FACILITY FOR EUROPE-MEDITERRANEAN INVESTMENT
AND PARTNERSHIP (FEMIP) (13558/06)
Letter from the Chairman to Gareth Thomas
MP, Parliamentary Under-Secretary of State, Department for International
Development
Thank you for the Explanatory Memorandum on
the above Communication which Sub-Committee C considered on 23
November and has decided to hold under scrutiny.
The Sub-Committee agreed that Option 2 of the
three in the Commission's Communication appeared to be the most
practical course for the future but expressed concern about the
number of uncertainties noted by the Government surrounding this
option, in particular the financial implications. The Sub-Committee
would like more information on the costings, on the reasons why
there has not been a greater take-up, particularly by SMEs, of
the finance which is already available; and on the relative roles
of the EIB and the Community in risk-taking—is the EU giving
loan guarantees to the EIB? The Sub-Committee would also like
to see an analysis of how Option 2 will be followed up.
The Sub-Committee also commented that the Government's
consultation process should have been wider to include the Foreign
and Commonwealth Office and UKTI who have offices on the ground
in the countries concerned.
27 November 2006
Letter from Gareth Thomas MP to the Chairman
Your Committee met on 23 November 2006 and discussed
the Commission Communication entitled Assessment of the Facility
for Euro-Mediterranean Investment and Partnership (FEMIP) and
Future Options. Your Committee did not clear the document from
scrutiny and asked for further information in your letter of 27
November.
Conclusions on the FEMIP and Future Options
assessment were agreed at the Economic and Financial Affairs (ECOFIN)
Council meeting on 28 November, which I attach. Due to time constraints,
we were unable to provide you with the information you requested
prior to this Council.
In response to your queries, I would like to
share the following information with you:
1. FINANCIAL
IMPLICATIONS OF
OPTION 2
The ECOFIN Council Conclusions include an agreement
to establish an Advisory Committee. This Committee will be the
appropriate forum to discuss FEMIP's business plan, sector strategies
and the development of financing instruments, including their
cost implications.
It was agreed that FEMIP should be enhanced
further through the development of instruments which will target
the private sector, particularly small and medium enterprises
(SMEs). Enhancements will include:
— An improvement of the allocation
of risks between FEMIP, local financial intermediaries and local
companies to encourage increased risk-taking by local intermediaries;
— incentives provided together with
technical assistance to local intermediaries in order to make
global loans (loans to financial intermediaries for on lending
to their clients) more effective and accessible to SMEs;
— provision of guarantees and loans
in local currency, to minimise risks borne by SMEs; and
— increased use of risk capital
and technical assistance to enhance the quality of local SME projects.
The Council Conclusions are consistent with
the UK's position to avoid developing FEMIP into a subsidiary
(which would have substantial cost implications), but instead
to develop better ways of reaching SMEs. The Council agreed on
a subset of Option 2 that excludes new instruments in relation
to trade financing, loan guarantee schemes for SMEs, or microfinance,
that were proposed in the Staff Working Paper attached to the
Communication on the FEMIP Review. This reflects a concern to
focus on affordable options which are already within FEMIP's existing
portfolio of instruments, whilst seeking to increase their effectiveness.
The Conclusions serve to limit the increase in costs related to
Option 2. In addition, several of the recommendations do not involve
additional resources per se, rather improved ways of working,
such as a better combination of EIB loans and EU budgetary resources,
and increased risk taking by local intermediaries.
The full Cost implications of the Council Conclusions
will be determined through the forum of the Advisory Committee.
In the meantime, there has been some analysis of the possible
additional resources that are likely to be required. For example,
the Communication proposes an additional 20 staff by the end of
2013 to cope with strengthening of "staff-intensive risk
capital operations", the broadening of the role of local
offices and the creation of an Advisory Committee. FEMIP currently
has a very low staff to lending volume ratio relative to other
international financial institutions, so hiring additional staff
would seem reasonable in this context.
The Communication also gives an indication that
an appropriate level of risk capital financing under Option 2
would be €80 million (£53 million) a year, €30
million (£20 million) more than that envisaged under Option
1, and that this gap could either be filled by Member States,
Mediterranean countries or the EIB itself. The UK will continue
to work to ensure that an appropriate balance is struck between
keeping costs down and ensuring that FEMIP achieves its private
sector mandate, particularly in relation to reaching SMEs.
2. WHY
HAS THERE
NOT BEEN
GREATER TAKE-UP,
PARTICULARLY BY
SMES, OF
THE FINANCE
WHICH IS
ALREADY AVAILABLE?
The take up of FEMIP finance available to the
private sector, particularly SMEs, has varied from country to
country. Volumes in part depend on the investment climate in the
country and the liquidity of the financial system. Where the investment
climate is positive and there is a shortage of liquidity, there
will be a high demand for FEMIP's loan and risk capital offerings.
Another reason for FEMIP not fulfilling its
private sector mandate is that its instruments do not always match
the risk profile of private sector projects. The Special FEMIP
Envelope, set up in mid 2005, focuses on providing loans for private
sector operations with a higher risk profile. The Special FEMIP
Envelope is popular, and its budget is fully used.
Other reasons are the strict security/guarantee
requirements as well as the provision of loans in foreign currency,
which place exchange rate risk fully on the borrowers. Whilst
FEMIP can do, and is doing, more to make local currency loans
available, FEMIP needs to issue local currency bonds in order
to manage its own exchange risks. This is time-consuming and costly:
regulatory authorities in beneficiary countries need to clear
all steps to issue local currency bonds in local markets or develop
other hedging instruments. Specific Framework Agreements and other
legal documentation (for example on taxation) need to be negotiated
with local authorities before any EIB bond issuing is possible.
3. What are the relative roles of the EIB
and the Community in risk-taking — is the EU giving loan
guarantees to the EIB?
The European Commission and the EIB are currently
discussing the Guarantee Agreement relating to the Community Guarantee
to be provided to the Bank against losses under loans and guarantees
for projects financed outside the EU for the period 2007-13 (ie
within the framework of the external mandates approved recently
by the ECOFIN Council).
Loans granted by the Bank under these mandates
are covered by the EU's Guarantee Fund in respect of political,
and in certain cases, commercial risks. The logic behind this
guarantee is that the EIB operates outside the EU, at the request
of Member States. In order to secure its credit rating and cost
of funding, adequate guarantees are provided to the Bank when
operating in areas which are, by definition, riskier than Europe.
This activity has never cost anything to the Community's budget
as the EIB has always managed to get the money back from its customers.
At the request of Member States, the EIB is
progressively moving towards more risk sharing. The Euro-Mediterranean
Facility established by EIB in 2001 with €1 bn (£0.67
bin), for example, asks for an appropriate guarantee (from a recipient
country government, acceptable corporate entity and/or a pool
of banks), as it does not benefit from the Community Guarantee.
More recently, with the Special FEMIP Envelope (SFE) set up in
August 2005, the EIB provides loans for private sector operations
in the Mediterranean with a higher risk profile than under "standard"
EIB operations, or for which acceptable third party guarantees
are not available (or too expensive, or insufficient). To cover
the additional risk, SFE loans are priced according to the risk,
and a special reserve of €100 mln (£67.42 mln) has been
established (to cover loans up to around €500 mln (£336.9
mln).
It is premature to anticipate the details of
the new Guarantee Agreement but it is likely to be structured
along the following lines: a "Comprehensive Guarantee"
for operations entered into with a State, or guaranteed by a State,
and other operations entered into with regional or local authorities
or government-owned and/or—controlled public enterprises
or institutions; and a "Political Risk Guarantee", ie
coverage restricted to defaults resulting from non-transfer of
currency, expropriation, war or civil disturbance, and denial
of justice upon breach of contract in any other cases (which means,
principally, private sector projects).
4. How will Option 2 be followed up?
As set out above, the ECOFIN Council Conclusions
include the decision to establish a FEMIP Advisory Committee.
The EIB will contact the 35 Finance Ministries and invite 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. We will continue to work closely with
the EIB and the Commission, including through the Advisory Committee,
to ensure that FEMIP's operations are coordinated with those of
other international financial institutions, those of the Commission,
and are focused on developing affordable instruments in support
of private sector development, particularly to reach SMEs.
We will be mindful of the need to consult with
other Government departments who have offices in the areas where
FEMIP operates.
7 December 2006
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