unaccrued
amounts that are to be paid at a later date, which amounted to
ECU 6,1 million for NCI earthquake loans and ECU 3,3 million
for Madeira on 31 December 1997, are not shown outside the bal-
ance sheet.

3.16. The three preceding paragraphs show that the same eco-
nomic situation is presented in the accounts in different ways,
depending on the technical set-up of the operations. It is therefore
difficult to gain an understanding of the situation by examining
the financial statements.

Entry of the subsidies in the accounts

CONCLUSION

3.12. For most measures the Commission enters the subsidies it
pays to the EIB in the accounts without checking the related cal-
culations, even when the subsidies concerned were paid in advance
and calculated in present value terms. The Court examined the
files at the Commission and found no sign of any checks having
been carried out before sums were recorded.

In the case of the general budget and the EDFs (the situ-
3.13.
ation is different as regards the ECSC operating budget), expend-
iture on interest-rate subsidies is entered in the accounts at the
time the respective commitments are entered into and then when
the respective payments are made. When the amounts paid to the
EIB correspond to the total sum of the present value of the sub-
sidies in respect of a loan lasting several years (see paragraph
2.15), the Bank enters the portion relating to subsequent financial
years under its liabilities for as long as it holds this portion (sub-
sidies received in advance amounted to ECU 361,6 million on 31
December 1997), as it could be required to pay part of it back to

4.1. As regards the sound financial management of the subsidies,
the Commission should:

(cid:151) ensure that where intermediaries are used, they do not receive
unreasonable levels of remuneration and that certain financial
institutions have not been favoured over other competitors,
but have been selected in a satisfactorily transparent and equi-
table manner,

(cid:151) evaluate their efficiency by measuring the rate of achievement
of the set objectives, wherever possible (see paragraph 3.9),
and by determining the real impact of the subsidies (see para-
graphs 3.10 to 3.11).

(26) The Court(cid:146)s Statement of Assurance concerning activities financed
from the general budget for the financial year 1997 (OJ C 349,
17.11.1998 paragraphs 8.6 to 8.7).

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4.2. Harmonisation of the entry of the interest-rate subsidies
into the accounts contained in the EU(cid:146)s and the EDF(cid:146)s financial
statements could be improved to provide a clearer picture, and be
accompanied by more comprehensive information (see para-
graphs 3.13 to 3.16). The Commission should also check the cal-
culations and verify the appropriateness of the discount rates
applied (see paragraph 3.12).

(cid:151) ensure on a systematic basis that the planned investments are
eligible and that the beneficiaries meet the requisite condi-
tions (see paragraph 3.6),

(cid:151) ensure in good time that the investments made or being made

are in line with estimates (see paragraph 3.7).

4.3. When the EIB is involved in the distribution of subsidies (see
Table 1), the Commission carries out hardly any controls and
relies excessively on its agent. Given that delegating management
is not tantamount to delegating responsibility, the Commission
should:

(cid:151) ensure that the amounts of the subsidies correspond to the aid
actually received by the final beneficiaries, net of the stipu-
lated margins (see paragraphs 3.2 to 3.5),

4.4. This set of problems requires horizontal treatment. The
Commission should introduce centralised control of the financial
management of interest-rate subsidies, and even of banking-type
instruments in general, to ensure greater homogeneity in the
management of the instruments involved and their presentation
in the financial statements. This would also facilitate relations
with the EIB by limiting the number of Commission staff involved
in dealings with the EIB, while increasing control over the man-
agement that the Bank has been left to exercise on the Commis-
sion(cid:146)s behalf.

This report was adopted by the Court of Auditors in Luxembourg at the Court meeting of 16 and 17 June
1999.

For the Court of Auditors

In the absence of Jan O. KARLSSON

President of the Court

Bernhard FRIEDMANN

Acting President

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LIST OF ABBREVIATIONS

ACP

ECSC

EDF

African, Caribbean and Pacific States

European Coal and Steel Community

European Development Fund

EEA-FM

Financial mechanism for the European Economic Area

EIB

ERDF

EU

GB

MEDA

MNCs

NCI

OCT

SMCs

SMEs

TENs

European Investment Bank

European Regional Development Fund

European Union

General budget of the European Union

Measures to accompany the reform to the economic and social structures in Mediterranean non-member
countries

Mediterranean non-member countries

New Community instrument

Overseas countries and territories

Southern Mediterranean countries

Small and medium-sized enterprises

Trans-European networks

TF SMEs

Temporary facility for SMEs

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THE COMMISSION(cid:146)S REPLIES

INTRODUCTION

The report adopts a horizontal approach in analysing and assess-
ing a range of interest rebate measures that are not only quite
diverse in terms of objectives and eligibility conditions, but also
difficult to compare. Indeed, they address different economic
realities at different moments in time, and each measure(cid:146)s ration-
ale is largely determined by the general political and economic
context in which it originated. The Commission, like the Court,
considers that these parameters need to be taken into account in
the assessment of the measures(cid:146) efficiency, impact and manage-
ment.

CHARACTERISTICS OF THE MEASURES

Sixth and seventh EDFs

2.15. To avoid distortion of the financial markets, the subsidy is
used for purposes which are complementary to the financial
operation (increasing the capacity of intermediaries, improving
project evaluation, partial cover of exchange risks, etc.). This
explains the differences in interest rates granted to intermediaries
and to final beneficiaries.

OBSERVATIONS CONCERNING THE MANAGEMENT, ENTRY IN
THE ACCOUNTS AND CONTROL OF INTEREST-RATE SUBSIDIES

In cases where the Commission directly manages interest
3.1.
rebates and effects the associated payments, as in the case of
Madeira or trans-European networks, it is, of course, fully aware
of both the identity of the final beneficiary and the details of the
activity being supported.

Regarding trans-European networks, it should be recalled that the
Commission established, on its own initiative, a set of guidelines
on the use and administration of interest rebates for budget line
B5-7 0 0 (these were made available to the Court). These guide-
lines, whose purpose was to ensure transparent procedures and
allow proper verification of physical and financial implementa-
tion, were formally adopted by the Member States in the TEN-

Financial Assistance Committee in 1997. The guidelines were
especially intended to ensure uniformity between traditional direct
grant subsidies and interest rebates in the areas of ex-ante evalu-
ation (appraisal), and monitoring of projects. Thus the Commis-
sion aggregates both physical and financial data on the progress
of projects.

Amounts received by beneficiaries

3.2 to 3.5. Financial intermediaries are not free to manipulate
the level of the rate of interest, fees, exchange rates and value
dates. Financial markets and financial institutions do have rules
and customary procedures which are to a large extent transpar-
ent. The beneficiaries are able to compare conditions between
various intermediaries, whether the loans concerned are with or
without interest-rate subsidies. Of course, financial intermediar-
ies carry the solvability risk of the final borrower and adapt loan
conditions accordingly. This applies whether the management of
the loans and subsidies is delegated to the EIB or is assured by the
Commission.

The EIB works with large networks of intermediaries in all coun-
tries in which it operates, in accordance with Article 16 of its Stat-
ute, and this is no doubt taken into account when the EIB is con-
ferred the task of allocating interest subsidies decided by the
European Union. For example, of all external agencies, the EIB has
probably the most extensive network of banking contacts and
relationships throughout the ACP countries, financing under LomØ
IVa alone around 70 lines of credit to about 50 ACP financial
institutions.

Moreover, the EIB applies strict criteria of quality and solvability
in selecting its network of financial intermediaries. It is evident
that EU subsidies of a limited amount and duration cannot be dis-
tributed through an unlimited number of financial intermediar-
ies. For various reasons, not all potential intermediaries corres-
ponding to the EIB(cid:146)s criteria agree to manage global loans or
interest subsidies.

As regards the interest rates for loans made from its own resources,
the Bank is bound by Article 19 of its Statute and is subject to
controls. The grid of interest rates which the Bank fixes for its
loans from own resources is controlled and approved by its Board
of Directors where the Commission is represented by a regular
member and an alternate.

The EIB on-lends funds at a rate reflecting its excellent position
in the markets, plus a small margin to cover costs, in accordance
with its statutory obligation under the Treaty. Otherwise, the rates

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of EIB loans are fixed in accordance with market conditions. Inter-
est rates are usually fixed but are also revisable, variable or con-
vertible according to the client(cid:146)s preferences, and may be set either
on signature of the finance contract or on each disbursement
(open-rate contract). The method adopted for setting rates is the
same for all countries and sectors. The currencies in which dis-
bursements are made depends on the EIB(cid:146)s holdings and the bor-
rower(cid:146)s preferences.

The EIB provides the Commission with information on the admin-
istrative costs for the various activities it manages for the Com-
mission. A recapitulation of these costs is communicated to the
Court by the Commission.

According to various mandates, there also exist Member State
committees which give their opinion on project eligibility on the
basis of detailed reports.

The information prerequisite to the decisions on individual alloca-
tions varies according to the characteristics of the loans and the
operating capacity and technical know-how of the intermediary.
For global loans to financial intermediaries outside the Union, the
Bank often includes a contractual right to request further infor-
mation on the final beneficiaries. Although the Bank undertakes
periodic spot-checks to verify compliance, it does not systemat-
ically enforce its contractual right.

In its checks on interest-rate subsidies granted under Article
56(2)(a) of the ECSC Treaty, the Commission has found only a
very few cases in which the financial intermediaries failed to com-
ply with the conditions imposed.

As regards the EIB-Edinburgh facility, the Commission has received
a full list of all the final sub-loan beneficiaries. As the job creation
criteria are similar to those of the ECSC, and cover the same
period, these lists have been analysed and compared to the ECSC
sub-loan beneficiaries. A small number of cases of potential
double financing have been identified by the Commission and are
currently being examined and discussed with the EIB.

Eligibility and follow-up of projects entrusted to the EIB

3.6 to 3.7.
Interest subsidies under the programmes covered in
the Court(cid:146)s report apply not only to EIB loans but also to loans
from other public sources (e.g. government loans) and indeed
from private markets. In this context, it seems inappropriate to
draw general conclusions on either the Commission(cid:146)s control of
eligibility or its monitoring of projects. There is no single reliable
method for measuring the efficiency of interest rebates. Further,
it is important to note that the Commission(cid:146)s evaluation activ-
ities should be proportionate. This means that the scope of the
Commission(cid:146)s actions to effect ex-ante appraisal and ongoing
evaluation of individual projects should depend on whether the
lender is expected to undertake similar work. Such a considera-
tion would generally need to be taken into account in the case of
EIB loans, since the EIB, unlike a private bank, has its own eco-
nomic evaluation unit and makes detailed use of socioeconomic
criteria in both its funding decisions and follow-up.

Regarding EIB lending operations, the Commission receives full
and complete information concerning final beneficiaries. Interest
subsidies are attributed to EIB loans from own resources in accord-
ance with the various regulations, mandates, decisions and agree-
ments governing the allocation of such funds. EIB management
of such subsidised loans and information to its mandator, the
Commission, is always in accordance with its undertakings under
the particular mandate and, across the board, with its statutory
obligations. The control of eligibility of EIB loans from own
resources is effected in accordance with Article 21 of the EIB Stat-
ute, under which the Commission gives an opinion prior to the
approval of a loan.

Finally, on the broader question of the treatment of information
received from the EIB, the Commission insists on analysing this
information itself. The Commission is regularly informed by the
Bank on the development of projects and there is a dialogue if
major problems occur. The Commission is of the view that du-
plication of work should be avoided.

Effectiveness of the subsidies

3.8 to 3.11. Most measures apply to the whole Union and object-
ives, whether quantifiable or not, are necessarily of a global char-
acter. Not all objectives (e.g. strengthening competitiveness of
European industry, fostering development of high tech SMEs) can
be precisely quantified. This does not render the objectives less
important.

At a macroeconomic level, the effective rate of interest is known
to be a factor influencing the level of investment. The Commis-
sion would not claim that this is the single determining factor in
a beneficiary(cid:146)s decision to undertake an investment project. Rather,
interest subsidies form part of a package which also includes meas-
ures on a local, regional or national level which together create a
favourable context for the achievement of priority EU objectives.

The link between interest rate subsidies and investment cannot be
necessarily quantified but this does not mean that there is no
causal relationship at all.

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Various final beneficiaries have confirmed that the interest rate
subsidy received had a positive and significant influence on the
investment decision. With respect to the Copenhagen facility, the
Commission will present its evaluation report in the near future.
At this stage, it seems premature to draw general conclusions as
regards the effectiveness of the facility.

way these are managed for the sole purpose of having a uniform
system. The Commission, however, bears the overall budgetary
and political responsibility for the measures discussed. The Com-
mission is of the opinion that the procedures established relating
to the implementation of the mechanisms in question are appro-
priate and guarantee the respect of EU legislation and rules.

The Commission considers that the level of use made of a facility
is one indicator among others; however, it has never identified the
use of a particular instrument as its sole indicator of effectiveness.

Entry in the accounts of the subsidies

3.12. The relevant Commission departments verify the calcula-
tions by conducting spot checks.

3.13 to 3.16. As the Court(cid:146)s observations relate to three differ-
ent regimes, the general budget, ECSC and EDF, the Commission
undertakes to study the best way of entering in the accounts the
amounts of interest-rate subsidies paid in advance to the EIB. The
Commission will also endeavour to establish how best to harmon-
ise the procedure for entering subsidies in the accounts in so far
as the separate agreements permit.

3.14. The Commission agrees with the Court that interest earn-
ings generated by funds held on current account at the EIB should
be shown as a receivable item.

CONCLUSION

4.2. The Commission undertakes to look into ways of improv-
ing and harmonising presentation of the financial statements from
the point of view of interest-rate subsidies.

4.3. The cooperation agreements with the EIB regulate in detail
the delegation of the financial and technical work to the Bank,
whose long standing activity and solid know-how in the financial
field are beyond any doubt. The EIB provides the Commission
with sufficient financial and technical data to allow for an efficient
control i.e. respecting the principle of avoiding unnecessary dupli-
cation of work and safeguarding a reasonable relationship between
use of resources and results obtained.

The responsibilities and division of tasks between the Commis-
sion and the EIB for operations in the ACP countries under the
LomØ Convention are described in the internal agreement, signed
by the Member States(cid:146) Representatives on 20 December 1995.
This agreement will be renewed on the occasion of the next Con-
vention.

4.1.
Interest rate subsidies are granted in order to contribute to a
number of different objectives where economic and political con-
ditions vary considerably within the Union. It is therefore inap-
propriate to sacrifice the variety of subsidy mechanisms and the

4.4. The Commission will consider the Court(cid:146)s suggestion and
investigate the extent to which management of the interest rate
subsidy instruments could be harmonised and centralised.