Academy of Economic Studies

Faculty of Business Administration with teaching in English

European Investment Banks activities in Romania

Authors Turcanu Liviu Andrei Osmat Sari Seria B Group 138/137

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EIB financing in Romania

After twenty years of financing projects fostering the integration of Romania into the European Union, the European Investment Banks lending operations now cover all of the countrys economic sectors, ranging from basic infrastructure to manufacturing and services, including support for small and medium-sized companies through local financial institutions, and the development of a knowledge-based economy.Since 1990,the EIBs lending in Romania has reached almost 8 billion euro to finance investment projects relevant for meeting EU accession criteria.Now that Romania has joined the EU, the EIB expects to play an important role in supporting the countrys successful development within the Union; building not only on the Banks past experience in Romania but also with previous enlargements.
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EIB Financing in Romania The EIB is the European Unions financing institution,set up in 1958 under the Treaty of Rome.Its mission is to contribute to the realization of the policy objectives of the European Union by providing long-term finance for sound investment projects.The 27 EU Member States,including Romania, jointly own the EIB.Within the European Union,the EUs policy objectives and the Banks lending priorities are: Regionally balanced economic development and social cohesion in the Union through support for the economically weaker regions Support to investments of small and mediumenterprises (SMEs) Environmental protection and improvement Strengthening Europes competitiveness by supporting research,development and innovation Extension of trans-European transport and telecoms networks Sustainable, competitive and secure energy Regional economic development and social cohesion Financing projects contributing to economic progress in EU assisted areas remains the key activity of the EIB. The Bank aims to ensure that 40-45%of its total lending inside the EU goes to regional policys priority regions.The whole territory of Romania consists of regions qualifying for EIB loans ass well as for allocations from the European Unions Structural and Cohesion Funds.All of the Banks projects in Romania thus meet the goals of economic and social cohesion and the Bank has been active in support of projects throughout the country.This includes infrastructure and other projects in Bucharest but also across Romania,While supporting the extension of the Bucharest Metro system (total loans of EUR 278 M) and district heating and other investments in the capital,the Bank has also provided loans totaling EUR 180 M for projects in 32 cities and counties for municipal investments,New investments in the regions also include a recent EUR 50 M loan to Pirelli for investments in Slatina and projects directly targetingsocial cohesion such as rehabilitation of 1400 pre-university schools all over the country (EUR 131mil).The Bank provided also a total of EUR 550 million to implement short term construction measures as well as mediumterm prevention projects to reduce the impacts of natural disasters in Romania and to reconstruct damages caused by the recent devastating floods in the country.

Financing projects of SMEs To increase the access of small and medium-sized enterprises (SMEs) to long-term financing, the EIB closely cooperates with well established financial institutions with market expertise inRomania,especially in providing those that service small and medium entrepreneurs through a well-developed network of branches.Through these intermediary banks, the EIB co-finances smaller projects, mostly in the areas of industry and services, including tourism, energy and energy savings, environmental protection,as well as infrastructure in the health, education,urban renewal and social housing sectors.Since 1990, EIB loans to partner banks in Romania to finance small andmedium-sized investments have reached EUR 272 million.In 2006,the EIB provided intermediated loans to Banca Commerciala.Romana (EUR 50 million) and Bancpost (EUR 20 million). R&D and innovation In line with the Lisbon strategy of making Europe an innovative and competitive region, the Bank offers enhanced support for investments in technology, technology networks, R&D and innovation under a special programme called the Innovation 2010 Initiative. To support the implementation of the Lisbon Strategy,the EIB has so far lent some EUR 45.7 billion overall since the start of the current decade. Trans-European networks Rehabilitation and extension of trans-European infrastructure,notably transport corridors, is crucial for the successful development of Romania within the EU single market. Investment in infrastructure is important for removing bottlenecks and barriers to the efficient movement of people and goods, enhancing safety and safeguarding the environment.Up to the end of 2006, the Bank.Provided 3.1 billion euro for the rehabilitation and extension of the Romanian transport network.The EIB canal so co-finance projects.EIB financing in Romania implemented and operated with the help of public-private partnership (PPP) financing schemes.The EIB is co-financing sections of the motorway on the Pan-European Corridor IV in Romania to the tune of 660 million euro:The Bucharest-Constanta Motorway (withan EIB loan of 210 million euro),Constanta Cerna Voda (250 million euro) and the Arad -Timisoara section (200 million euro). On the same transport corridor the Bank has provided 300 million euros for the upgrading of the railway section between Simeria and the Hungarian border.For the development of the countrys local (not trans-European) transport sector, the EIB provided 450 million euro in 2006 for the rehabilitation of several sections of the national road network, thus bringing total lending for national roads to 1.3 billion euro. Memorandum of understanding between EIB and Romania In October 2006 the EIB and the Republic of Romania signed a cooperation agreement setting a framework for the EIBs support to the countrys investment programme over the next years.While financing will be based on specific project proposals,the agreement indicates that such financing may be in the order of 1 billion euro per year and will be adjusted in line with evolving needs.The overall cooperation between Romania and the EIB focuses on the following development objectives: Offering financing for national priority investments and setting up dedicated co-financing facilities and new mechanisms for investments that come under the EU Cohesion and Structural funds facilities;

 Cooperate closely in the implementation of projects financed by the Bank using the technical and sectoral experience of the Bank as well for the effective absorption of EU grants. This includes offering a dedicated pool of expertise for the preparation of selected Cohesion and Structural Funds projects through the JASPERS National Action Plan initiative; Environmental protection Substantial investment is needed inenvironmental protection and improvement in Romania, notably to help the country achieve EU environmental standards in terms of air quality, drinking and Waste water management, and solid urban and industrial waste processing.The EIB plays an important role in this area.In 2006 the Bank supported the construction of the Bucharest Glina Wastewater Treatment Plant (25 million euro) and continued to finance the infrastructure development programme for small and medium-sized towns that started in 2005 and totals to 42 million euro.In addition, in 2006 the EIB provided 41 million euro for the rehabilitation and expansion of sewerage systems in six Romanian municipalities. Framework for future cooperation Improve the sources of funding for SMEs through the JEREMIE programme with the participation of the Banks subsidiary EIF,which is specialised in venture capital and guarantees; Support sustainable investments in city areas through the JESSICA programme; Assist the Government and private partners in the structuring and implementation of PPP projects. EIB Expertise to Support to PPP Projects Over the years, the EIB has gained significant experience in cofinancing publicprivate partnership projects (PPPs):the Bank has financed PPP projects with a total value exceeding 20 billion in various countries. The EIB is well able to assess whether a project is suitable for a PPP structure and if risks and responsibilities between the partners are appropriately shared.It shares its PPP expertise with clients.In this way, Romania may profit from the main advantage for using PPPs, which is to make long-term services related to the use of infrastructure cheaper and more effective than if such services would be provided by the State.The State defines which services it needs and selects a private company that can deliver such services for the best value for money. Involvement of a private partner usually reduces costs and construction times as well as maintenance expenditures during the project life.

Combining EIB loans with EU Programmes and Funds Romania is entitled to 17.2 billion euro from EU funds in the budget period 2007 2013. Through its various loan products, the EIB can provide the financial resources needed for co-financing projects with the EU Funds and thus contribute to the successful implementation of the Romanian National Development Plan.The cooperation between the Bank and Romania is covered by the Memorandum of Understanding signed in 2006. EIB Products Advantages of EIB loans The Bank is a major international borrower, which has been consistently awardeda first class (AAA) credit ratingby the leading rating agencies.This enables the EIB to borrow large volumes of funds on advantageous terms.The Bank on-lends these resources on a notfor-profit basis with only a small mark-up to cover its administrative costs. This makes it possible to provide medium and long-term loans for up to 20 or more years at attractive interest rates with appropriate grace periods for repayment of principal.The EIB supports the new Member States, including Romania,by not only increasing its lending operations in these countries,but also by contributing to the development of domestic capital markets. The Bank is actively supporting the development of the local Romanian Lei bond market through a first time RON 300 million (88 million euro)domestic bond issue in 2007, which has set a new maturity benchmark. As a result, it is expected that the Banks lending activity will also develop in Romanias national currency, thus helping to avoid exchange rate risk for project promoters.The EIB can normally finance up to 50% of the eligible cost of a project,making additional finance from other sources necessary.This can be extended up to 75% for priority trans-European network investments and projects under the Banks Innovation 2010 Initiative. The EIBs technical and economic due-diligence appraisal of all projects by its teams of sector engineers and economists usually gives comfort to other sources of finance participating in the financial arrangements. Who can benefit from EIB loans? The EIB provides loans to public promoters, including municipalities,and to private companies.All customers with eligible projects located in the EU Member States are treated on the same terms.The financial and economic viability of a project are the most important criteria for granting a loan. Every project has also to be technically as well as environmentally sound. Types of loans provided Individual loans: large projects exceeding total costs of around 25 million euro are financed individually by the Bank.Loans may also take the form of: Grouped loans for financing a number of smaller projects that do not meet the criteria for individual loans interms of the amount of the investment.Such projects have to be identified before hand and are to be implemented by a single promoter. Framework loans are intended to finance a set of small and medium-scale schemes, unspecified in advance and presented by a single promoter.Such loans are generally channelled through a public-sector promoter.

 Intermediated loans are arrangements for financing small and medium-sized projects with a total investment cost of normally less than EUR 25 million.These are usually promoted by small and medium-sized companies (SMEs) and smaller municipalities.Intermediated loans are arranged with an EIB partner bank (or intermediary bank) operating in the region. The intermediary banks on-lend EIB funds to borrowers at their own risk, assessing each project individually. Promoters of small to medium-scale projects have to address EIB partner banks directly. Cooperation with the banking community in the new Member States Building on its experience in the EU-15, the EIB is developing its partnership with commercial banks in the new Member States along three main lines: Co-financing - as other sources of finance are required for any project involving the EIB, additional funds may often be provided by commercial banks.Although the security is specific to each party, a certain degree of consultation and coordination takes place between the co-lenders. Guarantee structure EIB financing requires inadequate security structure for the loan. This security is often provided by an acceptable commercial bank (or a group of banks, usually in the form of a syndicate).There are cases where partner banks both co-finance with the EIB and guarantee its loan. Intermediation - this can take the form of a intermediated loan,a line of credit typically directed towards financing a number of SMEs and smaller projects; or, in the case of larger projects, an indirect loan to be on-lent for the purpose of a specific project. Project cycle, project appraisal When a project supports the economic priorities of the EU and in the country concerned,multidisciplinary professional teams from the Bank, usually consisting of a financial analyst, an economist and an engineer, carry out appraisals.All project appraisals include an environmental impact assessment with identification of possible problems as well as solutions.The Bank requires that all projects respect the EU environmental standards. If an appraisal is positive,the EIBs Management Committee submits the project to the Board of Directors, which decides on the granting of the loan. Lending conditions-Individual Loans For investments exceeding EUR 25million Types of investment Infrastructure of any type. Energy production and transport, environmental protection, industry and services,research and development, health and education Beneficiaries Public promoters, including municipalities, Private companies and banks Financing framework No upper limit to absolute amount.However, standard maximum of 50% of total cost of an investment.Loan period usually from 5 to 12 years in the case of industry projects; 15 to 25 years for infrastructure and energy projects- with loan periods tailored to the project Interest rate Fixed interest rate (with or without revision clause) or variable interest rate.The interest rate corresponds to the cost of funding plus a small margin to cover administrative costs Currencies Loans can be provided in one or more currencies (Euro, British Pound, US Dollar, Swiss Franc, Japanese Yen, etc.)

Repayment Usually fixed annual or semi-annual instalments.Tailored repayments including grace period for repayment of principal are possible Guarantees Guarantees are negotiated individually and usually involve a bank guarantee or other first-class security. Intermediated Loans For investments from EUR 40 000 to EUR 25million Types of investment Investments, especially by SMEs and municipalities, in the areas of industry and services, advanced technologies, energy saving, environment, water treatment and local infrastructure, including health and education beneficiaries Small and mediumsized enterprises, public promoters, including municipalities Financing framework Up to 50% of total project cost.Loan period,interest rates,repayment,currencies, guarantees,Provisions/fees Determined by the EIB partner bank. Concrete Case-EIB supports the development of automotive sector in Romania The European Investment Bank (EIB) is lending EUR 400 million to Ford Romania SA for the expansion and refurbishment of the companys existing car assembly plant located in Craiova in the South-West of Romania. The Republic of Romania is providing a State guarantee for 80% of the loan under the European Commissions temporary framework for State aid measures, which gives Member States additional scope to facilitate access to financing in the present economic and financial crisis.The EIB loan will finance investments in the Craiova Ford plant for the facilities and tooling needed for the production of a new Bsegment vehicle with a start of production in the near future and production of the existing model of the light commercial vehicle and a new model scheduled to be launched later. EIB funds will also help to introduce the production of a new small, advanced-technology petrol engine with low fuel consumption. It is envisaged that expanded production capacity will represent an annual output of up to 300 000 vehicles and 300 000 engines. The EIB has also approved - in principle - a loan of EUR 200 million that will finance research, development and innovation towards the development of vehicles and engines to be produced in the Craiova plant. However, these activities willl be carried out in Fords facilities located mainly in Germany.The vehicles and engines to be manufactured in the Ford Craiova plant will incorporate the latest safety (EURO NCAP 5), environmental (EURO 5 stage) standards and other new technology features and will support Ford in going beyond compliance with the EU regulation concerning CO2 emissions. EIB Vice-President Matthias Kollatz Ahnen, responsible for lending in Romania, stated:EIB funds, together with the Romanian State support, provided on favourable terms at a time of difficult market conditions, will both help the Romanian economy to better face the consequences of the current economic crisis and contribute to the production of more environmentally friendly cars. Automotive sector is a priority of the EIB in this respect: in 2009 the Bank loans for this sector amounting to EUR 8.2 billion. "We are very pleased concerning the provision of the loan, and want to thank both the European Investment Bank and the Romanian government for their support," said Wolfgang Schneider, Vice President, Governmental and Legal Affairs, Ford of Europe and continued: "The loan will help to assist in the plant's ongoing transformation into a worldclass manufacturing facility for vehicles and engines.Our guiding principle is that products built in Craiova deliver what customers expect from us: great products offering environmentally-advanced technologies at affordable prices."

Conclusion European Investment Bank has been supporting Romania for twenty years financing any project which could improve the countrys prosperity.For the future EIB executives hope that Romania will go forward as rapid as in the previous years so that in a good day they could say weve made the best investment possible when we came to Romania. References: 1.www.comunicatemedia.ro 2..http://www.eib.org 3.www.europa.eu