31998D0828(01)

BOARD OF GOVERNORS Increase in the capital of the EIB and related decisions (98/C 269/05)

The Board of Governors of the European Investment Bank, at its annual meeting on 5 June 1998, unanimously adopted the following decisions:

- the Board of Governors of the EIB decided to increase the Bank's subscribed capital from ECU 62 013 million to ECU 100 000 million,

- the paid-in capital shall with effect from 1 January 1999 rise to ECU 6 000 million, or 6 % of the subscribed capital of ECU 100 000 million; the increase in the paid-in capital shall be effected, as of 1 January 1999, through a transfer of ECU 1 348 014 839 from the Bank's free additional reserves,

- the increase in the callable capital shall in part take effect subject to formal completion of certain parliamentary procedures at the national level; consequently, the Bank's total subscribed capital shall rise as from 1 January 1999 to at least ECU 95 549 597 250, in which case the remainder shall take effect as soon as the required formalities have been completed,

- of the abovementioned amount of free reserves, a further ECU 3 798 700 000 shall be transferred from the free additional reserves to the statutory reserve, so as to establish this at ECU 10 000 million, or 10 % of the ECU 100 000 million subscribed capital,

- based on a review of the Bank's requirements of own funds, the Board of Governors further unanimously decided to distribute to the Member States, as an exceptional payment, pro rata of their contributions to the Bank's subscribed capital, ECU 1 000 million, to be funded as to ECU 676 795 744 from the unallocated earned surplus remaining from 1996, the balance of ECU 323 204 256 to be drawn from the ECU 1 105 169 722 operating surplus for 1997,

- on 20 August 1997, as part of its endorsement of the Amsterdam special action programme (Official Journal of the European Communities C 10 of 15 January 1998), the Board of Governors approved the appropriation from the Bank's unallocated earned surplus of ECU 200 million for financing sound projects extending the scope of the Bank's financing as specified in the said decision, forming part of an overall amount of up to ECU 1 000 million set aside for that purpose for the period ending in the year 2000. The Board of Governors has now decided to make a further allocation of ECU 300 million for the said purposes from the 1997 surplus,

- in connection with the capital increase, the Board of Governors has endorsed the following strategic framework of the Bank.

ANNEX

THE STRATEGIC FRAMEWORK FOR THE BANK

1. Introductory background

The last increase in the Bank's capital (aside from the upwards adjustment to ECU 62 billion made as a result of the accession of Austria, Finland and Sweden in 1995) was its doubling to ECU 57,6 billion in 1990. All recent increases (as opposed to adjustments), have also doubled the Bank's existing capital (1978, 1981, 1986). In 1990, the new ceiling on lending represented by this amount (namely 250 % of subscribed capital) was expected to suffice until the end of 1995: in the event, operations have continued for two years beyond the prospective horizon for the lending ceiling.

Since 1990, Bank lending has risen, in current terms, from a total of ECU 13,4 billion (1990) to ECU 26,2 billion (1997). This represents an average annual growth of 10 %. Within the total, operations outside the Union rose from ECU 0,7 billion in 1990 to ECU 3,2 billion in 1997. Looking at the balance sheet, loans outstanding increased from ECU 61,6 billion to ECU 142,4 billion.

The increase during this period reflected a number of fundamental policy and market developments affecting the Bank, including the integration of the East German Länder and the accession of three new member countries. As in the past, several of the developments took their origin or were formalised in a number of European Councils. The Edinburgh European Council at the end of 1992 decided the establishment of the ECU 5 billion Edinburgh facility, with a focus on trans-European networks (TENs) and the environment. It also gave a decisive impetus to the process, launched by the Bank and the Commission, which ultimately led to the creation of the European Investment Fund, in partnership with the banking sector. Another important outcome was closer cooperation between the Bank and the Commission on the Cohesion Fund and the Structural Funds, now in their turn about to be reformed.

In mid-1993 the Copenhagen European Council decided to increase the Edinburgh facility by ECU 2 billion, extending its duration and adding an ECU 1 billion subsidised facility for stimulating investment by small and medium-sized enterprises (SMEs) to support employment. In December of that year, the Brussels European Council saw the focus shift to growth, competitiveness and employment, with the emphasis for the Bank on investment-intensive transport and energy TENs and the environment. In 1995, TENs financing was intensified with the process of prioritisation instigated by the Essen Council.

In 1997, the Amsterdam European Council invited the Bank to step up its activities, with special reference to a number of sectors, in order to promote the creation of employment in the European Union. Accordingly, the Bank introduced its Amsterdam special action programme (ASAP), involving:

- the creation of a special SME window, designed to provide support for new instruments to help finance high-technology and high-growth small and medium-sized enterprises; this can be backed where appropriate by recourse to the annual surpluses of the Bank, up to a ceiling of ECU 1 billion,

- the development and reinforcement of EIB activity in the sectors of education, health, urban environment and environmental protection,

- a new impetus to the financing of trans-European networks and other large infrastructure networks.

The Special Luxembourg Council on employment in November 1997 confirmed the steps already taken and encouraged the Bank to maintain and reinforce the momentum of this programme.

On the external side, the activity of the Bank over the period in question has been characterised by the renewal of various mandates, for the African, Caribbean and Pacific Countries (Lomé IV-B), the Mediterranean (including also METAP) and the countries of Central and Eastern Europe (CEEC). To these have been added new theatres of operations, notably the countries of Asia and Latin America, and South Africa, and most recently the preaccession facility for the CEEC accession countries and Cyprus.

Against this background, the Board of Directors has discussed the strategic framework for the period expected to be covered by the proposed increase in capital.

2. Bank strategy

The Bank's strategy will need to develop in line with changing circumstances. However, the main pillars of the Bank's strategy for the duration of the new capital increase that have emerged from these discussions are:

- concentrating the Bank's effort on 'peripheral economic areas`, in accordance with its principal mission to support economic convergence and integration. The main priority is to support lagging regions within the Union and the integration of those countries seeking membership of the Union,

- also continuing to support key areas of EU policy, as authorised from time to time by its governing bodies, taking account of policy decisions or requests by the European Council, such as the development of TENs, international competitiveness, small and medium-sized enterprises, energy and the environment, and financing operations under specific mandates or other agreements in support of EU external cooperation and development policies.

This broad strategy was agreed by the Board in January, 1997. As mentioned above, its main thrust has been reinforced by recent developments:

- there has been increasing recognition that the fiscal and monetary disciplines of EMU must be accompanied by a concerted policy to reduce unemployment, including structural changes and increasing competitiveness. The Bank has, among other things, started implementing ASAP in support of the European Council's resolution on growth and employment,

- the European Council's decisions on enlargement have given a sharper focus to the Bank's role in this area, and the Bank has now introduced its preaccession lending facility for the candidate countries.

In the immediate future, within the above broad strategy, the Bank's top priority is to support economic and monetary union. On the lending side, this is reflected in the ASAP programme. As regards its borrowing strategy, the Bank will continue its innovative euro policy. This involves assisting with the establishment of euro benchmarks, investor diversification, and the creation of an organised market for EIB eurobonds. Diversification of markets, particularly in the Central and East European Countries, will be developed together with innovation into attractive, cost-effective products.

3. Priority-setting in an evolving environment

While financial sector integration over time should have the effect of further increasing the access of project promoters to alternative sources of capital, there will remain a significant role for the Bank in the coming years. Investment levels have fallen, in part due to the macroeconomic adjustment of preparing for EMU, and public investment is likely to remain constrained. However, the Bank can help to support investment growth by providing low-cost, long-term finance, and through lending to new forms of public-private partnerships.

Owing both to its own resource constraints and to the principle of subsidiarity, an assessment of the Bank's priorities is needed. These must evolve with time, but there are a number of general observations that can be made.

It is important for the Bank to focus on those sectors that are of highest priority for the EU, and the projects financed should be particularly relevant for attaining these goals. However, this is not sufficient to ensure the Bank contributes added-value. Under its Statute (Article 18(1)), the Bank lends to the extent that funds are not available from other sources on reasonable terms. An additional contribution from the EIB comes about when, in complement to other sources of finance:

- it can demonstrate in project financing proposals that an EIB loan is more appropriate than other sources for the project in question (for example, when the project has a long economic life, thus justifying a long maturity),

- the Bank advances or improves the project in some additional way. This can come about because its presence lends comfort to private investors regarding a project's regulatory risks (the EU 'stamp of approval`). This also applies to the political risks of lending outside the Union. In this way the Bank can act as a catalyst for other sources of finance, not least in public-private partnerships. Equally, the technical expertise of the Bank can itself add value.

In developing its future lending strategy, as to both sectors and regions, the Bank should be guided by the above principles. The Bank should seek to focus on those areas of highest added-value, while lower emphasis should be accorded to projects of lesser added-value. When adequate funding on appropriate terms is available from the market and the Bank's intervention does not otherwise enhance the speed of implementation or quality of the project, the Bank should leave the financing of the project to other sources in accordance with Article 18(1) of the Statute.

The evolution of such priorities will be discussed with the Board on an annual basis in the context of a forward-looking corporate operational plan, to be approved by the Board. This is explained in more detail below.

4. Subsidiarity and cooperation with the financial sector

Within the above framework, cooperation with the banking sector and other financial intermediaries operating on the capital markets is one of the guiding principles for implementing the Bank's strategy. Indeed, the development and diversification of this cooperation will remain a priority for years to come. This reflects both the goal of subsidiarity and straightforward practical considerations.

In order to maximise its leverage, the Bank will act in all circumstances according to the principle of complementarity and will only fund that share of the project deemed necessary to fulfil its agreed policy objectives. The Bank will work even more closely with other banks to make the partnership more efficient, and will seek (for example, by developing new products) to enhance its catalytic role.

This may include encouraging the access of borrowers to capital markets as well as collaborating in the financing plan with commercial lenders. For example, the Bank will assist regional banks and specialist institutions (such as for SMEs) as they face the challenge of adapting to the single market in financial services. Reflecting the EIB's primary mission, this would be particularly relevant in assisted areas. A similar role could be played in the preaccession countries, or other neighbouring countries of the Union. In developing this collaboration, as with other spheres of its activity, the Bank will pay careful attention to avoiding any distortions to competition. One consequence of the annual discussion of priorities is that, for investments of lesser added-value, the Bank would reduce the proportion of project costs that it finances. The complementarity of the Bank's loan will be outlined fully in project documentation.

The practical need for cooperation with the financial sector applies generally, but is most prominent in the case of lending to SMEs. Indeed, in terms of cost-effectiveness the global loan instrument is the only viable and economical mechanism it can deploy to support a large number of SMEs. However, the global loan approach will be reviewed in order to ensure that, among other things, the maximum benefits possible are received by the ultimate recipients of SME financing. In the medium term, the Bank's approach to SME finance could be further enriched through experience gained with alternative instruments under the ASAP SME window.

Of course, cooperation with the financial sector extends to the liability side of the Bank's balance sheet, through its financial operations. Every year, reports on the overall cooperation between the Bank and the financial sector, for both lending and borrowing activities, will be addressed to the Board of Directors.

5. Partnership with the EIF

An additional concrete example of the philosophy of partnership is the creation of the European Investment Fund, as the shareholding structure of the EIF brings together both public and private partners in an innovative way. The development of the partnership between the Bank and the Fund is one of the EIB's priorities. This was exemplified in the establishment in October 1997 (following the Amsterdam European Council) of the European technology facility to act through specialist venture capital funds in support of technology-oriented and high-growth SMEs.

The Bank and the Fund will continue to pursue the reinforcement and widening of their cooperation. In order to make this as effective as possible, the Bank will rationalise its working relationships with the EIF, while ensuring that it still provides the greatest possible operational support for the Fund.

Moreover, to support more effectively key EU policies, the Bank will consult with the EIF on the possibility of enhancing its operations in the following two directions: firstly, it will examine the possibility of extending its sphere of activity to the environmental sector; secondly, within the framework of the preaccession facility, it will explore the possibilities for the selective extension of operations in Central and Eastern Europe to include trans-European networks between the countries of the region. Subject to the views of the Fund's other shareholders and the decisions of its general meeting, proposals along these lines may in due course be brought forward.

6. Cooperation with the Commission

Within the broader EU context, lending by the Bank for regional development is complemented by EU budgetary resources. Coordination of these two sources of funds, and hence cooperation between the Bank and the Commission, is essential for effective support for the regions.

Both the Bank and the Commission already cooperate closely, but they have looked at ways to improve their effectiveness in the next decade. Improvements to operating procedures by both institutions will make for even better collaboration in the future. This is a timely issue since the Commission has produced its Agenda 2000, and the next round of negotiations with Member States concerning the Structural Funds is getting under way.

The Bank, while taking into account the respective roles of the regions and the Commission in this process, has proposed the following specific measures, approved by the Board of Directors:

- the Bank will seek to strengthen its participation in the preparatory programming and negotiating stages of structural operations,

- the Bank will seek to increase consultation between the institutions on co-financing operations. Subject to any considerations of commercial confidentiality, the Bank will make its project analysis available to the Commission for these projects,

- the Bank will continue to offer its technical services to the Commission on a cost-covering remunerated basis. Such services are already used to appraise projects for the Cohesion Fund, and, as appropriate, this could be extended to selected ERDF or TEN projects.

7. Implementing the strategy: Pricing policy

The Bank achieves its basic objective of promoting the balanced development of the European Union by making available in all Member States, and especially the less prosperous regions of the Union, the collective benefits of its financial strength. Its pricing policy is based on the principles of non-profit seeking (meeting obligations and covering expenses, Article 19(1) of the Statute), non-discrimination, and transparency. Within the specific ASAP mandate, an additional guideline is the goal of achieving an appropriate balance between risk and remuneration.

An important evolution in the operations of the Bank is that the variation in appraisal costs between projects is increasing, and this trend may well accelerate over the coming years. The Bank has already adapted its uniform pricing approach to some degree to take into account the varying costs of different categories of loans (notably a lower margin for large loans and for loans with repeat borrowers). It proposes to modulate prices further, in particular through adding a further mark-up for certain high cost operations. These include:

- structured/project-finance when obtaining privileged status as secured lender presents difficulties for the Bank,

- and certain corporates that are only able to offer security or collateral which is less immediately recoverable.

The Bank's Statute requires that each individual operation carry adequate guarantees. The Bank continues to believe that for normal operations there are sufficient ways to control risk by externalising (i.e. mitigating or transferring) it to third-party guarantees or other securities. In this way, the overall price of EIB finance also reflects credit risk. Indeed, externalising the risk of projects is also an important source of collaboration between the EIB and the commercial banking sector.

However, there are certain categories of projects, within guidelines and limits to be agreed by the Board of Directors (such as some TENs, public-private partnerships, or corporate and structured project loans) and workouts where it may not be possible to externalise some elements of risk in accordance with the Bank's normal practice. In these cases, and subject to maintaining an acceptable risk profile, the Bank will reconsider its approach and, where appropriate, include a premium in the mark-up. The Bank will develop more specific proposals on the above guidelines, limits and other aspects, as soon as possible. However, it is clear that there will be no change as to the assessment of sovereign risks for Member States, and thus no discrimination on grounds of risk between this group of borrowers.

8. Operations outside the European Union

The Bank's operations outside the Union are based on mandates from the European Council. The general approach to such lending was last reviewed by the Board of Governors at the annual meeting in 1994, when the key issues pinpointed were the indicative ceiling on operations of 10 % of the Bank's average overall activity and the need for further reflection on the question of the Union's guarantee.

An important subsequent development has been the establishment of the preaccession facility for Central and Eastern Europe. This has no EU budgetary guarantee, and is not included in the 10 % guideline mentioned above. In general, a system of risk-sharing by the Bank has been established for a range of operations.

The immediate priority is to execute existing mandates: Lomé (for the African, Caribbean and Pacific countries), South Africa, Asia and Latin America, Central and Eastern Europe, the Mediterranean. These will progressively come to an end over the next two years, and the governing bodies of the Bank will have to consider its overall role in supporting EU external cooperation and development policies.

These issues cannot be decided immediately, but, at the present stage, there are a number of principles for guiding future strategy discussions. For example:

- the Bank will continue to be the financial institution of the Member States and its core activity should be within these States or to their direct benefit. Lending outside the Union will be carried out under specific mandates from the Member States and should remain a complementary activity,

- it will pursue close collaboration with the Commission, (in conformity with the Union's overall development strategy in the individual country or group of countries concerned) and with other international financial institutions and national agencies. It will seek to coordinate its operations and project conditionality with those agencies,

- it will contribute to the development of the private sector, including the building of appropriate financing institutions and support to SMEs. As for lending within the European Union, it will finance investments to the extent that funds are not available from other sources on reasonable terms (Article 18(1) of the Statute),

- the Bank will require adequate guarantees from budgetary sources, though it will continue to share risks in appropriate cases.

The observations made in earlier sections regarding additionality, maximising leverage, and partnership with the commercial banking sector also apply, mutatis mutandis, both within and outside the Union. Among other things, the 10 % indicative ceiling on outstandings for loans outside the Union will have to be considered in line with lending policies. Further discussion of these issues will take place with the Board of Directors in anticipation of the next round of external mandates.

9. Lending priorities and the effective use of the Bank's resources

The evolving economic and financial environment means that the implementation of the broad strategy must be carefully monitored and adapted in the light of economic and financial developments as well as the Bank's past performance. To ensure the contribution to EU policies is maximised, and to make the most effective use of its resources, the Bank will develop a forward-looking corporate operational plan for annual discussion with, and approval by the Board. This will include sectoral analyses of lending both within and outside the Union. The operational plan, to be updated on a rolling basis, will provide a concrete framework for discussing priorities and objectives, and for setting new priorities and objectives on an ongoing basis, bearing in mind those tasks that may increasingly be left to other sources of finance. This would also provide a suitable context in which to review the annual report on the cooperation with the financial sector mentioned above.

The corporate operational plan will provide a framework for performance evaluation. It will integrate feedback from the analysis of the quality of the project portfolio according to a set of performance criteria and the findings of the Bank's Evaluation Unit. This could include ways of improving operational procedures, for example a programme approach in some areas. Over the last few years, the Bank has considerably developed its systems to monitor its performance as a financial intermediary. The Bank will continue to develop systems to monitor activities, including benchmarking its financial operations and the comprehensive analysis of risks.

Taking a longer-term perspective, the Bank will also consider further its capital and reserves requirements in preparation for a review with the Board of Directors in 2001 including a review of key ratios.

A related issue to the medium-term outlook is the resources needed to achieve the Bank's objectives. With a small staff and the objective of keeping administrative expenses firmly under control, the Bank must continue carefully to identify its human resource requirements, and appropriate staff skills should be developed in line with the strategic priorities. The Board's discussion of the corporate operational plan referred to above will also provide a framework for setting strategic orientations regarding the Bank's allocation of resources.