CELEX: 51988PC0661
Language: en
Date: 1988-11-30
Title: Proposal for a COUNCIL DECISION empowering the Commission to borrow under the New Community Instrument to stabilize the level of debt outstanding for the purpose of promoting investment within the Community (presented by the Commission)

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DOCUMENTS "COM"
COM (88) 661
Vol. 1988/0220
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 ---pagebreak---      COMMISSION OF THE EUROPEAN COMMUNITIES
     THIS DOCUMENT CANCELS                                COM(88 ) 661 final - revised version I
     AND REPLACES DOCUMENT
     C0M(88)661 final
                                                          Brussels , 3QNovember 1988
                                          Proposai for a
                                         COUNCIL DECISION
            empowering the Commission to borrow under the New Community Instrument to
               stabilize the level of debt outstanding for the purpose of promoting
                                 investment within the Community
                                   ( presented by the Commission )
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                                                               2.
                                 EXPLANATORY tEMDRANDUM
The     New Community    Instrument   ( NCI ) is a financial facility  created     in
1978 ( 1 ) empowering the Commission (2 ) to borrow in the name of the Euro­
pean Economic Community and to re-lend the funds in order to promote inves­
tment in the Community . The success of the first experiment encouraged the
use of the NCI , which has been renewed five times ( including two special
aid operations to help with reconstruction after natural desasters ).             The
total volume of the NCI reached nearly 6,000 million ECU (3 ) in 1987 .
1 . THE BASIS
     The Single European Act , referring to the " other financial instruments "
     alongside the EIB , made clear that the Community 's financial capability
     is one componant of the Community 's institutional balance . In that
     sense , the existence of the Community alongside the EIB is above all an
     institutional necessity . Indeed ,
     a) the Community as such has a vital role row to play , both as guide and
         as promoter , in the unity and the development of Europe . To this end ,
         it has the obligation - which it cannot renonce - of , first , setting
         the priorities and degrees of urgency from the point of view of the
          Community 's interest , especially in the economic field , and , second¬
         ly , of deciding among the Community measures which these priorities
         require ;
     b ) to carry out this fondamental task , the NCI is the appropriate
          instrument which is indispensable for the Community 's purposes .
          Indeed by contrast with the other financial instruments which exist ,
          the NCI can be adapted to whatever objectives are given priority in
          Community policies .
(*■) The NCI decision is based on article 235 of the EEC Treaty , which
       authorises the adoption of appropriate measures to achieve Community
       objectives where these have not been provided for elsewhere in the
       Treaty .
( 2 ) Council Decision 78 /870 / EEC
 (3 ) Com(88)438 final , 28.07.1988 , on the use made of the NCI .
                                                                      • • • • Ф •
 ---pagebreak---                                                            3.
    No doubt the most important role of the NCI is thus that of signalling
    to the market ( and even to the authorities ) the priorities and degrees
    of urgency of Community policies , with a vew to bringing about a lever¬
    age effect ; the very strong demand for NCI credit is a proof in itself
    of its success . Moreover , the NCI IV set up a marker which incited the
    EIB to adopt new guidelines and techniques : it was in fact the Commis¬
    sion proposals which opened the way to permitting the EIB to set out , in
    a " parallel action" on it own resources , to finance investment projects
    of small and medium sized enterprises .
    Futhermore , having regard to the excellent guarantees which underlie NCI
    loans , these operations are virtually risk free and thus involve no
    budgetary cost .
    It is important to indicate , in this context , that the European Parlia-
    me nt has unceasingly supported the Commission's proposals concerning the
    NCI , so much so that it is now the Parliament itself which requests
    further NCI action .
2 . THE OBJECTIVES OF THE NEW NCI ACTION
    In the context of the new NCI , the general priority would again be
    SMEs . For several years one of the priority objectives of the Community
    has been the encouragement of the creation and development of small and
    medium sized enterprises , as well as the improvement of their financial
    environment . The development of such enterprises will help to spread the
    spririt     of enterprise and to  foster  investment capable of creating
    em plo yme nt •
    Putting at the disposal of SMEs credit conditions comparable to those
    available to the Community will help to overcome their relative dis¬
    advantage compared with large firms . It also gives them the possibility
    of building up their equity capital .     It is in this spirit that the
    NCI IV was allocated entirely to SMEs .
                                                                  • • •/ • •
                                                                              J
 ---pagebreak---                                                                     4.
     The first of the more specific objectives which the Commission intend to
     pursue is the safeguarding of rural areas . This priority comes within a
     package of Community actions        :   the regulation on the reform of the
     structural Funds ( 1 ) includes among its objectives the development of
     rural areas .
     As regards rural development (2 ) we are in a period of important changes
     bringing about a significant decline in the relative importance of
     agriculture in rural areas , in terms of employment , of contributions to
     the regional product or of the protection of the environment . In the
     near future , this situation may well be aggravated by the effects of the
     reform of    the CAP ,   intended to bring about        certain adjustments           in
     Community agriculture .
     Community action is therefore necessary in order to :
     - promote the diversification of rural economies and
     - pursue the protection of the environment .
     It  is  important ,   in   particular ,    to  promote  the   development        of   an
     economic fabric with a view to the creation and / or the stabilization of
     employment in rural areas by bringing financial help to the investments
     of SMEs - including individual entrepreneurs and co-operatives .
     All activities not of a strictly agricultural nature would be eligible
     under   the    NCI    -   including     services    and   all     agro-industrial ,
     agro-commercial ,   para-agricultural or other activity complementary to
     agriculture (^). On the other hand agricultural production would be
     excluded  except    in   so  far  as    it   concerned  products    in   which       the
     Community is not self-suf ficiant or investments of a truly agricultural
     nature carried out by young farmers .
( 1 ) Council Regulation EEC 2052 /88
( 2 ) Com(88)501 final : The future of rural areas
(3 ) Including forestry
                                                                            • • • / • • •
 ---pagebreak---                                                            5.
particular importance . This is especially true in certain regions where
the return of the population , the modernization of agriculture and the
diversification of the activity and the style of life , pose serious
environment problems . In this connexion , NCI finance would be available
in parallel with other Community actions for projects of SMEs having a
content favorable to the environment .
From the geographical point of view , the NCI should be applicable in all
the rural areas of the Community .
As  regard   high  technology and   innovation ,   the  second   of    the      more
specific objectives , the contribution of the NIC to SMEs , independently
of the location of the investment , is envisaged at the level of the
incorporation and the application of new technologies and material in
the investment projects of SMEs . These technologies would cover a wide
range of materials and products . In particular , the financing of
specific applications of research results would be eligible .
Educational    and  training  costs   would  be     accepted   as    intangible
investments .
This action , which would be complementary to that undertaken in the
context of the BRITE and EURAM programmes , would fit into the logic of
the Single Act which provides , in Title      VI ,   for the development of
technology , given that this remains a major challenge for Europe .
                                                                   • • •/ • • •
                                                                                     5“
 ---pagebreak---                                                                           6.
    The action envisaged must fit into a suitable time-scale . This is clear
    both from the Commission communication to the Council on the " Future of
    Rural Areas” and from the action already taken by the Community towards
    the reform of the structural Funds , which fits into a package of
    measures lasting from three to five years . Moreover , as regards high
    technology , the average life of research projects is four years . In
    consequence , an NCI action designed to accompany such measures should
    have a long life , especially as , in a rural context , the leverage effect
    on markets may prove to be slow .
3 . METHOD
    Borrowing
    For the Community 's financial capability to carry out                     its basically
    political    task   ( by  contrast     with    that   of     the   EIB )   of    signalling
    Community priorities , and in order to maintain a permanent institutional
    balance ,  it    must   keep   up   a  continuous     and     stable    presence        in  the
    markets .  This means     abandoning     the   traditional       formula of      successive
    authorizations , in favour of a method under which the Commission would
    be empowered to carry out new borrowing and lending operations within
    the  limit   of   repayments     of   existing    debt ;   this    would   represent        new
    borrowing of 500 to 1.000 million ECU per year . The effect would be to
    convert   the NCI into       a  " revolving    fund ", with the        Commission         being
    automatically empowered to borrow and re-lend up to the limit set by the
    amount of debt outstanding , currently around 5.8 billion EC U.
    The recurrent nature of operations            under the      new method     will       help to
    raise the Community 's profile in the markets and ensure that its calls ,
    coming regularly and       for roughly the       same    amount    each time ,       are   well
    received . This will foster the growth of a regular clientele and hence
    keep down issue costs . Moreover the proposed revolving method offers the
    advantage of     clarity ,   in that    the   total debt is capped -             successive
    tranches   no   longer   being    cumulable .   At  the     same    time  it    avoids      the
    apparance of gaps , such as that which has emerged at the present time
    with the rapid exhaustion of the NCI IV , leaving an unsatisfied demand
    while awaiting a new authorisation .
                                                                                  I  • • /
 ---pagebreak---                                                            7.
After three years , the Commission will review the working of the system ;
fresh priorities could also be set on that occasion .
Loans
Given that the investments in question are of modest size , the loans of
the new authorization could be granted by the well tried method of
global    loans .    This  allows , not  only  to distribute     the   resources
available to a large number of enterprises , but also to cut out the risk
of default , in vew of the excellent guarantees provided by the
intermediaries •
The techniques of financial engineering should be used as a way of
supporting projects more efficiently . One could envisage , amongst other
possibilities , to :
a ) promote the transformation of global loans into equity in the context
    of high technology and innovation ;
b ) couple the NCI with a mechanism to give repayments which increase
    over t ime ;
c ) improve the guarantee conditions for these investments ; this would
    mean , for example , close collaboration with guarantee organizations ;
d ) include      the    possibility   of   making  loans ,    in     appropriate
    circumstances , at floating rates ;
e ) encourage the finance of projects through risk-capital operations by
    using an appropriate combination of equity and long term loans .
To increase the efficiency of the instrument , the NCI - and particularly
the " rural" NCI - will be closely associated with the other Community
instruments , especially the structural Funds and the EIB
 ---pagebreak---                                            COUNCIL DECISION
            empowering the Commission to borrow under the New Community Instrument
                   to stabilize the level of debt outstanding for the purpose
                            of promoting investment within the Community
THE COUNCIL OF THE EUROPEAN COMMUNITIES ,            Whereas such action will help to achieve
                                                     the Community's objectives regarding the
Having regard to the Treaty establishing             reversal of the exodus from rural areas
the European Economic Community , and in             and concerning the development of these
particular Article 235 thereof ,                     areas ;
Having regard to the proposal from the               Whereas it is vital in order to streng¬
Commission ( 1 ),                                    then the Community 's technological base
                                                     and industrial competitiveness to encou¬
Having      regard   to   the  opinion of    the     rage the innovative capacity of under¬
European Parliament (2 ),                            takings ;
Having      regard   to   the  opinion of    the     Whereas investment by small and medium¬
Economic and Social Committee (3 ),                  sized undertakings involving the appli¬
                                                     cation of new technologies and innova¬
Whereas       the    Community 's    investment      tion has features which raise special
financing facilities should continue to              financing problems ;
operate , with a view to correcting
structural shortcomings in the produc¬               Whereas special financing arrangements
tion system so as to increase investment             should consequently be provided for to
and thereby stabilize employment ;                   deal with such problems , in particular
                                                     by extending the financing base and by
Whereas        loan     applications     already     encouraging    the   supply   of    equity
approved by the Commission account for               funding ;
over 87% of the borrowing authorized by
the Council in Decision 87 /182/EEC (4 )             Whereas   the  European  Investment   Bank
and over 97% of the cumulative total of              ( hereinafter referred to as the 'Bank' )
all authorizations to date ;                         has stated that it is willing to contri¬
                                                     bute to the implementation of this
Whereas the Commission should therefore              measure , and to take responsibility for
be empowered to borrow amounts enabling              managing the cash holdings for carrying
it   to maintain the       level  of  debt  out¬     out the lending operations , it being
standing under the New Community Instru¬             understood that the discharge and audit
ment at its present level of 5,865 mil¬              procedures shall be those provided for
lion ECU ;                                           in the Bank 's Statute in respect of all
                                                     its operations ,
Whereas action under the New Community
Instrument , as last defined by Decision             Whereas the Treaty establishing the
87 / 182 / EEC , should for the next three           European Economic Community has not
years     continue    to   be  concentrated   in     provided the necessary powers for a
favour of small and medium-sized enter¬              Community action in this field needed to
prises ;                                             attain , in the course of the operation
                                                     of the common market , one of the
                                                     objectives of the Community ,
C 1 ) OJ No C
 (2 ) OJ No C
( 3 ) OJ No C
 (4 ) OJ No L71 , 14.3.1987 , p.34
 ---pagebreak--- HAS DECIDED AS FOLLOWS :                          - the investment projects of small and
                                                    medium-sized       enterprises    in    rural
                                                    areas ,    aimed    at    safeguarding    the
                    Article  1                      environment or stabilizing employment
                                                    likely to be lost in agricultural
The Commission shall be empowered to                activities , shall be eligible ;
borrow ,    on behalf of         the    European
Economic Community under the New Commu­           - projects      and    their    implementation
nity Instrument , amounts enabling it to            shall comply with the provisions of
maintain the level of debt           outstanding    the     Treaty       and     of    secondary
under this facility at 5865         million ECU     legislation , in particular provisions
in principal , having regard        to the flow     relating to competition , and with the
of repayments of principal          on existing     rules and requirements of the relevant
borrowings .                                        Community policies .
                    Article 2                                         Article 4
The proceeds of the borrowings referred           Loans shall for the first three years
to   in   Article    1 shall    be   on-lent   to generally be granted through the agency
finance investment projects that contri­          of financial intermediaries .       In certain
bute to the structural adjustment and             limited cases , however , they may be made
the competitiveness of the Community ;            directly to the recipients .
for a period of three years following
the entry into force of the present               Whatever the procedure for granting
decision ,     such    projects       shall    be loans , capital and interest payments may
directed towards the application of new           be deferred . Loans may also be used to
technologies      and   innovation or         the finance     intangible      assets    such as
stabilization of employment in rural              patents ,      licences ,     know-how ,    and
areas ; thereafter the Commission shall           research and development expenditure
determine the priorities to be applied .          directly     linked     to    the   investment
                                                  concerned .
These projects , to be carried out in
Community territory , must , where appro­         Where they are granted through the
priate , be such that they serve the              agency of a financial intermediary , that
Community 's priority objectives relating         intermediary may , with the agreement of
to the financing of investment by small           the Bank , pass the loan on to under¬
and medium- si zed undertakings .                 takings either in the form of a loan or
                                                  in the form of equity capital . In both
                    Article 3                     cases ,   the      intermediary     shall     be
                                                  responsible for the service of the loan
The   Commission    shall  decide    whether   or and associated risk .
not projects are eligible in accordance
with the following priorities and guide­                              Article 5
lines   :
                                                  Lending       terms      as     regards     the
- the investment projects of small and            reimbursements of the principal and the
   medium-sized enterprises in industry           rate and payment of interest shall be
   and    other    productive      sectors ,   in those applied by the Bank , in accordance
   particular with a view to the applica­         with its Statute in respect of loans
   tion of new technologies and innova­           from its own resources , and shall be
   tion ( including renewable sources of          fixed in such a way that , overall , they
   energy )    shall    be     eligible ;     the cover the costs and expenses incurred in
   projects of small       enterprises      shall concluding and performing both the
   have priority ;                                borrowing and the lending side of the
                                                  transactions .
                                                                                                   3
 ---pagebreak---                      Artide 6                         - the Commission and the Bank shall sign
                                                         the loan contracts with the primary
The terms of borrowings shall be nego¬                   borrover , viz the financial interme¬
tiated by the Commission in the best                     diary in the case of a global loan , or
interests of the Community , having                      the beneficiary in the case of a
regard     to   the   conditions     on    capital       direct loan ,
markets     and    in   accordance      with     the
constraints imposed by the duration and               - the    Bank shall  inform the     Commission
other financial aspects of the loans to                  of the allocation of the loans .
be granted . The borrowed funds shall be
entrusted to the Bank , which shall                                      Artide 8
manage them in the manner agreed with
the   Commission under       the   terms    of   the  The Commission shall annually inform the
existing co-operation agreement .                     European Parliament and the Council of
                                                      capital receipts and payments resulting
Borrowing and lending operations shall                from borrowing and lending transactions .
be expressed in the same monetary units ,             To   this   end the  Bank shall    forward  to
and to ensure adequate coverage the                   the Commission any data required for the
Commission       may     carry      out      " swap " European Parliament and the Council to
operations provided that there is no                  be fully informed .
resultant exchange or interest rate risk
for the Community .                                                     Article 9
Where borrowings are expressed , payable              Three years after the entry into force
or reimbursable in the currency of a                  of the present decision the Council
Member State , they may be concluded only             shall examine , on the basis of a report
with the agreement of the competent                   by the Commission and after consulting
authorities of that State .                           the European Parliament , whether the
                                                      objectives and priorities of the New
                     Article 7                        Community Instrument should be changed .
A mandate shall be given to the Bank to                                 Article 10
grant and administer loans in pursuance
of this Decision . The Bank shall carry               The   financial  control   and  audit   of the
out  transactions      under   this   mandate     on  Commission' s   accounts   shall   be  carried
behalf      of     the     Community ,       whilst   out    in  accordance   with   the   Financial
exercising the same diligence as for the              Regulation applicable to the general
operations carried out with its own                   budget of the European Communities and
resources .                                           with Article 206 of the Treaty institu ¬
                                                      ting the European Economic Community .
The Commission shall decide , in accor¬
dance with Article 3 , whether projects               The lending transactions and management
are eligible . Where the Commission gives             of cash holdings shall be covered by the
a favourable decision , the Bank shall                discharge and audit procedures provided
decide     whether    and   on   what    terms    to  for in the Bank' s Statute in respect of
grant the loans , in accordance with its              all its operations .
usual criteria and with the procedures
laid     down  in   its   Statute    and   in    the
co-operation agreement .
                                                      Done at Brussels ,
Loan procedure as provided for in this
Decision shall be as follows :
- loan applications shall be transmit¬
   ted simultaneously to the Commission
  and to the Bank by the primary borro¬
   wer ,
                                                                                                     <AO