Proposal for a Council Decision on the Community participation in the capital increase of the European Investment Fund [SEC(2006) 1347]
Date: 2006-10-24
Institutions: European Commission
Subjects: EU financing, European Investment Fund, capital increase

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 24.10.2006 
COM(2006) 621 final 

2006/0203 (CNS) 

Proposal for a 

COUNCIL DECISION 

on the Community participation in the capital increase of the European Investment 
Fund 

(presented by the Commission) 

[SEC(2006) 1347] 

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EXPLANATORY MEMORANDUM 

1)  CONTEXT OF THE PROPOSAL 

110 

•  Grounds for and objectives of the proposal 

The European Investment Fund (the Fund) was created in 1994. Its founder members 
are  the  European  Community,  represented  by  the  European  Commission,  the 
European  Investment  Bank  (EIB)  and  a  number  of  financial  institutions.  The 
Community membership of the Fund is determined by Council Decision 1994/375/EC 
(OJ L 173, 7 July 1994, p. 12).  

The Fund will exhaust its own resources by mid-2007 and will be unable to continue 
its own resources operations. Therefore, following an exhaustive examination of the 
outlook  and  alternatives  by  the  Fund's  Board  of  Directors,  the  Board  proposes  to 
increase the subscribed capital by 50% in nominal terms.  

Article  3  of  the  Council  Decision  1994/375/EC  specifies  that  the  position  of  the 
Community  on  a  possible  capital  increase  in  the  capital  of  the  Fund  and  on  its 
participation in that increase shall be decided unanimously by the Council, acting on 
proposal  from  the  Commission  and  after  consulting  the  European  Parliament. 
Consequently, the purpose of this proposal for a Council Decision is to approve the 
50% increase in the nominal capital of the Fund and Community participation in it. 
Following the adoption of the proposed Decision by the Council, and in line with the 
Statutes  of  the  Fund,  the  General  Meeting of  the  Fund  would  authorise  the  Fund  to 
increase  its  capital  by  50%  in  nominal  terms.  This  new  Council  Decision  would 
enable the Commissioner for Economic and Monetary Affairs to vote in favour of the 
capital increase at the Fund's General Meeting. 

120 

•  General context 

European  venture  capital  markets  must  provide  not  only  better  access  to  equity  for 
innovative SMEs in seed and start-up stages, but follow-on investments for SMEs in 
more mature stages to help businesses reach their full potential, bring their products 
and  services  to  the  market  thus  creating  jobs  and  continue  funding  their  research 
activity. With regard to the European banking sector, securitisation is widely seen as 
one of the possible answers to the problem for SME lending that may derive from the 
Basle II capital requirements which will be in place as of 2008. Since its creation, the 
Fund  has  been  able  to  support  around  270  000  SMEs  through  venture  capital 
investments and portfolio guarantees in the European Union and accession countries. 
The  EIB  Risk  Capital  Mandate,  the  EIF/ERP1  mandate  initiated  by  the  German 
Ministry of Economics and Labour and the Community mandates (notably ETF Start-
up  Facility,  SME  Guarantee  Facility  and  Growth  &  Environment  Scheme)  have 
supported around 263 000 SMEs under the Fund's management.  

While  the  Fund's  operations  have  a  high  leverage  effect,  these  have  to  be  further 
developed  to  respond  to  the  changing  needs  of  all  types  of  SMEs  and  to  shifting 
market  circumstances.  The  Fund  plays  an  important  role  in  addressing  in  a  flexible 

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European Recovery Programme 

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way  persistent  and  well-identified  market  gaps  that  limit  SMEs'  access  to  finance, 
thus  hindering  their  potential  growth  in  all  stages:  creation,  expansion  and 
development. In the absence of the capital increase, the Fund would have to gradually 
scale down all new operations funded by its own resources. Due to its co-investment 
obligations  under  certain  mandates,  there  would  also  be  an  impact  on  the  mandate 
activity. 

130 

The Fund's capital increase falls within the framework of the Lisbon strategy and is 
the  Commission 
considered  as  a  further  measure 
Communication  "Implementing  the  Community  Lisbon  Programme:  financing  SME 
Growth  –  Adding  European  Value"  COM(2006)  349,  which  includes  measures  to 
generate  more  risk  capital  investments,  to  develop  bank  finance  for  innovation  and 
make existing financing systems more SME-friendly.  

laid  down 

those 

in 

to 

•  Existing provisions in the area of the proposal 

An  Act  amending  the  Protocol  of  the  Statute  of  the  EIB  was  adopted  on  25  March 
1993 (OJ L 173, 7 July 1994, p. 14) empowering the Board of Governors of the EIB 
to  create  the  Fund.  Article  4  of  this  amendment  specifies  that  the  European 
Community  and  financial  institutions  may  become  members  of  the  Fund  and 
contribute  to  its  subscribed  capital.  Council  Decision  1994/375/EC  provides  for  the 
Community participation in the Fund. Following the conclusions of the March 2000 
Lisbon  Summit,  which  called  for  increased  support  for  risk  capital  initiatives  in 
favour of SMEs, the shareholders of the Fund approved in June 2000 a reform of the 
institution with a view to making the Fund a key financial instrument of Community 
policy directed at SMEs.  

141 

•  Consistency with other policies and objectives of the Union 

The  Fund's  policy  objective  has  been  reinforced  in  recent  years  through  its  active 
support  of  the  Lisbon  strategy  for  growth  and  employment,  of  which  enhancing 
SMEs'  access  to  finance  and  the  financing  of  innovation  and  research  are  key 
elements.  The  Fund's  operations  complement  EIB's  Risk  Capital  Mandate  and 
Community  financial  programmes  such  as  the  Competitiveness  and  Innovation 
Framework  Programme  (CIP),  Joint  European  Resources  for  Micro  to  medium 
Enterprises  (JEREMIE),  the  Seventh  Research  Framework  Programme,  which  also 
includes measures to help SMEs under the Cooperation and Capacities programmes. 
Each  of  these  programmes  will  work  according  to  their  individual  policy  scope  and 
guidelines,  mainly  targeting  specific  group  of  SME  beneficiaries,  different  SME 
development  stages  and  they  mainly  have  different  risk-profiles.  Thus,  the  one  and 
same eligible costs will not be double-funded, but the Fund may make co-investments 
from its own capital in order to leverage the Community budget funding for specific 
programmes.  Finally,  the  Fund's  Board  of  Directors  has  the  responsibility  to  ensure 
that Fund's resources are used to contribute to the pursuit of Community objectives.  

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2)  CONSULTATION OF INTERESTED PARTIES AND IMPACT ASSESSMENT 

•  Consultation of interested parties 

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Consultation methods, main sectors targeted and general profile of respondents 

The ECOFIN of 14 March 2006 adopted a report on the proposal by the EIB Group 
(the  EIB  and  the  Fund)  for  reinforcing  the  contribution  by  the  EIB  Group  to 
promoting growth and employment in the EU under the Lisbon strategy. This report, 
which  was  prepared  in  co-operation  with  the  Commission,  included  a  proposal  to 
increase  the  Fund's  subscribed  capital  by  50%  in  nominal  terms.  The  European 
Council of 23/24 March 2006 welcomed the EIB Group's report and emphasised that 
a fully integrated financial market and sufficient access to finance are crucial for the 
growth  of  small  and  medium-sized  enterprises.  Finally,  the  capital  increase  was 
endorsed by the EIB's Board of Governors on 7 June 2006.  

212 

Summary of responses and how they have been taken into account 

The views of the Fund's Board of Directors and of the EIB are fully reflected in the 
proposal.  The  Economic  and  Financial  Committee  of  2-3  March  2006  invited  the 
Commission to table a legal proposal to be examined by the ECOFIN Council.  

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•  Collection and use of expertise 

Scientific/expertise domains concerned 

Financial and market expertise of the Fund. 

Methodology used 

Not applicable. 

Main organisations/experts consulted 

The Fund, the EIB and the Board of Directors of the Fund. 

2249 

Summary of advice received and used 

The  nature  of  the  risk  related  to  the  Community's  shareholding  in  the  EIF  does  not 
change as a result of this proposal. 

The position of the Fund and the views of the EIB and the Board of Directors on the 
capital increase are reflected in the proposal and in the ex-ante evaluation. 

Means used to make the expert advice publicly available 

Not applicable. 

•  Impact assessment 

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No formal impact assessment has been carried out. Since Autumn 2005, the Board of 
Directors of the Fund however has assessed various options and alternatives in order 

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to  improve  the  Fund's  own  resources'  situation.  Without  a  capital  increase  the  Fund 
would  have  to  cease  its  own  resources  activity.  Finally,  sale  of  assets,  hedging  or 
borrowing  were  not  considered  as  meaningful  alternatives  considering  the  risk-
profile, liquidity requirements and long-term character of the Fund's operations.  

The capital increase, the first since the inception of the Fund in 1994, is fundamental 
to achieving the Fund's objectives. In the short- to medium-term, it would increase the 
Fund's  potential  for  cooperation  with  the  Commission,  with  the  EIB  and  with  the 
financial  shareholders,  as  well  as  with  new  or  existing  non-shareholder  mandators 
requiring  co-investment  by  the  Fund.  No  additional  request  for  increased  capital 
would be made during the forthcoming Financial Framework period 2007-2013. The 
Fund  will  use  its  own  resources  for  venture  capital  and  guarantee  operations  to 
increase financing available for SMEs and growth-enhancing investments by SMEs in 
innovation  and  R&D.  The  EIB  and  the  Commission  are  dedicated  to  providing  the 
resources  deemed  necessary  to  make  EU  policies  work,  notably  in  the  fields  of  the 
Lisbon agenda: innovation, SME growth and job creation. 

The  Fund  has  a  significant  track  record  in  facilitating  SMEs'  access  to  debt  finance 
through  the  setting-up  of  and  participation  in  securitisation  transactions.  Without  a 
capital  increase  the  Fund  would  no  longer  be  able  to  participate  in  securitisation 
transactions.  Due  to  the  limited  budgetary  resources,  the  proposed  securitisation 
window  under  Competitiveness  and  Innovation  framework  Programme  2007-2013 
(CIP) could only cover a small portion of the current overall guarantee activity of the 
Fund.  Furthermore,  the  Fund  would  not  be  able  to  extend  its  activities,  especially 
venture capital operations, to markets with development potential, notably in the new 
Member States. 

Within the context of the reorientation of the EIB Group's priorities by the Board of 
Governors in June 2005, which placed emphasis on innovative products making use 
of  Group-level  synergies,  the  Fund  has  been  called  upon  to  clearly  strengthen  its 
support for EU policies. The Governors' request for extended activity is reinforced by 
the Fund's ongoing discussions with the Commission on a number of important new 
initiatives.  

3)  LEGAL ELEMENTS OF THE PROPOSAL 

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•  Summary of the proposed action 

The Fund's own resources will be exhausted by mid-2007. The Board of Directors of 
the  Fund  has  therefore  suggested  increasing  the  subscribed  capital  of  the  Fund  by 
50% in nominal terms, of which 20% will be paid-in. The intention is to issue 1000 
new shares, which would mean, in nominal terms, an increase of the total subscribed 
share capital from EUR 2 billion to EUR 3 billion and, maintaining the current paid-
in ratio of 20%, an increase from EUR 400 million to EUR 600 million of the paid-in 
capital.  The  capital  increase  of  the  Fund  was  endorsed  within  the  framework  of  the 
EIB  Group's  contribution  to  the  growth  and  jobs  initiative  which  was  welcomed  by 
the ECOFIN of 14 March 2006 and European Council of 23-24 March 2006.  

It is proposed that the Commission, on behalf of the Community, will subscribe for up 
to  30%  of  the  new  nominal  capital.  Under  the  Financial  Framework  2007-2013,  an 
amount of EUR 100 million is allocated in the general budget for this purpose.  

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The total share purchase price to be paid to the Fund comprises two components: the 
nominal value of capital paid-in and the share premium. Subject to a constant rate of 
dividend payments, the share purchase price reflects the financial performance of the 
Fund, i.e. the better the performance of the Fund the higher the price of its shares and 
consequently the higher the amount of the share premium. In order to accommodate 
any  price  uncertainties,  the  Commission  proposes  to  use  the  dividends  paid  by  the 
Fund  to  the  Community  during  the  four-year  period  to  cover  part  of  the  cost  of  the 
capital  increase.  The  dividends  earned  and  required  during  the  period  2007-2010  to 
cover  the  cost  of  the  capital  increase  are  considered  as  assigned  revenue  in 
accordance  with  Article  18(2)  of  the  Financial  Regulation.  This  would  support  the 
Commission's intention to maintain the Community shareholding at 30% in order to 
support  the  Fund's  continued  focus  on  EU  policies.  In  any  case,  the  maximum 
Community liability will not exceed the budget allocation of EUR 100 million and the 
dividends received during this period, estimated at around EUR 20 million. 

310 

•  Legal basis 

Article  3  of  Council  Decision  1994/375/EC  of  6  June  1994  on  Community 
membership of the European Investment Fund. 

329 

•  Subsidiarity principle 

The  proposal  falls  under  the  exclusive  competence  of  the  Community.  The 
Community participation in the Fund is based on Council Decision 1994/375/EC. The 
establishment  of  the  Fund  and  its  Statutes  have  been  approved  by  the  Board  of 
Governors of the EIB. The subsidiarity principle therefore does not apply. 

•  Proportionality principle 

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The proposal complies with the proportionality principle for the following reasons. 

The  market  failures  in  the  area  of  access  to  finance  to  SMEs,  which  existed  at  the 
time of the Fund's creation in 1994, still persist and for this reason Community level 
intervention  is  considered  to  remain  valid.  The  Fund  has  proven  to  be  able  to  offer 
financing products supporting SMEs in a very effective way throughout the EU which 
would not be possible for a national institution. The Fund shall continue to manage its 
increased  own  resources  operations  with  the  usual  investment  and  credit  policy 
criteria and procedures.  

In addition, the capital increase takes into consideration the budgetary constraints of 
the agreed Financial Framework and the Fund's business projections demonstrate that 
the  50%  capital  increase  is  sufficient  to  continue  its  own  resources  operations  until 
2013.  

The  additional  own  resources  of  the  Fund  will  increase  the  amounts  of  finance 
available  for  SMEs.  Following  a  thorough  due-diligence  process  the  Fund  selects 
appropriate partners, i.e. venture capital funds and financial institutions which in turn 
provide equity or debt finance to SMEs. The Board of Directors of the Fund, in which 
the Commission has two Nominees, must approve all project proposals. 

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•  Choice of instruments 

Proposed instruments: other. 

Other means would not be adequate for the following reason(s). 

Article  3  of  the  Council  Decision  1994/375/EC  specifies  that  the  position  of  the 
Community  on  a  possible  capital  increase  in  the  capital  of  the  Fund  and  on  its 
participation in that increase shall be decided unanimously by the Council, acting on 
proposal from the Commission and after consulting the European Parliament. 

4)  BUDGETARY IMPLICATION 

The  Community  will  subscribe  to  up  to  300  new  shares  of  the  EIF.  The  annual 
payments  of  the  shares  will  be  done  over  the  four-year  period  2007-2010.  The 
indicative budget appropriation for the four-year period would amount to around EUR 
100 million, i.e. EUR 25 million per year.  

The intention is to maintain the Community shareholding in the Fund at the level of 
30%  of  the  capital  of  the  Fund  by  2010.  Due  to  the  variable  share  issue  price  the 
Commission does not have the possibility to determine in advance the exact overall 
and  annual  budgetary  commitments  and  payments.  In  order  to  maintain  the 
shareholding  at  30%  by  2010  and  to  face  any  price  uncertainties,  the  Commission 
proposes  that  the  dividends  which  will  be  paid  by  the  Fund  during  the  years  2007-
2010 will be used each year to cover part of the cost of the new shares. In any case, 
the maximum Community liability will not exceed the budget allocation of EUR 100 
million  and  the  dividends  received  during  this  period,  estimated  at  around  EUR  20 
million. 

5)  ADDITIONAL INFORMATION 

•  Review/revision/sunset clause 

The proposal includes a review clause. 

•  Detailed explanation of the proposal 

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Article 1 determines that the Community shall subscribe to the 50% capital increase 
of the Fund in nominal terms. The Community would thus purchase up to 300 shares. 
The terms and conditions of the capital increase will be set by the General Meeting of 
the Fund in 2007.  

Article 2 covers the budgetary aspect of the proposal. In order  to maintain  the 30% 
Community  shareholding,  the  Commission  would  purchase  up  to  300  of  the  Fund's 
new  shares.  Within  the  Financial  Framework  2007-2013,  the  budgetary  funds 
allocated for the purpose of the capital increase are limited to EUR 100 million. As 
the share purchase price is variable and it is uncertain whether the budgetary funds are 
sufficient  to  maintain  the  30%  shareholding  in  the  Fund  by  2010,  the  Commission 
proposes to use each year the dividends paid by the Fund during this period to cover 
part of the costs of the Community participation in the capital increase. The maximum 
Community liability is thus limited to the budget allocation of EUR 100 million and 

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the dividends received each year during 2007-2010, i.e. an amount estimated at EUR 
20 million. 

Article  3  covers  the  evaluation  of  the  Fund's  activities  to  be  carried  out  by  the 
Commission by 31 July 2012. 

In  the  past,  based  on  the  10th  recital  of  the  Council  Decision  1994/375/EC,  the 
Commission forwarded the Fund's Annual Report to the Council and the Parliament. 
Article 4 proposes a change to this practice and invites the Fund to send its Annual 
Report and the Annual Report of the Audit Board directly to the European Parliament 
and the Council. In accordance with Article 2 of the Council Decision 1994/375/EC, 
the Commission will continue to notify the Council of the matters to be discussed at 
the Funds' General Meeting.  

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2006/0203 (CNS) 

Proposal for a 

COUNCIL DECISION 

on the Community participation in the capital increase of the European Investment 
Fund 

THE COUNCIL OF THE EUROPEAN UNION, 

Having regard to the Treaty establishing the European Community,  

Having regard to Council Decision 1994/375/EC of 6 June 1994 on Community membership 
of the European Investment Fund2, and in particular Article 3 thereof, 

Having regard to the proposal from the Commission3, 

Having regard to the opinion of the European Parliament4, 

Whereas: 

(1) 

(2) 

(3) 

The authorised capital of the European Investment Fund, hereinafter "the Fund", was 
set  at  the  time  of  its  establishment  at  EUR  2  billion,  divided  into  2  000  shares  each 
with a nominal value of EUR 1 million. In accordance with Article 7(1) of the Statutes 
of  the  European  Investment  Fund5,  hereinafter  "the  Statutes",  the  subscribed  capital 
shall be paid-in at a rate of 20%. 

Pursuant  to  Decision  1994/375/EC,  the  European  Community,  represented  by  the 
Commission, subscribed for 600 shares of the Fund for a nominal value of EUR 600 
million of which EUR 120 million are paid-in. 

The guarantee and venture capital operations of the Fund may not exceed the ceilings 
set by Article 26 of the Statutes or by the General Meeting of the Fund. The ceilings 
depend on the size of the Fund’s capital and own resources. As the Fund is expected to 
exhaust  its  own  resources  by  mid  2007  and  therefore  will  be  unable  to  continue  its 
own resources operations, the Board of Directors has proposed to increase by 50% the 
Fund’s authorised capital in nominal terms.  

(4) 

The ECOFIN Council of 14 March 2006 adopted a report on the proposals put forward 
by the European Investment Bank Group, hereinafter "the EIB Group", for reinforcing 

2 
3 
4 
5 

OJ L 173, 7.7.1994, p. 12. 
OJ C , , p. . 
OJ C , , p. . 
OJ L 173, 7.7.1994, p. 1. Statutes as amended on 19 June 2000 by the General Meeting of the European 
Investment Fund (OJ C 225, 10.8.2001, p. 2). 

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(5) 

(6) 

(7) 

(8) 

(9) 

the contribution by the EIB Group to promoting growth  and employment in  the EU, 
which includes the proposal for a capital increase of the Fund.  

The  European  Council  of  23-24  March  2006  welcomed  the  EIB  Group  contribution 
and  invited  the  relevant  actors  to  take  the  necessary  follow-up  steps,  taking  into 
account the final agreement on the Financial Framework 2007-2013. 

The Community subscription for the new shares would support the implementation of 
the Lisbon strategy and help achieve the Community’s objectives in the field of small 
and  medium-sized  enterprises,  job  creation,  innovation,  research  and  development, 
cohesion and regional policy and enlargement. 

A  budget  allocation  of  EUR  100  million  for  the  capital  increase  of  the  Fund  is 
consistent with the final agreement on the Financial Framework 2007-2013.  

New shares should be subscribed by the Fund's shareholders at their discretion over a 
four-year period, starting in 2007 and ending in 2010, while respecting the interests of 
the financial institution shareholders and the European Investment Bank as well as the 
budgetary  constraints  of  the  Community.  The  price  of  the  new  shares  should  be  set 
annually  and  be  based  on  the  net  asset  value  formula  agreed  between  the  Fund's 
shareholders. 

The annual dividends received for the Community participation in the Fund from 1995 
to  2006  have  been  duly  returned  to  the  Community  budget.  During  the  years  2007-
2010 the dividends received should be considered as assigned revenue and be used to 
cover  part  of  the  cost  of  the  capital  increase.  This  should  increase  the  amount  of 
budgetary  funds  available  for  the  capital  increase,  thus  supporting  the  objective  of 
maintaining  the  Community  shareholding  in  the  Fund  at  30%  of  the  capital  of  the 
Fund. 

(10)  Until  now  the  Commission  has  forwarded  the  Annual  Reports  of  the  Fund  to  the 
European  Parliament  and  the  Council.  With  a  view  to  simplifying  the  reporting 
procedure,  it  is  necessary  to  provide  that  the  Fund  should  send  directly  its  Annual 
Report and the Annual Report of the Audit Board to the European Parliament and the 
Council. 

(11)  Appropriate co-ordination, synergy and complementarity will be ensured between the 
operations  of  the  Fund  and  the  European  Investment  Bank,  Community  financial 
instruments  for  small  and  medium-sized  enterprises  and,  where  appropriate,  other 
financial institutions. 

HAS DECIDED AS FOLLOWS:  

Article 1 

In  addition  to  its  current  shareholding  in  the  European  Investment  Fund,  hereinafter  "the 
Fund",  the  Community  shall  subscribe  for  up  to  300  shares  each  of  nominal  value  of 
EUR 1 million  in  the  Fund.  The  subscription  of  shares  and  the  annual  payments  shall  be 
carried out in accordance with the terms and conditions that shall be approved by the General 
Meeting of the Fund. 

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Article 2 

The  Community  shall  purchase  the  new  shares  over  a  four-year  period  starting  in  2007. 
During 2007-2010, the dividends received for the Community participation in the Fund shall 
be  considered  as  assigned  revenue,  in  accordance  with  Article  18(2)  of  Council  Regulation 
(EC, Euratom) No. 1605/20026, to cover part of the cost of subscription.  

In addition, a total amount of up to EUR 100 million for the whole period shall be available 
within  the  general  budget  of  the  European  Communities  to  cover  the  remaining  cost.  The 
budgetary  commitment  may  be  broken  down  into  annual  instalments  over  four  years  in 
accordance with Article 76(3) of Council Regulation (EC, Euratom) No. 1605/2002.  

The Commission shall  submit  to  the  Council an evaluation  of  the  own  resources  activity  of 
the Fund by 31 July 2012. 

Article 3 

Article 4 

The Fund shall transmit its Annual Report and the Annual Report of the Audit Board to the 
European Parliament and the Council. 

Done at Brussels,  

For the Council 
The President 

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OJ L 248, 16.9.2002, p. 1. 

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LEGISLATIVE FINANCIAL STATEMENT 

1. 

NAME OF THE PROPOSAL:  

Capital  increase  of  the  European  Investment  Fund  (EIF)  and  the  Community 
participation in the capital increase. 

2. 

ABM / ABB FRAMEWORK 

Economic and Financial Affairs 

01.04 Financial operations and instruments 

3. 

BUDGET LINES 

3.1. 

Budget lines including headings: 

Expenditure. 

01.0409: 

European Investment Fund 

01.040901:  European  Investment  Fund  —  Provision  of  paid-up  shares  of 
subscribed capital 

01.040902:  European Investment Fund — Callable portion of subscribed capital 

Revenue line. 

850 : Dividends paid by the EIF 

3.2. 

Duration of the action and of the financial impact: 

An  amount  of  EUR  100  million  is  allocated  within  the  financial  framework  2007-
2013  under  the  sub-heading  1A,  i.e.  EUR  25  million  annually  during  the  four-year 
period  2007-2010.  The  Commission  will  subscribe  the  new  shares  in  accordance 
with the decision to be taken by the General Meeting of the EIF on the modalities of 
the  capital  increase  and  pay  them  in  four  annual  instalments  in  accordance  with 
Article 76(3) of the Financial Regulation. 

The final impact on the Community budget mainly depends on the annual share price 
to be paid for the new shares issued by the EIF. In order to address any share price 
uncertainties whilst maintaining the Community shareholding in the EIF at 30%, the 
Commission proposes to use the EIF dividends, which would be received during the 
four-year  period,  to  cover  part  of  the  cost  of  the  capital  increase.  The  dividends 
earned  during  2007-2010  are  considered  as  assigned  revenue  in  accordance  with 
Article  18(2)  of  the  Financial  Regulation.  In  any  case,  the  maximum  Community 
liability will not exceed the budget allocation of EUR 100 million and the dividends 
received during this period, estimated at around EUR 20 million. 

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The  commitments  and  payments  of  the  Community  participation  will  be  subject  to 
the approval of the issue of new shares, the appropriation of annual net income and 
the distribution of dividends by the General Meeting of the EIF.  

3.3. 

Budgetary characteristics: 

Budget 
line 

01 04 09 

Type of expenditure 

New 

EFTA 
contribution 

Contributions 
from applicant 
countries 

Heading in 
financial 
framework 

Non-
comp 

Diff7 

YES 

NO 

NO 

No 1A 

4. 

SUMMARY OF RESOURCES 

4.1. 

Financial Resources 

4.1.1. 

Summary  of  indicative  commitment  appropriations  (CA)  and  indicative  payment 
appropriations (PA) 

The table provides for the amounts allocated in the Financial Framework 2007-2013 
to cover the commitment and payment appropriations without taking into account the 
EIF dividends (see point 4.1.3).  

2007 

2008 

2009 

2010 

2011 

EUR million  

Total 

2012 
and 
later 

Expenditure type 
(indicative amounts) 

Section 
no. 

Operational expenditure8 

Commitment Appropriations 
(CA) 

8.1. 

Payment 
(PA) 

Appropriations 

a 

b 

25.0 

25.0 

25.0 

25.0 

25.0 

25.0 

25.0 

25.0 

Administrative expenditure within reference amount9 

Technical  &  administrative 
assistance (NDA) 

8.2.4. 

c 

- 

- 

- 

- 

TOTAL REFERENCE AMOUNT 

Commitment 
Appropriations 

Payment Appropriations 

a+c 

b+c 

25.0 

25.0 

25.0 

25.0 

25.0 

25.0 

25.0 

25.0 

- 

- 

- 

- 

- 

- 

- 

- 

- 

- 

100.0 

100.0 

- 

100.0 

100.0 

7 
8 
9 

Differentiated appropriations 
Expenditure that does not fall under Chapter xx 01 of the Title xx concerned. 
Expenditure within article xx 01 04 of Title xx. 

EN 

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Administrative expenditure not included in reference amount10 

Human 
associated 
(NDA) 

resources 

and 
expenditure 

Administrative  costs,  other 
than  human  resources  and 
associated 
not 
included 
reference 
in 
amount (NDA) 

costs, 

8.2.5. 

d 

8.2.6. 

e 

- 

- 

- 

- 

- 

- 

- 

- 

- 

0.1 

Total indicative financial cost of intervention 

TOTAL CA including cost 
of Human Resources 

TOTAL  PA  including  cost 
of Human Resources 

a+c+d
+e 

b+c+
d+e 

25.0 

25.0 

25.0 

25.0 

0.1 

25.0 

25.0 

25.0 

25.0 

0.1 

4.1.2.  Compatibility with Financial Programming 

- 

- 

- 

- 

- 

0.1 

100.1 

100.1 

X 

(cid:133) 

(cid:133) 

Proposal is compatible with existing financial programming. 

Proposal  will  entail  reprogramming  of  the  relevant  heading  in  the  Financial 
Framework. 

Proposal  may  require  application  of  the  provisions  of  the  Interinstitutional 
Agreement11  (i.e.  flexibility 
the  Financial 
Framework). 

instrument  or  revision  of 

4.1.3.  Financial impact on Revenue 

(cid:133) 

X 

Proposal has no financial implications on revenue 

Proposal has financial impact – the effect on revenue is as follows: 

Dividends paid by the EIF during the period 2007-2010 are considered as assigned revenue in 
accordance with Article 18(2) of the Financial Regulation and will be used to cover part of the 
expenditure of the Community participation in the EIF's capital increase. Any excess amounts 
not  required  to  cover  the  cost  of  the  capital  increase  will  be  returned  to  the  Community 
budget. All details relating to the method of calculating the effect on revenue and an example 
are provided in the Annex. The amounts hereunder are only indicative and based on 30 June 
2006 profit and loss account figures of the EIF.  

10 
11 

Expenditure within chapter xx 01 other than articles xx 01 04 or xx 01 05. 
See points 19 and 24 of the Interinstitutional agreement. 

EN 

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Budget line 

Indicative amounts 

Prior to
action 
2006 

Indicative situation following action 

2007 

2008 

2009 

2010 

2011 

2012 

850 
Dividends paid by 
the EIF 

a) Indicative Revenue 

5.1 

6.2 

5.6 

6.4 

7.5 

b) Change in revenue 

Δ 

-6.2 

-5.6 

-6.4 

-7.5 

- 

- 

- 

- 

EUR million  

4.2. 

Human Resources FTE (including officials, temporary and external staff) – see 
detail under point 8.2.1. 

Annual requirements 

Total  number  of  human 
resources 

2007 

2008 

2009 

2010 

2011 

2012 
and 
later 

0.6 

0.6 

0.6 

0.6 

0.6 

0.6 

5. 

CHARACTERISTICS AND OBJECTIVES 

5.1. 

Need to be met  

EIF  uses  its  own  resources  as  capital  allocation  for  its  guarantee  operations  and  as 
equity payments for its venture capital investments. Based on the business forecasts 
for  2006-2009,  the  EIF  will  run  out  of  own  resources  by  mid-2007.  The  proposed 
capital  increase  is  fundamental  to  the  achievement  of  the  EIF's  objectives,  i.e.  to 
support SMEs' access to finance in the EU, accession, candidate countries and certain 
other third countries. The EIF would continue to consolidate its position as a centre 
of  excellence,  know-how  and  professionalism  in  managing  its  core  business  of 
venture  capital  and  portfolio  guarantees,  as  well  as  extending  financial  engineering 
techniques,  to  areas  where  there  are  acknowledged  market  failures  (early  stage, 
innovation,  technology  transfer,  etc.)  and  where  EIF's  added  value  can  be 
demonstrated,  in  particular  in  the  new  Member  States  and  accession  countries.  It 
could extend its activity to provide increasingly flexible funding for SMEs and a new 
range of innovative schemes.  

5.2. 

Value-added of Community involvement, consistency of the proposal with other 
financial instruments and possible synergy 

The  capital  increase  would  enhance  the  EIF's  potential  for  co-operation  with  its 
shareholders  (the  Commission,  the  EIB  and  the  financial  institutions)  and  third 
parties.  It  would  allow  the  EIF  to  broaden  its  current  geographic  coverage  and  to 
deepen its activity in the areas of R&D/innovation, SMEs and new Member States. 

EIF's  own  resources  will  complement  the  Community  and  EIB  mandates  (i.e.  the 
financial  instruments  under  the  Competitiveness  and  Innovation  Programme  (CIP) 
and the EIB Risk Capital Mandate), and contribute to the achievement of the Lisbon 
objectives. EIF's own resources will be required to leverage Community funds, i.e. to 
co-invest  with  Community  resources  in  venture  capital  funds  and  possibly 

EN 

15 

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technology  transfer  projects,  as  well  as  to  participate  in  risk-sharing  under  the  CIP 
guarantee facilities.  

5.3. 

Objectives, expected results and related indicators of the proposal in the context 
of the ABM framework 

The ex-ante evaluation provides detailed information on policy objectives, expected 
results and related indicators. 

The EIF has distinguished itself by being the only Community institution which has a 
specialised  focus  on  SME  financing,  pursuing  relevant  EU  objectives  particularly 
innovation,  research  and  development,  entrepreneurship,  growth,  and  job  creation. 
Such  objectives,  which  are  also  to  be  placed  within  the  general  objective  of 
successful  EU  enlargement,  are  still  highly  topical  and  their  pursuit  remains  a  key 
EU priority, as underlined in the spring 2005 and 2006 Council conclusions. 

No  additional  request  for  increased  capital  would  be  made  during  the  forthcoming 
Financial Framework period (2007-2013).  

5.4.  Method of Implementation (indicative) 

X 

Centralised Management 

X 

directly by the Commission 

6. 

MONITORING AND EVALUATION 

6.1.  Monitoring system 

The  EIF's  annual  accounts  are  audited  by  external  auditors  under  the  mandate  of 
EIF's  Audit  Board.  These  accounts  have  to  be  approved  by  the  shareholders  at  the 
Annual General Meeting.  

The  internal  audit,  which  is  outsourced  to  the  EIB,  evaluates  the  relevance  and 
effectiveness  of  the  internal  control  systems  and  the  procedures  involved.  It  is 
introducing  an  internal  control  framework  based  on  BIS  guidelines.  Internal  audit 
also reviews and tests controls in information technology and administrative areas.  

The  Board  of  Directors  assesses  the  EIF's  individual  operations  and  monitors  the 
venture capital and guarantee portfolios. It also ensures that the Fund is managed in 
accordance  with  its  Statutes  and  the  specific  guidelines  adopted  by  the  Board.  The 
Commission  has  designated  two  directors  and  two  alternates  to  the  Board  of 
Directors. In performing their duties as directors or alternates, Members of the Board 
of Directors and Alternates are accountable only to the General Meeting of the EIF. 
In carrying out their duties as Members of the Board or Alternates, they have to act 
independently and to serve the best interests of the EIF. They shall ensure that their 
action  remains  within  the  powers  conferred  upon  them  by  or  under  the  Statute  and 
otherwise comply with the provisions of the Statutes and the Rules of Procedure of 
the EIF. Any conflict of interest and disclosure issues are dealt with in the code of 
conduct signed by all Members and Alternates of the Board.  

EN 

16 

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The EIF is rated by the three major rating agencies, Fitch, Moody's and Standard & 
Poors. 

Finally,  a  Tripartite  Agreement  between  the  EIF,  the  Court  of  Auditors  and  the 
Commission  covers  the  arrangements  for  providing  the  Court  with  the  documents 
and information relating to the Community participation in the capital of the EIF.  

6.2. 

Evaluation 

6.2.1.  Ex-ante evaluation 

The  ex-ante  evaluation  was  prepared  by  the  Commission  services  (DG  ECFIN)  in 
March 2006.  

6.2.2.  Measures taken following an intermediate/ex-post evaluation (lessons learned from 

similar experiences in the past) 

No  ex-post  evaluation  has  been  carried  out.  The  ex-ante  evaluation  contains 
conclusions of other relevant evaluations carried out by the Commission. 

6.2.3.  Terms and frequency of future evaluation 

The proposal for the new Council Decision stipulates that the Commission will carry 
out an evaluation by 31 July 2012. This report shall assess EIF's SME  activity and 
the situation of its own funds. 

7. 

ANTI-FRAUD MEASURES  

EIF Anti-Fraud Procedures were implemented on 22 January 2002 in order to ensure 
that appropriate measures are in place in the event of detection of fraud or fraudulent 
behaviour at the EIF.  

In  addition,  the  EIF  Board  of  Directors  adopted  in  June  2004  a  document  "OLAF: 
Decision on measures to combat fraud" which sets out the terms and conditions for 
investigations  in  relation  to  the  prevention  of  fraud,  corruption  and  any  illegal 
activity detrimental to the Community's financial interests. 

EN 

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8. 

DETAILS OF RESOURCES 

8.1. 

Objectives of the proposal in terms of their financial cost (indicative amounts) 

Commitment appropriations in EUR million  

Type of output 

Av. 
cost 

2007 

2008 

2009 

2010 *) 

2011 and later 

TOTAL 

No. outputs 

Total 
cost 

No. outputs 

Total 
cost 

No. outputs 

Total 
cost 

No. outputs 

Total 
cost 

No. 
outputs 

Total 
cost 

No. outputs 

Total cost 

Dividends  used  to 
cover  part  of  the 
cost  of  the  capital 
increase 

Participation in the 
capital 
EIF 
increase 
(initial 
budget allocation) 

6.4 

Acquisition  of 
new shares 

6.2 

Acquisition  of 
new shares 

5.6 

Acquisition  of 
new shares 

6.4 

Acquisition  of 
new shares 

7.5 

25.0 

Acquisition  of 
new shares 

25.0 

Acquisition  of 
new shares 

25.0 

Acquisition  of 
new shares 

25.0 

Acquisition  of 
new shares 

25.0 

TOTAL 
COST 

31.4 

Acquisition  of 
around  90  new 
shares 

31.2 

Acquisition  of 
around  91  new 
shares 

30.6 

Acquisition  of 
around  91  new 
shares 

31.4 

Acquisition  of 
around  28  new 
shares 

32.5 

- 

- 

- 

- 

- 

- 

25.7 

Acquisition 
of 
shares 

new 

100.0 

Acquisition 
of 
shares 

new 

125.7 

Acquisition 
of  up  to  300 
new shares 

*) The amounts indicated in 2010 are the total amounts available to cover the cost of the capital increase. The amount needed in 2010 to cover the 
purchase of the new shares is expected to be significantly lower.  

EN 

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8.2. 

Administrative Expenditure 

The  needs  for  human  and  administrative  resources  shall  be  covered  within  the 
allocation granted to the managing service in the framework of the annual allocation 
procedure. 

8.2.1.  Number and type of human resources 

The tasks will be carried out by the current Commission staff. 

Types of post 

Staff to be assigned to management of the action using existing resources 
(number of posts/FTEs) 

2007 

2008 

2009 

2010 

2011 

2012 

Officials or 
temporary 
staff12 (XX 01 
01) 

TOTAL 

A*/AD 

0.6 

B*, 
C*/AST 

- 

0.6 

0.6 

- 

0.6 

0.6 

- 

0.6 

0.6 

- 

0.6 

- 

- 

8.2.2.  Description of tasks deriving from the action 

Besides  administrative  work  in  relation  to  the  financial  transactions,  the  capital 
increase will not create significant additional tasks. 

However, in order to manage ongoing relations with the EIF, the official in charge is 
responsible for the preparation of all administrative procedures, such as Commission 
decisions  on  the  designation  of  Commission  nominees  to  the  EIF  Boards;  liaison 
with the EIF and follow-up of negotiations of any types of undertakings, such as the 
put  option;  and  the  co-ordination  with  the  Court  of  Auditors  under  the  Tripartite 
Agreement.  

Furthermore, the official assists the Commission Nominees in the preparation of the 
Board of Directors meetings. In this respect, the official examines the implications of 
the  EIF  proposals  for  the  interest  of  the  Community  within  the  framework  of  EIF's 
policies  and  in  co-ordination  with  the  relevant  Commission  services.  This  task  also 
covers  the  assessment  of  EIF  operations  involving  investments  or  co-investment  of 
EIF's own resources. The official also assists the Commissioner or his representative in 
the preparation of the EIF's General Meetings. 

Finally, the official ensures that the Council is appropriately informed of the work of 
the EIF in accordance with the Council Decision 1994/375/EC. 

8.2.3. 

Sources of human resources (statutory) 

When more than one source is stated, please indicate the number of posts originating 
from each of the sources. 

X 

Posts currently allocated  

12 

Cost of which is NOT covered by the reference amount 

EN 

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8.2.4.  Other  Administrative  expenditure  included  in  reference  amount  (XX  01  04/05  – 

Expenditure on administrative management) 

None. 

8.2.5.  Financial cost of human resources and associated costs not included in the reference 

amount 

Type of human resources 

2007 

2008 

2009 

2010 

2011 

2012 

and later 

Officials  and  temporary  staff 
(XX 01 01) 

0.065 

0.065 

0.065 

0.065 

EUR million  

cost 

of  Human 
Total 
Resources  and  associated 
costs 
in  reference 
amount) 

(NOT 

0.065 

0.065 

0.065 

0.065 

Calculation– Officials and Temporary agents 

EUR 108 000 * 0.6 = EUR 64 800. 

8.2.6. Other administrative expenditure not included in reference amount 

2007 

2008 

2009 

2010 

2011 

EUR million

2012 
and 
later 

TOTAL 

- 

- 

- 

- 

- 

- 

- 

- 

- 

- 

- 

0.1 

0.1 

- 

- 

0.1 

0.1 

- 

0.1 

- 

0.1 

XX 01 02 11 04 – Studies & consultations 

Total Other Management Expenditure 

(XX 01 02 11) 

expenditure, 
than  human  resources  and 
in 

Total  Administrative 
other 
associated  costs  (NOT 
reference amount) 

included 

Calculation - Other administrative expenditure not included in reference amount 

This  indicative  amount  of  EUR  100  000  covers  the  costs  of  an  external  evaluation  to  be 
prepared by July 2012. 

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Annex 

The capital increase and the share price 

The EIF aims to achieve a cash injection of around EUR 330 million, which would be based 
on the 50% capital increase in nominal terms. In order to achieve this, 1000 new shares will 
be  issued  by  the  EIF  and  subsequently  subscribed  by  its  shareholders  .  As  far  as  the 
Community is concerned, payments will follow over a four-year period. The EIF proposal for 
the  capital  increase  foresees  that  the  new  shares  will  be  priced  on  the  basis  of  the 
Replacement Share Purchase Undertaking (RSPU) formula agreed between the shareholders 
in June 2005 which is determined as follows:  

Share  price  =  (Capital  paid-in  +  share  premium  account  +  reserves  +  unrealised 
venture capital gains + profit brought forward + profit of the year – dividends of the 
year) / number of shares. 

Under this net asset value (NAV) formula, the annual share issue price will vary as a function 
of  the  annual  NAV  calculation  and  the  shareholders  will  pay  for  each  share  more  than  the 
nominal  value  of  the  capital  paid-in.  The  excess  value  will  be  allocated  to  EIF’s  share 
premium account, thus further increasing the amount of EIF's own resources.  

Following  the  Council  authorisation  to  increase  the  capital  of  the  EIF  by  1000  shares  the 
General Meeting of the EIF would adopt the decision to issue the new shares.  

The EIF will offer the same conditions to each shareholder, i.e. the possibility to purchase the 
new  shares  over  the  four-year  period  2007-2010.  However,  the  most  of  the  financial 
institutions  that  currently  own  around  8%  of  the  EIF  shares  have  indicated  that  they  could 
purchase  their  entire  share  allocation  in  2007.  The  calculations  below  are  based  on  the 
assumption  that  the  EIB  will  also  purchase  its  portion  of  the  shares  in  2007  in  order  to 
respond to the financial institutions' request to provide EIB's irrevocable commitment to the 
capital increase. Consequently the number of shares to be issued in 2007 would be higher than 
in the following years. 

The annual budget available for the Commission for the purchase of EIF shares amounts to 
EUR  25  million.  In  order  to  be  able  to  purchase  the  indicated  number  of  the  shares,  it  is 
proposed to use the EIF dividends received during the period 2007-2010 for the purchase of 
the  new  shares  in  accordance  with  Article  18(2)  of  the  Financial  Regulation.  This  would 
notably enable the Community shareholding structure to remain relatively stable by 2010 and 
show the Commission's intention to purchase as many shares as possible right from the start, 
thus  demonstrating  its  commitment  to  the  EIF  and  to  the  capital  increase.  However,  as  a 
consequence  of  the  limited  budgetary  resources  available  per  year,  during  2007-2009  the 
Community shareholding percentage of 30% will be slightly diluted (based on the indicative 
calculations  presented  hereunder,  in  2007  the  Community  shareholding  would  be  around 
25%, in 2008 around 27%, in 2009 around 29% and from 2010 at around 30%). 

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Based  on  the  EIF's  30  June  2006  profit  and  loss  account  of  the  EIF  and  the  indicative  share  price,  the  table  hereunder  provides  an  example  of  the 
number of shares the Commission could possibly purchase and the budget needs: 

Indicative number of shares to be subscribed by the shareholders 
Indicative number of shares to be subscribed by the Commission 
Indicative annual share price (in EUR) 
Indicative budgetary need (in EUR) 

2007 
790 
95 
326 526

2008 
90 
90 
338 912 
31 019 970  30 502 080 

2009 
89 
89 
351 406 
31 275 134 

2010 
26 
26 
364 376 

Total 
1000 
300 

9 473 776  102 270 960 

Community Revenues  

According to Article 24 of its Statutes, EIF targets appropriate returns for its shareholders. Following the decision of the General Meeting of the EIF, 
the EIF distributes dividends from the annual net profit to its shareholders. With regard to the Community shareholding, these dividends are returned to 
the Community budget (line 850 : dividends paid by the EIF). 

Currently,  EIF's  income  mainly  consists  of  treasury  income,  management  fees  and  income  from  its  own  resources  guarantee  operations.  However, 
venture  capital  income,  which  is  difficult  to  predict,  will  possibly  make  up  an  increasing  share  of  EIF's  overall  income  in  the  future.  Furthermore, 
possible new mandates will provide additional management fees, thus increasing EIF's profitability. It is therefore difficult to provide definitive figures 
on future income and the subsequent dividends. For illustrative purposes, the table below shows a simplified example: 

Number of shares initially subscribed by the Commission 
Indicative number of new shares to be subscribed by the Commission 
Cumulative number of shares subscribed by the Commission 
Annual estimated dividend per share (in EUR) 
Estimated amount of dividends to be received by the Commission in the following 
year (in EUR) 

*) Dividends pertaining to financial year n are paid in May/June of year n+1. 

Financial Year *) 
2007
600
95
695
8 014 
6 179 400  5 569 730 

2008
600
90
785
8 197
6 434 645 

2006
600
0
600
10 299

2009
600
89
874
8 8534 
7 458 716 

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Overall impact on the Community budget 

In  order  to  maintain  the  Community  shareholding  at  approximately  30%,  the  Commission 
would  purchase  up  to  300  new  EIF  shares.  The  annual  payments  will  be  done  during  the 
period 2007-2010 in accordance with Article 76(3) of the Financial Regulation. In addition to 
the  annual  budget  allocation  of  EUR  25  million  the  Commission  proposes  to  use  the 
dividends paid during the period 2007-2010 to cover part of the cost of the capital increase. 

The payment of dividends follows immediately upon approval of the dividend distribution by 
the  General  Meeting  of  the  EIF.  Simultaneously,  following  the  decision  of  the  General 
Meeting,  the  shareholders  would  be  invited  to  subscribe  to  the  new  shares  and  would  be 
requested by the EIF to pay for the new shares subscribed. In accordance with Article 18(2) of 
the Financial Regulation, the Commission would use the dividends earned to cover part of the 
cost of the capital increase. Any excess amounts of dividends earned each year in 2007-2009, 
which were not needed to cover part of the cost of the capital increase, would be transferred to 
the following year. Should the excess of dividends in 2010 not be required to cover the cost of 
the capital increase, these excess dividends would be returned to the Community budget.  

A further impact would be that the amounts of commitments and payments would be front-
loaded, i.e. it is likely that the amounts needed for budget commitments and payments in 2010 
could be significantly reduced.  

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