A new Facility for Euro-Mediterranean Investment and Partnership (FEMIP) within the European Investment Bank (EIB) was officially launched in Barcelona on 18 October by the Finance Ministers of the European Union members states, the Commission and the 12 Mediterranean Partner Countries (MPC). This act was jointly chaired by Rodrigo Rato, Spanish Minister of Economy, and Philippe Maystadt, President of the EIB. The Commission was represented by Commissioner Pedro Solbes, and delegates from the main international financial institutions (World Bank, IMF, International Financial Society and African Development Bank) were also present. This initiative will try to make the region more attractive for investors and support the development of the private sector in the Mediterranean region.
The Context: the Barcelona Process and the EIB
This new initiative is an ambitious step in the reinvigoration of EU relations with the Mediterranean and in its effort to contribute to the prosperity of the region. The EU has always been very interested and committed to the development of the Mediterranean region, and to contributing to its stability and progress. In this sense, the Barcelona Process was launched in 1995 with three main objectives: establishing an area of peace and stability; creating an area of shared prosperity; developing human resources; and promoting understanding between cultures and exchanges between civil societies.
The second aim of the Barcelona Process –creating an area of shared prosperity- is being pursued through several means, the most important of which is the establishment of bilateral free trade areas in the Mediterranean as an intermediate step leading to a larger Euro-Mediterranean Free Trade Area by 2010. This means that the MPC industries are gradually becoming exposed to EU competition. Other means include economic cooperation, concerted action (coordination mechanisms) and financial assistance granted by the EU to the Mediterranean partners to support them in the reform process of market liberalisation they are currently undertaking. In this context, the EU provides financial assistance through the MEDA funds, and has allocated €5.35 billion for the period 2002-2006. In addition to that sum, the EIB is also an important provider of funds –loans, while MEDA gives grants. During the last five years the EIB has provided average annual lending of €1 billion and will provide € 6.42 billion for the period 2000-2006 under the Euro-Med Lending Mandate (II), covered by a Community guarantee. In 2000 an additional Euro-Mediterranean Partnership financing facility was established within the EIB to support major trans-regional transport projects, energy and environmental projects (Nice European Council, December 2000). This facility will provide a further €1 billion from its establishment until 2007 and will operate at the EIB’s own risk.
As shown by these figures, the financial commitment from the EU to the region is considerable. Nonetheless, despite efforts to increase the level of assistance to the MPC and to make them attractive for foreign investors, the results so far have proved unimpressive. The economic performance of the region has been mixed; some progress correcting certain macroeconomic imbalances has been made, but the situation remains fragile, with rising unemployment and a growth rate that does not encompass population growth and does not allow for poverty reduction. The events of 11 September have contributed to a worsening of the situation.
Regarding FDI, the attractiveness of the region has not increased: the MPC managed to attract only 0.7% of the global FDI share in 2000, while this figure stood at 1.7% in 1992. The Barcelona process has not succeeded so far in stimulating the interest of European investors in the region; even if the EU is the main source of FDI to the Mediterranean only 2% of European FDI goes to the region.
As for private investment, the situation is even less impressive. The environment of these countries makes it very difficult for the private sector, mainly for small and medium sized enterprises (SME), to have access to funding. Local banking is not sufficiently developed in the region; many banks belong to the public sector and are neither competitive nor efficient, and therefore they cannot provide enough funding to small investors at competitive rates.
These figures show extra funding is required for the private sector, which needs to be strengthened through domestic and foreign investment, since it is the leading player in promoting employment and growth in a market economy. Investment is also necessary to contribute to the financing of badly needed reforms that would give certainty to investors, including institutional reforms and the creation of infrastructure services. Indeed, if reforms are properly undertaken the potential of the Mediterranean as a destination for investments could be very encouraging.
These are the reasons that led the European Council of Laeken, in December 2001, to invite the European Council and the European Commission to study the establishment of a Euro-Mediterranean Development Bank.
The Steps Leading to the Establishment of the FEMIP
The creation of the FEMIP was a daunting task; negotiations were complex and the documents had to be prepared in a very short time. The Spanish Presidency and the Commission played an important role in this process and had to deploy important resources and efforts to achieve this outcome. Spain, which occupied the EU presidency during the first semester of 2002, was very keen on the idea of launching a Euro-Mediterranean Bank, and included this idea in its Priorities, in line with the European Council Conclusions of Laeken.
The Commission elaborated a study and presented an options paper in February 2002; this contemplated four initial options and then narrowed them down to two. The options discarded were the upgrading of existing instruments and arrangements and the creation of a completely new financial institution. The two preferred options were the creation of an EIB subsidiary for the Mediterranean and the establishment of a new Euro-Mediterranean Investment Facility within the EIB. The Commission later opted for the creation of an EIB subsidiary devoted to the Mediterranean region, which it saw as the most ambitious and at the same time pragmatic option. The Spanish Presidency and the southern states (France, Italy and Portugal) also supported the establishment of such a subsidiary, but the other member states (mainly Germany, Netherlands and the UK), preferred the creation of an EIB new Mediterranean Facility, since the establishment of a subsidiary would have entailed having to increase their contributions to the region. The ECOFIN Council of 14 March also supported this last option of creating an EIB Facility, which was confirmed by the Barcelona European Council on 15-16 March 2002. As a result, a Euro-Mediterranean Reinforced Investment Facility (FEMIP) was established within the EIB, which will be a Fund devoted to financing projects in the Mediterranean region. It will be complemented with the Euro-Mediterranean Partnership Arrangement and an EIB representative office located in the area. The EU and MPC Foreign Ministers, meeting in Valencia at the Vth Euro-Mediterranean Conference (22-23 April 2002), also expressed their support for this initiative.
The Reinforced Investment Facility (FEMIP)
The establishment of the FEMIP is the fruit of a compromise solution that has two stages; initially the FEMIP is to be established, coupled with an EIB office located in the area and a Euro-Mediterranean Partnership Arrangement. Within a year, the situation will be further assessed and the setting up an EIB subsidiary for the Mediterranean region analysed, on the basis of an evaluation of the facility’s performance and taking into account the point of view of the MPC. The FEMIP was officially launched on 18 October, and in a year’s time it will be possible to proceed to the second stage or at least engage in discussions.
The Commission will contribute to the financing of the FEMIP, and the EIB’s loan portfolio in the MPC will also be incorporated in the new facility. The financial package for the FEMIP for the period 2003-2006 has been established at €225 million (ECOFIN Council decision, 20 June). It was initially understood that member states would be able to make contributions “on a voluntary basis”, but to date none has actually done so. As a result of the establishment of the FEMIP, the EIB will gradually expand its annual lending to the region from the current 1.4 billion per year to 2 billions.
The main role of the new FEMIP is to promote private sector development and support infrastructures, notably in sectors that are being liberalised or that have a trans-regional dimension, either promoting South-South integration or that have a common interest for the EU and the MPC, such as infrastructure services. This means the FEMIP will not have as broad a mandate as was originally believed. When the Free Trade Area is completely implemented these sectors will be exposed to competition from EU firms; consequently, these reforms and support are fundamental if Mediterranean industries are to become sufficiently competitive to rise to this challenge.
To accomplish this task, the FEMIP will broaden the instruments currently used for the region: it will provide loans, equity investments, risk capital operations, technical assistance and other kinds of new financial instruments. More venture capital will be financed, with a more positive effect in terms of transfer of know-how and technology than the establishment of EU-MPC joint ventures would normally have. These funds will be provided directly or through local intermediaries; the channelling of financing through local banks will contribute to the development of a competitive and sound private banking sector in the region, which would be highly positive.
As for the management of the FEMIP, the usual EIB decision-making mechanisms will apply, but with some peculiarities. A Joint Coordination and Economic Dialogue Committee has been established to allow for the participation of the beneficiary Mediterranean partners and to increase their sense of ownership. This Committee will be integrated by the EIB, the Commission, the EU member states and the 12 MPC. They will meet twice a year, having done so for the first time on 18 October, to officially launch the FEMIP. The role of this Committee is supervisory: it will oversee the implementation and operations of the FEMIP; provide guidance for future developments; ensure coordination between the Facility and other donors and identify constraints to private sector development and reform. Together with this new Committee, the EIB will be assisted in its task by two offices that will be established in the region, one of them in the Maghreb and the other in the Mashrek. Even if the location of these two offices has not been officially decided yet, Cairo and Casablanca, respectively, have mentioned informally. These offices will ensure coordination with the MPC and contribute to the selection and management of the projects.
Critical Assessment: Towards a New Bank?
Member states opted for the FEMIP for several practical reasons. In the first place, it is clear that they did not want to increase their contributions to the region, particularly those who do not feel very strongly about the Mediterranean, and the FEMIP does not require new contributions from them. Besides, the setting up of a new Fund can be speedy and simple, as has been shown by the fact that it has been launched only a few months after the initial proposal was placed on the table. Furthermore, the FEMIP can work at very low operating costs, and will allow the use of EIB expertise in the region and the network of collaborating institutions while avoiding duplication: the EIB has been lending to the Mediterranean since 1974, having provided around €12.6 billion to the region since that date in incremental terms. It has also collaborated with 55 banks and financial intermediaries in the region.
The creation of the FEMIP is a positive step forward, and it was the best agreement that could be reached given the current climate in the EU, but it may not be the best possible option. The sense of co-ownership will not really be enhanced, since the Mediterranean Partners will only take part in a supervisory committee with no decision-making capacity. The creation of a Bank would have entailed substantial leverage; it would probably have encouraged other parties to participate in the Bank and therefore provide more funds for the region. As for the EIB, only the EU member states are members, and even they have not provided any further contributions for the facility. Finally, a Bank would have also entailed more visibility, which is something the Barcelona Process badly needs.
The two-stage procedure agreed upon is the result of the difficulty in reaching a consensus in establishing a new financial institution for the Mediterranean. These difficulties will arise again in a year’s time, when the FEMIP will be assessed and the decision whether or not to create an EIB subsidiary will have to be taken. As a basis for making this decision, an “evaluation of the facility’s performance” will be used. It is probably too ambitious to think that in only a year we will be in a position to evaluate the performance of the facility, so the task will be a difficult one. The MPC will also be consulted, but they have already expressed their support for the creation of a Euro-Mediterranean Bank in the Valencia Action Plan and the Presidency Conclusions of the fifth Euro-Mediterranean Conference last April.
For all these reasons, the discussions will probably be very controversial. It is likely that the same kind of entrenched positions that arose during the negotiations will reappear. The Presidency will have a very important role in trying to achieve a consensus and pushing the best option for the Mediterranean further. In this regard, it is no doubt a good thing that the assessment and discussions will take place under Italian Presidency, which will presumably be very committed to the Mediterranean. The terms of reference of this discussion have already been set out: only the option of establishing an EIB subsidiary will be analysed, and other possibilities such as the setting up of a completely new Mediterranean Bank will not be taken into consideration. At the same time, if such a subsidiary is to be established there will be important discussions to decide all the technicalities and details concerning its management and functioning.
The subsidiary would be majority-owned by the EIB; this would be positive in that it would preserve the European character of the institution and ensure its close links with EU policy in the region, but it would inevitably undermine the incentive for other countries to contribute. Overall, it would be a positive development to establish an EIB subsidiary. This could allow the MPC to be further involved in the management and decision-making of the subsidiary, thus providing more co-ownership and contributing to forge a common banking and financing culture. The new subsidiary could also be open to shareholders other than the EU member states, the Commission, the EIB and the MPC. It could therefore have more leverage vis-à-vis other donors, acting as a financial catalyst. At the same time firms in the MPC could take advantage of the fact that the EIB charges lower interest rates than other banks, since it can obtain funds in the capital market at competitive rates. Again from a practical point of view, establishing the new Mediterranean Bank as an EIB subsidiary would save time and resources and would take advantage of the EIB expertise in the region.
The achievements of the Facility and the added value it will bring to the region remain to be seen. Nevertheless, we can undoubtedly greet the launching of the Facility as a major step forward. The FEMIP will provide more funds to the region, even though additional funding would be very welcome. It will fund projects for infrastructure and private sector support, and will hopefully contribute to reducing poverty, promoting employment and growth, and thus to the region’s to social and political stability. Even if there is clearly room for improvement, the FEMIP is good news for the Mediterranean region and for Euro-Mediterranean relations as a whole.
Clara Mira Salama
Cabinet of External Relations Commissioner Chris Patten during the Spanish Presidency