Report from the Commission to the Council and the European Parliament on THE BORROWING AND LENDING ACTIVITIES OF THE EUROPEAN COMMUNITIES IN 2005 {SEC(2006)1306} .
Date: 2006-10-17
Institutions: European Commission
Subjects: Community loan, EIB loan, EU borrowing, activity report, third country

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 17.10.2006 
COM(2006) 597 final 

REPORT FROM THE COMMISSION 
TO THE COUNCIL AND THE EUROPEAN PARLIAMENT 

ON THE BORROWING AND LENDING ACTIVITIES 
OF THE EUROPEAN COMMUNITIES IN 2005 

{SEC(2006)1306} 

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TABLE OF CONTENTS 

Introduction ................................................................................................................................ 3 

1. 

2. 

2.1. 

2.2. 

2.3. 

BORROWING ACTIVITIES IN 2005........................................................................ 3 

LENDING IN NON-MEMBER STATES................................................................... 4 

Overview ...................................................................................................................... 4 

The Community's Macro-Financial Assistance ........................................................... 4 

EIB Lending in 2005 in the South-Eastern Neighbours, the Mediterranean, Asia & 
Latin America and Republic of South Africa .............................................................. 5 

2.3.1.  EIB Objectives and Priorities....................................................................................... 5 

2.3.2.  Lending Activity .......................................................................................................... 6 

2.3.3.  Risk Sharing ................................................................................................................. 6 

2.3.4.  Cooperation with other Institutions.............................................................................. 7 

2.4. 

Signatories of the Lomé/Cotonou Conventions - Lending Activity ............................ 7 

3. 

3.1. 

3.2. 

3.3. 

BUDGETARY IMPACT OF LENDING .................................................................... 7 

Budget Guarantees ....................................................................................................... 7 

Interest Subsidies ......................................................................................................... 8 

Risk Capital.................................................................................................................. 8 

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INTRODUCTION 

The  Council  decisions  establishing  the  various  lending  instruments  of  the  European 
Communities  require  the  Commission  to  inform  the  Council  and  European  Parliament  each 
year of the use made of these instruments. 

As  for  lending  activities  outside  the  Community,  the  decisions  adopted  in  1997  and  20001 
require  the  Commission  to  inform  the  Council  and  Parliament  on  an  annual  basis  of  the 
situation regarding European Investment Bank (EIB) loans guaranteed by the Union budget in 
the South-Eastern Neighbours, in the Mediterranean countries, in Latin America and Asia and 
in South Africa. 

In order to meet these information requirements, this report describes the operations for each 
of  the  areas  concerned.  To  complete  the  picture  of  lending  activities,  it  also  gives  a  brief 
summary of the macro-financial assistance provided by the Community to third countries and 
of  the  interest  subsidies  and  guarantees  associated  with  Community  loans.  In  addition,  it 
provides information on Euratom’s lending activities. 

The tables to this report are published in a Commission Staff Working Paper. References to 
tables in the text refer to the Staff Working Paper. 

1. 

BORROWING ACTIVITIES IN 2005 

In  order  to  finance  the  lending  activities  decided  by  the  Council,  the  Commission  is 
empowered to borrow, on behalf of the respective Community (EC, Euratom), funds on the 
capital market2. One borrowing for macro-financial assistance in 2005 was raised to grant a 
loan  to  Serbia  and  Montenegro.  There  were  three  borrowings  under  the  Euratom  loans 
instrument  to  finance  one  loan  to  a  nuclear  plant  in  Bulgaria  and  two  loans  for  the  same 
purpose in Romania. 

Despite the above-mentioned factors, total borrowing by the European Communities and the 
EIB increased in 2005 by 6% to EUR 52.9 billion, against EUR 49.9 billion the previous year 
(see Table 1.1), mainly due to an increase in borrowing by the EIB. 

Taking  into  account  repayments,  cancellations  and  exchange-rate  fluctuations,  the  total 
amount of borrowings outstanding at 31 December 2005 was EUR 250.1 billion, 15.5% up on 
2004 (see Table 1.2). 

The breakdown of borrowings by currency (see Table 1.3) shows a decrease in the share of 
EUR-denominated  borrowings  in  2005  to  37.5%  from  44.9%  in  2004  of  all  issues,  while 
issues  in  other  Community  currencies  increased  from  13.0%  to  23.0%.  Non-Community 
currencies took a smaller share of borrowing, decreasing  from  42.0%  to  39.5%  of  the  total. 
Issues  in  USD  were  down  from  41.6%  to  27.9%.  In  2005,  after  swaps,  97.3%  of  the  loans 

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Legal base: Council decision 97/256/EC for the first global mandate and 2000/24/EC, as amended, for 
the second mandate and also Decisions 98/348/EC, 98/729/EC, 99/786/EC, 2000/24/EC, 2000/688/EC, 
2000/788/EC, 2001/777/EC, 2001/778/EC, 2005/47/EC and 2005/48/EC. 
The ECSC treaty expired in 2002. The ceilings for the New Community instrument (NCI) have been 
fully  used  and  the  last  borrowing  under  NCI  was  fully  amortised  in  2004.  No  funds  were  raised  for 
these instruments and there will be no new lending activities for them. 

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were on a variable-rate as compared to 100% in 2004 (figure before swap : see Table 1.3 in 
Annex). 

2. 

LENDING IN NON-MEMBER STATES3 

2.1. 

Overview 

Financial  support  for  non-member  States  that  have  concluded  cooperation  agreements  with 
the Community takes a variety of forms depending on the geographical areas concerned and 
the objectives pursued. It generally takes the form of bilateral loans (macro-financial support 
or  balance-of-payments  support),  where  the  Community  helps  to  re-establish  a  country's 
macro-economic  balance.  The  Commission  administers  these  financial  operations  under 
decisions of the Council. 

In other cases loans are granted either in the form of direct financing for individual projects or 
of global loans  to  banks, which then allocate funds  to smaller-scale local  projects. The EIB 
manages these loans on its usual terms, generally with the guarantee of the Union budget. 

The  Euratom  loans  instrument  is  available  for  financing  operations  in  Member  States  and 
certain non-member States at the time of the Decision (Armenia, Bulgaria, Czech Republic, 
Hungary, Lithuania, Romania, Russia, Slovakia, Slovenia and Ukraine). 

The  geographical  regions  in  which  the  Community  conducts  lending  activities  are  listed  in 
annex (see Table 2.1). 

2.2. 

The Community's Macro-Financial Assistance 

Macro-financial assistance (MFA) in the form of loans is, by its very nature, exceptional and 
forms  part  of  the  efforts  of  the  international  community  to  provide,  in  conjunction  with  the 
Bretton  Woods  institutions,  balance-of-payments  support  to  certain  countries  facing 
focuses  on 
transitional  macro-economic  difficulties.  The  Community’s  assistance 
neighbouring  regions,  such  as  the  Western  Balkans  and  the  Caucasus.  Disbursements  are 
subject to the beneficiary countries meeting objectives for macro-economic stabilisation and 
structural reforms. In these circumstances, the number of operations undertaken each year is 
limited, and it is difficult to make valid comparisons for the assistance given from one year to 
the next. 

Grants  and  loans  disbursed  under  this  instrument  are  listed  in  the  annex  (see  Table 2.2). 
Moreover, information is also given in the annual Commission Report on the implementation 
of MFA to third countries4. 

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In 2005 there were no lending activities to Member States by the Communities. As the accession of ten 
new  Member  States  took  place  on  1 May  2004,  the  guaranteed  loans  to  these  countries  ceased  to  be 
considered as external actions from that date. 
COM(2006)391 and its annex SEC(2006)938. 

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2.3. 

EIB Lending in 2005 in the South-Eastern Neighbours, the Mediterranean, Asia 
& Latin America and Republic of South Africa 

Section 2.3 constitutes the annual report for 2005 to be submitted to the European Parliament 
and the Council in accordance with Article 2 of Council Decision 2000/24/EC. 

2.3.1.  EIB Objectives and Priorities  

In  the  South-Eastern  Neighbours,  the  Bank  has  been  active  in  2005  in  both  the  Acceding 
and  Accession  States  (Bulgaria,  Romania,  Croatia  and  Turkey)  as  well  as  continuing  to 
support  investments  in  the  countries  of  the  Western  Balkans  in  various  sectors  (mainly 
infrastructure, health and education and SMEs). 

The  EIB  gives  priority  to  upgrading,  modernising  and  developing  the  communications  and 
energy sectors, with particular emphasis on Trans-European Networks (TENs) on the basis of 
the road and rail corridors defined by the Pan-European Conference of Transport Ministers as 
development priorities for the medium term. 

Environmental  issues  related  to  EIB  projects,  as  well  as  environmental  projects  per  se,  are 
given  priority  in  the  framework  of  the  gradual  adaptation  of  the  legislation  of  the  countries 
concerned to that of the EU. The EIB also supports SMEs and other industrial initiatives, in 
particular  Foreign  Direct  Investment  (FDI),  either  directly  or  through  its  global  loan 
instrument, in particular when involving EU partners. 

The  EIB  continued  lending  under  the  mandate  for  special  lending  action  for  selected 
environmental  projects  in  North-Western  Russia  that  expired  in  May  2005  (two  projects 
were signed in April and May for EUR 60 million in St. Petersburg, bringing total signatures 
under this mandate to EUR 85 million), and carried out significant preparatory work viz the 
second  Mandate  (EUR  500  million  up  to  July  2007)  for  Russia,  Ukraine,  Moldova  and 
Belarus, approved by the Council in December 2004 and for which the Guarantee Agreement 
was  signed  with  the  Commission  in  December  2005.  The  Commission,  the  EIB  and  the 
European  Bank  for  Reconstruction  and  Development  (EBRD)  also  worked  on  preparing  a 
tripartite Memorandum of Understanding concerning the implementation of the possible next 
Mandate currently under discussion (2007-2013) for operations in Russia, Eastern Europe and 
Southern Caucasus5 and Central Asia6.  

In the Mediterranean region, the Bank’s lending under mandate is carried out by the Facility 
for Euro-Mediterranean Investment and Partnership  (FEMIP)  and  takes  place  mainly  within 
the  framework  of  the  Euro-Mediterranean  Partnership,  in  support  of  the  economic 
development of the countries concerned. EIB lending supports individual investment projects 
and, through the global loan mechanism, smaller projects and SMEs, while at the same time 
strengthening  the  financial  sector  in  the  various  countries.  In  order  to  complement  the 
remaining  amount  available  under  the  existing mandate  (EUR  248  million),  an  interim  EIB 
facility  could  be  launched  in  2006,  allowing  the  Bank  to  pursue  an  appropriate  level  of 
operations in the Mediterranean countries before the entry into force of the future mandate. 

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Ukraine, Moldova, Belarus, Armenia, Azerbaijan, Georgia. 
Kazakhstan, Kyrgyz Republic, Tajikistan, Turkmenistan and Uzbekistan. 

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In addition to its lending under the EuroMed II mandate and at the request of the Council, the 
Bank has continued with its programme of lending from its own resources, without budgetary 
guarantee, under the Mediterranean Partnership Facility. 

EIB own resources lending under mandate is further complemented by interest subsidies (for 
loans  in  the  environmental  sector)  and  by  risk  capital  from  EU  budgetary  sources  and 
managed by the Bank. Operations continued under the Technical Assistance FEMIP Support 
Fund, which utilises funds granted by the European Commission under the MEDA regulation. 
2005  was  the  first  operational  year  of  the  FEMIP  Trust  Fund  created  in  mid-2004  to 
complement the Technical Assistance Fund by focusing on upstream technical assistance and 
risk capital operations. 

Formalising  a  longstanding  relationship,  a  Memorandum  of  Understanding  on  an  enhanced 
strategic  partner  for  cooperation  in  the  African  countries  was  signed  in  2005  between  the 
European  Investment  Bank,  the  European  Commission  and  the  African  Development  Bank. 
To  combine  resources  and  increase  cooperation  with  bilateral  development  finance 
institutions from the Member States that also operate in the Mediterranean, the EIB signed an 
agreement with twelve such institutions last year. In addition, it signed a letter of intent with 
the Agence Française de Développement and the KfW Development Bank. 

In  Asia  and  Latin  America,  the  Bank  finances  projects  that  are  of  interest  to  both  the 
Community  and  the  countries  concerned  –  cofinancing  with  EU  promoters,  transfer  of 
technology,  cooperation  in  the  fields  of  energy  and  environmental  protection.  Since  the 
Tsunami of end-2004, reconstruction efforts are also eligible for EIB support. 

In  the  Republic  of  South  Africa,  the  Bank’s  objective  is  to  contribute  to  the  successful 
implementation  of  the  country’s  reconstruction  and  development  programme.  In  addition  to 
its lending operations, the EIB provided management support to the EU Commission for its 
Risk Capital Facility. 

A summary of the activity developed by the EIB since 2001 can be found in table 2.3.1. 

2.3.2.  Lending Activity 

The breakdown by country and by sector can be found in annex (see Section 2.3.2. a-e). 

2.3.3.  Risk Sharing 

Council Decision 2000/24/EC7, as amended, provides Community guarantee global coverage 
for  65%  of  the  overall  amount  of  loans  signed.  Under  the  risk-sharing  arrangements,  EIB 
loans  with  non-sovereign  project  guarantees  are  covered  only  for  political  risk  by  the 
Community  guarantee,  whereas  loans  with  sovereign  project  guarantees  are  covered  for  all 
risks  by  the  Community  guarantee.  The  Bank  would  call  the  Community  guarantee  for  an 
individual loan only if the project guarantee for that loan failed to reimburse the Bank, in the 
case of a non-sovereign project guarantee for political reasons only, but for any reason in the 

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Council  Decision  2000/24/EC  invites  the  Bank  “to  aim  to  cover  the  commercial  risk  on  30%  of  its 
lending under this Decision from non-sovereign guarantees as far as possible on an individual regional 
mandate  basis.  This  percentage  shall  be  expanded  upon  whenever  possible  insofar  as  the  market 
permits”. During 2005, the Bank continued to work towards the risk-sharing objective with, however, 
the target increased to 30% instead of 25% as under the first mandate. 

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case  of  a  sovereign  project  guarantee.  Such  a  call  would  be  for  the  full  loan  amount 
outstanding,  since,  in  practice,  any  loan  is  covered  to  the  extent  of  100%,  subject  to  the 
overall 65% limit for the total liability of the guarantee. 

Risk-sharing at 31 December 2005 is shown in tables 2.3.3 and 2.3.3(bis) - separately for each 
mandate (risk-sharing percentage unchanged since end-2001 for the 1st Mandate). 

2.3.4.  Cooperation with other Institutions 

During  2005,  the  Bank’s  activities  in  the  Accession  and  Acceding  States  were  conducted 
within the framework of the EU programme to help these countries to prepare for accession, 
in particular by financing investment aimed at integrating their infrastructure with that of the 
EU  and  by  assisting  SMEs.  Whenever  possible,  projects  are  co-financed  with  other 
institutions.  The  Bank’s  activities  thus  form  part  of  a  concerted  approach  that  is  pursued  in 
close  cooperation  with  the  Commission  and,  as  appropriate,  with  the  international  financial 
institutions working in the countries concerned. 

The Bank cooperates closely with the PHARE/ISPA Programme, with which it has developed 
a  productive  relationship,  much  appreciated  by  the  beneficiary  countries.  In  addition  to 
frequent  PHARE  assistance  during  the  pre-investment  phase  to  ensure  that  the  necessary 
studies  and  technical  assistance  are  implemented  in  support  of  EIB  projects,  the  Bank  also 
cooperates with PHARE in cofinancing infrastructure projects. 

Co-financing  contributions  to  projects  financed  by  the  EIB  in  2005  are  shown  in  annex 
(Tables 2.3.4/2.3.5). Additional projects were cofinanced in the framework of the Bank’s Pre-
Accession Facility, which is outside the scope of this report. 

2.4. 

Signatories of the Lomé/Cotonou Conventions - Lending Activity 

Total  EIB  lending  in  the  ACP/OCT  amounted  to  EUR  537  million  in  2005,  of  which  EUR 
151 million from the Bank’s own resources and EUR 386 million from risk capital (see Table 
2.4).  

3. 

BUDGETARY IMPACT OF LENDING 

Lending  activities  have  an  impact  on  the  Union  budget  when  they  are  accompanied  by 
Community  guarantees,  interest  subsidies  or  special  conditions  comparable  to  risk-bearing 
operations for the lender. 

3.1. 

Budget Guarantees 

On 22 December 2004 the Council decided to grant a Community guarantee to the European 
Investment Bank against losses under loans for certain types of projects in Russia, Ukraine, 
Moldova and Belarus (2005/48/EC). The overall ceiling of the credits opened shall be EUR 
500 million and the EIB shall benefit from an exceptional Community guarantee of 100 %. 

On  22  December  2004  the  Council  decided  to  amend  Decision  2000/24/EC  to  take  into 
account  the  enlargement  of  the  European  Union  and  the  European  Neighbourhood  Policy 
(2005/47/EC). 

The new ceilings for each area are as follows (in EUR): 

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South-Eastern Neighbours 

Mediterranean countries 

Latin America and Asia 

Republic of South Africa 

Turkey 

9,185 million 

6,520 million 

2,480 million 

825 million 

450 million 

The  overall  ceiling  for  the  guarantee  is  therefore  EUR 19 460 million,  and  the  Commission 
budget  covers  65%  of  that  amount  (compared  with  70%  under  the  previous  mandate).  This 
decision calls on the EIB to seek other sources of (commercial) guarantee from its financial 
intermediaries where possible and sets a target rate of 30% of the ceiling (as opposed to 25% 
under the previous mandate). 

This guarantee programme will expire on 31 January 2007; it may automatically be extended 
by six months if the loans ceiling has not been reached. 

The Commission budget covers furthermore 65% of a maximum amount of EUR 600 million 
to Turkey (TERRA) for which no risk-sharing was requested. 

During 2005 (the sixth year of the new mandate) the EIB signed loan agreements for a total of 
EUR 3,618 million,  bringing  total  lending  under  the  new  mandate  to  EUR 17,238 million 
corresponding to 89% of the ceiling, with risk-sharing equivalent to 17% of the loans signed. 

The  detailed  situation  relating  to  guarantees  is  set  out  in  the  six-monthly  report  by  the 
Commission on guarantees covered by the general budget8. 

3.2. 

Interest Subsidies 

Interest subsidies were granted under a number of Community  programmes both inside and 
outside the Union. At the Council's request, the Commission drew up an overall assessment 
report on this subject9. Most of these programmes have been completed and no longer have 
any impact on budgetary expenditure. In annex, the Table 3.2 lists the programmes which are 
still under way and the amount of interest subsidy paid during the years under review.  

3.3. 

Risk Capital 

Under the successive Lomé Conventions and the Cotonou Agreement, the EIB carries out risk 
capital operations in the ACP region, which are financed by the EDF budget. A breakdown of 
the operations is given in annex (see Table 2.4). 

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COM(2005) 699 and SEC(2005) 1769. 
COM(2000) 524 of 6 September 2000. 

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