Select Committee on European Scrutiny Forty-Second Report


6 The Facility for Euro-Mediterranean Investment and Partnership

(27924)

13558/06

COM(06) 592

+ ADD 1

Commission Communication: Assessment of the Facility for Euro-Mediterranean Investment and Partnership (FEMIP) and Future Options

Commission Staff Working Document

Legal base
Document originated17 October 2006
Deposited in Parliament23 October 2006
DepartmentInternational Development
Basis of considerationEM of 3 November 2006
Previous Committee ReportNone; but see HC 34-xxxvii para 8 (11 October 2006)
To be discussed in Council28 November Economic and Finance Council
Committee's assessmentPolitically important
Committee's decisionNot cleared; ask for further information

Background

6.1 The Facility for Euro-Mediterranean Investment and Partnership (FEMIP) was created in October 2002 following the conclusions of the Barcelona European Council in March 2002, to stimulate economic growth and private sector development in the Mediterranean region.[16] It combined European Investment Bank (EIB) loans with EU budget resources to provide technical assistance, interest rate subsidies for environmental projects and risk capital. A dialogue structure between EU and Mediterranean Partner Countries was also created.

6.2 In November 2003, the Council, on the basis of a Commission assessment, carried out a first review of FEMIP's activities and decided to reinforce the Facility with new features: creation of a Special FEMIP Envelope for loans with a higher risk profile, establishment of a donor Trust Fund, reinforcement of the dialogue structure and further extension of FEMIP's local presence in the region. It also agreed to increase the amount of Community guarantees for loans to the region — an increase which was formalized in December 2004, in the context of the mid-term review of EIB external mandates.

6.3 The European Council also invited the Ecofin Council to conduct another review in 2006, after consulting the Mediterranean partner countries. The Commission says that this consultation process involved a direct exchange of views amongst Ministers, the Commission and the EIB in the FEMIP Ministerial meeting in June 2006, bilateral discussions between the EIB and authorities in Mediterranean countries in the first half of 2006 and consultations with FEMIP stakeholders through both targeted and internet-based questionnaires.

Commission Communication

6.4 The Communication summarizes the main findings of the review and presents options for the future. The Commission Staff Working Document provides more detailed and technical information from the review.

6.5 The review notes that FEMIP has significantly contributed to investment in the region. The financial value added was generally substantial, as the type of finance provided by EIB was not readily available in local markets. The non-financial contribution to the projects varied depending on the project, but was generally found to be adequate. Since October 2002, 77 operations for a total amount of €7.2 billion (£4.87 billion) have been signed by FEMIP in Mediterranean partner countries, of which Turkey, Egypt, Tunisia and Morocco have been the main beneficiaries. 60% constitutes support for infrastructure projects. The risk capital budget of €350 million (£237.18) — of which more than €200 million (£135.53 million) is disbursed and still outstanding — is expected to be fully used by end-2006, and makes the EIB the largest international provider of risk capital to the region. One hundred technical assistance operations amounting to €105 million (£71.15 million) were undertaken before end-2005, and 64 service contracts amounting to €42 million (£28.46 million) were concluded with consulting firms by August 2006. But only about 23% of loans were made directly to the private sector at end 2005, as opposed to a target of 50%. And less than 30% of the technical assistance has been used for the private sector. Small enterprises, which constitute more than 95% of businesses and 50-70% of employment in many Mediterranean countries, "have even less access to credit than the private sector as a whole".

6.6 The review describes the main obstacles in this respect as: the business environment; insufficient cooperation from the Mediterranean governments and the insufficient adaptability of FEMIP's instruments to the needs and risk profile of private sector projects in the region. It concludes that the Facility needs to be "fine-tuned and diversified."

6.7 The Communication acknowledges that the European Neighbourhood Policy (ENP) and the introduction of the European Neighbourhood and Partnership Instrument (ENPI) will affect the future of the FEMIP. It outlines three options for the future:

—  Option 1: Maintain the reinforced FEMIP with no changes in instruments, an increase in the volume of loans and stronger linkages with the ENP, including EU country strategies. EIB would need to increase staff numbers to around 110 by 2013, from approximately 70 operational staff as of end of 2005. This option would be the least costly but "would not address the pitfalls as regards private sector development."

—  Option 2: Fine tune and diversify FEMIP's financial instruments, while reinforcing partnership and local presence, so as to further improve FEMIP's effectiveness and value added for private sector development. In addition to the features under Option 1, Option 2 proposes to better match private sector needs through a wider range of financial instruments and services with added focus on SMEs. EIB local presence would also be reinforced by expanding local offices, with 130 local staff being envisaged. Under this option, the private sector's needs would be better served, EIB would move closer to its customers and other stakeholders, and Mediterranean countries would become more involved in FEMIP's strategy and results. It would also increase the intensity of FEMIP's support to SME creation and development.

—  Option 3: Upgrade FEMIP into a fully-fledged Euro Mediterranean Bank. This bank would use at least the same variety of instruments to provide flexible financing as Option 2 but with a stronger focus on higher risk products. This option would enhance ownership but it would entail additional costs for shareholders, and would take time to set up.

6.8 The Communication concludes that Option 2 "appears to be the most cost- and time-efficient option".

The Government's view

6.9 In his 3 November 2006 Explanatory Memorandum, the Parliamentary Under-Secretary of State at the Department for International Development (Mr Gareth Thomas) says that the Government is supportive of FEMIP and its aims, and supports EIB's ability to use grant funds for technical assistance, risk capital and subsidies where appropriate.

6.10 He notes that FEMIP forms part of the External Lending Mandate of the EIB, which he says is being negotiated separately (and which we considered on 11 October).[17] He continues as follows:

    "Our main aim in those negotiations is to improve the quality of EIB lending but we are also working to restrict the lending ceiling. Our broad approach is consistent with this line.

    "We want to ensure that FEMIP is reinforced in a way that increases its impact on socio-economic development in the Euro-Med Region, without substantial additional cost. We also want to avoid any appearance of downgrading of Euro-Med relations. Current indications are that the majority of Member States favour Option 2.

    "We want to avoid any moves towards the establishment of a Euro-Med Bank (Option 3). The costs of this are high and in any case, there is not strong support for it among the Partner Countries in the region.

    "We are in principle supportive of Option 2 as it fits with our objectives for EIB to be better coordinated with the Commission in support of a coherent EU offer (HMT and DFID have jointly written to EIB President Maystadt setting out that the UK would like to see a formal role for EIB in the EC's Country Strategy process), which also needs to be coordinated with the work of international financial institutions (IFIs) and regional development banks.

    "However, we remain concerned about the apparent focus on volumes of lending and we would need to be assured that any new EIB financing facilities genuinely address problems with accessing finance and do not just undercut existing finance. It is also important that each of the proposals identified under Option 2 is considered on the basis of affordability and EIB's likely comparative advantage, taking into account the activities of other IFIs and technical assistance providers in the region.

    "For example, better-targeted lending to other financial intermediaries (which will themselves lend to SMEs), and use of local currency loans would improve the effectiveness of FEMIP's activities in reaching SMEs. Providing more and better targeted technical assistance linked to specific project proposals is also likely to increase FEMIP's effectiveness. However, we recommend further analysis of the value added of FEMIP involvement in trade finance, loan guarantee schemes, general support to business development services and micro-finance.

    "We have indicated our general support for Option 2 but we have stressed that the UK's preference is to see more focus on adding value and providing finance where it would not otherwise be available. We will press the Commission to select aspects that are affordable within the External Lending Mandate (ELM) settlement and offer the most value-added in terms of reaching SMEs. We will also focus on improving FEMIP's linkages with the Commission's ENP.

6.11 He goes on to say that the Financial Implications of Option 3 would be substantial for EIB shareholders, including the UK, although there appears to be a consensus amongst Member States against this option. Option 1 would be the least costly, "with lending volumes dependent on the Council decision on EIB external mandates which will be taken before the end of 2006". The financial implications of Option 2 "are not yet clear, as it comprises proposals for a range of innovative new instruments, strengthening of local offices, and increased levels of equity investment".

6.12 Finally, on the Timetable, the Minister says there the Communication was discussed at the Economic and Finance Committee (EFC) alternates meeting on the 19th/20th October and "will be discussed during the next round of EFC meetings, leading to the 28th November ECOFIN meeting of Finance Ministers".

Conclusion

6.13 The review suggests that FEMIP has some creditable achievements to its name. However, something more rigorous might have been expected in a review not just reviewing progress but also proposing significant additional expenditure. We wonder if the Court of Auditors has had anything to say about FEMIP's operations thus far; and if so, what?

6.14 We should also be grateful to be reminded by the Minister of the legal base for this mix of EIB and EU funding.

6.15 We should also like an explanation, with reference to the €350 million risk capital budget, of what is meant by more than €200 million (£135.53 million) being disbursed and still outstanding, and of this being "fully used by end-2006".

6.16 As well as achievements, the review illustrates clearly the limits so far, particularly with regard to effective support for the type of business that constitutes the major source of private sector employment, viz., the small and medium-sized enterprise. However, although he supports Option 2, he clearly has a number of reservations, both as to the proposed scope and the increased cost. As he succinctly puts it: "we would need to be assured that any new EIB financing facilities genuinely address problems with accessing finance and do not just undercut existing finance".

6.17 It is not altogether apparent to us either that the Commission's proposals will adequately address the obstacles identified. One of the major obstacles has been the unwillingness of some, or all (it is not clear), Mediterranean partner governments to permit EIB to lend in local currency. How will Option 2 remedy this? Who would cover the exchange risk of such lending?

6.18 There are then the central questions of greater coherence, particularly with regard to the European Neighbourhood process and the new European Neighbourhood Policy Instrument, avoiding overlap with the work of other international financial institutions, and affordability. The Minister is plainly alive to them. The EIB President has been lobbied — but with what outcome? He says that he will "press the Commission to select aspects that are affordable within the External Lending Mandate (ELM) settlement and offer the most value-added in terms of reaching SMEs", and that he will also "focus on improving FEMIP's linkages with the Commission's ENP". All well and good. But how will he ensure that the Commission responds appropriately? Although he says that the proposal is to be considered by the Ecofin Council on 28 November, the Minister does not say what is intended thereafter.

6.19 As he notes, there is a read-across to the overall question of the EIB's lending mandate, with regard to which, on 11 October, we have kept a draft Council Decision under scrutiny, pending further information on negotiations in which the UK objective is to improve the quality of EIB lending and limit the quantity.[18] In this present instance, there are disturbing signs of a similar, familiar Commission reflex response, of increased expenditure and staffing as the answer to a problem.

6.20 We therefore keep the document under scrutiny and ask the Minister to write to us after that meeting and before any "green light" is given to the Commission to go ahead on the present sketchy basis, to explain how his reservations are being addressed and his overall objectives achieved.


16   The so-called "Barcelona process" countries: Morocco, Algeria, Tunisia, Egypt, Gaza-West Bank, Israel, Lebanon, Syria, Jordan and Turkey.

 Back

17   See headnote. Back

18   Ditto Back


 
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