Explanatory Memorandum to COM(2000)289 - Amendment of Decision 2000/24/EC so as to extend the EC guarantee granted to the European Investment Bank to cover loans for projects in Croatia - Main contents
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| dossier | COM(2000)289 - Amendment of Decision 2000/24/EC so as to extend the EC guarantee granted to the European Investment Bank to cover loans for ... |
|---|---|
| source | COM(2000)289  |
| date | 06-06-2000 |
On 6 March 1995, the General Affairs Council adopted negotiation directives, put forward by the Commission on 24 February 1995 i, for the conclusion of an economic and trade agreement including a financial protocol with Croatia. Subsequently, on 10 April 1995 Council authorised the Commission to open negotiations.
The financial protocol consisted of a special EUR 230 million EIB loan facility for Croatia covering a five-year period from 1 January 1996 to 31 December 2000.
Following the Commission proposal of November 1994 i, Council on 12 June 1995 adopted Regulation (EC) No 1366/95 i amending Regulation (EEC) No 3906/89 in order to extend Phare assistance to Croatia.
On 4 August 1995, the EU presidency on behalf of the Council announced the suspension of both the negotiations with Croatia on the economic and trade agreement as well as Phare assistance to Croatia due to the start of military operations in Krajina.
Recent developments, following the results of the parliamentary and the presidential elections in early 2000, have fundamentally changed the political scenario in Croatia. The new Croatian leadership is seriously committed to put Croatia on a democratic path and to implement the necessary political and economic reforms, in line with the conditions of the EU Stabilisation and Association process for the countries of South-Eastern Europe, to establish a closer relationship with the EU.
These developments have lead to a reassessment of the EU/Croatia relations. The General Affairs Council on 24 January 2000 adopted a specific statement on Croatia and re-iterated its readiness to help Croatia meeting the challenges it faces in developing a closer relationship with the EU.
On 14 February 2000, after meeting the newly appointed Prime Minister of Croatia, the General Affairs Council invited the Commission to prepare a report on the feasibility of opening negotiations for a Stabilisation and Association Agreement with Croatia. The Commission intends to adopt such a feasibility report by June 2000.
As an important step towards the dynamic development of future relations between the EU and Croatia, the joint EU/Croatia Consultative Task Force (CTF) on 15 February 2000 held its inaugural meeting and endorsed specific recommendations regarding progress on the rule of law and respect for minorities rights, the return of refugees, the cooperation with the International Criminal Tribunal for the former Yugoslavia (ICTY), the democratisation of the media as well as economic policy and reform.
The economic outlook for Croatia in the medium term provides significant policy challenges, which are inter alia reflected in the slight contraction of GDP in 1999 (minus 1%), a significant budget deficit contained only due to revenue from privatisation, a substantial current account deficit and a lack of enterprise restructuring. The government will be called to adopt a coherent and comprehensive economic reform agenda, which among other things will require major changes in the policy mix, with a substantial and painful restructuring of the government budget.
- the World Bank Group, which in Croatia currently holds a portfolio of 24 projects amounting to EUR 850 million;
- the European Bank for Reconstruction and Development, which currently holds a portfolio of 33 investments amounting to EUR 560 million;
- the Council of Europe Development Bank, which currently holds a portfolio of two projects amounting to EUR 31 million.
The International Monetary Fund, of which Croatia is member since 1992, provided assistance from 1992 to 1997. Croatia's inoperative extended fund facility arrangement to support the government's medium-term economic reform program for 1997-1999 expired in March 2000. Negotiations on a Stand-By Arrangement failed in 1999, but have been recently resumed and developments are expected by June.
Apart from significant humanitarian aid via ECHO (1995-1999: EUR 293.8 million) and assistance through 'Media', 'Democracy and human rights', 'Demining' and 'Customs' (altogether 1995-1999: EUR 9.39 million), financial assistance by the Union to Croatia up to now has rested on Council Regulation (EC) No 1628/96 of 25 July 1996 ("Obnova") relating to aid for Bosnia and Herzegovina, Croatia, the Federal Republic of Yugoslavia and the former Yugoslav Republic of Macedonia i (under Obnova, allocations to Croatia between 1995-1999 were EUR 45.61 million). The Commission is presently preparing a new framework for extending grant assistance to the Western Balkans, the so-called Community Assistance for Reconstruction, Development and Stabilisation Programme ("CARDS") i, which shall establish a single legal basis for assistance and replace the present Obnova and Phare programmes for these countries.
Contractual relations governing trade and economic cooperation as well as financial assistance are yet to be established with Croatia. Subject to a positive outcome of the abovementioned feasibility report, the Commission will recommend to the Council to authorise the opening of negotiations with Croatia on a Stabilisation and Association Agreement on the basis of negotiating directives. Following the adoption by Council of these negotiating directives, and after the preparation by the Commission of a draft agreement, negotiations with Croatia could commence. The actual process of negotiations is expected to be long-drawn-out due to the complexity of the issues.
Despite the early stages of the renewal of the EU/Croatia relations, it is under the above described conditions crucial to demonstrate the Union's support to Croatia not only in political but also in financial terms, in order to encourage and concretely help the new leadership to implement its political and economic reform programme against the background of a difficult economic and financial situation. The resumption of EIB lending would give a clear political signal in addition to mitigating the initial hardship of economic reform by assisting the country's investment activities in infrastructure and private sector development. Clearly, support by the Community is of the essence for the new leadership to be able to successfully implement the necessary reforms and to achieve increased political stability.
The present communication puts forward a Commission proposal for the extension to Croatia of the general EIB mandate for lending outside the Union laid down in Council Decision 2000/24/EC of 22 December 1999 i.
In order to make Croatia eligible for lending under the general EIB mandate, the mandate and its eastern European envelope shall be increased by EUR 250 million. The mandate for Croatia shall therefore be of the same order as the one originally set out in the financial protocol adopted by Council in the framework of the negotiation directives in 1996 i plus an adjustment allowing for inflation since then (in line with the adjustment made for real stabilisation at the renewal of the 1997 general lending mandate).
The guarantee mandate for Croatia shall, however, be fully integrated into the Central and Eastern European envelope of the general EIB mandate, which includes the Western Balkans, and no specific regional envelope with a precisely earmarked amount shall be established. Croatia will receive EIB loans as one of the countries entitled to benefit from the CEEC envelope. The target amount for Croatia shall be EUR 250 million; the final amount of lending to Croatia will depend upon the availability of suitable investment projects. This approach will help avoiding that parts of specific regional mandates remain unused at the expiry of the regional mandate, eventually resulting in the lapse of such residual amounts - even when taking account of the automatic extension of the mandate by six months. This is in line with the approach pursued for Bosnia and Herzegovina and the Former Yugoslav Republic of Macedonia at the renewal of the 1997 general lending mandate in December 1999.
Accordingly, the overall ceiling of the credits to be opened under Decision 2000/24/EC, currently fixed at EUR 18 410 million, together with the ceiling for Central and Eastern Europe, currently fixed at EUR 8 680 million, shall be increased by EUR 250 million to EUR 18 660 million and EUR 8 930 million, respectively. The durations of the Central and Eastern European mandate and of the overall mandate shall remain unchanged, as shall all the other provisions of the general EIB lending mandate.
As part of the Socialist Federal Republic of Yugoslavia, Croatia in the framework of the former Yugoslavia Financial Protocols benefited from EIB loans amounting to a total of EUR 200 million from loans extended in 1977 and 1990. This amount refers to Croatia's share of large Yugoslavian projects in the power and transport sectors, which after the Yugoslavian split-up were assigned to Croatia.
As of the end of February 2000, the outstanding amount from these loans is EUR 94 million. Croatia is presently regularly servicing its financial obligations from these loans in a timely manner and is fully current on all payments. There are no arrears. Croatia's capacity to service its debt should continue to be good, given its relatively high income level, its record on the capital markets including the fact that it is regularly servicing all its foreign debt, and assuming the implementation of a comprehensive reform programme.
The Bank has indicated its ability and willingness to extend loans in Croatia, applying the usual EIB loan conditions according to its Statute.
The perspectives for the EIB's operations under the current proposal in terms of infrastructure and private sector development are in basic infrastructure and environmental investments, industrial and SME development, housing reconstruction and urban renewal as well as tourism. These perspectives are coherent with the infrastructure projects put forward for Croatia at the Regional Funding Conference of 29/30 March 2000 which was organised by the Commission and the World Bank in liaison with the Stability Pact i.
The proposal is intended to assist Croatia in implementing the necessary political and economic reforms by supporting the country's investment activities in infrastructure and private sector development. The new Croatian leadership is committed to democracy and economic reform and the Commission does not have reason to believe that their political line would change in a way which would necessitate the reassessment of the approach chosen by this proposal. However, Article 1 of Decision 2000/24/EC specifying that the EIB's lending under it is "in support of the Community's relevant external policy objectives" gives the Community safeguard in the event that Croatia would not honour its commitments to make substantial progress regarding political and economic conditionality under the EU Stabilisation and Association process i.
Contents
The present proposal for increasing by EUR 250 million the overall ceiling of the credits, together with the ceiling for Central and Eastern Europe, to be opened under Decision 2000/24/EC, in order to extend the Community guarantee granted to the EIB under this Decision to Croatia, will have a total impact on the guarantee fund for external actions of EUR 14.63 million.
The duration of the mandate, as for any other country in the general mandate, will end on 31 January 2007. The provisioning for this amount, however, will be spread over the four years 2000 to 2003 to take account of the probable scheduling of loans.
The action for Croatia was introduced in the outlook for the provisioning of the guarantee fund following the adoption by Council of the negotiation directives for the conclusion of an economic and trade agreement with Croatia in 1996. The action was suspended before it was completed in Council, but it has still been carried over in the outlook for the guarantee fund since.
Currently and before taking into account the present proposal, the margin remaining in the reserve for the Guarantee Fund for 2000 stands at EUR 27.84 million, taking into account all external actions already decided or proposed as well as those that can be foreseen with some certainty. The current proposal will bring this margin down to EUR 20.53 million. This leaves still some room for manoeuvre for other external actions during the year.
As for the following years, the yearly provisioning required for the current proposal in light of the reserve available in the guarantee fund is manageable, other things being equal.