COMMISSION STAFF WORKING DOCUMENT
Accompanying the document
REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL
ON 2012 EIB EXTERNAL ACTIVITY WITH EU BUDGETARY GUARANTEE
This Staff Working Document (SWD) reviews the implementation of the current EIB external mandate at regional and country level as well as the contribution of EIB financing operations to the fulfilment of external policy objectives, taking into account the operational objectives of the EIB.
The following tables summarise the EIB own resources lending activity in the regions covered by the mandate: overall signatures (Table 1), the signatures and available headroom under the mandate (Table 2) and the signatures and available headroom under EIB own risk facilities (Table 3).
Table 1: Overview of overall EIB lending signatures in the regions covered by the Decision
Table 2: EIB lending signatures under the current Decision
Table 3: EIB lending signatures under EIB own risk facilities
The chart below illustrates the sectoral distribution of EIB total financing (EUR 6.5bn) under the Mandate and under the EIB own-risk Facilities in 2012. Credit lines for SMEs (38%), transport (23%), energy (12%), industry and services sectors (12% together) remained key priorities for EIB financing with more than EUR 3bn invested in 2012 outside the EU.
Chart 1: Regional and sectoral breakdown of signatures under Mandate and Facilities in 2012
2. Overall contribution to EU policy objectives
The objective of EIB operations under the guarantee is to support relevant external policy objectives of the EU. In particular, the Decision provides for some specific policy goals to be addressed through EIB external operations. The following chart illustrates the EIB contribution to the high-level objectives of the Decision based on the existing stock of operations signed over the period of implementation of the Decision (1/08/2007-31/12/2012). Considering that the objectives are not mutually exclusive, some operations contribute to more than one objective; e.g. sustainable transport project may, in addition to economic infrastructure, contribute to climate change mitigation.
Chart 2: Expected contribution to mandate objectives based on signatures under Mandate and Facilities in 2007-2012
2.1. Climate change mitigation and adaptation
As regards climate action, 2012 overall EIB signatures amounted to EUR 1.6 bn, representing 24% of total EIB financing in the regions covered by the Decision (29% of signatures under the EU guarantee, either under the general or the climate change mandate envelopes). This proportion is in line with the EIB’s global target of 25% of overall lending (increased from 20% in 2010), and relatively more than in 2010 when broadly an equal volume of EUR 1.6 bn in climate action signatures accounted for 21% of total financing in the regions covered by the Decision (15% of signatures under the EU guarantee).
More precisely, projects contributing to climate action signed under the EU guarantee in 2012 comprised:
In the Pre-Accession countries, two projects signed in Turkey and one in Montenegro, the latter comprising an urgent flood relief and prevention project. In Turkey too, the climate action projects comprised a proportion (EUR 10 mn) of EUR 100 mn loan for flood prevention and protection as well as an environmental loan of EUR 75 mn for financing of small and medium-scale projects carried out by local authorities;
in the Mediterranean, five projects of which three under the Climate Change Mandate: a loan in Lebanon to a financial intermediary for on-lending to private sector companies for energy efficiency and renewable energy, two projects in Morocco, supporting the first phase of a solar power complex, and upgrading of public irrigation systems, a project in Egypt supporting an extension of the Cairo metro, and a combined heat and power plant in Israel;
in Eastern Neighbourhood: a loan in Ukraine for hydropower infrastructure rehabilitation along the river Dnieper;
in Asia, under the Climate Change Mandate, a loan in Vietnam to financial intermediaries for on-lending for renewable energy, energy efficiency and other climate operations;
in Latin America, in Ecuador, the construction of Quito’s first metro line;
in South Africa, a loan for the construction and operation of a solar tower renewable energy plant.
Complementing the Bank’s climate action financing under the EU guarantee, the following operations were financed in 2012 under the EIB own-risk facilities:
in Pre-Accession, three intermediated loans via local financial institutions signed in Turkey for on-lending primarily to small and medium-sized enterprises for renewable energy and energy efficiency projects, and one direct loan for research and development in Turkey for energy improvement technology in motor vehicles;
in Asia, one intermediated framework loan in China for financing of forestry projects contributing to climate change mitigation through carbon sinking and avoidance of greenhouse gas emissions;
in the Mediterranean, one direct loan for research and development in Israel for electric vehicle infrastructure and service.
The Bank calculates the carbon footprint of all projects directly financed (or through fully appraised framework loan allocations) which emit more than 100kt of CO2equivalent (CO2eq) per year (absolute emissions) or lead to an emission variation of more than 20kt of CO2eq per year compared to a baseline. A previous sample revealed that the application of these thresholds captures 95% of all emissions from projects financed directly. The data for 2012 were still under elaboration at the time of the drafting of this report. As a matter of example the projects financed under the Mandate in 2011 accounted for annual absolute emissions of 7.97 mn tCO2eq. However the relative emissions of this same group of projects were minus 1.58 mn tCO2eq (i.e. emission reductions compared to the baseline).
2.2. Development of social and economic infrastructure
Over the years 2007-2012, the EIB has provided more than EUR 23.2 bn for the financing of social and economic infrastructure, including transport, energy, environmental infrastructure and information and communication technology.
Chart 3: Breakdown of energy and transport signatures under Mandate and Facilities in 2007-2012
Since 2007, EIB has contributed to the development of sustainable and secure energy systems that meet partner countries’ economic, social and environmental needs, by providing more than half of its energy lending for system expansion in terms of generation capacity / electricity production. Another 20% was invested in energy transmission and distribution. Over the period, investments in renewable energy and in energy efficiency represented approximately 55 % of total energy lending.
Developing more efficient sustainable transport systems, offering upgraded networks and improved public transport services have been priorities for EIB with over 80% of transport financing aimed at improving roads, motorways, railways and urban transport. These projects not only benefit the local communities by offering improved transport networks, accessible and affordable transport services, reductions in traffic congestion, fuel consumption, and air pollution, but the projects also generate economic activity and contribute to a more sustainable development. Moreover, improving transport networks is a crucial element in regional integration at local, national and regional levels, thus supporting trade, employment opportunities and social cohesion.
In 2012, EIB financed 34 projects across all regions in support of social and economic infrastructure, predominately under Mandate.
Out of 9 energy projects signed, 6 concern renewable energy, including the first tranche of EUR 100m (out of EUR 300m approved) financing for the Ouarzazate Concentrated Solar Power Plant in Morocco, the first large-scale plant of this kind in North Africa. A EUR 75m framework loan for financing small and medium-scale renewable energy and energy efficiency projects in Turkey was the only energy investment under EIB own risk facilities in 2012.
Another 9 projects targeted the transport infrastructure, mainly roads and motorways, almost exclusively under the Mandate. Significant projects include the construction of two motorway sections in Bosnia and Herzegovina, connecting the country with international transit corridors to Croatia and Hungary, the construction of dual two-lane motorway on new alignment bypassing Fier in Albania, the construction of a key link to the motorway network in Morocco (Autoroute El Jadida) and the Georgia East-West Highway project – all key in contributing to regional integration and economic development in the regions.
2 urban transport projects were financed for the construction of a metro line in Ecuador and in Egypt that will provide improved, accessible, affordable and efficient transport service in Quito and Cairo, alleviating urban congestion and pollution and promoting the use of public transport, thus contributing to more sustainable development of both cities.
7 operations supported environmental infrastructure, more specifically water and sanitation, including a rehabilitation of water supply, sewerage and sewage treatment facilities of 17 small towns throughout Armenia, benefiting approximately 300,000 inhabitants, primarily lower-income groups, by improving the quality and continuity of water supply as well as improving wastewater collection and treatment.
The EIB’s support to the development of knowledge economy and social infrastructure is highlighted by two large-scale programmes implemented with the Scientific and Technological Research Council of Turkey (Tübitak), which aim at strengthening the country’s research and innovation capacity.
2 projects, one in Brazil and another in Turkey, were financed in support of information and communication technology by increasing the capacity and extending the geographical coverage of broadband networks and developing new technologies and services by facilitating the local business environment.
2.3. Local private sector development, support to SMEs
In many countries covered by the Decision, long-term funds are in short supply which creates a serious obstacle to private enterprise expansion. The purpose of EIB's lending is to help overcome such local market gaps. SME investment projects are mostly too small to justify a direct EIB intervention but can be handled by local banks. These projects may receive indirect support from the EIB in the form of global loans, i.e. credit lines opened to certain intermediary banks for a number of small and medium sized projects which remain to be identified by the intermediaries within a given allocation period.
Partner banks are carefully selected by the EIB, notably regarding their capacity to assess projects and their compliance with international regulations against fraud and other prohibited practices. The intermediary banks on-lend the EIB’s long-term funds to private enterprises subject to their own project and borrower appraisal, and to an allocation decision by the EIB in respect of the proposed investment projects. The intermediary banks assume detailed reporting obligations on projects and end-borrowers. They often provide in parallel loans (usually of shorter term) from their own resources. Subsidiaries of European banks, affiliates of regional banking groups as well as local banks count among the EIB’s global loan partners. At the end of 2012, the EIB authorised the “Loan for SMEs and Mid-Caps” product to be used in all regions outside the EU, which had been successfully pioneered within the EU since 2008, later also in the Pre-Accession region and in some countries of the Eastern Neighbourhood. This product allows for more flexible funding of individual projects.
Over the past three years, the EIB has provided a total of EUR 4.5 bn in long-term finance via credit lines to financial intermediaries, reaching more than 14,000 SME and MidCap beneficiaries in the regions covered by the Decision. While Pre-Accession countries received more than 80% of this volume, the Eastern Neighbourhood recorded the strongest growth in signatures with 6 new loans signed in 2012 totalling EUR 500 mn of which EUR 350 mn targeting SME beneficiaries1. In Turkey, the number of intermediaries has been increasing over the years, with the aim to ensure a good geographical coverage of attribution of EIB funds throughout the country.
Table 4: Credit lines for SMEs and MidCaps in 2010-2012
Allocations of funds made in 2012 under credit lines amounted to EUR 1.7 bn, contributing to almost 4,800 investment projects undertaken by SMEs and MidCaps with total investment cost of EUR 3.6 bn. In the SME segment, i.e. enterprises of less than 250 employees, the average allocation size was EUR 315,000, and half of the allocations were smaller than EUR 50,000. A limited number of allocations (6%) went to MidCaps, i.e enterprises of between 250 and 3,000 employees. In this segment, the average allocation size was EUR 1.5 mn. Larger allocations with individual size of more than EUR 3 mn represented only 3% of the total number of allocations made. Certain credit lines, in particular those signed in 2011 and 2012 with the ProCredit Group in several Eastern Neighbourhood and Pre-Accession countries were particularly successful in addressing the lower end of the SME target group. The first allocations under these credit lines materialised quickly and a year after signature, already 330 allocations had been made. 65% of these are in support of enterprises of less than 10 employees.
EIB funding through credit lines supports a diversified range of activity sectors. The largest in 2012 were manufacturing (37%), agro and food processing (15%), commerce (12%), hotels and tourism (11%), energy (8%) and construction (5%). More detail on the expected results of EIB support to SMEs based on credit lines approved in 2012 is provided in Section 3.
Apart from intermediated lending, the EIB also supports local private sector development through direct loans to larger private enterprises, mainly in the industrial and services sectors. These investments often induce employment and investment effects also in the local supplier base. Direct lending to local private sector is essentially provided at EIB’s own risk under the Pre-Accession Facility (EUR 440 mn signed in 2012) or under the Decision in Pre-Accession (EUR 175 mn) and Mediterranean countries (EUR 328 mn).
Besides long-term lending, the EIB invests in funds which provide equity to SMEs as well as to micro-enterprises. Such investments are carried out not from EIB’s own resources, but using third party money, such as the EU budgetary funds for risk capital operations under the European Neighbourhood Partnership Instrument. This is in consideration of the high-risk nature of the operations and the fact that the EU Guarantee under the Mandate only covers political risks.
In 2012, 19 SME-focused equity funds were in their investment phase, investing some EUR 100m in favour of SMEs in the Mediterranean region. At the end of 2012, the stock of investments being held and actively followed up by the funds' management comprised 142 investee companies. Considering that EIB is known as one of the key investors in SME funds in Mediterranean countries, its participation encourages contributions from other sources. Based on existing stock, EIB participation has a leverage effect of 5.3x in the Mediterranean equity funds.
The Bank also uses the EU’s loan-grant blending mechanisms to finance technical assistance to banks, micro-finance institutions and SMEs. Implementation of such support schemes in the Mediterranean region went ahead in 2012 and included MicroMed, a large technical assistance scheme to support microfinance institutions in Tunisia (EUR 4m of which half funded by Luxembourg). The potential for Mesofinance - a bridge between microfinance and the banking sector - is being studied for the whole region. As mobile finance is making great progress, EIB presented the first regional study on this topic during a workshop in November 2012 and is preparing a working group and further technical assistance for the region in the context of the Deauville Partnership.
2.4. Contribution to other aspects – Regional integration and European FDI
Regional integration has been supported mainly in EIB financing of social and economic infrastructure. Over the past six years, EIB has financed 26 projects (EUR 2.5 bn) contributing to regional integration, of which 45% was signed in the Mediterranean countries, followed by 42% in Pre-Accession. Promotion of the regional integration dimension was one of the reasons for developing the Western Balkans Investment Framework jointly by the Commission, the EIB, the EBRD, the Council of Europe Bank and other donors. Besides the more traditional financing of integrated regional and cross-border networks of transportation and energy, EIB projects fostering regional integration include certain information and communications technology projects as well as investments for the development of knowledge economy, particularly scientific research, tertiary education, innovation and the financing of academic research programme promoting the integration with the European Research Area.
By foreign direct investment, the EIB is supporting the internationalisation of the EU economy, which aims at promoting EU competitiveness while bringing substantial benefits to the economies outside the EU. Over the past six years, the EIB has financed 30 projects (EUR 3.8 bn) in Pre-Accession, Mediterranean and Latin America, mostly in the energy, industry, and telecommunication sectors. Turkey and Brazil are by far the largest recipients of EIB supported FDI with a combined inflow of EUR 1.7 bn (45% of total FDI) between 2007-2012. In 2012, five projects (EUR 474 mn) supported EU FDI including mobile broadband network project in Brazil, R&D and start-up of electric vehicle infrastructure and service scheme in Israel, modernisation of a plant producing a redesigned range of light and medium-sized commercial vehicles in Turkey and two projects in Morocco (automotive industry and technology parks), all of which support the development of private sector economic activities in the regions.
3. Actual and Expected Results of EIB operations: REM
3.1. The REM framework
In line with the former frameworks, projects are rated according to three “pillars”:
Pillar 1 rates the expected contribution to the three high level objectives mentioned in section 3.2, as well as to the countries' and EU priorities. As the distribution of Pillar 1 ratings shows, more than half of the operations approved are expected to make an excellent contribution to mandate objectives, meaning that they are not only fully in line with the objectives for that region, but they are also aligned with the countries’ development objectives and the EU priorities for the country and/or region. Those projects that will make a “good” contribution are in line with mandate objectives but not necessarily featuring as high priority in terms of the country’s own development objectives or those of the EU.
Pillar 2 measures the expected results, the quality, and the soundness of projects. Nearly 20% of operations approved received an excellent rating, indicating that results, either in terms of net economic gains to society (for direct projects) or results of intermediated operations are expected to be excellent, i.e. economic rate of return (ERR) greater than 15%. More than 80% of operations are expected to be “good”, with an average ERR of 10% to 15%.
Pillar 3 measures the EIB’s expected additionality which inlcudes, inter alia, how the capacity of the beneficiaries of EIB financing is expected to be reinforced also with technical assistance. About 17% of operations approved this year are expected to have high additionality – typically, extending the longest maturity of debt available to the borrower from the market by more than 100%; matching economic life of the assets to be financed by at least 80%; taking a lead role in project preparation, structuring and/or implementation support. Another 67% are considered good, providing significant additionality – typically, combining significant financial additionality with significant technical and sector contribution or standards and assurance. The 16% of approved operations that were rated as expecting moderate additionality were typically standard products where limited contribution to project design, structuring or implementation was necessary.
The three pillars of the REM are based on a logical framework approach, which serves to show how EIB inputs (e.g. loan), generate outputs (e.g. an electricity transmission line, a training programme), which enable outcomes (e.g. improved access to energy, improved institutional capacity) and, over time, lead to impacts (development of economic infrastructure, regional integration) which are in line with the Bank’s mandate objectives.
Figure 1: REM conceptual Framework
Pillar ratings are assigned according to a four-point scale (4-excellent, 3-good, 2-acceptable, 1-marginal)2 and are based on a series of objectively measurable indicators and guidelines. No overall project rating is provided. An example of the REM framework applied to an EIB project is included in Annex.
The REM framework provides an assessment of project results throughout the lifecycle. At the outset, standardized and monitorable indicators are identified, with baselines and targets that capture expected economic, social, environmental, and governance outputs and outcomes of the operation. Achievement against these specified benchmarks will be monitored throughout the project life and will be reported at two milestones -- at project completion and 3 years after project completion (“post completion”) for direct operations, and at the end of the investment (or allocation) period and end of life of the fund for indirect (intermediated) operations. REM indicators will also be used for ex-post evaluation. REM results indicators are - to the extent possible - being harmonised with other International Financial Institutions to simplify client reporting requirements for co-financed operations.