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

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

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

4. Part 1 Overview of EIB role and operations

5. 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

6. 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

7. CURRENT EXTERNAL EU LENDING MANDATES EUR million • Central and Eastern European countries 9 280(2000-2007) (350m for Yugoslavia) • Pre-accession facility (EIB risk) 8 500(2000-2003) • Mediterranean countries 6 425(2001-2007) • Euro-Med mechanism (EIB risk) 1 000(2001-2007) • ACP Countries 3 965(2001-2007) • South Africa 825(2000-2006) • Latin America Asia 2 480(2000-2006) • Russia (2000-2005)100 A global economic development partner 31

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

9. Syria 290 Turkey1 629 Lebanon105 Tunisia977 Jordan 234 Gaza-Westbank133 Algeria625 Morocco 949 Egypt 943 Israel LOAN SIGNATURES IN EURO-MEDITERRANEAN PARTNERSHIP COUNTRIES EUR 5.9bn (1998-2002) Loans andRisk capital EURm: • Energy • Communications • Water • Industry & Services • Global loans A partnership for economic liberalisation and privatisation

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 10

11. LOANS SIGNED IN THE MPC 1992-2002 (EUR million) CONCRETE SUPPORT TO THE BARCELONA PROCESS

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

13. Part 2 Main challenges facing Mediterranean Partner Countries

14. 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

15. 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

16. 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

20. 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

21. 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)

22. 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)

23. 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

24. 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

25. Part 3 FEMIP as a response

26. 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

27. 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

28. 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

29. 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

30. 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

31. 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

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

33. 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

34. 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

35. 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

36. 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

37. 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

38. 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

39. 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

40. 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