A concessional loan is a loan with terms that are significantly more favourable than the terms of loans at market conditions. The IMF calculates the concessionality level as the difference between the loan’s nominal value and the sum of the discounted future debt-service payments to be made by the borrower, expressed as a percentage of the loan’s nominal value.

EBRD:

European Bank for Reconstruction and Development

The EBRD is a publicly owned development bank based in London that promotes transition to open, market-based economies in countries from central and eastern Europe to central Asia and the southern and eastern Mediterranean. It provides project financing for banks, industries and businesses, both new ventures and investments in existing companies. It focuses on the private sector but also works with publicly owned companies.

EDF:

European Development Fund

The EDFs are the main instrument for providing European Union aid for development cooperation to the African, Caribbean and Pacific States and overseas countries and territories. The partnership agreement signed in Cotonou on 23 June 2000 for a period of 20 years (‘the Cotonou Agreement’) is the current framework for the European Union’s relations with these countries and territories. Its focus is on reducing and eventually eradicating poverty.

EIB:

European Investment Bank

The EIB is the European Union’s bank. It is owned by and represents the interests of the European Union Member States and works closely with other EU institutions to implement EU policy by providing finance for investment projects.

EU Delegation:

The EU is represented through 139 EU delegations and offices around the world. The EU Delegations are part of the European Commission structure but serve EU interests as a whole.

EuropeAid:

Directorate-General for Development and Cooperation — EuropeAid

IFCA:

Investment Facility for Central Asia

IFP:

Investment Facility for the Pacific

IMF:

International Monetary Fund

ITF:

EU–Africa Infrastructure Trust Fund

KfW:

Kreditanstalt für Wiederaufbau

KfW is the promotional bank of the Federal Republic of Germany and is based in Frankfurt. The development branch of the bank carries out German financial development cooperation on behalf of the government.

LAIF:

Latin America Investment Facility

MRI:

Mutual Reliance Initiative

The MRI is a formal framework set up in 2009 by AFD, EIB and KfW with the purpose of increasing effectiveness in co-financing development projects. Its main features are the delegation of most tasks to the lead financier of an operation and the mutual recognition of procedures.

NIF:

Neighbourhood Investment Facility

ROM:

Results Oriented Monitoring

The ROM system is a review tool for projects and programmes, which provides recommendations for improvement.

WBIF:

Western Balkans Investment Framework

Audit scope and approach 14

The Court assessed the effectiveness of blending the regional investment facility grants with loans from financial institutions to support EU external policies by focusing on the following two questions:

(a)

Have the regional investment facilities been set up and managed well?

(b)

Did the use of blending yield the intended benefits?

This audit, which was the first by the Court in this particular area, was carried out between May and December 2013 and looked at how the regional investment facilities had performed since their creation. The Court focused its audit on the EU financial allocations and the role of the Commission. The audit work consisted of an analytical review, interviews with Commission staff, a survey of 40 EU delegations 11

22 EU delegations responded to the survey.

, visits to the four main financial institutions and a detailed examination of a sample of projects. The sample1 12

The Court selected the projects randomly by monetary unit sampling.

consisted of 15 projects that received grants from the ITF (see Annex VI) and 15 projects that had received grants under the Neighbourhood Investment Facility (NIF) (see Annex VII). These two regional investment facilities cover both the EDF and the EU general budget, and represent more than 70 % of the grants approved by the regional investment facilities by the end of 2013. They are also the oldest investment facilities and thus have the most advanced projects. Because of their particular characteristics, the audit also included an examination of eight projects relating to the creation of sub-facilities (see paragraph 11) for financing actions with the involvement of local financial institutions (see Annex VIII).

Observations The regional investment facilities have been set up in an appropriate manner, but the Commission’s management is still affected by shortcomings 16

The Court examined whether the overall set-up of the regional investment facilities and the procedural framework were appropriate. The audit also focused on the procedure for assessing grant applications, the justification for the projects selected and the appropriateness of the type and amount of the grants. Finally, the implementation of the grants and monitoring of the projects were also examined as part of the audit.

The set-up of the regional investment facilities is satisfactory and the regulatory and procedural framework is improving 17

It is appropriate to have eight different regional investment facilities instead of one global investment facility because:

(a)

the facilities have different structures for combining the funding from the various donors involved and channelling it to the projects;

(b)

EU funding to the geographical investment facilities comes from different financial instruments, which have different legal bases;

(c)

the allocation of responsibilities within the Commission and the financial institutions is geographically based;

(d)

the parties represented in the various governance bodies (see paragraph 6) vary from region to region.

The objectives and priority sectors under all the regional investment facilities are aligned with global EU policy objectives. In the case of the ITF, only projects with a regional dimension were eligible, which limited the potential for blending.

The Financial Regulation 13

Regulation No 966/2012 of the European Parliament and of the Council of 25 October 2012 on the financial rules applicable to the general budget of the Union and repealing Council Regulation (EC, Euratom) No 1605/2002 (OJ L 298, 26.10.2012, p. 1).

recently introduced specific rules on blending mechanisms 14

A new Title VIII, Financial Instruments, was introduced.

. These rules, applicable from 2014 onwards, significantly improve the regulatory framework by defining concepts and principles, simplifying the management modes used for blending, and providing the legal basis to use innovative financing tools. The Commission is currently further improving the framework by preparing guidelines for the management of the regional investment facilities 15

Practical guidelines that have helped partner countries to understand the requirements connected with WBIF project applications and submissions have existed since 2012.

While the Commission has made some progress in this area, projects were generally initiated by financial institutions with the Commission responding to these proposals and the ensuing grant requests, rather than actively identifying operations.

The secretariat of the ITF is operated by the EIB (see paragraph 8). In view of the fact that the EIB is a project financier and irrespective of the fact that the secretariat is ring-fenced from the EIB’s banking activities, this is an issue that needs to be addressed.

Suitable projects are selected but the Commission’s assessment does not focus adequately on the added value and amount of EU grants Selection of projects for grants assistance 22

The process for identifying and selecting projects enabled sufficient grant applications to be made in order for the funding allocated to be committed within the planned timeframe. The projects approved were relevant to the development needs of the regions and countries concerned.

To request a grant from a regional investment facility, financial institutions need to submit a grant application form 16

The ‘Standard Project Submission Form’ in the case of the geographical investment facilities managed by EuropeAid, the ‘Project Grant Application Form’ for the WBIF and the ‘Cover Sheet’ for the ITF.

. Although they became longer and more detailed over time, the information provided by the financial institutions before grant approval was too general for appropriate decision-making by the executive bodies of the regional investment facilities. Quantified data were lacking on loan conditions, concessionality (see Box 1) and viability (see Box 2 for an example). Furthermore, the expected added value of providing a grant was not well formulated, structured or quantified. Box2 ITF project — Power rehabilitation in Benin and Togo

The project concerned the construction and refurbishing of electricity transmission lines and substations for a total of 85,7 million euro. It aimed to improve the reliability and efficiency of the electricity supply in Benin and Togo. The ITF granted an interest rate subsidy of 12,25 million euro which enabled the concessionality level of 35 % to be met, as required by the IMF (see Box 1).

Insufficient information provided by the financial institution

The grant application form provided by the financial institutions does not include figures on the financial and economic viability of the project, concessionality and the alignment of the project with the countries’ needs even though it was all available in the financial institution’s files. Furthermore, the form was unclear about the expected added value of the ITF grant. Without this information, the Commission could not carry out an appropriate assessment of the grant request.

An underlying reason why the information provided by the financial institutions was limited was that projects were often still at the preliminary stage when the grant applications were made. The financial institutions decide on their loans at a later stage, i.e. after the feasibility study. Their decisions were therefore based on better, more detailed information than the Commission had when it assessed the grant applications.

Although there is no particular guidance for this, the Commission has improved its reviews of grant applications over time. However, the reviews remain largely based on the information presented in the grant application form and are therefore limited by it. For the projects examined, the reviews paid little attention to concessionality, debt sustainability, the grant amount or economic viability. The Commission has not established criteria for the economic viability. In fact, it has no clear rules or guidance as to which type of development investments should be financed by either grants, loans or a blend of the two.

The Commission’s reviews progressively involved the relevant EU delegations by consulting them when assessing grant applications. The Court’s examination of projects and interviews with delegation staff indicated that this involvement was still insufficient, in particular during the identification phase. Only 59 % of the 22 EU delegations that responded to the Court’s survey said they were involved in the identification rocess of blended projects. This limited the extent of ownership of projects by the delegations. However, once financial institutions applied for a grant, the Commission asked most of the delegations to provide their views on the projects selected for their respective countries.

The average number of days from introduction in the pipeline to final board approval is 215 for the ITF, 257 for the LAIF and 290 for the NIF 17

The information necessary to alculate this was not available for the other regional investment facilities.

. In the LAIF and the NIF, each project needed provisional and final approval at both technical and board level, which was time-consuming. This procedure was somewhat lighter for the ITF, which did not require provisional approvals 18

Although the possibility exists for financial institutions to request a so‑called ‘Cleared in principle’ from the Executive Committee.

Selection of grant type and amount 28

The grant types chosen (see paragraph 1) were appropriate for the added value they intended to achieve. Only the ITF provided interest rate subsidies; the other regional investment facilities did not, even though this was permitted by their regulatory and contractual framework.

Eleven of the 30 grants examined by the Court aimed to ensure that the loan met the minimum concessionality level of 35 % required by the IMF (see Box 1). For seven of these 11 grants, the Court could not obtain evidence from the Commission or the financial institutions showing that the concessionality level was not higher than needed to meet the IMF requirement. In one case, the concessionality level exceeded the minimum of 35 % without the Commission being informed of it.

There were no established criteria for setting the amounts of grants where the main objective was other than compliance with IMF requirements. In the cases examined, it was often unclear how amounts had been decided upon. Furthermore, the Commission did not consider it necessary to carry out a rigorous verification of the way the grant amounts requested by financial institutions have been calculated.

In theory, financial institutions could set an interest rate that is higher than normal and have it accepted by the beneficiary by including a grant in the financial package. Consequently, there is a risk that the benefit of grants is not fully transferred to the beneficiary. Although the public development financial institutions are responsible for providing the most appropriate financing conditions, neither the Commission nor the Court can exclude that this risk may materialise as they don’t have the means to examine this due to the confidentiality of how interest rates are set 19

As already observed by the Court in paragraph 3.2 of Special Report No 3/99 on the management and control of interest rate subsidies by the Commission (OJ C 217, 29.7.1999, p. 1).

The Commission makes advance disbursements that are unnecessarily high 32

Once grants have been approved and agreements signed, considerable advance disbursements were made. The Commission had the funds available and transferred these before they were needed. The beneficiary used these funds slowly because it took time to set up the project and contract the necessary services and works and because of the duration of implementation. The funds transferred remained therefore unused for long periods of time, contrary to the principles of sound financial management (see Box 3 for an example). As a consequence, the budgetary outturn does not reflect the actual underlying activity of the facilities.

For the ITF, the Commission makes transfers to the fund and then the EIB, as manager of the fund, transfers grants from the fund to the lead financial institution. The ITF’s executive board approves grants for a total that does not exceed the cash balance available in the fund. With this prudent approach, the ITF ensures that it will be able to meet its commitments. As it takes time before project implementation actually starts, the beneficiary will disburse the respective amounts only some years later. As a result, a large amount of money lies dormant in the fund’s bank account for years (see the Figure). Box3 NIF project — Second phase of the Tunis fast railway network

This 550 million euro project finances the construction of priority sections of two new lines of the high-speed urban railway network of Tunis. The NIF grant of 28 million euro provides technical assistance to the contracting authority and the supervisor.

Unnecessarily high advance disbursement of the NIF grant

In 2010, the Commission transferred the entire grant to the beneficiary. The financial institutions disbursed their loans only when the beneficiary needed the funds. As the project experienced significant implementation delays, the first loan disbursement took place only in 2013. Due to the delays, 24,5 million euro of the NIF grant was left unused for more than 3 years.

Figure ITF Cash flow movements Source: ITF Secretariat.