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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 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 EURO-MEDITERRANEAN PARTNERSHIP In 2002, EUR 1.8bn towards sustainable development in the 12 countries South and East on the Mediterranean shores Key-areas: Private sector support Improvement of the environment Strengthening economic infrastructure Energy & communications Regional cooperation projects – South-South cooperation Social projects (health & education Concrete support for the Barcelona process LOAN SIGNATURES IN EUROMEDITERRANEAN PARTNERSHIP COUNTRIES EUR 5.9bn (1998-2002) Syria 290 Turkey 1 629 Lebanon 105 Tunisia 977 Jordan 234 Morocco 949 Gaza-Westbank 133 Algeria 625 EURm: Egypt 943 Israel A partnership for economic liberalisation and privatisation Energy Communications Water Industry & Services Global loans 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 LOANS SIGNED IN THE MPC 1992-2002 (EUR million) 2000 1808 1476 (EUR million) 1600 1159 1200 768 400 966 1002 1998 1999 684 650 800 1214 1122 329 0 1992 1993 1994 1995 1996 1997 2000 2001 CONCRETE SUPPORT TO THE BARCELONA PROCESS 2002 CONCRETE SUPPORT TO THE EURO-MED PARTNERSHIP: EUR 5.9 billion (1998 – 2002) Building physical links with communications infrastructure 21% Underpinning private initiative 33% INDUSTRY, SERVICES AND FINANCIAL SECTOR: EUR 1951 MILLIONS ENVIRONMENT: EUR 1452 MILLIONS ENERGY: EUR 1238 MILLIONS Securing sustainable energy supplies 21% COMMUNICATIONS: EUR 1250 MILLIONS Safeguarding the environment 25% 12 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 GDP per capita (US$) - Average 30,000.00 20,000.00 10,000.00 Mediterranean countries EU 15 Year 2002 2,130.00 24,670.00 Real GDP growth 4.0% 3.0% 2.0% 1.0% 0.0% Average 1990-1995 Average 1996-2002 Mediterranean countries 2.8% 3.4% EU 15 1.5% 2.3% GDP per capita growth 2.0% 1.5% 1.0% 0.5% 0.0% Average 1990-1995 Average 1996-2002 Mediterranean countries 0.2% 1.3% EU 15 1.1% 2.0% 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