Fifth 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: 2000-06-07
Institutions: European Commission
Subjects: Community budget, EU financing, European Economic Area, European Investment Bank, Member States' contribution

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 07.06.2000
COM(2000) 343 final

FIFTH 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

1.

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 allocated
funds to the beneficiary regions of ECU 492.8 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 (EIB).

Priority has been given to projects which placed 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 has been given to small and medium-sized enterprises.

The Mechanism is administered by the EIB. The EIB has appraised each project
according to financial, economic and technical criteria as well as its compatibility with the
EU objectives, sectorial policies and environmental regulations and standards. The EIB
then has submitted proposals to the Financial Mechanism Committee, appointed by the
participating EFTA States and the Commission, which decided on the allocation of the
financial resources available under the Mechanism. While the process of allocation of
Funds has come to an end on 31 December 1998, the EIB continues to manage the projects
portfolio until their completion.

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 fully participates in the Mechanism.

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2.

THE FIFTH 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 1.1.94 to 31.5.1995.

The second annual report presented the activity concerning the Mechanism during the
period from 1.1.95 to 30.06.96, the third from 01.07.96 to 30.06.97 and the fourth from
1.7.97 to 30.6.98.

This fifth annual report presents the activity from 1.7.98 to 31.12.99.

2.1.

The activity of the Mechanism up to 31.12.99

The project’s approval process has come to an end on 31.12.98. By that date, the Financial
Mechanism Committee has approved:

• grant applications to a total of ECU 492.8 million corresponding to 98.6% of the total

grant facility;

• interest rebates on a total loan portfolio of ECU 1500 million corresponding to 100% of
the total EIB loan portfolio for which the interest rebate facility has been made
available.

Grant activity

The distribution by beneficiary country of the grants approved by the Financial Committee
over the whole period 1994-1998 and their sectorial distribution are shown below:

Grants distribution by country

MECU

APPROVED GRANTS

Greece

Ireland

Northern Ireland

Portugal

Spain

TOTAL

114.3

35.5

11.0

105.0

227.0

492.8

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Sectorial distribution

Transport

Environment

Education

Other

MECU

83 5

301 9

105 9

1 5

Total

16.9%

61.2%

21.5%

0.3%

21,5%

0,3%

16.9%

Transport

Environment

Education and training

Other

61,2%

The grant allocations for Ireland, Northern Ireland, Portugal and Spain have been fully
committed. As for Greece, despite contacts with the Ministry of National Economy to
process a sufficient number of acceptable proposals, the commitments finally granted
amounted to 94% of the available amount of ECU 121.5 million.

As of 31 December 1999, the grant disbursement amounted to EUR 231.915 million
(excluding the EIB’s fee of 0.5%) corresponding to 46 % of the total facility.

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Interest rebate activity

The distribution by beneficiary country of the EIB loans benefiting from interest rebates
approved by the Financial Committee over the whole period 1994-1998 and their sectorial
distribution are shown below:

Loans distribution by country

MECU

APPROVED LOANS

Greece

Ireland

Northern Ireland

Portugal

Spain

TOTAL

364.5

106.5

33.0

315.0

681.0

1500.0

Sectorial distribution

Transport

Environment

Education

MECU

958.5

469.5

39.0

Total

65.3%

32.0%

2.7%

(Non included a global loan of 33 MECU for Northern Ireland as the global loan covers all priority sectors)

2,7%

32%

Transport

Environnement

Education and training

65,3%

5

The Financial Mechanism Committee has approved applications relating to total EIB loans
of ECU 1,500 million corresponding to 100% of the total EIB loan portfolio for which the
interest rebate facility has been made available.

As of 31 December 1999, the EIB loans disbursement benefiting from interest rebates
amounted to EUR 1270.196 million, corresponding to 85 % of the total facility.

2.2.

The approval of grants and interest rebates from 1.7.98 to 31.12.98

The following grant applications, amounting to ECU 118.76 million, were approved:

Greece

Greek Monasteries Rehabilitation B

ECU 5.86 million for rehabilitation, reconstruction, conservation and restoration works in
Monasteries of Dochiariou (ECU 1.77 million), Pantokratoros (ECU 0.63 million),
Vatopediou (ECU 2.46 million) and in the Skete of St. Andreas (ECU 1.00 million);

Greek Monasteries Rehabilitation C

ECU 7.39 million for rehabilitation, reconstruction, conservation and restoration works in
the Monasteries of Dochiariou (ECU 1.26 million), Osiou Grigoriou (ECU 0.81 million),
Simonos Petra (ECU 2.19 million) and Timiou Prodromou (ECU 3.13 million);

Meghistis Lavras Monastery - Energy Project

ECU 2.50 million for the generation of sufficient additional power to provide air-
conditioning to the Monastery for the preservation of its valuable library and treasure
chambers; extending thus the lifetime of irreplaceable collections of manuscripts, books
and antique artifacts. This phase also includes measures to safeguarding the monastery’s
facilities against theft and fire as well as ancillary works like maintenance to existing
building installations;

Gazi Sewerage

ECU 2.29 million for a primary sewer and a connection of this primary sewer to the
Heraclion sewage system;

Thalassocosmos – Cretaquarium project

ECU 5.63 million for the construction and operation of a sea water aquarium for research,
educational and tourism purposes; the aquarium will be located close to Heraclion, Crete.

Thessaloniki Science Centre

ECU 13.78 million for the relocation and expansion of the existing Technology Museum of
Thessaloniki into a new Technology Museum and Science Centre based on the new
concept of science-technology centres combining educational and entertainment functions
with the aim of expanding knowledge.

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Macedonian Museum of Contemporary Art

ECU 2.37 million for the extension of the existing museum and partial refurbishment of
the existing building, including also the installation of air-conditioning as well as fire and
intrusion security systems.

Ano Liossia Regional Park Development

ECU 12.4 million for the creation of a regional leisure park of 31 ha.
in the flood
threatened zone of Ano Liossia, north-west of Athens, being one of the less-developed and
poorest areas of the Attica region. As such, the project also embraces certain measures of
environmental protection (flood remedying, recation of green areas).

Ierissos Multipurpose Cultural Centre

ECU 1.04 million for the construction of a multipurpose cultural facility in Ierissos (small
town in Halkidiki, Northern Greece) intended to host exhibitions and presentations and
provide information on Byzantine and modern art and music related to Ierissos and Mount
Ahtos.

Portugal

Urban Rehabilitation Alte

ECU 4.9 million for road works, renovation of typical village buildings, a new local
professional training school and a multi-purpose hall. The project concerns the integrated
rehabilitation of the village of Alte.

Urban Rehabilitation Porto

ECU 42.2 million for 6 sub-projects concentrated around the historical centre of Porto.
Project works include road improvements to encourage inner urban development and ease
traffic congestion and to improve quality of
the urban
environment for locals and tourists alike, with measures including renovation of historic
buildings and provision of new tourist attractions. All sub-projects are part of Porto’s
Municipal Master Plan and Campanhã Strategic Plan.

life and attractiveness of

Almada Waste Water Treatment Plant

ECU 7,821,280 for a tertiary sewerage treatment plant based an activated sludge process.
The project is a component of the municipal master plan of Almada.

Spain

Renovación Urbana La Carolina

ECU 2.5 million for the renovation of a main avenue,
improvement of public street
improvement of footpaths.

installation of traffic lights,
lighting and road re-paving and associated works and

Sevilla Medio Ambiente

ECU 8,065,778 for a part of an investment package designed to enhance the urban
environment and make Sevilla a more attractive town. The subprojects financed by the

7

Financial Mechanism comprise i.a. fencing and rehabilitation of gardens, afforestation of a
ring road, cleaning and afforrestation of degraded municipal land, installation of pneumatic
waste collection and greening of one of the feeder roads.

Decommitments and recommitments were made for several projects in order to optimise
the beneficiaries’ use of funds.

The following interest rebate applications, amounting to a total loan amount of ECU
236.1 million were approved:

Greece

East Egnatia Motorway

ECU 77.2 million for two sections on the eastern part of the trunk road (Kavala bypass and
Komotini – Kipi).

Northern Ireland

Global Loans

ECU 33 million for financing of investments in priority sectors of environmental
protection,
forestry, heritage and restoration of historical
buildings, transport and transport infrastructure and education and training.

including urban renewal,

Portugal

Metro do Porto Light Metro

ECU 71.7 million for the creation of a light metro network to serve the Area Metropolitano
do Porto.

Spain

ICO Environmental Global Loan III

ECU 54,184,009 for financing of small and medium-scale environmental investments
undertaken by private and public entities.

Limited decommitments and recommitments were made for several projects in order to
optimise the beneficiaries’ use of funds.

2.3.

The implementation of the projects as per 31 December 1999

Grants as per 31 December 1999

Of the 56 grant projects, 7 had been fully disbursed, 35 were under disbursements and for
14 projects no disbursements had been made as at 31 December 1999. The grant
disbursements and the still undisbursed amounts for each category of projects are shown in
the table below.

8

(*) Excluding technical assistance disbursements (in total EUR 104330) for which earmarking per project is not available.

Grants as per 31 December 1999

Numberof
projects

Disbursedamountin
EUR

Remainstobe
disbursedinEUR

Total

Fully disbursed

Under disbursement

Not yet under disbursement
Total(*)

7

35

14

56

73 564 321

158 350 636

0

231 914 957

0

185 523 311

67 251 280

252 774 591

%

15%

71%

14%

73 564 321

343 873 947

67 251 280

484 689 548

100%

The grant disbursements follow the physical progress of project implementation, and the
to documented project completion.
last grant disbursement cannot be made prior
Consequently, the grant disbursements are expected to take place until ult. 2002, for a few
projects even later.

An ultimate deadline for disbursement has been stipulated in the commitment letters and
the grant agreements. This deadline allows for a delay of up to 24 months after scheduled
physical project completion.

Interest Rebates as per 31 December 1999

Of the 37 projects benefiting from interest rebates, 28 had been fully disbursed, 7 were
under disbursements and for 2 no disbursement had been made as at 31 December 1999.
The loan disbursements and amounts not yet disbursed for each category of projects are
shown in the table below.

%

71%

22%

7%

Loans benefiting from interest rebates as per 31 December 1999

Numberof
projects

Disbursedamountin
EUR

Remainstobe
disbursedinEUR

Total

Fully disbursed

Under disbursement

Not yet under disbursement
Total

28

7

2

37

1 062 721 202

207 474 511

0

1 270 195 713

0

1 062 721 202

119 596 087

110 200 000

229 796 087

327 070 598

110 200 000

1 499 991 800

100%

is expected that all

It
undisbursed commitments will be disbursed before year end 2000.

the remaining disbursements for partly disbursed as well as

2.4.

The funding of the Financial Mechanism

The Act of Accession (Articles 83, 111, 136) of the EU specifies that the shares in the
Mechanism of the new Member States in the Mechanism are to be met from the general
budget of the European Communities. On a proposal from the Commission (COM(94)
398), the financial perspectives were already reworked accordingly by adding a specific
heading under “Structural Activities”. The budget adopted for the years 1994 to 1999
contained a heading with the relevant comments (B2-401). The amount forecast for each
year from 1994 to 1998 was ECU 108 million and for 1999 EUR 5 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

9

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 1994 to 1998 and the shares between the
participating EFTA countries and the Community were decided by the Financial
Mechanism Committee. These contributions were calculated in accordance with the gross
national product at market prices using data for the last three calendar years.

2.4.1.

The annual contributions from the donors

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.

the amounts necessary to meet

Article 4 of the Cooperation Agreement states that the participating EFTA States and the
Community budget shall deposit
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 latest 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 was
important to keep a reasonable contribution to the Mechanism account each year in order
to be able to match reasonably the final obligations in terms of commitments at the end of
1998. An increase from ECU 110 million to ECU 130 million in the replenishment for
1997 and a replenishment of ECU 135 million for 1998 have been decided.

For 1999, no replenishment was deemed necessary. The Committee concluded from a
review of the Financial Mechanism’s future payment obligations that future disbursement
obligations would be met by the previously generated liquidity together with past and
future interest earnings made on it.

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2.4.2

The share between the Commission and the participating EFTA

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 was the following:

ECU million

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

(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 %)

(36.75
%)

(18.66
%)

(82.09
%)

89.6281

(81.48
%)

87.076

(79.16
%)

102.518

(78.86
%)

110

110

130

1998

1.296

27.916

0.2565

106.2315

135

(0.96 %)

(20.16 %)

(0.19 %)

(78.69
%)

Total

4.907

112.254

1.0865

475.7525

595

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.

11

2.5.

The management of the Financial Mechanism liquidity

The Financial Mechanism liquidity was initially managed solely through a Financial
Mechanism account at the EIB. On 9 July 1999 a Fund Management Agreement was
concluded between the Financial Mechanism Committee and the European Community
represented by the Commission of the European Communities acting through the
Economic and Financial Affairs DG. Since 15 July 1999,
the Financial Mechanism
liquidity is managed by the Financial Affairs DG and disbursement instructions are sent by
the EIB to the Fund manager. Transfers of funds to the Beneficiary (respectively to the
borrower in case of interest rebates) take place via a designed EIB Financial Mechanism
disbursement account.

In summary, the account transactions from 30 June 1998 were as follows:

Balance as of 30 June 1998

Management by the EIB

ECU/EUR

399 184 268.33

Crediting

Interest

Debiting

12 585 177.73

Disbursements

(grants,

interest

89 117 833.74

rebates)

Liaison Officer function cost

Miscellaneous

523 148.00

26 005.42

Balance as of 15 July 1999

322 102 458.90

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Management by the Economic and Financial Affairs DG.

Balance as of 15 July 1999

Crediting

Net income (yield on the invested

4 271 495.00

EUR

322 102 458.90

capital)

Debiting

Disbursement

interest

to
rebates)

EIB

(grants,

34 010 869.49

Balance as of 31 December 1999

292 363 084.41

2.6.

Coordination and complementarity with other financial instruments of the European
Union

The Commission has ensured, 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 had been clearly defined in the
“Operational arrangements” concluded between the Commission and the European
Investment Bank on 9 March 1994.

13