9 The Facility for Euro-Mediterranean
Investment and Partnership
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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
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| Legal base | — |
| Department | International Development
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| Basis of consideration | Minister's letter of 9 January 2007
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| Previous Committee Report | HC 34-xlii (2005-06), para 6 (7 November 2006); also see HC 34-xxxvii (2005-06), para 8 (11 October 2006)
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| Discussed in Council | 28 November Economic and Finance Council
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| Committee's assessment | Politically important
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| Committee's decision | Cleared
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Background
9.1 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.[29] 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.
Commission Communication
9.2 The Communication — which we considered on 7 November
2006 — summarizes the main findings of a review of the Facility
and presents options for the future. The Working Document provides
more detailed and technical information from the review. The review
drew both on consultation with stakeholders and a selection of
EIB evaluations and economic data.
9.3 While FEMIP has succeeded in providing substantial
amounts of loans suitable to larger long-term investments, and
has made efforts to cater for the needs of smaller companies,
the review notes that access to finance in particular remains
problematic for small and medium enterprises (SMEs). Only about
23% of loans were made directly to the private sector at end 2005,
as opposed to a target of 50%. The main obstacles are: the business
environment; insufficient cooperation from the Mediterranean governments,
particularly resistance to the EIB lending in local currency;
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", and to take account of the introduction of
the European Neighbourhood and Partnership Instrument (ENPI).
It outlines three options for the future:
— Option
1: Reinforce FEMIP with no changes in instruments; increase the
volume of loans; stronger linkages with the ENP, including EU
country strategies; increase staff numbers from 70 to 110 by 2013.
This option would be the least costly but "would not address
the pitfalls as regards private sector development";
— Option 2: in addition to the features
under Option 1, better match private sector needs through a wider
range of financial instruments and services, added focus on SMEs
and moving closer to its customers and other stakeholders (130
staff by 2013);
— Option 3: upgrade FEMIP into a fully
fledged Euro Mediterranean Bank.
9.4 The Communication concludes that option 2 "appears
to be the most cost- and time-efficient option". So did the
Minister, in his accompanying Explanatory Memorandum; as, it seemed,
did a majority of other Member States. But the Minister clearly
had a number of reservations about how this would work in practice,
both as to the proposed scope and also the increased cost. As
he succinctly put 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".
9.5 It was not altogether apparent to us either that
the Commission's proposals would adequately address the problems
identified. One of the major obstacles had been the unwillingness
of some, or all (it was not clear), Mediterranean partner governments
to permit EIB to lend in local currency. How would Option 2 remedy
this? Who would cover the exchange risk of such lending?
9.6 There were 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 was plainly alive
to them; the EIB President had been lobbied — but with what
outcome? He said that he would "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 also "focus on improving FEMIP's linkages
with the Commission's ENP". All well and good: but how would
he ensure that the Commission responded appropriately? Although
he said that the proposal was to be considered by the ECOFIN Council
on 28 November, the Minister did not say what was intended thereafter.
9.7 He also noted that there was a read-across to
the overall question of the EIB's lending mandate. Here, on 11
October 2006, we 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.[30]
In both instances we felt there were disturbing signs of a similar,
familiar Commission reflex response, of increased expenditure
and staffing as the answer to a problem.
9.8 . The FEMIP proposal was to be considered by
the Economic and Financial Affairs Council (ECOFIN) on 28 November
2006. Given the Minister's reservations, we kept the document
under scrutiny and asked him to report back, after that meeting
and before any "green light" was given to the Commission
to go ahead on the present sketchy basis:
The Minister's letter
9.9 He has now done so in his letter of 9 January
2007. But, before answering our questions, he says that Conclusions
on FEMIP and Future Options were agreed at the ECOFIN meeting
on 28 November, and continues as follows:
"Unfortunately, due to an internal administrative
error, we did not provide responses to your questions in advance
of that meeting. This was due to an oversight in our tracking
of the progress of this Explanatory Memorandum.
"I appreciate the importance of ensuring that
you have adequate information to scrutinise EU documents in advance
of agreement in Council and I apologise that in this case this
did not happen. I attach the Conclusions agreed at ECOFIN[31]
and I hope that the responses below provide you with the information
you need to clear the document from scrutiny".
9.10 He then deals with each of our questions (which
are in italics) as follows:
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 assessing 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?
"The Court of Auditors has not issued any reports
on FEMIP.
What is the legal base for the mix of EIB and EU
funding?
"The main legal base is Council Regulation 2698/2000
(the MEDA Regulation). Section 11 of the Preamble says 'The Commission
and the European Investment Bank are committed to ensuring further
improvement of their collaboration on the implementation of risk
capital operations and interest rate subsidies' and Article 4
of the Regulation includes the specific references to EIB's involvement.
With reference to €350 million risk capital
budget, what is meant by more than €200 million being disbursed
and still outstanding, and of this being "fully utilised
by end 2006"?
"In this context, risk capital means equity
financing provided to companies in their start-up or development
phase. This is sometimes provided by FEMIP through financial intermediaries
(banks or investment funds).
"In particular, risk capital has been used for:
participation in equity funds, including regional funds; co-investments
with local partners, where each co-investor provides 50% of the
equity and takes 50% of the risk (the local partner receives funding
requests, which the EIB needs to co-approve); local currency loans
to micro-finance institutions; small and medium enterprise (SME)
loan guarantee schemes (covering part of the risk on SMEs); and
direct investments in companies, under the form of equity.
"As of the time of writing the Communication,
€212 mln (£142.94 mln) was disbursed and still outstanding.
'Disbursed and outstanding' means that investments have been made
by FEMIP. FEMIP has purchased shares in companies, in investment
companies, etc. In other words, this capital is still being used
by FEMIP, and has not yet been written off or reimbursed.
"As of the time of writing the Communication,
the EIB had invested in 27 local private equity funds, had taken
a direct financing risk on 678 local SMEs and had financed 27
direct operations (including local currency loans to microfinance
institutions).
"Since the beginning of 2006, 6 new operations
have been approved for an amount of €54 million (£36.36
mln); these will be signed in 2006-2007. More operations for 2006-2007
are in the pipeline. It is therefore expected the available risk
capital will be fully used by the end of 2006.
How will Option 2 help to increase lending in
local currency? Who would cover the exchange risk of such lending?
"Because all steps to issue EIB-bonds in Mediterranean
countries have not yet been taken, the EIB can currently only
provide loans to financial intermediaries such as banks and investment
funds in local currency from risk capital resources. EIB will
not provide loans in local currency from its own resources, as
it cannot then manage the exchange risk.
"Option 2 would allow for a stronger local presence
and larger number of staff. Increased capacity would allow the
EIB to borrow in some of the Mediterranean markets by issuing
local currency bonds. Raising funds in local currencies would
allow the EIB to lend more to businesses in that same currency
without taking on any additional exchange risk.
What was the outcome of lobbying the EIB President
on questions of greater coherence, particularly with regard to
the ENP and the ENPI, and avoiding overlap with the work of other
international financial intermediaries (IFIs)?
"In discussions on the review of a reinforced
FEMIP, ECOFIN agreed that an important priority is to improve
the 'linkages of FEMIP with the European Neighbourhood Policy,
including by a better integration of the EIB's activities into
the EU country strategies and by better combining EIB loans and
EU budgetary resources.' The Council also agreed to develop further
instruments to overcome the obstacles to more effective financing
of the private sector (focused particularly on SMEs), and that
in implementing these priorities, the EIB should continue to safeguard
FEMIP's value-added vis-à-vis the market and other IFIs.
"Our lobbying has helped to shape these Council
Conclusions and helped to ensure that the negotiations of the
EIB's External Lending Mandate (ELM) led to agreement to put in
place better processes to coordinate EIB and Commission operations.
The ECOFIN Council on 28th November reached a general agreement
on the main elements of the ELM, which include enhanced cooperation
with the Commission and IFIs.
"There will be continuing opportunities to review
and encourage greater coherence between EIB, Commission and other
IFI operations. In particular, the UK will use the opportunity
of the mid-term review of the new lending mandate to keep up the
pressure on coherence issues. The review — to include input
from external experts — will take place in 2010.
How will the Commission be made to respond appropriately
to the Minister's request that the Commission selects aspects
(within Option 2) that are affordable within the External Lending
Mandate settlement and offer the most value-added in terms of
reaching SMEs and improving FEMIP's linkages with the ENP? What
is the process going forward?
"The ECOFIN Council has agreed Conclusions that
reflect the proposals set out under Option 2 of the Communication.
This includes confirmation that a FEMIP Advisory Committee will
be established which will involve the EIB contacting the 35 Finance
Ministries and inviting them to designate their representative
in order to call a first meeting in February. This Committee will
become the appropriate forum to discuss FEMIP's business plan,
sector strategies and the development of financing instruments,
including their cost implications. We will continue to work closely
with the EIB and Commission, including through the Advisory Committee,
to ensure that FEMIP's operations in the region are coordinated
with other IFIs, those of the Commission, and with a particular
focus on developing affordable instruments in support of private
sector development, particularly to reach SMEs".
Conclusion
9.11 We are deeply concerned not only that the
go-ahead was given for the Commission's proposal before scrutiny
had been completed but that the 28th November ECOFIN Council reached
a general agreement on the main elements of the EIB's External
Lending Mandate, and subsequently adopted the Council Decision
embodying it on 20 December, despite the fact that this Council
Decision remained under scrutiny, pending further information
on negotiations.[32]
9.12 We have noted previously the Minister's and
his department's hitherto excellent scrutiny record. We are prepared
to accept his apology and explanation on this occasion but only
on the basis of an undertaking that he will take the steps necessary
to ensure that such oversights do not occur again.
9.13 As to FEMIP itself, the Minister's responses
and the Council conclusions suggest that agreement has been reached
on improvements that — if effectively implemented —
should enable it better to achieve its key objective of SME development.
There are two clear targets — doubling the private sector
percentage of FEMIP lending, and more effective cooperation from
partner governments, particularly with regard to the issuing of
bonds in local currencies.
9.14 We note that a mid-term review, with outside
expert participation, is planned for 2010, which will assess how
well cooperation is working between the EIB and the Commission.
We presume that it will also assess the level and effectiveness
of cooperation of partner governments, particularly in the new
FEMIP Advisory Committee.
9.15 We also suggest that a way be found of involving
the Court of Auditors in this review.
9.16 In the meantime, we clear the Commission
Communication.
29 The so-called "Barcelona process" countries:
Morocco, Algeria, Tunisia, Egypt, Gaza-West Bank, Israel, Lebanon,
Syria, Jordan and Turkey. Back
30
See headnote. Back
31
At Annex 1 to this Report. Back
32
We consider this additional breach of scrutiny in paragraph 10
of this Report. Back
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