Select Committee on European Scrutiny Thirty-Seventh Report

8 European Investment Bank lending in non-EU countries




COM(06) 323

+ ADDS 1-2




COM(06) 324

Commission Report on operations conducted under the External Lending Mandate of the European Investment Bank and future outlook

Draft Council Decision granting a Community guarantee to the European Investment Bank against losses under loans and guarantees for projects outside the Community

Legal base(a) — (b) Art 181 a EC; QMV
Document originated22 June 2006
Deposited in Parliament3 July 2006
DepartmentInternational Development
Basis of considerationEMs of 13 July 2006
Previous Committee ReportNone
To be discussed in CouncilNovember 2006 ECOFIN
Committee's assessmentPolitically important
Committee's decision(a) Cleared

(b) Not cleared; further information requested


8.1 According to its website, the task of the European Investment Bank (EIB), — "the European Union's financing institution" — is "to contribute towards the integration, balanced development and economic and social cohesion of the Member Countries". It is also active outside the Union, where it "implements the financial components of agreements concluded under European development aid and cooperation policies".[19]

8.2 With regard to this latter, the Commission explains that these non-EU activities have customarily made up around 10% of the EIB's total activities, amounting to €5.1 billion in 2005, of which €3.7 billion is under Community guarantee. The EIB operates outside the EU on the basis of formal mandates from the Council, with successive Council Decisions having widened the geographical scope, so that the EIB is fully operational in pre-accession and Mediterranean countries, Asia, Latin America and South Africa, and is progressively expanding its operations in Russia, the Ukraine and Moldova. As the Commission says, "the Community guarantee prevents such operations, which often bear a significantly higher level of risk than the EIB's operations within the EU, from affecting the credit standing of the Bank, and allows the EIB to maintain attractive lending rates outside the EU".

The Commission Report

8.3 In his helpful 13 July Explanatory Memorandum, the Parliamentary Under-Secretary of State at the Department for International Development (Mr Gareth Thomas) says that the report is a Commission evaluation of the current EIB External Lending Mandate (ELM), which will expire at end of January 2007, preparatory to agreeing a renewal. The ELM "invites" the EIB to lend up to specific regional ceilings outside the EU, with each region having specific objectives and regulations. Overall, in 2000-06, the EIB was "invited" to lend €20.6 billion outside the EU.

8.4 The first part of the Report discusses the Bank's activities under the ELM between 2000 and 31st December 2005. It outlines lending volumes, by mandate and by region and relative to the other International Financial Institutions. It also discusses the value added of the EIB. The second part makes proposals for the next ELM; they include new regional ceilings, an increase in country coverage as and when new countries fulfil appropriate conditionality, a Reserve Mandate for natural disaster and post-conflict reconstruction, and a clarification of the guarantee coverage by which loans made by the Bank are guaranteed to varying degrees by the Commission. Finally the report addresses co-operation between the Bank and International Financial Institutions (IFIs) and between the Bank and the Commission, outlines an improvement in reporting and suggests a mid-term review of the mandate in 2010.

8.5 There are two annexes to the Report. The first is concerned with the regional outlook of the next mandate: it discusses spending by region under the current mandate, outlining the sectoral breakdown of loans, and then seeks to provide justification for the size of lending envisaged by the Commission for 2007-13 and the sectoral priorities. The second annex analyses the Bank's operations under the ELM between 2000 and the 31 December 2005; discusses how lending by the EIB has supported EU policy objectives and how the Bank has co-operated with the Community and other IFIs; and evaluates EIB loans by region. Five sub-annexes provide comprehensive lists and breakdowns of loans by region, country and sector.

The draft Council Decision

8.6 The legislative text incorporating these proposals is explained and discussed in a separate EM from the Minister. He explains that, as well as expiring on 31 January 2007, the current guarantee protects the EIB from loss due to non-payment up to specific regional ceilings, and that only 65% of these sums are covered; this proposal would put in place a new guarantee for 2007-13. He says:

"The Commission proposes to clarify the exact nature of the guarantee and to extend the coverage to loan guarantees made by the EIB, as well as loans. The proposal would comprehensively cover the EIB for losses on operations with the public sector (national and local/regional) or public sector guaranteed operations. For operations falling outside of the public sphere, the EIB would be covered against specific political risk only.

"The proposals put forward relating to the renewal of the ELM include articles setting the size of the regional ceilings, to increase the size of the whole ELM to €33 bn, including a €1.5 bn reserve mandate, and sets out which countries are eligible and how countries can become eligible. The proposal also includes articles relating to the consistency of EIB actions with EU policy, cooperation with other International Financial Institutions (IFIs), reporting and accounting standards, and recovery of payments made by the Commission under the guarantee. Finally, the proposal allows for a review of the decision by 30th June 2010 accompanied by proposals for its amendment."

The Government View

8.7 The Minister says that the renewal of the guarantee is important since it helps the EIB to lend in countries that are sub-investment grade, and that clarification of the guarantee and recognition of the need for better coordination between the Commission and the Bank and between the Bank and other IFIs are both to be welcomed. However, the Government is still in discussion about the guarantee together with other Member States regarding a number of concerns, which he specifies as follows:

"The proposal has not been adequately justified. The report from the Commission on the current ELM (COM (2006) 323 final) is a presentation with some discussion of facts and figures rather than the evaluation requested by Member States. It is therefore a useful summary at most. Member States need to know how the mandates contribute to EU objectives, what key lessons have been learned and how they will be incorporated to inform the next mandate in order to make our judgement on the new ELM and therefore this proposal.

"The report also does not include an adequate justification for the sizeable increases in lending activity, from €22.7 bn to €33 bn, a 16% real terms increase, nor the increase in scope to take in countries previously not covered. The UK's focus has consistently been to urge the EIB to improve the value-added of its lending (its efficacy) before seeking to increase the size and scope of lending.

"The Asia/Latin America (ALA) region of the Bank's mandate has a unique mutual interest clause. This clause says that any EIB lending in the region must be in the mutual interest of both the borrower and the EU. We would like to see this aspect of the ALA mandate removed entirely, because in practice it has been used to finance the foreign direct investment activities of European firms and it is only imposed on the ALA mandate. The current proposal suggests only a widening of the clause to encompass projects in the transport, energy and communications sectors in order to further regional integration, and environmental projects.

"Finally, the proposal envisages a Reserve Mandate of €1.5 bn to cover unforeseen post conflict situations and natural disasters, when funds are required quickly. We are not convinced of the rationale for this, nor are we happy that decisions on its use will be made 'in consultation' with the Council only."

8.8 In forthcoming discussions, the Minister says, the UK will:

"press the EIB and the Commission to provide a meaningful strategic analysis of the current and future mandates and how they can aid policy outside the Union. We will press for value added indicators in lending targets and better justification of proposed lending volumes and the increased geographical scope. We will also work for the removal of the mutual interest clause."

8.9 Looking ahead, the Minister says that the Presidency has targeted the November ECOFIN for an agreement on the ELM renewal — hence this proposal — and that a six month extension is possible should agreement not be reached by the current ELM expiry date of 31 January 2007.


8.10 We now clear the Commission report.

8.11 However, with regard to the draft Council Decision, the Minister's concerns are well put. As he notes, the question of value added is central to the ELM mandate renewal, and it is telling that "Value added of the EIB" section encompasses only four short paragraphs in the Commission's voluminous report. Even that does not amount to a great deal: an alleged perception by potential borrowers that the EIB is "a streamlined and efficient lending institution with a closely defined focus"; a claimed "expertise and comparative advantage" in infrastructure, environment and SME projects; project conditionality that is said to ensure EU environmental and procurement standards and encourage appropriate management and pricing practices; lower borrowing costs passed on to beneficiaries; "a catalytic effect on the participation of other financial partners"; and using local fund-raising to develop local financial markets.

8.12 We should be grateful if the Minister would inform us of the progress of the forthcoming discussions to which he refers, and in the meantime will keep the draft Council Decision under scrutiny.

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