EN

Brussels, 17.10.2006

SEC(2006) 1294

COMMISSION STAFF WORKING DOCUMENT

Accompanying document to the

COMMUNICATION FROM THE COMMISSION TO THE COUNCIL

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

{COM(2006)592 final}

Table of contents:

1. Introduction

1.1 Background

2. Economic challenges and constraints in the region

3. FEMIP Assessment

3.1 Overall quantitative assessment

3.2 Assessment of the support to private sector development

3.3 Qualitative assessment of the different instruments

3.4 Organisation and Governance of the FEMIP facility

4. FEMIP Future Orientations

4.1 The future of the ENP Policy

4.2 The options

4.3 Option 1: Maintain “reinforced” FEMIP and improve its linkages with the ENP

4.4 Option 2: In the framework of the ENP, adjust FEMIP to enhance support for SME development and increase partnership

4.5 Option 3: Establishment of a fully-fledged Euro-Mediterranean Bank

5. Conclusions

6. Annexes

1. Introduction

This staff working paper reports the findings on the current functioning of the Facility for Euro-Mediterranean Investment and Partnership (FEMIP) and provides a range of options for the future, to serve as background for the European Commission Communication on FEMIP and a decision on FEMIP's future.

The main finding of this paper is that FEMIP has been instrumental in channelling substantial funding to the Mediterranean region [1] and in improving the conditions for economic growth, through financial support to infrastructure, FDI and local companies, including SMEs. The share of finance provided to private companies reached less than the 50% target hoped for however, mainly due to the policy environment in Mediterranean countries, the characteristics of the FEMIP instruments, not always being suited to the risk profile of private sector projects, and often insufficient cooperation from Mediterranean governments to facilitate EIB private sector operations in their countries.

The analysis suggests that FEMIP’s ability to influence the economic reform process, as agreed with partner countries in the framework of European Neighbourhood Policy (ENP) Action Plans, and meet private sector needs could be increased by: 1. increasing its strategic focus, by better linking EIB operations to EU policies for economic reform, 2. broadening and fine-tuning the range of FEMIP instruments to better match private sector needs and 3. strengthening the dialogue and presence at the local level, to better identify and respond to the needs of Mediterranean countries and strengthen the partnership.

Incorporating these options within the current institutional setting (a facility within the EIB) appears to be the most cost-and time-efficient option.

1.1. Background

The European Investment Bank (EIB) has been active in the Mediterranean countries since the seventies, as part of the cooperation agreements between the EU and individual countries in the Mediterranean region. In 1995, the Barcelona process gave a new impulse to the EU-cooperation with the Mediterranean region. In 1997, the individual EIB mandates were replaced by a general mandate for the region, the EUROMED [2] mandate, focussing on infrastructure and private sector development.

The Barcelona European Council on March 15, 2002 stressed the need to stimulate private sector development in the Mediterranean partner countries, to help them achieve a higher level of economic growth. The Council decided to establish the Facility for Euro-Mediterranean Investment and Partnership (FEMIP), to support private sector investments through increased lending to the private sector and support to the creation of an enabling environment.

The FEMIP facility bundles all resources available to Mediterranean countries which are financed or managed by the EIB, such as EIB-loans (both with and without EU budget guarantee) and EU-budget resources for technical assistance, risk capital and interest rate subsidies for environmental projects. Furthermore, a dialogue structure (Policy Dialogue Coordination Committee - PDCC) was introduced, which included both Mediterranean partner countries and EU-member states.

As agreed in the Barcelona Council, the Ecofin Council conducted a first review of FEMIP's activity and perspectives in November 2003. The Council concluded that FEMIP's first year results were positive, though challenges remained. According to the Council, more support was needed for private sector operations in the region by engaging into riskier investments; the ownership could be strengthened and the dialogue on economic policy and frameworks for private sector development could be improved. To this end, the Council recommended “reinforcing” FEMIP with a number of new features and instruments (see annex for details):

· creation of a Special FEMIP Envelope for loans with a higher risk profile;

· establishment of a FEMIP donor Trust Fund;

· reinforcement of the dialogue, by turning the Policy Dialogue Coordination Committee into an annual Ministerial Meeting, prepared by experts meetings;

· further extension of FEMIP’s local presence to other parts of the region (by opening two more local offices, bringing the number of local offices from 1 to 3).

The Council also agreed to increase the amount of EIB-loans available for the Mediterranean region [3]; this was formalised in the context of the mid-term review of the EIB external mandates (December 2004).

The European Council further invited the Ecofin Council “to assess the incorporation of an EIB majority-owned subsidiary dedicated to Mediterranean Partner Countries in December 2006, on the basis of an evaluation of the reinforced Facility’s performance, and taking into account the outcome of consultations with the Barcelona process partners”.

In line with the 2003 European Council conclusions the Commission, in close cooperation with the EIB, has conducted a review to assess the strengths and weaknesses of the current FEMIP facility and put forward suggestions for the future. In this process, stakeholders in the Mediterranean region have been consulted in various ways:

· Finance Ministers of the EU and Mediterranean Partner countries held an open debate on the subject during the FEMIP Ministerial meeting in June 2006;

· EIB Vice-President Philippe de Fontaine Vive met with government authorities from all Mediterranean Partner countries in the first half of 2006;

· FEMIP stakeholders (Ministries, individual borrowers, intermediary banks who received global loans and risk capital recipients) were consulted by means of questionnaires [4];

· Other multilateral and bilateral donors active in the region were also requested to provide their views.

These consultations have proved useful to assess FEMIP's strengths and weaknesses and helped shape the options for the future, as reflected in this paper. More detailed information on the outcome of the consultations is available in the annex.

The structure of this paper is as follows: In chapter 2, the economic context in the region is reviewed, with emphasis on the business environment and access to finance for the private sector. In chapter 3, the FEMIP facility is assessed in quantitative and qualitative terms, including instruments and institutional issues. A combined assessment of current needs on the ground and FEMIP's present set-up leads to orientations for the future, which are described in chapters 4 and 5.

2. Economic challenges and business environment constraints in the region

Although the Mediterranean region experienced relatively strong economic growth, around 5% in recent years (2003-2005), unemployment and poverty remain high; officially-reported unemployment rates range from 9% to 23% (2005). Although the percentage of people living below the international poverty lines of USD 1 and USD 2 a day are relatively low, poverty is widespread: the share of people below USD 3 a day varies from 20% (Tunisia, Jordan), 35% (Algeria) to 70% (Egypt) [5]. To provide sufficient job opportunities for the growing population, higher rates of economic growth would be needed.

The recent economic growth has been mostly driven by external factors, such as high oil prices, and by private consumption. The region benefited from substantial inflows of remittances and tourist income, but the level of overall investment remained limited. Investment ratios in Mediterranean countries have stagnated since the end of the 1970s and FDI inflows seem relatively low compared to other regions; only 3% of net private capital flows to developing regions is directed towards the region [6]. This is basically due to a weak business environment, associated with a high political and economic risk perception.

The region's progress in improving the business climate was substantial, but the region still scores below the world average on important determinants for the ease of doing business, such as starting a business, dealing with licences, registering property, or investor protection [7]. Further reforms in the business climate are needed to facilitate the creation and development of new companies, creating jobs and strengthening economic growth.

Access to finance remains problematic for private enterprises, especially for smaller companies. Although on average Mediterranean banks seem to have sufficient capital and liquidity, their behaviour is very risk averse. This is partly due to the fact that the percentage of non-performing loans is already high. Banks therefore charge relatively high interest rates, provide loans with short maturities and require high collateral from their borrowers. Access is further limited by underdeveloped delivery channels and organisational weaknesses within banks. Government ownership of banks is widespread, and in some countries a large part of the loans are directed towards the public sector. The result is that bank credit available for the private sector remains scarce and only covers between 4% and 20% of private sector investment needs [8].

Financial access (sources: World Development Indicators 2006, MENA economic developments and Prospects 2006, enterprise surveys, all from World Bank) |

| % non-Perform.loans | Spread between lending &deposit rates | Collateral needed for loan (as % of loan) | Loans requiring collat. (% of loans) | Nr of bank branchesper 100.000people | % banking assets held by governm.owned banks | Domestic credit provided by banks (% GDP) | Credit to private sector (% GDP) | Bank finance for investment (% of investm.) |

Algeria | (near 25) | 5.5 | 169 | 82 | | 96 | 25 | 11 | 16 |

Egypt | 24 | 5.7 | 124 | 89 | 4 | 65 | 106 | 54 | 7 |

Israel | 11 | 3.8 | | | 15 | 46 | 83 | 92 | |

Jordan | 20 | 5.8 | | | 10 | 0 | 92 | 72 | |

Lebanon | 10 | 3.4 | | | 18 | 2 | 179 | 76 | |

Morocco | 19 | 7.9 | 226 | 99 | 7 | 35 | 83 | 57 | 19 |

Syria | | 5.0 | 207 | 75 | | | 30 | 10 | 4 |

Tunisia | 24 | | | | | 43 | 71 | 67 | |

Turkey | 6 | | 101 | 83 | 9 | 32 | 55 | 20 | 6.5 |

Gaza West B. | | | | | 3 | | | | |

EMU | 2 | 4 | | | 53 | 2 | 125 | 106 | |

Other develop. regions | | | 90-140% | 75-80% | | | | | Around 20% |

Small enterprises have even less access to credit than the private sector as a whole, while in many Mediterranean countries they constitute more than 95% of all businesses and account for 50-70% of employment [9]. The main reasons why SMEs face more difficulties than larger enterprises are a frequent under-capitalisation, lack of collateral and lack of transparency within SMEs; furthermore banks face relatively high administrative costs when they provide small loans. Micro-finance institutions and less resource intensive, standardised instruments could help solve the problem for the smallest companies. Although the availability of micro-finance is growing fast, it currently covers less than 0.5% of the Mediterranean population, leaving a large potential unfulfilled. As the Euro-Mediterranean charter for enterprise [10] (signed by all Mediterranean partners in 2004) also acknowledged, action needs to be taken by governments, banks and companies to improve the access to finance for SMEs.

In addition, the recourse of enterprises to international financial markets is limited, due to restrictions on capital movements and limited trade liberalisation of services.

Country ratings by Standard & Poors (June 2006, local currency) |

Algeria | Egypt | Israel | Jordan | Lebanon | Morocco | Syria | Tunisia | Turkey | GWB |

- | BBB- | A+ | BBB | B- | BBB | - | A | BB | - |

Next to the reforms needed in the financial sector and in the business environment in general, there is a clear need for financial support and expertise to help the private sector develop and thus provide sufficient job opportunities and income for the region. In this respect, as a facility targeting private sector development throughout the region, FEMIP could certainly play a major supporting role in the coming years.

A more detailed analysis on the economic environment is provided in the annex.

3. FEMIP Assessment: Overview

3.1 Overall quantitative assessment

The FEMIP facility has been instrumental in channelling substantial and growing amounts of funding to the region.

The range of instruments available under FEMIP has been widened considerably since its start in October 2002. The FEMIP facility currently offers:

· Loans, both individual loans and global loans (in the case of riskier loans, financed by the Special FEMIP Envelope);

· Risk capital and technical assistance, funded either by the EU budget or from the FEMIP donor trust fund [11], and interest subsidies funded by the EU budget.

Use of the various instruments / mandates, in euro |

| Total size | Signed until end 2005 | Projections until the end of the mandate |

EIB loans (Euromed-II loan mandate, guaranteed by EU-budget) | 6,520m(2000-2006) | 6,272m | Will be fully used |

Higher-risk EIB loans (SFE, under Euromed-II mandate) | 100m capital reserve | Approx. 11% of capital used | Second tranche of 100m approved |

Non-guaranteed EIB-loans (Nice-facility) | 1bn (2001-2006) | 364m | Will be fully used |

Risk capital from EU-budget | 150m (2003-2006) | 79m | Will be fully used |

Project-related technical assistance from EU-budget | 105m (2003-2006) | 105m allocated | Will be fully used |

Interest subsidies from EU-budget | Decided ad-hoc | 68m (approved) | To be decided ad-hoc |

Upstream technical assistance and risk capital from donor trust fund | 33.5m | 6.5m (approved) | Will be partially used |

Loans

EIB's lending activities in the Mediterranean region have grown substantially since the establishment of FEMIP in October 2002. Signatures increased from a level of EUR 1.6bn in 2002 to EUR 2.2bn in 2005, making the Bank the largest provider of loans in the Mediterranean region. Approvals and disbursements followed similar trends (see annex). These figures include Turkey, which was transferred to a different loan mandate (South Eastern Neighbours) in 2005, due to its recognition as a candidate for accession to the EU, but is still involved in the institutional aspects of FEMIP.

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Since 1 October 2002, 77 operations for a total amount of EUR 7.2bn were signed by FEMIP, corresponding to a total project value of EUR 25.6 bn, thus leveraging almost three times EIB's contribution. 31 projects amounting to nearly EUR 3bn were directed to private companies.

Operations were signed in nearly all Mediterranean countries, Israel being the only exception due to the still pending ratification by the Israeli Parliamentary Assembly of the Framework Agreement with the EIB [12]. In terms of geographical distribution, signatures were almost equally split among FEMIP three main regions i.e. the Maghreb, the Near East and Turkey (28%, 36% and 36% respectively of FEMIP overall portfolio).

The growth in volume was highest in Turkey and the Near East. This came as a direct consequence of Turkey's prospect of accession to the EU, as well as a substantial improvement of the investment climate in both regions (leading to a parallel increase in FDI flows). By contrast, declining volumes in the Maghreb coincided with a period of excess liquidity. In Algeria, booming oil and gas prices led to a drastic reduction in borrowing and early reimbursement of all outstanding EIB loans. Finally the EIB resumed operations in West Bank and the Gaza strip in 2005.

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Infrastructure continued to be the main focus of FEMIP operations (transport and energy accounted for 60% of the portfolio). Financial services/global loans to SMEs accounted for more than 20%, while lending to industry reached nearly 10%. The balance concerns environmental projects (mostly water and wastewater) and human capital (education and health-care). EIB-support for human capital remained limited, due to the reluctance of local governments to borrow at non-concessional terms for the development of these sectors.

Lending operations were mostly financed under the EC-guaranteed EuroMed II mandate [13] Overall, quantitative targets were exceeded to such extent that resources under the Euro-Med II mandate would be completely depleted before the end date of the mandate. To avoid a decrease in FEMIP support to the region before the entry into force of the EIB external mandates 2007-2013, the EIB has proposed an interim-facility of EUR 1bn to be used in 2006 and possibly EUR 0.5bn for 2007 (with no EU-guarantee and with wider eligibility criteria than the Nice facility). The Euro-Mediterranean meeting of Heads of States (Barcelona, 29-11-2005) welcomed this proposal, to be adopted by the EIB Board of Directors when the need for it will emerge [14].

The Special FEMIP Envelope (SFE) was set up in August 2005 by the EIB to provide loans for private sector operations with a higher risk profile than the one generally accepted under “standard” EIB operations, or for which acceptable third party guarantees are not available (or too expensive, or insufficient). According to its operating guidelines, the SFE aims at targeting 'the local financial sector, milestone industrial and infrastructure projects and selective initiatives in the tourist sector'. To cover for the additional risk, SFE loans are priced according to the risk, and a special reserve was established of EUR 100m (to cover loans up to around EUR 500 m).

The SFE has financed 2 operations in 2005: two global loans to banks in Morocco and Lebanon, for a total amount of EUR 80m (for which approximately 11% of the initial capital reserve of 100m was used). A third SFE operation (a global loan to a bank in Jordan) was approved by the EIB Board but has not yet been signed [15].

Nevertheless, with a project pipeline of around EUR 500m (up to EUR 60-70m in estimated reserve utilisation), it is foreseen that the first EUR 100m SFE tranche will be soon fully depleted. Furthermore, due to the expected changes in the EU budget guarantee mechanism (likely to be more restrictive from 2007 onwards), the SFE is expected to be used more often in the future. Therefore, a request for an additional EUR 100m reserve allocation for SFE operations has been approved by EIB Board of Governors in June 2006. Successive appropriations to the SFE reserve of up to EUR 100m per year shall be decided by the EIB governing bodies, after the completion of annual reviews of the use of the SFE.

Risk capital

Risk capital resources have been provided through the EIB to the Mediterranean region since 1985, financed from the EU budget (MEDA programmes and earlier financial protocols). These resources are used for various instruments and types of users:

· 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;

· a SME loan guarantee scheme (covering part of the risk on SMEs);

· direct investment in companies, under the form of equity or quasi-equity (local currency convertible, participating subordinated loans).

During the period October 2002 - December 2005, 8 new risk capital contracts were signed on the MEDA II mandate. Some of the contracts concerned global authorisations which were used for individual operations at a later date; in the October 2002-December 2005 period, EIB committed in total to 74 new individual financings for a total amount of EUR 125m [16]

Risk capital operations | Between Oct. 2002- end 2005 | Cumulative |

| Number | Amount | Number |

Private equity funds | 7 | 37m | 27 |

Co-investments | 62 | 67m | 678 |

Direct investments (including loans to microfinance institutions) | 5 | 21m | 27 |

These operations mainly took place in Morocco, Egypt and Algeria. In some other countries, the regulatory environment was not stable enough to conduct private equity operations, or market size was too small; to cater needs in these countries, regional funds were supported too.

Since the beginning of 2006, 6 new operations have been approved for an amount of EUR 54 million; these will be signed in 2006-2007. More operations for 2006-2007 are in the pipeline. It is therefore expected that the EU-budget contribution for risk capital (EUR 200m for 2001-2006, of which EUR 150m for 2003-2006) will be fully used in the current period.

The cumulative total of net signatures for risk-capital amounts to EUR 411m (of which EUR 364m has effectively been committed [17]; EUR 212m is still outstanding, i.e. disbursed and not yet reimbursed or written-off). The EIB is thereby the largest risk capital investor amongst international financial institutions in the region. In total, EIB has invested in 27 local private equity funds, has taken a direct financing risk on 678 local SMEs and financed 27 direct operations (including local currency loans to micro-finance institutions). Main recipients over the whole period were Morocco, Egypt and Tunisia, which reflects market developments (legislation, presence of qualified staff etc) and the size of the economies.

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Technical assistance

For the period 2003-2006, EUR 105m were available from the EU MEDA budget for project-related technical assistance (so-called “FEMIP Technical Assistance Support Fund”). The FEMIP Technical Assistance Support Fund provides technical assistance linked to EIB-loans for individual borrowers (for project identification, preparation, implementation / management and evaluation of projects) and for financial intermediaries (for improving procedures in the context of global loan operations, risk management, or setting up private equity funds).

At the end of 2005, more than 100 technical assistance operations [18] were identified for an amount of EUR 105 million (including Turkey). Up to end of August 2006, 64 service contracts amounting to EUR 42 million have been concluded with consulting firms.

For the period 2003-2005, the allocation of technical assistance operations over countries and sectors was as follows:

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Technical assistance operations are demand driven and always linked to an ongoing or future EIB investment. Hence, the allocation of technical assistance operations by country reflects to a large extent the size of lending operations under preparation or implementation, coupled with the project promoter's willingness to cooperate more intensively with the Bank and external advisors and willingness to invest in capacity building and institutional change (being typical goals within long-term technical assistance assignments).

So far, most of the project-related technical assistance resources have been used for environment (project management services for water and wastewater projects, environmental studies and capacity building measures for utilities), infrastructure (project management services for road construction and maintenance, port modernization, private participation in infrastructure and social housing) and private sector (long-term lending to SMEs in the context of global loan operations, setting up and strengthening risk capital intermediaries, feasibility and market studies). Technical assistance support to the energy, health and education sector has proven less relevant because of competent promoters (e.g. in the energy sector) and the reluctance of Mediterranean Partner Countries to use non-concessional finance for health and education projects.

The FEMIP donor trust fund was set up in October 2004 to finance project upstream technical assistance and risk capital operations that cannot be funded under MEDA. In the period until August 2006, the trust fund had received contributions from 16 donors (15 Member States and the EC) in the order of EUR 33.5 m, in line with the EUR 20-40m target set by the Council. In this period, 12 technical assistance operations/studies, mainly related to the financial sector, and one risk capital project, were approved by the Trust Fund Assembly of Donors for a total amount of EUR 6.5m.

As the amounts per operation are relatively low and the donor trust fund is rather new, around EUR 25-26m will remain available for technical assistance and risk capital in future years.

Interest rate subsidies

Interest rate subsidies were available from the EU budget for EIB loans to environmental projects; these subsidies are financed via the national indicative programs for individual countries (MEDA country allocations). In 2003-2005, interest subsidies were approved for ten EIB operations, for a total of EUR 68 million. Interest rate subsidies were mainly provided to water treatment / sewerage and solid waste projects and the subsidy amounts varied from EUR 5 to 10 million per project. The allocation of interest rate subsidies over countries was as follows:

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3.2 Assessment of the support to private sector development

The FEMIP facility has contributed to improving the business climate through financing of infrastructure. The majority of loans has been used for this purpose (60% of the loans provided since October 2002). Transport and energy infrastructure reduce production and transaction costs for private companies and improve their competitiveness and access to markets. These projects were mainly carried out by governments and state-owned enterprises.

More directly, in the period October 2002-December 2005, FEMIP has contributed to the development of the private sector through:

· loans to individual companies: 8 operations were signed between October 2002-end 2005, for a total of EUR 1.3 billion (of which a third in Turkey);

· global loans to financial intermediaries, for on-lending to SMEs: 15 global loans were signed for a total of EUR 1.6 billion (however, the number of financial intermediaries used was greater than 15);

· Risk capital: during the period October 2002 - December 2005, 8 new risk capital contracts were signed, next to commitments under global authorisations;

· technical assistance: nearly 30% of technical assistance was used for private sector, mainly for capacity building in local banks, setting up new investment funds and industrial projects.

Support to private operations has almost tripled in absolute terms, increasing from EUR 0.3bn per year in 2000-2002 to an average EUR 0.9bn in the period 2003-2005 (including Turkey).

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Despite this progress, by 2005 FEMIP was still struggling to reverse its public/private sector balance in a sustainable way and to bring its support to private companies to more than half of FEMIP activities. This was mainly caused by:

· The limited size of the private sector in various Mediterranean countries, the unattractive business environment, low investment rate and limited number of privatisations (see chapter 2 and annex);

· Criteria for FEMIP's instruments not always matching the risk profile of private sector projects throughout the region (although these risk criteria were widened since the introduction of the Special FEMIP Envelope; see paragraph 3.3);

· Mediterranean governments not always accepting private sector operations under their Framework agreement with the EIB.

3.3 Qualitative assessment of the different instruments

This section provides an assessment of the various FEMIP instruments, their strengths and weaknesses, taking into account consultations with FEMIP stakeholders which have taken place for this review as well as evaluation reports on EIB-loans to the Mediterranean region produced by the EIB Evaluation Division in 2005 [19]. Although referring to projects signed until 2003, these evaluation reports provide some useful insights into the strengths and weaknesses of EIB activity in the Mediterranean region, especially when taken together with the results of the stakeholder consultations. Summaries of the evaluation reports and stakeholder consultations are provided in the annex.

Loans

The evaluation reports showed that EIB lending operations were generally relevant for the economic development of Mediterranean partner countries. EIB's financial value added was generally substantial, as the type of finance provided by EIB (size, maturity, grace period and interest rate of loans) was not easily available in the local markets. This was much appreciated by borrowers, as the stakeholder consultations showed.

However, the value added was lower than it could have been, due to EIB's strict security/guarantee requirements, which limited the range of potential private sector borrowers and potential financial intermediaries. Furthermore, providing loans in foreign currency placed the exchange rate risk fully on borrowers. These findings were confirmed by the outcomes of stakeholder consultations, who pleaded for lighter security requirements and loans in local currency.

The evaluation report on individual loans also concluded that some opportunities to provide value added were missed by not placing enough emphasis on institutional issues and because of lack of technical assistance resources. It deemed activities had not been prioritised and saw potential gains from EIB better defining its role in each country or sector in cooperation with the local authorities, the Commission and other donors.

Global loans were found to add little to the development of the intermediary financial institutions and generally failed to reach smaller size companies, because most intermediaries were unwilling to finance these companies due to credit risk considerations (within the global loan instrument, the intermediary bank bears the risk on the end user), or because they didn't know how to handle these companies. In addition, small companies often need assistance to prepare bankable projects. The evaluation report on global loans therefore suggested targeting intermediaries which focus more on smaller companies and linking the global loans with support programs for smaller enterprises, so as to develop bankable projects.

These findings were confirmed by stakeholders’ consultations. Nearly all responding financial intermediaries also considered collateral to be an obstacle for smaller SMEs to access finance in their country, next to the lack of local currency finance and weaknesses within the SMEs themselves (weak financial structure, lack of reliable financial statements, weak management etc). The financial intermediaries therefore suggested including SME loan guarantee schemes in FEMIP's product range.

The “reinforcement” of FEMIP in 2003, with the introduction of a number of new instruments and features, directly addressed some of these deficiencies. The improvements included:

1. the Special FEMIP Envelope (SFE), for loans with a higher risk profile;

2. technical assistance, to improve the design, preparation and implementation of projects and for financial intermediaries;

3. more attention to sectoral and institutional developments, through FEMIP Experts’ meetings and sector studies financed under the donor trust fund;

4. intensified monitoring, through a general reinforcement of staff, the creation of specific “monitoring” posts and the opening of regional/local offices.

However, since its introduction the utilization of the SFE has been constrained by:

· the limited range of potential "bankable" beneficiaries for the SFE product in the region, mostly limited to best local corporates and banks (a segment of the market where local and international financiers are also active);

· the fact that certain Mediterranean countries (Algeria and Jordan) have started to question the applicability to private sector projects of their Framework Agreements with EIB;

· A number of obstacles which have emerged in the appraisal and negotiation of SFE operations. The legal expertise needed for taking local security for instance proved difficult, as the EIB has little in-house knowledge of local legal systems and outsourcing to local firms has proved difficult.

Regarding local currency loans, the EIB has undertaken much effort to offer these, in order to reach certain segments of the market (especially smaller companies, which cannot count on revenues in foreign currency or do not possess adequate means to hedge their foreign exchange positions). Before the EIB can issue local currency loans however, it needs to borrow in the same currency to cover its foreign currency risk. Although concrete steps were taken over the last few years regarding EIB bond issues in Morocco, Tunisia, Egypt and Israel, such efforts have not yet led to tangible results. The main reason for this is that specific Framework Agreements and other legal documentation (for example on taxation) need to be negotiated with the local authorities before any EIB bond issuing is possible. A positive development towards the goal of local bond issuance in Mediterranean countries was the launch of an international synthetic issue in Egyptian pounds in February 2006.

The reinforcement of FEMIP was a significant step in the right direction. However, some challenges remain:

· Current statutory provisions require EIB to secure stringent guarantees for its lending operations, thus constraining the institution's risk-taking and making it difficult for FEMIP to cater for private sector needs. The Special FEMIP Envelope is meant to facilitate this, but as of end 2005 this facility had only been used twice. Furthermore, despite the existence of a strong demand on the ground for this kind of product, the EIB has encountered difficulties in providing local currency loans.

· Global loans are primarily used by larger/export-oriented SMEs.

· Despite its project conditionality, EIB operations remain mainly project-based with little link to wider EU sector and country economic reform strategies.

Risk capital and technical assistance

FEMIP complemented loan products with risk capital, and technical assistance. For loans to environmental projects, interest subsidies were available too.

Risk capital

Consultations with a sample of stakeholders showed that the main reasons for choosing the EIB as a provider of risk capital were the availability of risk capital (not widely available from other sources), the size of risk capital, its pricing, maturity and EIB's speed of appraisal. All respondents believed that, without EIB support, it would have taken them longer to find convenient funding and most of them deemed it would have been more difficult to obtain financing from alternative sources. Without EIB-support, some end-users (SMEs) would not have received funding and other end-users would have received less funding.

Users suggested to increase the size of risk capital participations, deliver more expertise, and facilitate access to technical assistance resources [20]. Like the other user groups, the risk capital intermediaries were interested in using new instruments, such as loans in local currencies, SME loan guarantee schemes and quasi-equity instruments [21].

The last few years, management of risk capital operations within the EIB has strongly improved, by establishing a reinforced team within the FEMIP department dedicated to risk capital operations and by the use of local offices. The increased staffing also allows the EIB to participate in the decision making bodies of the funds / companies invested in, which contributes to knowledge transfer, improves decision making and helps deflect any potential local conflict of interest. Through application of best market practice for EIB's risk capital investments, notably in terms of transparency [22], the governance of the companies invested in will improve, which has a catalytic effect on other sources of finance. Furthermore, the EIB was able to conduct various innovative ventures, such as the first private sector leasing company in Algeria, the first international private sector bank in Algeria and the first technology seed fund in Tunisia.

To improve its own transparency of the use of risk capital, the EIB is currently preparing a report to be ready in Fall 2006 and plans to follow-up with annual reports on the risk capital portfolio.

Technical Assistance for EIB-projects

The 'FEMIP Technical Assistance Support Fund' for project-related TA, funded by the EU budget, proved to be a key instrument for the Bank to become more developmental in its operation in the Mediterranean Partner Countries. It also helps to develop new areas of intervention, such as small business lending, microfinance, privatisation, public-private partnership and project upstream work (sector reviews, institutional reform and capacity building measures, legal advice, training, etc.).The success of technical assistance depends largely on mainstreaming technical assistance activities, i.e. making them an integral part of the project identification and appraisal process from a very early stage, and an appropriate monitoring and evaluation effort. To be effective, technical assistance at project level has to dovetail with the assistance provided by the European Commission, the Bretton Woods institutions, other IFI’s and bilaterals, which support policy reform, institution and capacity building.

A mid-term evaluation of the Technical Assistance Support Fund is currently taking place; preliminary conclusions are that the majority of technical assistance operations are performing well and that the FEMIP support fund has the potential to improve considerably the quality of the EIB loan portfolio. The technical assistance has considerably improved the image of the Bank; the FEMIP support fund concept and approach is positively received in all target countries and co-operation with other donors seems good.

Issues for further improvement are that the technical assistance operations could sometimes be better tuned to the underlying investment project in terms of substance and timing; furthermore the Bank’s supervision and monitoring of technical assistance operations could be strengthened.

The preliminary conclusions of the mid-term evaluation exercise of the FEMIP support fund confirm the findings of the general assessment of the FEMIP facility: consultations with stakeholders showed that the users of technical assistance were generally satisfied with the technical assistance. Individual borrowers believed the technical assistance contributed to a smooth implementation of projects and greater sustainability of the investment, and increased the performance of the organisation.

Local banks found the technical assistance useful too; in their case the technical assistance was mainly used to improve the intermediaries' internal procedures (speed, reporting etc). Other uses of technical assistance mentioned were improving risk management capacity, advice to final beneficiaries, creation of a venture capital fund, training for bank staff and marketing.

The non-loan instruments proved to be useful additions to the FEMIP range of instruments, notably risk capital and technical assistance. To increase FEMIP's focus on smaller companies, technical assistance might be used more to help set up new venture capital funds and facilitate their establishment, discover innovative products and delivery channels for micro- & SME finance, assist SMEs in improving their bankability, etc (see chapter 4 for details).

3.4 Organisation and governance of the FEMIP facility

FEMIP is a facility established within the EIB, using its headquarters and basing its activities on EIB statutes, policy guidelines and governance structures. Decisions concerning FEMIP are taken by the EIB Board of Directors and its Board of Governors.

To cope with the growing activities in the Mediterranean region, a FEMIP Department was established within EIB at the end of 2002 (as part of the Directorate General for Lending Operations Outside the European Union). The FEMIP Department draws on the services and expertise of other EIB operational directorates (i.e. engineers, economists, lawyers, credit officers, etc), who provide essential input into project analysis, operational monitoring, project conditionality for disbursement of funds, etc. It further uses services of the Bank’s non-operational support directorates (e.g. Human Resources, IT, Budget & Planning, Treasury, Internal Audit, Evaluation, etc).

As of end of 2005, the number of operational staff working directly on FEMIP [23] amounted to approximately 70 people, compared to approximately 40 at the end of 2003 (excluding Turkey). If indirect non-operational staff was also taken into account, these figures would probably double.

While the reinforcement of FEMIP has led to an increase in FEMIP staff, its staff size still compares modest to other multilateral banks: both the size of new operations per staff member and the number of new operations per staff member in FEMIP are higher than in other multilateral institutions (see annex).

This increase in FEMIP staff has led to an increase in the administrative costs for FEMIP, from EUR 19m in 2003 to EUR 28m for the year 2005 (both estimates excluding Turkey). As such increase in costs was only partly offset by the growth in both intermediation and administrative revenues, FEMIP cost-coverage kept basically constant over the period, with current revenues covering around 80% of current costs [24].

Such incomplete cost coverage can be explained by a number of factors:

· There is always a 'chronological mismatch' between costs and revenues, with most costs being incurred before loan signature, while revenues only accrue following disbursement. While the recent sudden growth in FEMIP activity immediately translated in increased costs, most of the financial benefits are still to be seen

· FEMIP is bound to EIB’s budgetary and staff policies and lacks budgetary autonomy. Therefore, FEMIP is limited in its ability to cut its costs and increase its revenues, having to comply with general EIB rules, which are often inspired by its intra-EU operational needs. Lending rates are also uniformly set for 'regular' EIB operations outside the EU;

· While FEMIP own resources lending activities appear to be on average cost covering, the management of risk capital and technical assistance activities is not cost-covering. This can be partly explained by the particularly labour and time-intensive nature of such activities. For the next programming period, EIB's management fees for these activities will be renegotiated between the EIB and the Commission.

The more FEMIP engages in time and resource intensive areas (such as SME financing, policy and institutional dialogue, enhanced monitoring and advisory services), the more its cost-coverage ratios will deteriorate. EIB shareholders therefore need to weight their decisions regarding FEMIP's future role against cost-coverage considerations, desired lending rates and uniform pricing policies.

Local offices

In accordance with the 2003 review of FEMIP, the EIB increased its local presence throughout the Mediterranean region, through the establishment of two local offices in Rabat and Tunis (in addition to the regional one already established in Cairo in October 2003). The first experience with all offices is positive, which was confirmed by stakeholder consultations, helping among others to increase EIB's visibility in the region. However, due to the very limited number of staff attributed to these offices, their role has so far been mostly limited to that of representative offices, mostly providing support to Luxembourg-based operational activities (e.g. client/local authorities relationship, follow-up and monitoring, etc).

Together, the offices employ 7 EIB expatriate staff members (part of the 70 operational staff members mentioned above): the Cairo office employs 3 people, Tunis 2 and Rabat 2, including one secretary per office [25]. Other multilateral banks have a much stronger local presence, with offices established in all or at least half of the borrowing countries and employing more people per office:

Number of local offices and staff in local offices (rounded figures) [26] |

| IBRD/IDA | IFC | EBRD | IaDB/FSO | AsDB/AsDF | AfDB/AfDF | FEMIP |

% of staff in local offices | 32% | 45% | 40 -50% | 28% | 17% | changing | 10% |

Number of local offices | 109(5 MED) | 80(5 MED) | 32 | 26 | 23 | 12 - 24(4 MED) | 3 |

Both the number and size of EIB local offices are small compared to those of other IFIs; to exploit the full potential of these offices a staff increase would be needed. To ensure a uniform geographical coverage of the region, the number of external offices could also be increased.

Dialogue with Mediterranean countries

In the 2003 review of FEMIP, it was decided to strengthen the dialogue with Mediterranean countries by transforming the Policy Dialogue and Coordination Committee (PDCC) into an annual meeting at Ministerial level, to be preceded by two meetings of high-level experts’ per year.

In the last few years themes discussed at these meetings have included:

· access to finance ( 2004)

· privatisation (2004)

· transport, water & sanitation (2004), energy (2006)

· banking and financial sector development (2005)

· business climate in general and reducing the administrative burden (2006)

Next to representatives from Mediterranean and EU Ministries of Finance and Commission staff, experts from multilateral and bilateral development banks active in the region have been invited to the meetings (such as the IFC, African Development Bank, KfW etc), as well as representatives from the private sector. The meetings have proven useful to discuss both sector topics and more general topics such as access to finance and the overall business climate. They facilitated the exchange of best practices and lessons learned between countries and increased the involvement of the Mediterranean Partner countries in the FEMIP facility.

Starting in 2005, the Ministerial FEMIP meetings were organised back-to back with Euro-MED Ecofin Council meetings, at which macro-economic development and reforms in the Mediterranean region are being discussed.

In the FEMIP Ministerial meeting in Tunis and in stakeholder consultations, Mediterranean Partner countries supported the establishment of stronger and more regular dialogue structures, ensuring a greater involvement of Mediterranean countries in FEMIP's strategies, priorities and results.

Frameworks for cooperation with other donors

Compared to other IFIs, the EIB is the largest provider of finance in the Mediterranean region. Excluding Turkey, the EIB provided EUR 1.3bn in new loans to Mediterranean countries in 2005, while the African Development Bank (AfDB) provided around EUR 0.8 bn, the World Bank around EUR 0.7bn and the IFC around EUR 0.2 bn. Compared to the EIB, World Bank and AfDB tend to focus more on the public sector and also provide loans for sector reforms, social sectors and agriculture. Bilateral development institutions such as Kreditanstalt für Wiederaufbau (KfW) and Agence Française de Développement (AFD) are also active in the region.

Various initiatives have been taken in recent years by EIB to strengthen cooperation with other institutions:

· Around one-third of the EIB projects in the Mediterranean region was co-financed with multilateral and/or bilateral institutions. Of the 77 EIB loans signed between October 2002-end 2005, 15 projects were co-financed with multilateral institutions (EUR 1.3bn in co-financing) and 15 with bilateral development institutions (EUR 1.2bn in co-financing). Of these, 6 projects were co-financed with both multilateral and bilateral institutions;

· Participation of other multilateral and bilateral development banks in FEMIP meetings, which facilitates knowledge-sharing between institutions and countries;

· Organisation of joint events, such as a joint EIB-EC-World Bank seminar in Cairo in 2005 on the Investment Climate in the Mediterranean region;

· Cooperation agreements were signed with various institutions, such as the World Bank, AfDB, EDFI (association of bilateral development finance institutions in Europe), AFD and KfW. A work programme was established with the World Bank Institute, to share knowledge on new technologies, urban development and development of the financial sector;

· A cooperation and financing agreement, financed by the FEMIP Trust Fund, was signed with IMF´s Middle-East Technical Assistance Center (METAC), which offers assistance on reform of banking regulation, supervision and financial sectors in the Mashreq;

· Bi-annual consultations in the framework of the “Luxembourg process” continued between EIB/ EC/ World Bank/ IMF on lending and other issues of common interest in the region.

Various frameworks for cooperation have been recently established, which now need more time to be fully put into practice. Suggestions for improvement include increasing EIB's participation in donor meetings for individual countries as well as sector-wide approaches.

4. FEMIP Future Orientations

4.1 The future of the European Neighbourhood Policy (ENP)

The introduction of the European Neighbourhood Policy in 2004 has created a new political environment that needs to be taken into account when assessing the future of FEMIP. Starting in 2007, EC cooperation with neighbouring countries will be governed by the European Neighbourhood and Partnership Instrument (ENPI) which is a policy oriented instrument. This new instrument foresees specifically the need to ensure coherence with the EIB.

In this context, the Commission has put forward a proposal for the 2007-2013 EIB external mandate that would substantially increase the loan resources available for ENP countries. Such proposal also contemplates that the consistency of EIB external actions with the external policies and objectives of the European Union shall be strengthened.

With regard to the further development of ENP, it is expected that a comprehensive debate will take place within the EU in the course of next year. This could lead to a more ambitious and comprehensive approach in a wider ENP framework.

4.2 The options

For the future of FEMIP, various options, representing various levels of ambition, could be considered, ranging from:

Option 1: Baseline scenario – maintain the “reinforced” FEMIP taking into account the forthcoming Council decision on the EIB external mandates (increase in the volume of loans and reinforced articulation with the ENP);

Option 2: In addition to the above: fine-tuning and diversifying FEMIP's financial instruments and reinforcing partnership and local presence, to further improve FEMIP’s effectiveness and value-added for private sector development;

Option 3: Upgrading FEMIP into a fully-fledged Euro-Mediterranean bank, where the EIB would have a majority stake.

In this chapter the advantages and disadvantages of these options are described in detail.

4.3 Option 1: Maintain the “reinforced” FEMIP and improve its linkages with the ENP

The baseline option would be to leave FEMIP instruments unchanged, while adjusting the lending volume to take into account the Council decision on the EIB external mandates (which will be taken before the end of 2006) [27]. According to the Commission proposal, the increase in the regional ceiling would allow lending resources available to the region to grow by 2% per year in real terms, hence contributing to match the investment needs.

The external mandate proposal also envisages strengthening the linkage between EIB priorities and EU policies under the European Neighbourhood Policy (ENP) to deepen economic integration between the EU and its neighbours through further trade liberalisation, joint transport and energy networks and regulatory approximation to open up markets and overcome barriers to trade and investment.

The European Neighbourhood Policy complements the Euro-Mediterranean partnership and has become the relevant framework for economic policy reforms in the EU’s partner countries in the South and the East. A better integration of the EIB into the European Neighbourhood Policy political and strategic frameworks (notably relevant sections of the Action Plans), and better coordination between activities funded by the EU budget and EIB projects, would enhance the consistency and impact of EU actions, and better align the EIB with a wider economic reform perspective. In practical terms, the coordination between EIB and Commission in the Mediterranean region could be strengthened by:

· further association of the EIB in the Commission's programming process (country or regional strategy papers, indicative programmes and action programmes). This would also provide incentives for Mediterranean countries to use part of their allocations under the National Indicative Programmes in support of preparation of EIB projects and sector approaches. This would also imply an increasing EIB's association in EU-dialogues with public authorities and other donors in Mediterranean countries;

· close cooperation in the upstream identification and in the implementation of FEMIP projects: by exchanging project information at an early stage (i.e. pipeline and/or project identification), better exploiting potential synergies between EIB and EU budget funding and setting up sector-wide "framework loans", with EIB financing clusters of projects in a specific sector supporting a sector reform or strategy, drawn up in the context of the country action plan, in cooperation with the Commission and possibly other multilateral/bilateral institutions.

· increased EIB involvement in the financing of regional strategies such as the extension of the Trans-European Networks to the Mediterranean region, with emphasis both on North-South and South-South regional integration;

Risk capital and technical assistance are and will continue to be financed from EU budget resources. Over the period of the next Financial Perspectives, the Commission plans to propose under the ENPI regional programme for the Mediterranean region an envelope of € 32m per year in grant contribution to FEMIP, subject to the coming into force of ENPI and the relevant comitology procedures. In addition, the Commission foresees a revision of the EIB-Commission agreement governing the management of financial assistance to Mediterranean countries, and in particular the use of reflows of risk capital and special loans [28] from past operations under MEDA estimated at € 35m per year, in view of adding these resources as a contribution to FEMIP.

The reflows, both from past Protocols and Mandates and from future operations under the new mandate, would be used for new risk capital operations. This should enable FEMIP to aim for a volume of around EUR 50m a year in new risk capital operations (corresponding to the 2005-2006 average) and commit around EUR 20m a year for technical assistance [29].

Furthermore, the amounts available in the donor Trust Fund at the end of 2006 could be carried over to the new programming period, to finance additional technical assistance and risk capital operations. Interest rate subsidies will remain available for selected projects, on request by national authorities and financed by the ENPI country allocations.

To handle the larger volume of loans and increased integration of EIB activities into the ENP and EU sector and country strategies, the EIB broadly estimates it would need to reinforce its staff to approximately 110 operational staff by 2013, from its around 70 operational staff members as of end of 2005. The number of staff would still remain small compared to other International Financial Institutions. Under this scenario, according to the EIB, administrative costs would still outweigh current revenues, although FEMIP cost coverage would progressively improve over time [30].

This baseline option would be the least costly in terms of staff needs. However, it would not address the identified pitfalls as regards private sector development, nor sizeably increase ownership from Mediterranean countries or visibility.

4.4 Option 2: In the framework of the ENP, adjust FEMIP to enhance support for SME development and increase partnership

This option aims at overcoming the shortcomings identified above, while maintaining the current organisational arrangements. For FEMIP to realise more of its potential in targeting private sector needs (and notably SME needs), in addition to the features under Option 1, this option proposes to fine-tune and broaden the range of FEMIP instruments and to strengthen EIB presence at local level. Furthermore, the creation of an Advisory Committee is also proposed to reinforce the partnership with Mediterranean countries and increase their ownership.

Better matching private sector needs through a wider range of financial instruments and services with added focus on SMEs

To better address the difficulties in access to finance encountered by private companies, and especially by small companies (as mentioned in chapter 2 and 3), the range of FEMIP instruments could be revised with a view to more risk-taking and a better targeting of smaller SMEs.

Increased risk-taking:

In June 2006, the EIB Board of Governors approved a request for an additional EUR 100m tranche from the Bank’s reserves for Special FEMIP Envelope (SFE) operations [31]. Together with this expansion in size, the range of instruments financed by the SFE for operations with a higher risk profile could also be expanded, for example to include guarantee products (as is already the practice under the Special Financing Facility within the EU, to which the SFE is officially linked). More use could also be made of the SFE to widen the range of financial intermediaries receiving global loans and the range of individual recipients. Increased risk taking through an enhanced use of the SFE also requires cooperation from Mediterranean partner countries' authorities to fully implement the bilateral Framework Agreements with EIB for private sector projects.

Furthermore, risk capital resources will continue to support a range of activities with a higher risk profile, including instruments in local currency, without large collateral requirements. This would be useful for private companies and especially for SMEs. In this respect, FEMIP could further continue to support:

· the development of SMEs loan guarantee schemes. Global loans are not always the most appropriate instrument, as they provide liquidity without risk coverage. By providing guarantees to local banks for new SME loans, the credit risk for the local bank would be partly covered, thus lowering the need for collateral requirement and increasing access to finance for SMEs. Another advantage is that this instrument does not generate exchange rate risks and is therefore suitable for smaller SMEs without export earnings. The EIB already supported an SME loan guarantee scheme in Gaza-West Bank and schemes in ACP countries (through the Investment Facility);

· micro-finance activities, by participating in new or existing micro-finance institutions, or providing guarantees or loans to these institutions, to be combined with technical assistance if needed. The range of countries where micro-finance is available could be widened (next to Morocco and Tunisia); with FEMIP support, micro-finance institutions could broaden their client base, extend their range of services offered, introduce new technologies or find new delivery channels and bridge the gap between micro-finance and regular bank loans [32]. Through technical assistance, the EIB could also assist micro-finance institutions in becoming financially sustainable [33];

· the growing private equity/venture capital industry. To cover a wider range of countries, regional funds could be supported and technical assistance could be used to support the emergence of new funds and facilitate their establishment.

The EIB could also promote the availability of trade finance instruments, by providing global loans and/or guarantees to local financial institutions. This way, Mediterranean companies could make better use of the 2010 Euro-Mediterranean Free Trade Area. The scheme could be modelled on the examples of those set up by other IFIs in other regions (e.g. EBRD). The EIB could also make use of its network of bank counterparts to establish networks between institutions in the EU and in Mediterranean countries that promote trade finance. A study financed under the FEMIP Trust Fund is currently investigating whether scope for such an EIB scheme in the region exists.

If FEMIP were to undertake more and larger operations (such as participations in companies that are being privatised or joint equity investments with loans for large private sector projects such as PPPs), the financing requirements for risk capital activities could certainly exceed the level of EUR 50m a year foreseen under Option 1 (an EIB estimate points to a minimum of EUR 80m per year for 2007-2013). To fill the financing gap, EU Members States and Mediterranean countries or the EIB itself (through its reserves or alternative financing mechanisms) could provide additional funds.

Targeting smaller SMEs better:

Further to the above, SMEs' special difficulties could be addressed by encouraging financial intermediaries to cater for smaller SMEs needs better. To this end the global loan instrument could be further improved, along the lines set out in the last few years:

To stimulate competition between local banks and reach more SMEs, global loans could continue to be extended to several intermediary banks in each country; targets could be included in global loan agreements to focus more on smaller SME (or the incentive system can be changed to reward this), or more intermediaries could be targeted which specialise in the smaller SMEs or microfinance sectors and provide a wide range of instruments.

To ensure that the lower cost of EIB funding will benefit the SMEs, global loans agreements with intermediary banks will continue to include provisions on the transfer of the funding advantage.

To overcome local financial institutions' risk-averse attitude and SMEs' often non-transparent management, the EIB could also devote more technical assistance to local banks and, indirectly, SMEs:

· technical assistance for intermediary banks to help develop systems to assess SME credit risks better, streamline procedures and introduce new products for SMEs (including methods to ease transfers of remittances to Mediterranean countries). The expertise from SME-oriented banks in Europe and Candidate countries could be shared with banks in the Mediterranean;

· indirectly, technical assistance for SMEs, especially smaller companies, to assist them with drafting business plans, to improve reporting skills and overall transparency, which makes them more bankable. The EIB could channel this technical assistance through local business / SME organisations.

Developing local currency lending:

As many borrowers in the Mediterranean region have low export revenues, the provision of loans in hard currency creates a currency mismatch. Local currency loans could solve this. The stakeholder consultations showed that more than half of the individual borrowers and nearly all intermediary banks would be interested in using EIB loans in local currency.

Local currency loans will be an appropriate instrument for direct financing for private enterprises, intermediary banks receiving global loans, as well as infrastructure concessions projects with no foreign currency revenues. The issue of EIB bonds will also contribute to the development of domestic capital markets.

However, the EIB can provide local currency loans only once local authorities in the beneficiary countries have cleared all necessary steps for the EIB to issue bonds in local markets. Cooperation from Mediterranean authorities is therefore essential, as specific Framework Agreements and other legal documentation need to be negotiated first.

Increasing local interaction and partnership

To increase the involvement in and ownership of Mediterranean countries in FEMIP, the governance structure could be adjusted. In the FEMIP Ministerial meeting in June 2006, many countries showed interest in replacing the current bi-annual high-level experts’ meetings with an Advisory Committee composed of representatives from Member States, Mediterranean partners, and the Commission which could meet 2 to 4 times a year.

In addition to subjects discussed in the current experts’ meetings, such as achievements and challenges in individual sectors (including sector reforms), the overall business climate in the Mediterranean region and an exchange of best practices or lessons learned from countries and institutions, the Advisory Committee would also discuss FEMIP strategy, priorities and results, including:

· FEMIP business plans;

· FEMIP annual reports;

· Reports on the use of various FEMIP instruments;

· Hurdles encountered by FEMIP while conducting operations in Mediterranean countries.

This way, FEMIP would also become more responsive to needs on the ground. As is the case for the current experts’ meetings, the Advisory Committee would also prepare the ground for the yearly FEMIP Ministerial Meeting. Depending on the topics for discussion, outside experts would also possibly be invited, such as representatives from other International Financial Institutions or bilateral development banks. The participants could be of similar level to the ones taking part in the current high-level experts’ meetings or higher (e.g. senior officials in the Finance Ministries of Member States, Mediterranean partner countries and the Commission). Meetings would be chaired by the EIB.

To further improve proximity and visibility of FEMIP, the size of local offices could be gradually expanded. The current limited number of staff (a total of 7 EIB expatriate staff members, meaning 2-3 staff members per office including a secretary) limits their role mainly to representative offices. With more staff members per office, the offices could deliver more services, while still remaining small compared to offices of other IFIs. Next to establishing closer contacts with public authorities and (potential) clients, and improve EIB’s integration into wider strategies and donor cooperation, the offices could deepen their involvement in the project cycle (project identification, monitoring and evaluation), improve the monitoring of TA, risk capital and global loan operations and transfer more EIB knowledge and experience to clients. This would increase the effectiveness and value added of EIB operations.

Consideration should also be given to expanding the number of local offices, if justified by operational and business needs. From the stakeholder consultations, respondents in countries without an office were often in favour of establishing a local office. Priority could be given to countries with the highest potential for private sector development or where direct presence on the ground can lead to increased value added. This would also give the EIB more visibility and signal long-term commitment to the host country. In establishing new offices, synergies with the Commission and/or bilateral development agencies will be exploited.

Under Option 2, EIB estimates that it would need an increase in operational staff working directly on Mediterranean operations to a total of approximately 130 units by the end of 2013, to cope with the strengthening of staff-intensive risk-capital operations, the broadening of the role of local offices and the creation of an Advisory Committee. This would translate into higher costs than those incurred under Option 1. According to the EIB, administrative costs would outweigh current revenues, although FEMIP cost coverage would progressively improve between 2007 and 2013.

Under Option 2 (compared to Option 1), private sector needs would be better served, FEMIP would come closer to its customers and other stakeholders and Mediterranean countries would become more involved in FEMIP strategy and results. It would also increase the intensity of FEMIP's support to SME creation and development.

4.5 Option 3: Establishment of a fully fledged Euro-Mediterranean bank

The third option to be considered is the creation of a dedicated bank for the Mediterranean region, providing higher financing volumes, a wider variety of instruments and services and more risk taking. This bank would have its own statutes, financial policies, headquarters and staff, with EIB (majority), Member States, Mediterranean countries and the European Community as shareholders.

The new institution would operate in the Mediterranean partner countries in both the ENP and the Barcelona process (currently 9 countries) [34]. Besides EU Member States, the EIB and the European Community, shareholders could include other Mediterranean countries, notably candidate and potential candidate countries (e.g. Turkey).

A 'Bank for the Euro-Mediterranean could take a variety of forms (e.g. in terms of activities, operational independence, governance and membership), which would have different impacts on the operational and capital requirements. Delivering higher volumes, a wider variety of instruments and services on own resources and taking more risk than FEMIP would also be more human resource-intensive.

Activities

While in the long-term, the primary target of the new bank would be private companies or state-owned companies undergoing privatisation, a substantial portion of its activities in the first years of operation would still remain directed towards infrastructure and other public sector projects. Reasons for this are that the size of the Mediterranean private sector is currently too limited to sustain a bank focused only on the private sector (the absorption capacity would be restricted and the bank could not spread its risks sufficiently) and basic infrastructures are needed to create an “enabling environment” for private sector development.

The Bank for the Euro-Mediterranean could take a central role in areas such as privatisation and restructuring, reform of the financial sector, promotion of FDI and SME development, environmental rehabilitation, infrastructure and it could also support investments in human capital (e.g. education, health-care).

To provide flexible financing, the new bank would use at least the same variety of instruments on own resources as considered under Option 2, including lending, equity, guarantees, etc, but with a higher risk-tolerance. Like FEMIP and most other multilateral banks, it would also be looking at attracting and catalysing funds from external donors (shareholders) for grant-funded activities, such as technical assistance and subsidies.

Greater involvement of Mediterranean countries in the bank’s governance and extended local presence, which makes easier to increase the volume of private sector activities, would enable the Bank to reach higher business volumes than in the other scenarios contemplated in this review. The EIB estimates that lending activities could start at a level of EUR 1.8bn in 2009 (the new institution's first operational year), reaching a cruising speed of EUR 2.6bn by 2013. Risk capital activities could also progressively grow from an estimated EUR 100m p.a. in 2009 to EUR 120m p.a. in 2013.

Capital requirements

Its restricted country basis and increased risk appetite, compared to the EIB, would call for a capital base of the new institution at least as strong as other multilateral banks (full coverage of loans by capital: gearing ratio of 100%, as opposed to 250% for the EIB).

To create a constant flow of intermediation revenues from day one [35] and to improve the risk profile of the new bank's overall portfolio, the existing EIB portfolio in the Mediterranean region (estimated at around EUR 14bn at the beginning of 2009) could be notionally transferred to the new bank at the time of creation. This portfolio transfer would also include old loans to Turkey, Cyprus and Malta provided under Mediterranean mandates (however, responsibility for new operations in these three countries would remain with EIB itself). In this scenario, capital requirements to cover the first few years of activity (up to 2013) would amount to EUR 21.5bn for subscribed capital, including transfer of the current EIB-portfolio.

The capital required would increase over time, in line with the exposure, with new capital needs likely beyond 2013. The EIB could pay a part of its capital share by transferring the capital that is attached to current FEMIP operations to the new bank [36]. However, if the EIB were to ask a transfer price for the transfer of the existing portfolio to the new bank (equivalent to the economic value of the future intermediation revenues at the moment of transfer), this option would become less attractive.

In order to provide an estimate of the costs for shareholders, some calculations have been made for illustrative purposes, assuming the EIB would take a 60% share, the European Community 10%, Member States 15% and Mediterranean countries [37] also 15%. Various other scenarios can be envisaged too. Under the above assumptions, capital requirements of the new institution are estimated by the EIB as follows:

Indicative costs for shareholders in bn EUR (cumulative figures, assuming start in 2009) including transfer of the existing Mediterranean portfolio to the new institution |

| 2006 | 2008 | 2010 | 2013 |

| | | | |

Total portfolio (outstanding) [38] | 11.8 | 13.9 | 16.4 | 21.5 |

gearing ratio | | 100% | 100% | 100% |

subscribed capital | | 13.9 | 16.4 | 21.5 |

Paid-in ratio | | 20% | 20% | 20% |

Paid-in capital | | 2.8 | 3.3 | 4.3 |

| | | | |

EIB-share (60%) | | | | |

subscribed capital | | 8.3 | 9.8 | 12.9 |

Paid-in capital | | 1.7 | 2.0 | 2.6 |

| | | | |

European Community (10%) | | | | |

subscribed capital | | 1.4 | 1.6 | 2.2 |

Paid-in capital | | 0.3 | 0.3 | 0.4 |

| | | | |

Member states (15%) | | | | |

subscribed capital | | 2.1 | 2.5 | 3.2 |

Paid-in capital | | 0.4 | 0.5 | 0.6 |

| | | | |

Mediterranean countries (15%) | | | | |

subscribed capital | | 2.1 | 2.5 | 3.2 |

Paid-in capital | | 0.4 | 0.5 | 0.6 |

The capital requirements and the costs for the EU budget depend on various factors, such as whether the 'Bank for the Euro-Mediterranean’ would benefit from the EU budget guarantee currently provided to the EIB [39]. In the absence of a Community guarantee for political and commercial risks and depending on their risk profile, borrowers would be charged both a political and commercial risk premium. In that case the savings for the EU budget from no longer having to provisioning risks could be used to partly finance the European Community's capital share in the new bank, limiting the additional costs for the EU budget.

Alternative scenarios for the Bank for the Euro-Mediterranean

Alternative scenarios could also be looked at:

· Should the existing EIB-loan portfolio in the Mediterranean region not be transferred to the new institution, then capital needs would be lower (estimated at around EUR 11bn for 2009-2013). However, this would also mean that the new institution would not be able to benefit from day one from a constant flow of intermediation revenues. In order to generate sufficient treasury revenues, to cover its administrative costs in its first few years of activity, (on the example of EBRD), a higher paid in ratio would hence be required..

· If, for example, the paid-in ratio was halved (to 10%), then the figures for paid-in capital in the table above would also be halved, making it less costly for shareholders. However, the loss of treasury income would then need to be compensated by raising fees and mark-ups charged to the bank's clients, as to ensure full cost coverage.

Another option would be to increase the gearing ratio, following the example of the IFC. The IFC, also active in the private sector, can provide finance up to 4 times its capital. However, the IFC is active worldwide, so it is able to spread its risk more evenly, and its capital is fully paid-in. Such a structure (gearing of 4 with 100% paid-in) would be more expensive for shareholders than a bank with a gearing of 1 and 20% paid-in capital. Furthermore, a gearing ratio higher than one would lead to a more risk-averse attitude, as loans will not be fully covered by capital (same situation as in the EIB).

As regards human resources, for illustrative purposes the EIB estimates that under a “maximum” scenario, whereby the new subsidiary would function completely independently from EIB corporate (i.e. be developing its own specific corporate support services [40]), the 'Bank for the Euro-Mediterranean’ would need around 390 staff members in 2009, growing to 540 by end of 2013 [41]. Alternatively, should the new institution decide to continue to rely heavily, against payment a fee, on EIB support services, management and physical infrastructure,(i.e. “minimal” scenario) EIB estimates that these figures could be halved [42]. Such strong increase in staff numbers compared to current levels would be justified by the different nature and characteristics of the new institution: a stronger private sector focus, with a higher degree of operational and financial sophistication; an average project size and number of new projects per loan/investment officer lower than today’s and more in line with current standards among other IFIs; more emphasis on monitoring and operational follow-up; the provision of high value added financial advisory services to the bank clients together with increased integration of the bank activities into wider sector and country strategies; management of higher volumes of third-party resources (e.g. trust funds, etc); etc.

Achieving cost coverage in this context would imply either a strong increase in administrative mark-up levels for borrowers, or a sufficient paid-in capital by shareholders, to benefit from substantial treasury revenues from day one. Based on an EIB model, it is estimated that a 20% paid-in ratio would most likely allow the new institution to charge an administrative mark-up in line with what is currently charged by the EIB. In addition, risk premiums may apply.

The main advantages of this option would be to increase ownership, by including Mediterranean countries in the decision making process and shareholding, and to promote a more risk-taking attitude, with a corporate culture more oriented towards private sector lending and more flexible instruments. It could also increase the visibility of the EU political commitment to Euro-Mediterranean financial relations.

However, this option would entail additional costs for shareholders. Unless the subsidiary continued to benefit from EU budget guarantees, its restricted country basis compared with the EIB would call for a capital base at least as strong as other multilateral banks (gearing ratio of 100%, as opposed to 250% for the EIB). A higher paid-in capital ratio (i.e. 20%) would also be necessary so as to generate sufficient treasury revenues, to cover the higher costs linked to higher staff levels. [43].

The time and constraints needed to establish such an entity have to be considered. Compared with other options, it would take far more time and effort for the new institution to become fully operational. The creation of an EIB subsidiary would require a modification of the EIB statutes, such as the one carried out by the Act of 25 March 1993, amending the Protocol on the Statute of the European Investment Bank empowering the Board of Governors to establish a European Investment Fund (EIF), by which article 30 was inserted in the EIB statutes. As the Protocol is part of the EC-Treaty, convocation of an ad-hoc intergovernmental conference would be required, as well as signature and ratification by each Member State.

Furthermore, international negotiations on the actual set-up of the 'Bank for the Euro-Mediterranean’, its statutes, seat, capital structure and working methods that satisfy all shareholders involved are likely to be lengthy and complicated (eventually, ratification of its statutes by shareholders’ national parliaments). Finally, a Council Decision would have to be adopted on Community membership of the new entity, so that the Community, represented by the Commission, could become a member of the new bank, in line with the procedure followed in relation with the EIF. It therefore seems reasonable to expect a minimum period of 2 years between the decision to create a Bank for the Mediterranean and its actual creation.

5 Conclusions

At this stage, Option 2 appears as the preferred option, as it combines better matching private sector needs (including SMEs), more partnership with Mediterranean partner countries and more local presence with cost and time efficiency. Most improvements could be largely accommodated within the current institutional setting of FEMIP, with only some changes in the way activities are organised. This adaptation will take place in the context of the adoption of ENPI and of the future development of the European Neighbourhood Policy.

The main advantages of Option 3, a 'Bank for the Euro-Mediterranean’, would be the ownership and involvement of Mediterranean countries, visibility and a more risk-taking attitude/ more flexibility in instruments. However, this could to a large extent also be realised through some changes in the design of current facility: with Option 2 most improvements could be accommodated within the current institutional setting of FEMIP.

Mediterranean countries for instance could gain more control on the use of the FEMIP facility, by turning the expert meetings into an advisory committee, which also discusses FEMIP strategy and results, next to sector topics and the overall business climate.

The visibility and local presence of EIB's activities in the Mediterranean could be enhanced through the opening of slightly more and/or larger local offices. This will also facilitate the dialogue with the governments and other donors, and improve project monitoring. Furthermore, local presence also reduces information and transaction costs for potential clients, making the EIB more attractive.

By fine-tuning the range of instruments and strengthening the strategic focus of FEMIP, the operations will become more effective, private sector needs will be better met and the EIB would be able to add more value to its operations.

Annex 1: Main Instruments and Features of the current (reinforced) FEMIP

Transformation of the Policy Dialogue Coordination Committee (“PDCC”) into a supervisory Ministerial Meeting: To improve the dialogue on the structural reform process, the dialogue structure has been changed into a yearly Ministerial meeting, preceded by preparatory meetings of High Level Experts. Involving official representatives from the Mediterranean, EU member states and a range of regional and international experts (from the public and private sectors), these meetings have made a useful contribution to the regional policy dialogue and increased the sense of ownership among Mediterranean countries. |

Creation of a “Special FEMIP Envelope” (“SFE”):The SFE can finance private sector operations with a higher risk profile than accepted under “standard” EIB operations. To cover the additional risk, a special reserve of EUR 100m has been established which could cover up to around EUR 500m in loans. The SFE became operational in August 2005, after delays due to the required amendments to the EU guarantee (to extend political risk cover to SFE operations). In 2005, two operations were signed for an amount of EUR 80m. Obstacles encountered were: 1) cooperation needed from Mediterranean authorities, by acknowledging the application of the bilateral Framework Agreements with EIB for private sector projects, 2) limited number of potential "bankable" beneficiaries in the region (best local corporates and banks) and competition from other financiers in this segment and 3) the legal input needed for taking local security. However, with a project pipeline of up to EUR 60-70m in estimated capital utilisation, it is foreseen that the first EUR 100m SFE tranche will be soon fully depleted. A request for an additional EUR 100m for SFE operations has been approved by the EIB Board of Governors in June 2006. Successive appropriations to the SFE reserve of up to EUR 100m per annum are to be decided by the Bank governing bodies after the completion of annual reviews of the use of the SFE. |

Establishment of a FEMIP donor Trust Fund of initially EUR 20-40m:The donor trust fund was set up at the end of 2004 to provide resources for technical assistance and risk capital operations, focussing on operations that could not be financed from the EU (MEDA) budget (such as technical assistance that is not directly related to EIB-projects). As of August 2006, the FEMIP Trust Fund had received contributions from 15 Member States plus the European Community, in the order of EUR 33.5m. In its first year and a half, 12 technical assistance projects and one risk capital project were approved by the Assembly of Donors, for a total amount of EUR 6.5m. |

Risk capital financed from the EU budget:From the EU (MEDA) budget, EUR 150m was set aside for risk capital operations in 2003-2006. Between October 2002 and end 2005, 8 risk capital operations were signed for a total amount of EUR 79m; the remaining amount will be used in the remaining period. The total amount of risk-capital operations historically committed by the EIB in the Mediterranean countries is around EUR 350m (of which EUR 212m is still outstanding). Risk capital has been used for “direct” operations (either direct equity stakes in private companies of larger size or participating local currency loans to smaller companies or micro-finance institutions; together 19% of operations), “intermediated” operations including investments in private equity funds investing in SMEs (26% of operations) as well as risk-shared loans/co-investments in small private beneficiaries (55% of operations). In total, EIB has invested in 27 local private equity funds, has taken a direct financing risk on 678 local SMEs and financed 27 direct operations (including local currency loans to micro-finance institutions). |

Technical assistance financed from the EU budget (FEMIP TA Support Fund):EUR 105m was made available from the MEDA budget for 2003 – 2006 to finance technical assistance (TA) for EIB investments, during different stages of the project cycle (project identification, preparation, implementation and evaluation), as well as institutional reform and capacity building. As of August 2006, the Bank had identified more than 100 operations for an amount of EUR 105m (the budget will be fully used); of which 64 technical assistance operations were already contracted with consulting firms for an amount of EUR 42m. Technical assistance enhances the value-added of EIB operations and has the potential to improve the effectiveness of the EIB loans and risk capital operations. |

Extension of FEMIP’s local presence to the Mediterranean region:The EIB has opened a regional office in Egypt and two local offices (Tunisia and Morocco). These offices have contributed to improving contacts with local authorities, borrowers and other donors. They have made FEMIP more visible and helped to identify new projects and monitor existing projects/TA. However, due to the very limited number of staff (3 in Cairo, 2 in Tunis and Rabat, including one secretary per office) they have mainly functioned as representative offices and provided support to Luxembourg-based operational activities (e.g. client/local authorities relationship, follow-up and monitoring, etc). |

Annex to chapter 2: Economic challenges and constraints in the region

Overall economic environment [44]

The Mediterranean [45] region experienced relatively strong economic growth in recent years. However, the growth of per capita income is small, unemployment remains high and many countries remain vulnerable to external shocks. Receipts from remittances and tourist income are high, but foreign direct investments remains low, also due to the weak business climate (which is improving but still below that of other regions) and the slow pace of structural economic reforms.

Following an economic upswing in 2004 and an average real growth rate of 5%, the region continued to grow in 2005 at a comparable pace (4.8%). Although robust, the region growth rates still lag behind the growth (7%) observed in other emerging markets and developing countries. Economic growth in oil-producing countries was mainly driven by external factors, such as high oil prices. In non-oil countries, such as Egypt, Morocco, Tunisia and Jordan, economic growth was substantial but mostly driven by private consumption (2.6% growth on average), and relatively little by investment (0.7%) [46]. Investment ratios in Mediterranean countries have stagnated since the end of the 1970s, to a level of 17-25% of GDP, which is lower than in e.g. Asia. Explanatory factors for this are mainly the low productivity in the region and relatively high real interest rates.

(...PICT...)

On a per capita basis, in 2004-2005 the Mediterranean countries continued to grow at lower rates than developing countries as a whole (3% in Mediterranean compared to 4.7%). [47] Since the eighties, GDP per capita growth rates ranged between 1% and 3% for most countries in the region. Apart from Israel, the income per capita in the Mediterranean region varies between USD 1200 and USD 5000 (see chart below). Poverty remains widespread; the percentage of people living below USD 3 a day varies from 20% (Tunisia, Jordan), 35% (Algeria) to 70% (Egypt) [48].

(...PICT...)

Despite economic growth, unemployment remains high in most countries, because of the rapid population growth and the weak business climate, which hampers the start of new enterprises and growth of existing enterprises. Officially-reported unemployment rates range from 9% in Israel and Egypt up to 23% in West Bank and Gaza (2005 figures). For young people, unemployment rates are generally higher. Despite robust economic performance, unemployment has increased in Jordan (from 13% in 2004 to 16% in 2005) and in Syria (from 16% in 2004 to 20% in 2005), but improvements were observed in Israel (from 10% in 2004 to 9% in 2005) and Algeria (from 17% in 2004 to 14% in 2005). As the labour force in the region is expected to grow at around 3% a year, a GDP growth rate between 6% and 7 % per year would be needed to provide sufficient jobs. Most people are employed in the services sector and in industry; in some countries agriculture is a large employer too (for example in Egypt, Algeria and Turkey).

A high degree of political and security risks and vulnerability to other external shocks continue to characterise the region. Adverse conditions for agricultural production and high oil prices have deteriorated the current account balance in many countries in the region in 2005. Limited diversification of the economy, and particularly of exports, increases the vulnerability to shocks in Algeria, Egypt and Syria.

Next to tourist receipts, remittances and to a lesser extent ODA are strong sources of income. FDI inflows are relatively low compared to other regions; only 3% of net private capital flows to developing regions is directed towards the MENA region [49].

Main sources of external financing in 2004 (source: World Development Indicators 2006) |

| net ODA in bn $ | aid as % of GNI | Remittances in m $ | Tourism in m $ | FDI in m $ | FDI inflow [50] as % of GDP |

Algeria | 313 | 0,4 | 2460 | 112 | 882 | 1,0 |

Egypt | 1458 | 1,9 | 3341 | 6328 | 1253 | 1,6 |

Israel | 479 | 0,4 | 398 | 2819 | 1664 | 1,4 |

Jordan | 581 | 5,0 | 2287 | 1621 | 620 | 5,4 |

Lebanon | 265 | 1,3 | 2700 | 5931 | 288 | 1,3 |

Morocco | 706 | 1,4 | 4221 | 4541 | 769 | 1,5 |

Syria | 110 | 0,5 | 855 | 1888 | 275 | 1,1 |

Tunisia | 328 | 1,2 | 1432 | 2432 | 593 | 2,1 |

Turkey | 257 | 0,1 | 804 | | 2733 | 0,9 |

West Bank -Gaza | 1136 | over 25% | 692 | | | |

total | 5633 | | 19190 | 25672 ex. Turkey | 9077 | |

The fiscal situation remains a challenge for most of the Mediterranean countries, despite the consolidation efforts. For Lebanon, Israel and Egypt, the public debt exceeded 100% of GDP in 2004-2005, while the fiscal deficit remained high well above 5%. In some countries a large part of the government budget is spent on staff costs (up to 60% of current expenditure) [51], leaving little room for social expenditures or investment. The public sector as a share of total employment is also high in some countries (up to 40%, compared to an OECD overage of 14%).

In the early 2000s, the size of the private sector varied between 40% and 80% of GDP. Since then, some progress has been made regarding privatization, although this differs between countries.

Enabling environment for the private sector

A dynamic and competitive private sector is the engine for sustainable economic growth and job creation, both urgently needed in the Mediterranean region. Overall, the business climate in the Mediterranean is improving, but still ranks below world average. For instance, legal uncertainty, overregulation and poor public services lead to high costs and hamper starting up new enterprises and development of existing enterprises.

Experience shows that countries in which the business environment is more difficult, generally have a far higher unemployment rate. The benefits of reforms in the business environment can be substantial: the number of new businesses could rise substantially, generating higher economic growth and reducing unemployment. The costs of reform are often limited, and will be compensated by additional tax revenues due to higher economic growth. A better business environment is also an incentive for companies to join the formal sector [52].

According to World Bank data, most Mediterranean countries still score below the world average on various aspects regarding the ease of doing business. For instance, most Mediterranean countries face heavy regulations on many aspects of doing business, such as starting and closing businesses, dealing with licences, registering property etc.

Mediterranean partner countries’ business environment 2006 (country ranking; 1 is best and 155 lowest) [53] |

| Ease of doing business | Starting business | Dealing with licences | Hiring & firing | Getting credit | Registering property | Investor protect-tion | Paying taxes | Trading across borders | Closing business | Enforce-ment of contract |

Algeria | 128 | 109 | 100 | 96 | 138 | 138 | 97 | 149 | 84 | 46 | 131 |

Egypt | 141 | 115 | 146 | 140 | 142 | 129 | 114 | 87 | 70 | 106 | 118 |

Israel | 29 | 12 | 83 | 58 | 12 | 134 | 6 | 97 | 11 | 38 | 103 |

Jordan | 74 | 119 | 59 | 68 | 65 | 104 | 124 | 15 | 61 | 70 | 58 |

Lebanon | 95 | 99 | 90 | 49 | 66 | 85 | 102 | 43 | 94 | 98 | 142 |

Morocco | 102 | 50 | 125 | 124 | 146 | 58 | 117 | 126 | 98 | 51 | 29 |

Syria | 121 | 135 | 78 | 94 | 124 | 76 | 105 | 42 | 146 | 65 | 149 |

Tunisia | 58 | 40 | 88 | 101 | 102 | 67 | 133 | 64 | 53 | 31 | 6 |

Turkey | 93 | 46 | 137 | 141 | 103 | 49 | 75 | 66 | 95 | 125 | 37 |

Gaza-WB | 125 | 152 | 76 | 75 | 129 | 86 | | 96 | 75 | 155 | 88 |

Although the overall picture is still not satisfying, the region's progress in improving the business climate has been considerable in the last three years. For example, Tunisia reduced the minimum capital requirement to obtain a business registration by more than 90% in 2005; Morocco has reduced the number of procedures necessary to start a business from 11 to 5 in the period 2003-2005. In 2005, Egypt centralised business start-up in one building with electronic registration and lowered property registration fees to 3% of the property value. Egypt also established a single window for trade documentation and merged 26 approvals in 5, thereby substantially saving time.

However, looking more closely at the data, it appears that the number of procedures and time needed may not be the biggest hurdle for most of the Doing Business aspects in the Mediterranean [54]. The biggest hurdle may be the costs associated, such as the costs and minimum capital for starting a business, the costs of dealing with licences (see below), and costs of firing staff.

Examples of Doing Business indicators (source: World Bank Doing Business Report 2006) |

| Starting a Business | Dealing with licences |

| number of procedures | time(days) | cost(% of income per capita) | minimum capital(% of income per capita) | Time (days) | number of procedures | Costs (% of income per capita) |

Algeria | 14 | 24 | 25 | 55 | 244 | 25 | 71 |

Egypt | 10 | 34 | 105 | 740 | 263 | 30 | 1067 |

Israel | 5 | 34 | 5 | 0 | 219 | 21 | 94 |

Jordan | 11 | 36 | 46 | 1012 | 122 | 17 | 506 |

Lebanon | 6 | 46 | 111 | 69 | 275 | 16 | 214 |

Morocco | 5 | 11 | 12 | 700 | 217 | 21 | 1303 |

Syria | 12 | 47 | 34 | 5112 | 134 | 20 | 360 |

Tunisia | 9 | 14 | 10 | 30 | 154 | 21 | 340 |

Turkey | 8 | 9 | 28 | 21 | 232 | 32 | 369 |

Gaza-West B. | 11 | 106 | 275 | 1410 | 144 | 18 | 779 |

MED average | 9 | 36 | 65 | 914 | 200 | 22 | 510 |

EU average | 7 | 28 | 9 | 46 | 191 | 16 | 82 |

Further improving the business climate would not only benefit local companies, but would also make the region more attractive to foreign investors. According to World Bank Investment Climate surveys conducted in some Mediterranean countries [55], foreign investors are reluctant to invest in the Mediterranean for various reasons, from insufficient investor protection laws, limited rights to establishment, policy uncertainty, fear of corruption, tax rates to lacking access to finance. Mediterranean partner countries also compare unfavourably with other regions (such as Latin America and Asia) on a number of governance indicators, such as political stability, regulatory quality and 'voice and accountability'.

Access to finance [56]

Obtaining credit remains problematic for private enterprises in Mediterranean countries, especially for smaller companies, while their growth is essential to generate new jobs and income. Bank credit often covers less than 20% of private sector investment needs.

Obtaining credit is a major obstacle in most Mediterranean countries. Although on average banks seem to have sufficient capital and liquidity, they are reluctant to take risk. This is partly due to the fact that the percentage of non-performing loans is already high (between 10 and 25%, which is substantially higher than in the EU). Banks ask relatively high interest rates