FEMIP: the contribution of the EIB to reinvigorating the Euro-Mediterranean Partnership

Structure of the presentation Brief overview of EIB role and operations Main challenges facing Mediterranean Partner Countries FEMIP as a response

Part 1 Overview of EIB role and operations

THE EIB EIB - European Union’s financing institution  Created by the Treaty of Rome in 1958, to provide long-term finance for projects promoting European integration, current mission is to promote the EU’s policies  Subscribed capital EUR 150bn  EIB shareholders: 15 Member States of the European Union  EIB’s annual lending (2002): EUR 39bn (of which EUR 33bn within the EU)  EIB’s annual borrowing (2002): EUR 38bn

STRATEGIC OUTLOOK (Board of Governors) Focus on 5 priorities  regional development  implementation of i2i – the innovation 2000 initiative  environmental protection and sustainable development  preparation of Accession Countries  support for EU development aid and cooperation policy EIB implements EU policies; a policy driven Bank

CURRENT EXTERNAL EU LENDING MANDATES A global economic development partner 31 EUR million n Central and Eastern European countries ( ) (350m for Yugoslavia) n Pre-accession facility (EIB risk) ( ) n Mediterranean countries ( ) n Euro-Med mechanism (EIB risk) ( ) n ACP Countries ( ) n South Africa 825 ( ) n Latin America Asia ( ) n Russia ( ) 100

Concrete support for the Barcelona process EURO-MEDITERRANEAN PARTNERSHIP Private sector support Improvement of the environmentStrengthening economic infrastructure Energy & communications In 2002, EUR 1.8bn towards sustainable development in the 12 countries South and East on the Mediterranean shores Key-areas: Social projects (health & education Regional cooperation projects – South-South cooperation

A partnership for economic liberalisation and privatisation Loans and Risk capital Israel LOAN SIGNATURES IN EURO- MEDITERRANEAN PARTNERSHIP COUNTRIES EUR 5.9bn ( ) Turkey Morocco 949 Egypt 943 Tunisia 977 Algeria 625 Jordan 234 Lebanon 105 Syria 290 Gaza-Westbank 133 EURm: n Energy n Communications n Water n Industry & Services n Global loans

10 EIB: A LEADING FINANCIAL PARTNER OF THE MPC In support of  The economic and social development of the partner countries in the Mediterranean region  European Policy Objectives: «The Barcelona Process» PROJECT FOCUS: NO COUNTRY OR SECTOR QUOTAS

LOANS SIGNED IN THE MPC (EUR million) CONCRETE SUPPORT TO THE BARCELONA PROCESS

12 CONCRETE SUPPORT TO THE EURO-MED PARTNERSHIP: EUR 5.9 billion (1998 – 2002) INDUSTRY, SERVICES AND FINANCIAL SECTOR: EUR 1951 MILLIONS ENVIRONMENT: EUR 1452 MILLIONS ENERGY: EUR 1238 MILLIONS COMMUNICATIONS: EUR 1250 MILLIONS

Part 2 Main challenges facing Mediterranean Partner Countries

Sequence of events Before 1995, no economic convergence of Med and EU countries Barcelona process to facilitate convergence Some improvement, but not enough Reinvigorate the Barcelona process

Euro-Med Partnership Establishing a free trade area: cornerstone of Euro-Med Partnership Financial assistance to help partner countries rise up to the challenge of open markets Private sector response requires enabling environment

Economic performance of MPC A widening gap in living standards –GDP per capita: real growth –GDP per capita level: MED vs EU Reflects disappointing overall performance of Mediterranean countries Causes high unemployment and may affect social/political stability

Origins of the current predicament Inward-looking, state-directed development policies of the past Unsustainable macroeconomic imbalances Implementation of economic reforms often in a less than deliberate manner

Policy reform record Trade liberalisation proceeding slowly Fiscal and exchange rate policy Financial sector reform Privatisation Investment in infrastructure and human capital Slow improvement in business climate (« red tape », judicial system)

The consequences Fewer viable investment projects Crowding out of private sector Deterrent for private investors Outcome: relatively low FDI (0.75% of GDP, compared to 2.5% in East Asia and 1.8% in Latin America)

The way forward Maintain macroeconomic stability Adopt and decisively implement reforms conducive to private sector development Develop human capital Improve infrastructure required by the private sector EU financial assistance to be targeted at supporting and facilitating reform

Risks Magnitude of the task –Wide range of reforms –Institutional capacity Resistance to change –Public sector –Concerns about social impact –Private firms with rent position

Part 3 FEMIP as a response

A new impetus to the Barcelona process A new major initiative by the EU Council A reinforced mandate for the EIB in order to facilitate a more deliberate approach toward reform A strengthened Partnership concept

Better linking financial assistance and policy reform Available research shows that financial assistance can contribute to growth and development… … but that it works best when good policies and institutional frameworks are in place Thus financial assistance must go hand in hand with approriate reforms

The essence of FEMIP Financial assistance focused on support for private sector Emphasis on quality of interventions and better linkage with policy reforms More resources to finance private sector projects and complementary projects supporting private sector development

The PDCC: an instrument to enhance the dialogue on policy and strategy Brings together representatives of EU, Med Partner Countries and multilaterals To discuss relevant policy issues and investment strategy Objective: to strengthen ownership of policy reforms affecting FEMIP financed investments

PDCC (2) PDCC discussions could serve to raise awareness about need for specific reforms An incremental but realistic approach Could be more effective than discussions at project level only

FEMIP: concrete actions Increased direct support for private sector Increased support for complementary enabling activities Wider array of financial instruments and adaptation of existing instruments Provision of technical assistance

Types of operations with the private sector Structured finance/PPPs Corporate lending SMEs –Lines of credit (global loans) –Investment funds

Constraints confronting SMEs Most local firms are family-owned SMEs relying on self-financing (retained profits) and short term loans External equity financing hampered by –lack of institutional investors and intermediaries –corporate culture Long-term credit discouraged by macro instability and heavy collateral requirements

Risk capital (1) A flexible instrument used to provide equity to private firms through a variety of channels: private equity funds, finance companies and equity lines to banks (over 250 m € since 1996, with high multiplier effect) EIB pioneered development of investment funds in Morocco, Tunisia, Egypt, Jordan and Turkey. Also supported privatisation (Tunisia) EIB presence has also acted as catalyst for other investors

Risk capital (2) Under FEMIP, RC operations will increase substantially Reforms create prospects for development of private equity, which FEMIP could support To better serve the varied needs of SMEs, FEMIP will support the development of new instruments: quasi-equity, leasing, guarantees

Lending to private sector (1) Lack of long-term credit (reflecting scarcity of LT deposits) creates reliance on short term loans High collateral requirements restrict long term credit EIB lending to help fill this gap

Lending to private sector (2) Credit lines to SMEs to overcome limitations of maturity transformation by banks Risk-sharing mechanism (which EIB will work to improve) Better serve the needs of SMEs, FEMIP could launch local currency issues to provide long term resources in local currency to intermediaries

Complementary lending for PSD Create enabling environment by supporting human capital and physical infrastructure Focus on infrastructure of common interest with the EU, regional projects and other investments supporting trade integration Focus on projects in higher and technical education to increase availability of skills to attract FDI

Technical assistance Builds on EIB’s experience with environmental projects Wider range of projects, more resources Primarily for identification, design and management of projects (infrastructure, PPP) Also in banking sector, to improve appraisal capability in order to reduce collateral lending

Conclusion FEMIP: not just a quantitative increase Also a qualitative change: –Focus on private sector –New or reinforced instruments to fill identified gaps Enhanced dialogue with Commission, Partner Countries and IFIs Implementation and effectiveness will depend on pace of reforms