Legal base	Art 179 and 181 a TEC; QMV; co-decision
Document originated	14 January 2009
Deposited in Parliament	20 January 2009
Department	International Development
Basis of consideration	EM of 3 February 2009
Previous Committee Report	None; but see (27643) 11003/06 and (27645) 11006/06: HC-xxxvii (2005-06), chapter 8 (11 October 2006) and HC 41-v (2006-07), chapter 10 (10 January 2007); also see (27924) 13558/06: HC 41-v (2006-07), chapter 9 (10 January 2007)
To be discussed in Council	To be determined
Committee's assessment	Politically important
Committee's decision	Not cleared; further information requested

Background

3.1 The European Investment Bank (EIB)was created by the Treaty of Rome in 1958 as, according to its website, "the long-term lending bank of the European Union"; its mission is "to further the objectives of the European Union by making long-term finance available for sound investment"; its task being " to contribute towards the integration, balanced development and economic and social cohesion of the EU Member States." To this end, the EIB "raises substantial volumes of funds on the capital markets which it lends on favourable terms to projects furthering EU policy objectives". The EIB "continuously adapts its activity to developments in EU policies."

3.2 It offers four main services to clients:

—  Loans: granted to viable capital spending programmes or projects in both the public and private sectors; counterparties range from large corporations to municipalities and small and medium-sized enterprises;

—  Technical Assistance: expert economists, engineers and sectoral specialists to complement EIB financing facilities;

—  Guarantees: available to a wide range of counterparties; banks, leasing companies, guarantee institutions, mutual guarantee funds, special purpose vehicles and others; and

—  Venture Capital.

3.3 The EIB is active both inside and outside the European Union. According to its website, the majority of EIB lending is attributed to promoters in the EU countries (87% in 2007) supporting the continued development and integration of the Union; while outside the Union, EIB lending is governed by a series of mandates from the European Union in support of EU development and cooperation policies in partner countries — in the enlargement area in southern and eastern Europe; in the Mediterranean Neighbourhood; in Russia and the Eastern Neighbourhood; in the African, Caribbean and Pacific (ACP) countries; in South Africa; in Asia; and in Latin America.[5]

3.4 A Community guarantee aims to prevent 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 thereby to allow the EIB to maintain attractive lending rates outside the EU. The Commission says that this 13% of overall EIB lending amounted to €6.4 billion in 2007, of which €3.7 billion was under Community guarantee.

3.5 The Commission describes that EIB's operations in third countries as "a crucial complement to limited EU budget funds to increase the effectiveness and the visibility of the EU's external action." While the Community budgetary external assistance is focused on lower income countries and support to the social sectors, "EIB operations are of particular relevance in middle-income countries and in infrastructure, financial and commercial sectors." The EIB having originally been set up and structured financially to operate within the EU, "the mandates under Community guarantee cover represent the key tools which allow the EIB to carry out operations outside the EU, by providing the necessary political and financial backing by the Community for countries and projects which would not normally fit within the EIB's standard guidelines and criteria."[6]

The proposed Council Decision

3.6 As the Parliamentary Secretary at the Department for International Development (Mr Michael Foster) explains in his Explanatory Memorandum of 3 February 2009, this proposal — to provide a Community guarantee to EIB operations in non-EU countries under the External Lending Mandate (ELM) of the Bank — was originally adopted by the Council in December 2006 to cover the renewal of the ELM that expired on 31 January 2007. However, he goes on to explain, following an action brought by the European Parliament:

—  the European Court of Justice annulled this Council Decision, ruling that it should have been adopted on the basis of Articles 179 (Development Cooperation) and 181a (Economic, Financial and Technical Cooperation with Third Countries) as opposed to Article 181a only of the EC Treaty;

—  the Court allowed a grace period of 12 months to enable the Council Decision to be replaced by one adopted under the dual basis of both Articles; and

—  the main practical difference resulting from the amendment will be that the new legal basis will be adopted as a co-decision of the Council and European Parliament.

3.7 The Minister further explains that the proposal clarifies the exact nature of the guarantee and extends the coverage to loan guarantees made by the EIB, as well as loans. The Minister says that it comprehensively covers the EIB for losses on operations with the public sector (national and local/regional) or public sector guaranteed operations, and for operations falling outside of the public sphere, against specific political risk only.

3.8 The Minister also notes that the proposal:

—   includes articles setting the size of the regional ceilings,[7] putting the size of the whole ELM at €27.8 billion (£26.5 billion), including a €2 billion (£1.9 billion) optional mandate to be decided by the European Parliament and the Council and based on the outcome of the mid-term review of the ELM, due to be produced by 30 June 2010;

—  sets out which countries are eligible and how countries can become eligible; and

—  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.

The Government's view

3.9 The Minister says that amending the current legal base to encompass Development Cooperation will enable the Government "to emphasise its policy of promoting an EIB that focuses on the development impact of its operations (particularly in terms of the value they add), rather than the quantity." From the UK perspective, although the content of the Decision remains the same, "the new base gives an explicit link to development in the EIB's lending outside the Union [which] will strengthen the UK's position in pushing for greater developmental impact of EIB activities".

3.10 He regards renewal of the ELM as helping to improve the development impact of the EIB by promoting:

• "improved quality of EIB development investments;
• a more unified EU development package comprising a balanced mix of grants, loans and equity;
• a more coherent and clear role for EIB within the international development architecture"

3.11 The Minister also highlights a number of features in the Mandate that he believes should help improve EIB's effectiveness:

"It has been asked to strengthen the way it supports EU objectives and works with IFIs. This was particularly in response to past anecdotal evidence that the EIB had on occasions undercut other lending institutions on price and through less stringent conditionality."

3.12 Other features the Minister notes are:

• "Maximising coordination between EIB financing and the EU's grant resources (particularly through better links with EC's grants-based country and regional strategies).
• Strengthening of cooperation with IFIs including through co-financing, risk sharing and coherent conditionality.
• The end of the so called Mutual Interest Clause for operations in Asia and Latin America. (This clause restricted EIB financing to projects involving EU companies.)
• A Mid-Term Review looking at all aspects of EIB lending outside Europe, to be fully informed by an independent evaluation. The preliminaries for this have now started."

Conclusion

3.13 In October 2006 and January 2007 the Committee considered the proposal adopted by the Council in December 2006. In between these two occasions, a process of negotiation had been undertaken. As with all such negotiations, not everything had been achieved. But it was plain to us that the outcome was a considerable improvement on the original proposal; in particular:

—  the focus of 80% of the €25.8 million committed expenditure would be on the EU's Neighbourhood and the Pre-Accession countries;

—  the €5.1 billion increase was only half that originally proposed;

—  there was to be a mid-term review of the new mandate in 2010, with input from external experts; and

—  €2 billion of that was subject to further consideration in the light of the mid-term review.

3.14 We are accordingly glad to note that these key features remain in the present proposal.

3.15 When, in January 2007, we cleared the original Council Decision, we noted that the question of value added was central to the ELM mandate renewal, and that the four short paragraphs on "Value added of the EIB" in the Commission's voluminous accompanying report did not amount to a great deal.

3.16 We also considered an assessment of an EIB "regional fund": FEMIP (Fund for Euro-Mediterranean Investment and Partnership), which was created in October 2002 to stimulate economic growth and private sector development in the Mediterranean region and combined EIB loans with EU budget resources to provide technical assistance, interest rate subsidies for environmental projects and risk capital. Agreement had been reached on improvements that — if effectively implemented — were judged as enabling FEMIP better to achieve its key objective of SME development, with two clear targets — doubling the private sector percentage of FEMIP lending, and more effective cooperation from partner governments, particularly with regard to the issuing of bonds in local currencies (a problem). There, as here, a mid-term review, with outside expert participation, was planned for 2010, which would assess how well cooperation was working between the EIB and the Commission. We suggested that it should also assess the level and effectiveness of cooperation of partner governments (this having been a problem highlighted in the assessment); and that a way should be found of involving the Court of Auditors in both this and the ELM mid-term review — they being extremely experienced in assessing the effectiveness of the Community's development assistance.

3.17 The Minister, rightly, talks about adding value and effectiveness. But he makes no mention of this suggestion. We are therefore drawing his attention to it, and asking him to confirm that he sees no difficulty with taking it forward. As, according to the Minister, the Commission do not plan to put the proposal formally to the Council and the European Parliament until after the summer break, we shall in the meantime retain the document under scrutiny.

6   COM(08) 910, page 4. Back

7   See COM(08) 910, page 7, for the regional breakdown. Back