Report from the Commission to the Council and the European Parliament - Comprehensive Report on the functioning of the Guarantee Fund {SEC(2006) 1460}
Date: 2006-11-16
Institutions: European Commission
Subjects: Community loan, activity report, credit guarantee, financial management, fund (EU), third country

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 16.11.2006 
COM(2006) 695 final 

REPORT FROM THE COMMISSION TO THE COUNCIL AND THE EUROPEAN 
PARLIAMENT 

Comprehensive Report on the functioning of the Guarantee Fund 

{SEC(2006) 1460} 

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TABLE OF CONTENTS 

1. 

2. 

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

Functioning of the Fund and main changes in the period 2003-2006.......................... 3 

2.1. 

Operations covered by the Fund .................................................................................. 3 

2.1.1.  Main characteristics of guarantees given to the EIB.................................................... 4 

2.1.2.  Macro-Financial Assistance and Euratom operations covered by the Fund ................ 4 

2.2. 

Provisioning of the Fund.............................................................................................. 4 

3. 

3.1. 

3.2. 

3.3. 

4. 

4.1. 

4.2. 

4.3. 

5. 

5.1. 

5.2. 

6. 

6.1. 

6.2. 

6.3. 

Development and performance of the Fund over the period 2003-2006 ..................... 5 

Shielding the Union budget from calls due to defaults ................................................ 5 

Development of the Fund's assets ................................................................................ 5 

Budgetary discipline..................................................................................................... 6 

The parameters of the Guarantee Fund ........................................................................ 6 

Absorption capacity ..................................................................................................... 7 

Main parameters........................................................................................................... 7 

Terms and conditions of Community guarantees to the EIB (new Financial 
Framework 2007-2013)................................................................................................ 7 

New provisioning mechanism...................................................................................... 8 

Background .................................................................................................................. 8 

Basic principles of the new provisioning mechanism.................................................. 9 

Outlook....................................................................................................................... 10 

Next enlargement ....................................................................................................... 10 

New EIB external lending mandate ........................................................................... 10 

Review of the institutional arrangements for the management of the assets 
of the Fund ................................................................................................................. 10 

7. 

Conclusion.................................................................................................................. 11 

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1. 

INTRODUCTION 

Council Regulation (EC, Euratom) No 2728/94 of 31 October 1994 (“the Fund Regulation”) 
established  a  Guarantee  Fund  (“the  Fund”)  for  external  actions  so  that  the  Communities 
creditors could be reimbursed in the event of any default by the beneficiaries of loans granted 
or guaranteed by the Communities. 

A first review of the functioning of the Fund took place in 1998 in accordance with Article 9 
of  the  Fund  Regulation1.  The  Commission  also  made  a  proposal  for  amending  the  Fund 
Regulation.  In  accordance  with  Regulation  No 1149/1999  dated  25  May  19992  which 
modified, among others, Article 9 of the Fund Regulation, two further comprehensive reports 
on the functioning of the Fund have to be prepared both at the time of the conclusion of the 
first  accession  agreement…,  and  before  31 December  2006,  at  the  end  of  the  present  2000-
2006 Financial Perspectives, i.e. the present report. 

Further to the signing of an accession agreement by ten States on 19 April 2003, the second 
comprehensive report on the functioning of the Fund was adopted in October 20033. 

The  Commission  Staff  Working  Paper  (“the  Annex”)4  completes  this  report  by  providing 
graphs, tables and attachments. 

2. 

FUNCTIONING OF THE FUND AND MAIN CHANGES IN THE PERIOD 2003-2006 

2.1. 

Operations covered by the Fund 

In 1994, the Guarantee Fund was set up to limit the budgetary impact stemming from calls on 
guarantees given by the Communities budget for lending operations in third countries and to 
create an instrument of budgetary discipline.  

The lending operations covered by the Fund relate to three different instruments which benefit 
from a guarantee from the Communities budget: guarantees of the European Investment Bank 
(EIB) external lending, Euratom external lending and EU Macro-Financial Assistance (MFA) 
loans to third countries. 

The  Fund  covers  the  risk  of  loans  and  loan  guarantees  to  third  countries.  Following  its 
comprehensive  report  of  2003,  the  Commission  made  a  proposal  to  amend  the  Fund 
Regulation  in  order  to  take  into  account  future  enlargements  of  the  European  Union.  This 
second  amendment  of  the  Fund  was  adopted  with  Council  Regulation  (EC,  Euratom) 
No 2273/2004  on  22 December 20045.  As  stipulated  in  this  amendment,  if  third  countries 
become  Member  States,  the  Fund's  coverage  of  the  corresponding  guaranteed  lending  is 

1 

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3 
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5 

Parliament  and  Council  are  regularly  informed  in  detail  about  all  aspects  related  to  the  Fund.  The 
management  of  the  Fund  is  analysed  in  a  yearly  report  (see  last  report COM(2006)366  and  its  annex 
SEC(2006)891). 
A  report  to  the  budgetary  authority  on  guarantees  covered  by  the  general  budget  is  published  semi-
annually (see last report COM(2006)452 and its annex SEC(2006)1071). 
Article 1.4 of Regulation No 1149/1999. 
COM(2003)604 of 13.10.2003. 
SEC(2006)1460 
OJ L 396, 31.12.2004, p. 28. 

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withdrawn  and  the  Union  budget  directly  covers  these  guarantees.  In  application  of  this 
Regulation early 2005, an enlargement-related amount of  almost EUR 339  million  has  been 
reversed to the Community budget, thus reducing the size of the Fund. 

At  the  end  of  2005,  the  Fund  has  covered  an  amount  of  EUR 13.680  billion  guaranteed 
lending  of  which  EUR 13.554  billion  for  outstanding  and  EUR 126  million  for  accrued 
interest and the assets of the Fund stood at EUR 1.324 billion (see Graph 1 in Annex). 

2.1.1.  Main characteristics of guarantees given to the EIB 

The lion's share of the Fund's coverage concerns loan guarantees issued with respect to loans 
granted in third countries by the EIB6. When the recipient of a guaranteed loan fails to make a 
payment  on  the  due  date,  the  EIB  asks  the  Commission  to  pay  the  amounts  owed  by  the 
defaulting  debtor  in  accordance  with  the  respective  guarantee  contract.  If  the  EIB  has  a 
second  public  or  private  guarantor  in  addition  to  the  Community  guarantee,  it  is  obliged  to 
activate such third parties guarantees before a call under the EU guarantee is requested. 

The Community Guarantee covers all credit risks of a guaranteed lending operation in third 
countries,  unless  the  risk-sharing  arrangements  apply,  in  which  case  the  Community 
Guarantee  covers  only  specific  political  risks  whereas  non-political  risks  are  borne  and 
mitigated by the EIB. 

2.1.2.  Macro-Financial Assistance and Euratom operations covered by the Fund 

In  this  type  of  operation  covered  by  the  Fund,  the  Communities  borrow  on  the  financial 
market and on-lend the proceeds (on a back-to-back basis) to non-member countries (MFA) 
or to companies (Euratom). 

The  loan  repayments  are  scheduled  to  match  the  repayments  of  the  borrowings  due  by  the 
Communities. If the recipient of the loan is late in making a repayment, the Commission must 
draw  on  its  resources  to  repay  the  borrowing  on  the  due  date.  If  the  delay  extends  to  three 
months after the due date, the Commission draws on the Fund to cover the default. 

2.2. 

Provisioning of the Fund 

The Fund is provisioned via the entry of a "Reserve for loans and loan guarantees to and in 
non-member  countries"  as  a  provision  in  the  general  budget  of  the  European  Union.  The 
annual  amount  of  the  Reserve  is  defined  in  the  Financial  Perspectives  for  2000-2006  and 
amounts to EUR 200 million at 1999 prices. 

The base for the provisioning differs according to the guarantee rate applicable. All Euratom 
and MFA loans are guaranteed at a rate of 100%, i.e. the provisioning rate is applied to the 
total amount of the loan. The global ceilings on the loan guarantees granted to the EIB vary, 
depending on the loan portfolio concerned. Within each portfolio individual EIB loans are, de 
facto,  guaranteed  at  100%  until  the  global  ceiling  is  reached7.  In  order  to  determine  the 
amount to be provisioned in the Fund, in a first step, the total loan amounts are multiplied by 

6 
7 

90% of total guaranteed amount outstanding on 31.12.2005. 
At present the guarantee rate on the EIB external lending mandate is 65%. This rate is also proposed for 
the new EIB external lending mandate. In the past and for specific mandates, this rate has varied (100%, 
75%, 70% respectively). 

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the respective guarantee percentages. The result of this calculation is then multiplied by the 
provisioning rate of currently 9%. 

The agreement on the new Financial Framework 2007-2013 implies a change in the source of 
financing  of  the  Fund  from  the  present  ring-fenced  Reserve  in  the  budget  under  the  ad-hoc 
Heading  6  to  a  funding  via  a  budget  line  (compulsory  expenditure)  under  Heading  4  of  the 
budget. This is an essential change in the way the necessary budgetary resources for the Fund 
are provided8. An annual amount of EUR 200 million in current prices, i.e. EUR 1.4 billion 
over the 2007-2013 period, has been foreseen to provision the Fund in the financial envelopes 
underpinning the agreement on the new Financial Framework. 

3. 

DEVELOPMENT AND PERFORMANCE OF THE FUND OVER THE PERIOD 2003-20069 

3.1. 

Shielding the Union budget from calls due to defaults  

Since its beginning in 1994, the Fund has efficiently fulfilled its main objective by preventing 
any disruption of budget implementation that would have occurred as a result of the defaults 
on  lending  operations  guaranteed  by  the  Union  budget.  Graph 2  in  Annex  shows  how  the 
Fund has succeeded in absorbing the impact of calls on the Community guarantee. 

Had  it  not  been  for  the  Fund,  the  Communities  would  at  several  occasions  have  had  to  use 
budgetary  resources  to  pay  for  activations  of  guarantees  and  this  would  have  required 
redeployment of appropriations in the course of budget implementation. Since 2003, four calls 
for a total of EUR 9.2 million have been handled through the Fund, all concerning guarantees 
issued to the EIB for loans in the Republic of Argentina (see Table 1 in Annex which gives a 
detailed view on all flows in and out of the Fund). 

The  Fund  has  recovered  all  capital  and  interest  due  from  the  Republic  of  Argentina  in  the 
2003-2005 period. Only penalty interest of USD 1.4 million (EUR equivalent 1.2 million) has 
still to be recovered by the Fund. 

The  recent  low  default  related  losses  to  the  Fund  should  not  be  mistaken  as  a  sign  of  a 
decreased  risk  for  the  Fund.  Historically,  annual  losses  had  reached  a  maximum  amount  of 
EUR 303 million in the year 1995. At present the highest individual risk for a single country 
amounts  to  EUR 1.8 billion  and  in  case  of  for  instance a  civil war situation  the calls on the 
Fund  could  increase  substantially  as  the  experience  with  the  former  Federal  Republic  of 
Yugoslavia has shown. 

3.2. 

Development of the Fund's assets 

Graph 2 in Annex shows that the volume of the Fund decreased since 2001 when the Fund 
reached its peak of EUR 1.8 billion. 

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The  Inter-Institutional  agreement  (IIA)  of  17.05.2006  (OJ  C  139,  14.6.2006,  p.  1)  has  changed  the 
budgetary  source  for  the  provisioning  of  the  Fund.  The  impact  of  this  change  and  the  related 
Commission proposal for a new provisioning mechanism are discussed under Section 5. 
The latest available final data relate to 31 December 2005. All figures for 2006 in the present report and 
its annex are estimates unless specified otherwise. 

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Apart from changes in the net amount of guaranteed lending due to new lending operations 
and amortisations of old loans, the decrease in the volume of the Fund is mainly caused by the 
accession of ten new Member States to the EU on 1 May 2004. 

In addition to provisioning via the budgetary Reserve, the Fund's other main source of income 
is the interest earned on its assets which are managed by the EIB under the supervision of the 
Commission. The interest earned on the Fund's assets since 2003 fell in line with the volume 
of the Fund. This trend was further caused by a general decline in the market interest rates. At 
the  end  of  2005  the  total  assets  of  the  Fund  stood  at  EUR 1,299.4 million  (market  value 
excluding accrued interest). 75.8% of this amount were invested in bonds, 24.1% in deposits 
and  0.1%  were  held  on  current  accounts.  The  interest  earned  during  2005  amounted  to 
EUR 51.6 million. The net investment income of the Fund, i.e. interest earned minus the EIB's 
remuneration and other cost stood at EUR 50.7 million. 

Another  significant  development  is  the  decision  by  the  Commission  to  present  its  financial 
statements  according  to  the  IPSAS  inspired  principles  in  2005.  The  impact  of  this  decision 
which  will  lead  to  an  increase  in  the  volatility  of  the  valuation  of  the  fund's  portfolio  is 
explained in Attachment 1 in Annex. 

3.3. 

Budgetary discipline 

The  Reserve  inscribed  for  the  provisioning  of  the  Fund  together  with  the  rules  of  the  Fund 
have limited the new lending/guarantee capacity to about EUR 3 billion per year (depending 
on the guarantee rate) during the Financial Perspectives 2000-2006 (see Table 2 in Annex). In 
principle, whenever a new loan or loan guarantee is decided, a certain fraction of the capital 
amount of that loan or guarantee has to be provisioned out of the Reserve. The provisioning 
rate  together  with  the  amount  of  the  Reserve  therefore  determines  the  overall  amount  of 
possible lending or guaranteeing. 

With the abolishment of the Reserve beginning 2007, this mechanism will cease to exist in its 
present  form.  However,  the  budgetary  discipline  will  be  maintained  through  other 
mechanisms. Substantial elements of budgetary discipline remain in place which will ensure 
the  guaranteed  lending  will  evolve  in  full  agreement  with  the  Council  and  the  European 
Parliament: 

– 

– 

– 

the  EIB's  multi-annual  external  lending  mandate  will  be  limited  over  the  2007  to 
2013  period  (this  Council  Decision  represents  around  90%  of  the  overall  loan 
volume), 

Macro-Financial Assistance loans are subject to individual decisions by the Council, 
and 

the  Euratom  lending  has  a  ceiling  of  EUR 4 billion  of  which  around  85%  have 
already been used. The remaining margin is about EUR 600 million. 

4. 

THE PARAMETERS OF THE GUARANTEE FUND 

One  role  of  this  report  is  to  examine  the  adequacy  of  the  functioning  of  the  Fund  and  its 
parameters  over  time  and  to  propose  improvements  where  necessary.  Concerning  the 
functioning of the Fund, the provisioning mechanism has been identified to provide room for 

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improvement and a legislative proposal has been tabled by the Commission in April 2005 (see 
Section 5). 

This section concludes that there are no reasons which would justify the change of the Fund's 
parameters.  However,  as  the  Commission  proposals  for  new  EIB  external  lending  mandate 
and  the  new  provisioning  mechanism  are  still  not  adopted  and  prone  to  potential 
modifications, the Commission intends to address a new comprehensive report to the Council 
and  the  European  Parliament.  The  report  would  be  finalised  in  2010  at  the  latest  or  at  an 
earlier stage if a need for changing a parameter of the Fund would become apparent. It would 
review the Fund's parameters after a decision on the provisioning mechanism has taken place 
with regard to the experience gained under the new EIB mandate. 

4.1. 

Absorption capacity 

The  capacity  of  the  Fund  to  absorb  the  planned/estimated  guaranteed  operations  by  the 
Commission (MFA and Euratom) and the EIB is an important indicator for the evaluation of 
the  appropriateness  of  the  Fund’s  parameters.  Between  2002  and  2006  (see  Table 2  in 
Annex),  the  Fund’s  absorption  capacity  was  sufficient  to  accommodate  the  planned  and 
forecast lending operations. Therefore, no immediate reason to change the parameters of the 
Fund can be identified. 

4.2.  Main parameters 

With a view to the stable medium term development of the Fund, the main parameter to be 
analysed  is  the  target  rate.  The  provisioning  rate  and  the  EIB  guarantee  rate  will  be  of  no 
importance  once  the  Commission  proposal  for  a  new  provisioning  mechanism  has  been 
adopted,  as  only  the  application  of  the  target  rate  to  the  outstanding  amount  determines  the 
amount required for the Fund. 

The Commission services consider that the current target rate, i.e. the ratio between the value 
of the Fund's assets and the total amount of guaranteed loans outstanding, of 9% is compatible 
with  the  present  risk  profile  of  the  Fund.  As  the  new  EIB  external  mandate  is  not  likely  to 
change the risk profile of the Fund substantially in the foreseeable future due to the weight of 
existing loans, no reason to propose a change of this parameter has been identified. 

4.3. 

Terms  and  conditions  of  Community  guarantees  to  the  EIB  (new  Financial 
Framework 2007-2013) 

The  guarantee  coverage  rate  for  the  EIB's  external  lending  mandate  has  an  impact  on  the 
provisioning  needs  for  the  Fund  only  under  the  present  provisioning  rules.  Once  the  new 
provisioning  mechanism  will  be  adopted,  this  parameter  will  not  influence  the  level  of  the 
Fund's provisioning. 

Furthermore, given the historically low default rate and the additional security of third parties 
guarantees, the guarantee coverage of 65 % of the EIB loan portfolio exposure appears to be 
sufficiently prudent. In addition, as shown in Table 3 in the Annex, the annual risk coverage 
ratio will slightly deteriorate over the period 2007-2013. 

Against  that  background  it  does  not  appear  opportune  to  propose  any  change  in  the  rate  of 
coverage at this stage. 

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It  should  also  be  mentioned  that  the  Commission  proposal  for  a  new  EIB  external  lending 
mandate extends the guarantee given to the EIB to include not only loans given by the EIB 
but  also  guarantees  given  by  the  EIB  to  other  financial  institutions.  Furthermore,  the 
Commission proposal clarifies the nature of the guarantee coverage which will be limited to 
risks of a sovereign or political nature. The impact of such changes on the overall risk profile 
of the Fund may be assessed in the framework of the next comprehensive report which will be 
presented in 2010 at the latest. 

5. 

NEW PROVISIONING MECHANISM 

5.1. 

Background 

In  April  2005,  the  Commission  adopted  a  proposal10  (see  Attachment 2  in  Annex  for  a 
detailed presentation of the proposal) for a new provisioning mechanism for the Fund, i.e. the 
rules that determine how the Fund’s assets are brought in line with the target amount of the 
Fund.  The  proposed  amendment  is  in  line  with  the  needs  identified  in  the  second 
Comprehensive  Report  on  the  functioning  of  the  Fund  in  2003.  At  the  close  of  writing  this 
report,  the  proposal  was  still  under  discussion  in  the  Council  but  had  received  a  favourable 
opinion from the European Parliament11 and the European Court of Auditors12. 

The motivation for this new provisioning mechanism was twofold. 

First, experience had shown that the present  rules have often led to an over-provisioning of 
the Fund and therefore a sub-optimal use of budgetary funds. This problem has mainly been 
due  to  uncertain  forecast  figures  of  EIB  loan  signatures  in  the  provisioning  process. 
Furthermore,  the  present  rules  result  in  several  transfers  in  and  out  of  the  Fund  during  one 
year,  a  situation  that  creates  unnecessary  administrative  procedures  involving  not  only  the 
Commission services but also the two arms of the budgetary authority. 

Second, as mentioned before, the IIA implies as of 1 January 2007 a change of the budgetary 
source for the funding of the Fund from a dedicated Reserve to a financing via a budget line 
under  Heading  4.  The  present  provisioning  mechanism  is  not  compatible  with  this  new 
budgetary  setting.  Maintaining  the  present  provisioning  mechanism  would  imply  that 
budgetary planning and transparency would be compromised (see Attachment 3 in Annex). 

In addition, it would be very difficult or even impossible to provision the Fund in accordance 
with the Fund Regulation should an unforeseen and therefore not budgeted decision on MFA 
loans be taken towards the end of a year. In this case a lack of credits on the budget line for 
the Fund would make it very difficult or impossible to find the means to provide the necessary 
appropriations to the Fund's budget line and therefore prevent the Community from providing 
the required assistance. 

It should also be noted that with the present provisioning mechanism and taking into account 
that for the 2007-2013 period EUR 1.4 billion are foreseen to be used to provision the Fund, 
the maximum size of the EIB external lending mandate would only amount to EUR 17 billion 

10 
11 
12 

COM(2005)130 of 5.4.2005. 
SP (2006) 1094 OD of 17.3.2006. 
Opinion No 9/2005 (OJ C 313, 9.12.2005, p.6). 

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(assuming that no default related losses occur and that Euratom and MFA related lending will 
amount to EUR 4.5 billion, for details see Table 4 in Annex). 

5.2. 

Basic principles of the new provisioning mechanism13 

The proposed new mechanism is based on a provisioning linked to the outstanding amount of 
loans  and  guaranteed  loans,  i.e.  on  actual  net  disbursements  (i.e.  disbursements  minus 
amortizations minus cancellations). This is the main difference to the present system in which 
the provisioning is based on loan signatures independent of the amounts actually disbursed as 
the disbursements of loans take place over several years. 

Contrary to the present system of several annual transfers between the Fund and the Budget, 
only  one  single  annual  transfer  is  needed  under  the  new  provisioning  system.  The  single 
annual transfer is determined as the difference between the target amount of the Fund at year-
end and the value of the Fund's assets at year-end. 

Early  in  the  following  year,  the  respective  provisioning  amount  will  be  introduced  in  the 
budgetary  planning  process  and  inscribed  in  the  budget  for  the  following  year  when  the 
amount will be effectively paid. 

Losses to the Fund as a result of defaults would translate directly into increased provisioning 
needs.  In  order  to  maintain  the  Fund’s  main  purpose,  i.e.  to  act  as  a  shock  absorber  for  the 
Union  budget,  a  smoothing  mechanism  has  been  introduced  in  the  proposal  for  the  new 
provisioning  mechanism  which  will  cap  the  annual  amounts  to  a  maximum  of  EUR 100 
million per annum. This means that losses exceeding this cap will be paid back into the Fund 
over several years. 

In  order  to  avoid  that  the  Fund,  in  the  extremely  unlikely  case  of  a  series  of  severe  losses, 
would fall below a critical level of 50% of the target rate, it is foreseen that in such a case the 
legal  provision  is  maintained  according  to  which  the  Commission  would  submit  a  report  to 
the budgetary authority on exceptional measures to replenish the Fund. 

In conclusion it can be said that the main advantages of the proposal for a new provisioning 
mechanism are: 

– 

– 

The  improvement  of  the  efficiency  of  the  use  of  budgetary  means  and  reducing  to 
one the number of annual transfers between the Union Budget and the Fund; 

A  provisioning  based  on  the  variations  of  the  observed  net-disbursements,  thus 
creating  more 
the  budgetary 
improving 
programming. 

transparency  and 

the  precision  of 

It  should  also  be  noted  that  this  proposal  is  merely  a  technical  improvement  that  does  not 
change the principle of the Fund that the value of its assets should be equivalent of the target 
amount (9% times the total amount of outstanding guaranteed lending). 

The  new  provisioning  mechanism  will  be  much  stricter  in  maintaining  the  relation  between 
the amount of guaranteed loans and the assets of the Fund in a transparent way. The overall 
budgetary needs during the next Financial Framework will, under the new mechanism, remain 

13 

For more details, see Attachment 3 in Annex. 

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substantially  lower  than  would  be  the  case  under  the  present  mechanism.  However,  any 
“shocks” such as important  calls  on  the Fund or  outflows  due  to  accession  of  new  Member 
States  or  IPSAS-accounting  standards-induced  fluctuations  of  the  value  of  the  Fund's  assets 
will  have  a  direct  impact  on  the  funding  needs  for  the  Fund.  The  resulting  slightly  higher 
volatility of the provisioning needs, which is the price for the improved mechanism, will have 
to be absorbed in budgetary terms. 

6. 

OUTLOOK 

6.1. 

Next enlargement 

In 2007, two new Member states will become full Members of the Union and according to the 
Fund  Regulation  if  third  countries  become  Member  States,  the  Fund's  coverage  of  the 
corresponding  guaranteed  lending  is  withdrawn  and  the  Union  budget  will  directly  cover 
these guarantees. Consequently, early 2007 an enlargement-related estimated amount of about 
EUR 260 million14 will be reversed from the Fund's assets to the Union budget, thus reducing 
the size of the Fund. 

New EIB external lending mandate 

6.2. 
Assuming that the Commission proposal15 for a new EIB lending mandate of EUR 33 billion 
for  the  period  2007-2013  would  be  adopted,  the  new  provisioning  mechanism  would, 
according to  simulations,  under  normal circumstances need less than the EUR 1.4  billion in 
nominal terms foreseen in the Financial Framework for this period. Even in the unlikely case 
of  a  prolonged  series  of  major  losses  due  to  calls  on  the  guarantee  and/or  adverse 
developments of the value of the Fund's assets, this amount would be sufficient (see Table 5 
in Annex for details). 

6.3. 

Review  of  the  institutional  arrangements  for  the  management  of  the  assets  of 
the Fund 

In application of the Fund Regulation, the EIB is managing the assets of the Fund on behalf 
and under the supervision of the Commission. Experience has shown that the Bank has always 
performed this task most satisfactorily. 

However, from a cost point of view, the issue of whether the EIB or the Commission should 
manage  the  assets  of  the  Fund  has  been  raised.  In  2003  a  questionnaire  of  the  European 
Parliament  (CoCoBu)  in  relation  to  the  2002  discharge  procedure  has  suggested  that  the 
Commission  services  could  manage  the  portfolio  at  a  lesser  cost  and  therefore  it  should  be 
considered to transfer the management of the Fund's assets to the Commission. Furthermore, 
the  European  Court  of  Auditors  (ECA)  has  at  several  occasions  raised  a  question  on  the 
adequateness  of  the  management  fees  the  EIB  receives  for  the  management  of  the  Fund's 
assets. In addition to these fees non-negligible opportunist costs are borne by the Commission 

14 
15 

Final figures will only be known at the end of this year. 
COM(2006)323, SEC(2006)789 and 790 of 22.6.2006 

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services  who  invest  a  substantial  amount  of  human  resources  to  establish  and  monitor  the 
investment strategy and an adequate liquidity management16. 

In  fact,  the  Commission  services  have  themselves  the  adequate  means  and  considerable 
experience  in  dealing  with  asset  management.  For  instance  the  portfolio  of  the  ECSC  i.l. 
which  is  roughly  of  the  same  size  and  structure  as  the  Fund  assets  is  managed  by  the 
Commission  services.  The  Commission  services'  fund  management  activities  are  fully 
audited, controlled by a risk management and conform to good banking practice. 

The Commission is therefore evaluating whether it should take over the management of the 
Fund's  assets  itself.  Once  this  evaluation  is  finalised,  the  Commission  might  present  a 
proposal to amend Article 6 of the Fund Regulation. 

7. 

CONCLUSION 

Since  1994,  the  Fund  has  satisfactorily  performed  its  main  task  as  a  shock  absorber  for  the 
Union Budget. The new Commission proposal, if adopted, will improve the budget efficiency. 

At  this  stage,  no  further  legislative  proposal  is  required.  However,  a  new  comprehensive 
report  should  be  finalised  in  2010  at  the  latest  or  at  an  earlier  stage  if  a  need  to  change 
parameter of the Fund becomes apparent. 

16 

For  instance,  the  Commission  services  have  the  relevant  information  about  the  flows  generated  by 
Euratom,  MFA  loans  and  extraordinary  flows  caused  by  events  such  as  enlargement,  the  supervision 
and relations with the ECA. 

EN 

11 

   EN