A widening gap in living standards

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FEMIP the contribution of the EIB to
reinvigorating the Euro-Mediterranean Partnership
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Structure of the presentation

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

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Part 1

• Overview of EIB role and operations

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THE EIB

• EIB - European Unions 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
  EUs policies
• Subscribed capital EUR 150bn
• EIB shareholders 15 Member States of the
  European Union
• EIBs annual lending (2002) EUR 39bn (of which
  EUR 33bn within the EU)
• EIBs annual borrowing (2002) EUR 38bn

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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
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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
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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
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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
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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

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LOANS SIGNED IN THE MPC 1992-2002 (EUR million)
CONCRETE SUPPORT TO THE BARCELONA PROCESS
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CONCRETE SUPPORT TO THE EURO-MED PARTNERSHIP EUR
5.9 billion (1998 2002)
INDUSTRY, SERVICESAND FINANCIAL SECTOR EUR
1951 MILLIONS ENVIRONMENTEUR 1452
MILLIONS ENERGYEUR 1238 MILLIONS COMMUNICATIONS
EUR 1250 MILLIONS
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Part 2

• Main challenges facing Mediterranean Partner
  Countries

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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

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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

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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

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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

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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)

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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)

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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

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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

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Part 3

• FEMIP as a response

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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

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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

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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

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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

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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

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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

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Types of operations with the private sector

• Structured finance/PPPs
• Corporate lending
• SMEs
• Lines of credit (global loans)
• Investment funds

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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

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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

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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

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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

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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

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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

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Technical assistance

• Builds on EIBs 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

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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