Preliminary assessment of the first payment request of Romania

level, which are then provided as a guarantee to attract private investments in the country via financial intermediaries (also known as “Member State Compartment”). Following the signature of the Contribution Agreement, and following the signature of the guarantee agreement (not covered by this milestone), 50% of the total amount of resources shall be approved by the InvestEU Investment Committee by Q2 2023 (Milestone 251), and the rest by Q2 2024 (Milestone 252). Evidence provided: In line with the verification mechanism set out in the Operational Arrangements, the following evidence was provided: 1. Summary document duly justifying how the milestone (including all the constitutive elements) was satisfactorily fulfilled, including references to the relevant provisions. 2. A copy of the signed Contribution Agreement. The Contribution Agreement defines all the financial instruments covered by Milestones 247, 250 and 259. Details about the characteristics of sub-investment C9.I2b can be found under Clause 11.2 and under Annex 4, Part 2. The authorities also provided: 3. A Memorandum of Understanding signed by Ministry of Investments and European Projects and the Ministry of Finance and addressed to the Secretary General of the Government of Romania introducing and justifying the signature of the Contribution Agreement. 4. A note prepared by the implementing partner including information on the number of beneficiaries the financial instrument is expected to support. Analysis: All elements of the CID Annex have been addressed. In particular:  The Contribution Agreement defines the financial instrument to be implemented as a portfolio guarantee (Clause of the Contribution Agreement [“Clause”] 11.2).  In line with the Contribution Agreement and Art. 10 of the InvestEU Regulation, Romania proposed the EIF as implementing partner (Clause 13.2). In line with Art. 15 of the InvestEU Regulation and as indicated in the Council Implementing Decision (“CID”), the European Commission and the EIF are to sign a guarantee agreement that implements the financial instrument (Clause 13.1) through debt financing (Clause 11.2).  The Contribution Agreement sets out general guidelines for the setup of the Climate Action Portfolio Guarantee in compliance with the CID. With respect to “scope”, the Agreement establishes that the portfolio guarantee will support investments in green transitioning, energy efficiency and renewable energy production (Clause 11.1, Annex 4, Part II, Sections 3 and 4), which will help to address Romania’s current challenges in supporting investments in the energy efficiency and renewable energy sectors. In terms of “structure”, the deployment of the 47  instrument will be intermediated by eligible financial intermediaries (Annex 4, Part II, Sections 10 and 10a). Finally, eligibility criteria (additional to the application of the DNSH principle) are mentioned in Annex 4, Part II, Sections 6 and 7.  In line with the general approach taken under InvestEU, the Contribution Agreement defers the definition of details that determines the alignment between Member State Compartment and EU Compartment to a Guarantee Agreement between the EIF and the Commission. The Guarantee Agreement is the fundamental document that allows for the actual implementation of the portfolio guarantee and is currently being negotiated by the European Commission and the EIF.  In the summary document duly justifying the achievement of the milestone, Romania has requested that the Climate Action Portfolio Guarantee be fully aligned with the corresponding InvestEU EU-Compartment instrument with regard to specific goals and energy efficiency ambitions, structure and eligibility criteria – along with the general guidelines defined by the Contribution Agreement and the provisions in the CID Annex.  The target of the instruments are individuals and SMEs as defined in the Annex to Commission Recommendation 2003/361/EC concerning the definition of micro, small and medium-sized enterprises – that is, self-employed persons or enterprises which employ fewer than 250 persons and which have an annual turnover not exceeding EUR 50 million, and/or an annual balance sheet total not exceeding EUR 43 million. In line with the milestone description, the financial instrument is expected to support at least 250 beneficiaries – as stated in a dedicated note prepared by the implementing partner and in the summary document. The guarantee agreement will provide further and more refined detail about the final targeted companies (Annex 4, Part I, Sections 6 and 7).  The structure of the instrument enables to leverage private funds, as the minimum leverage of the financial product is set at four (clause 11.2). This is in line with the CID.  The Contribution Agreement requires the Guarantee Agreement to include provisions ensuring compliance of the financial instrument and its supported transactions with the “Do no significant harm” Technical Guidance (2021/C58/01). In particular, the Guarantee Agreement sets out an obligation for the implementing partner to use InvestEU sustainability proofing and to comply with an exclusion list - as outlined in the CID Annex [COM(2021)608 final and ST12319/21 ADD 1]. In accordance with the description of the milestone, the Contribution Agreement ensures that the Guarantee Agreement shall exclude the following list of activities and assts from eligibility (Clause 4.7): a. activities and assets related to fossil fuels, including downstream use (with the related exception concerning projects in power and/or heat generation, as well as related transmission and distribution infrastructure, using natural gas) b. activities and assets under the EU Emission Trading System (ETS) achieving projected greenhouse gas emissions that are not lower than the relevant benchmarks (with further requirements concerning supported activities achieving projected greenhouse gas emissions that are not significantly lower than the relevant benchmarks).  The sub-investment is in line with Commission’s Guidance Note of 22 January 2021 (SWD(2021) 12 final) as the Contribution Agreement: i) ensures the implementation of the contribution via the guarantee agreement shall respect the requirements of the RRF Regulation (Clause 7.4); and that ii) it contains all the relevant information regarding the participation of Romania in the InvestEU Programme that has been included in the national recovery and resilience plan has been transposed into the Contribution Agreement: the policy objectives of the measure (Clause 11); the State aid dimension (Clause 3.5); the contribution to the Invest EU provisioning (Clause 48  5); the target amount of finance and investment to be mobilized (Clause 11.2 and Annex 4); the type of support to be deployed mobilized (Clause 11.2 and Annex 4); the targeted beneficiaries and the nature of the mobilized (Clause 11.2 and Annex 4); a timetable for deploying the financial instrument (Clause 11.2 and Annex 4); the name of the InvestEU implementing partner (Clause 13.2); a description of the monitoring system to report on the investment mobilized through the financial instrument (Clause 16.3).  In accordance with the milestone description Clause 15.1 stipulates that returns to the financial instrument (that is, revenues generated from the management of assets and allocated to the Member State compartment, remuneration of the EU Guarantee under the Member State Compartment, amounts recovered and any other payments received) shall be reinvested to pursue the same policy goals, with the effect of such provisions extending after 2026.  In its summary of audits (issued in April 2022), the Romanian Auditing Authority could not assess positively the achievement of the milestone. The Authority had not been provided with the necessary and sufficient documents proving the signature of the contribution agreement between the European Commission and the Romanian Government. In fact, The Contribution Agreement was signed only on 24 May 2022, after the Authority’s checks. With the signature of the Contribution Agreement, Romania has therefore achieved the milestone. Commission Preliminary Assessment: Satisfactorily fulfilled Number: 253 Related Measure: Financial instruments for the private sector - Recovery Venture Capital Fund Name of the Milestone: Signature of the financing agreement between the European Investment Fund and the Romanian Government for the creation of the Recovery Risk Capital Fund (“the Fund”) and adoption of the investment policy of the Fund Qualitative Indicator: Agreement signed Time: Q4 2021 Context: The objective of this sub-investment is to provide equity support for SMEs, mid-caps, including start-ups, companies in early and advanced growth stages, and infrastructure projects focused on renewable energy, and energy efficiency. The support shall be delivered through venture capital funds and infrastructure funds, as part of a Risk Capital Fund, managed by the European Investment Fund (“EIF”). The signature of the Financing Agreement is the steppingstone for the implementation of the sub- investment I2c of Component 9. The Financing Agreement allows the EIF to open the call of competition for financial intermediaries through which resources would then be channelled towards final beneficiaries. Following the signature of the financing agreement, 50% of the total amount of resources allocated to this investment shall be transferred to financial intermediaries by Q4 2024 (Milestone 254), and the rest by Q2 2026 (Milestone 255). Evidence provided: In line with the verification mechanism set out in the Operational Arrangements, the following evidence was provided: 1. A summary document justifying how the milestone (including all the constitutive elements) was satisfactorily fulfilled. 2. A copy of the signed Financing Agreement. 49 The authorities also provided: 3. a Memorandum of Understanding signed by the Ministry of Investments and European Projects (MIPE) and the Ministry of Finance approving the negotiation and signature by MIPE of the financing contract for equity financial instruments under the National Recovery and Resilience Plan. 4. A signed copy of the addendum that aligns the Financing Agreement to the CID Annex and the RRF regulation. 5. A Memorandum of Understanding for the nomination of the members of the Investment Committee, signed by the Prime Minister of Romania. Analysis:  In its summary of audits (issued in April 2022), the Auditing Authority remarked that the following provisions of the CID Annex had not been transposed in the Financing Agreement: o the requirement that beneficiaries earning more than 50 % of their revenues in the previous financial year from activities or assets included in the exclusion list adopt and publish green transition plans; o provisions relating to the category of beneficiaries implementing infrastructure projects focusing on renewable energy and energy efficiency; o provide that “Any proceeds of the fund or financial instruments, including repayments, as well as profits made through the use of Recovery and Resilience Facility funds, less remuneration of the fund manager and financial intermediaries, will be used for the same policy objectives, including after 2026”.  As discussed below: o the Addendum to the Financing Agreement addresses concern (i); o the Financing Agreement clearly specifies that the Fund provides support to, among others, infrastructure projects focused on renewable energy and energy efficiency (Annex A, under policy objectives). As a consequence, the provisions mentioned in the Financing Agreement that applies to all the other beneficiaries, apply to such infrastructure projects too. o Clause 5.2 regulates the use of proceeds of the fund or financial instruments, including repayments, as well as profits made through the use of Recovery and Resilience Facility funds (i.e., “Proceeds of Operations”). All elements of the CID Annex have been addressed. In particular:  The Financing Agreement was signed by the governing bodies (that is, the EIF and the Government of Romania) of the financial instruments on 29 December 2021. An addendum to the Financing Agreement, which aligns the financing agreement to the CID Annex and the RRF Regulation, was signed on 25 May 2022.  Clause 2.1 of the Financing Agreement specifies that the Government of Romania appoints the EIF to implement and manage the funds and resources made available for the purpose of this financial instrument.  An investment committee is entrusted with approving, monitoring and supervising the implementation of the investment strategy and the deployment of the instrument (Clause 7.1 of the financing agreement). The investment committee was established by a Memorandum of Understanding signed by the Prime Minister of Romania on 16 May 2022 and is composed of 8 members.  According to the investment strategy (Annex A of the Financing Agreement), the financial 50  instrument provides access to finance in the form of equity and quasi equity to SMEs, mid-caps including start-ups, companies in early, advanced growth and expansion stages (Annex A.2 – policy objective) and infrastructure projects (Annex A.5 – investment policy).  The addendum specifies that the targeted number of beneficiaries under RRF over the entire duration of the Agreement is 100 (Amendment 2.i).  The Financing Agreement and its addendum includes selection criteria to ensure compliance with the “Do no significant harm” Technical Guidance (2021/C58/01) of supported transactions. The application of the Commission Notice on Technical guidance on sustainability proofing for the InvestEU Fund” is recalled in Annex G as well as in the addendum (Amendment 2.ii). Amendment 2.ii of the Addendum explicitly refers to an exclusion list that is in line with the provisions set out in the CID Annex. More specifically, according to this list the financial instrument cannot target: o activities and assets related to fossil fuels, including downstream use (with the related exception concerning projects in power and/or heat generation, as well as related transmission and distribution infrastructure, using natural gas); o activities and assets under the EU Emission Trading System (ETS) achieving projected greenhouse gas emissions that are not lower than the relevant benchmarks (with further requirements concerning supported activities achieving projected greenhouse gas emissions that are not significantly lower than the relevant benchmarks); o activities and assets related to waste landfills, incinerators (with related exceptions, as defined in the CID Annex) and mechanical biological treatment plants (with related exceptions, as defined in the CID Annex); o activities and assets where the long-term disposal of waste may cause harm to the environment. The Financing Agreement and its addendum also include the requirement for beneficiaries that derived more than 50% of their revenues during the preceding financial year from activities or assets in the exclusion list to adopt and publish green transition plans. It moreover ensures compliance of the instrument with the relevant EU and national environmental legislation.  Clauses 8.1 to 8.4 mention that the Government of Romania shall remunerate the EIF with a fixed management fee as well as a variable performance fee.  Annex I.6 to the Financing Agreement specifies that the structure of the fund (determined by the types of underlying funds and final recipients) will allow for an indicative leverage effect of 1.5 of the allocated amount.  Clause 5.2 of the Financing Agreement mentions that any returns to the Fund or financial instruments (i.e., “Proceeds of Operations”) generated in the course of a calendar year shall be used for the payment and/or reimbursement of management fees and performance fees, of any unforeseen additional expenses and of shortfalls (if any). The remaining amount shall be used for the same policy goals (that is, “entering into commitment agreements with underlying funds) in accordance with the investment strategy (Annex 1).  The Financing Agreement set up adequate mechanisms for monitoring and reporting the performance of the instrument. This Financing Agreement commits the EIF to prepare a semi- annual progress report (clause 15.2). The report shall include among others a list of final recipients and their characteristics, the total amounts approved by the investment committee and the amount transferred to final recipients, a summary of the performance of the fund and a 51  report on the compliance with the DNSH principle. Commission Preliminary