Communication from the Commission to the Council - Shaping support for private sector development in the Mediterranean {SEC(2003) 1110}
Date: 2003-10-15
Institutions: European Commission
Subjects: European Investment Bank, Union for the Mediterranean, economic analysis, financial cooperation, investment aid, private investment

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 15.10.2003
COM(2003) 587 final

COMMUNICATION FROM THE COMMISSION TO THE COUNCIL

SHAPING SUPPORT FOR PRIVATE SECTOR DEVELOPMENT
IN THE MEDITERRANEAN

{SEC(2003) 1110}

1. 

INTRODUCTION

The Laeken European Council of 14-15 December 2001 invited the Council and the
Commission to examine the setting up of a Euro-Mediterranean Development Bank.
Following this request the Commission on 27.2.2002 adopted a report to the Council
on  “A  new  Euro-Mediterranean  Bank1  ”.  The  report,  having  considered  different
options,  favoured  the  establishment  of  an  EIB  majority-owned  subsidiary  which
would incorporate the Bank's activities in the Mediterranean.

There was a consensus among the Commission, Member States and the EIB that the
lack of private sector development and investment in the Mediterranean was a core
impediment to achieving higher growth rates and to the region's long term economic
development,  and  that  private  sector  projects  should  have  the  priority  of  EU
investment support to the region.

In March 2002 the Ecofin and European Council in Barcelona decided to enhance the
EIB's  existing  activities  in  the  region  through  the  creation  of  a  Facility  within  the
Bank.  They  nevertheless  concluded  that  a  decision  on  the  incorporation  of  this
facility  into  an  EIB  subsidiary  should  be  considered  again  after  one  year.  In  its  14
March 2002 conclusions the ECOFIN states that "On the basis of the evaluation of
the Facility performance, and taking into account the outcome of consultations with
our Barcelona Process Partners, a decision on the incorporation of an EIB majority
owned  subsidiary  dedicated  to  our  Mediterranean  Partner  Countries  will  be
considered and taken one year after the launching of the Facility".

The new  Facility is a important instrument  in  the  broader  context  of  the  Barcelona
Euro-Mediterranean  Partnership  framework  launched  in  November  1995.  The
economic and financial pillar of the Barcelona framework aims at creating an area of
shared prosperity through the progressive establishment of a free trade-area between
the  EU  and  its  Partners  and  among  the  Mediterranean  Partners  themselves,
accompanied  by  substantial  EU  financial  support  for  economic  transition  in  the
Partners and for the social and economic consequences of this reform process. More
recently,  in  March  2003,  the  Commission  proposed  in  its  "Wider  Europe"
Communication  to  the  Council2  a  new  framework  for  relations  with  the  European
Union's Eastern and Southern neighbours, offering them a stake in the Single Market
in  return  for  concrete  progress  demonstrating  shared  values  and  effective
implementation of political, economic and institutional reforms. FEMIP, or subject to
the Council's review  a possible Euro-Mediterranean  Bank, was  identified  as  one  of
the  instruments  expected  to  contribute  to  the  development  of  a  prosperous
neighbourhood area.

The Facility started its operations on 1 September 2002 and was officially launched
at  a  meeting  held  in  Barcelona  on  18  October  2002.  The  meeting  provided  the
opportunity to establish the Policy Dialogue and Co-ordination Committee (PDCC),
a  consultative  board  which  will  also  be  a  discussion  forum  on  the  private  sector
investment  environment  and  which  meets  twice  a  year.  Member  States,  the
Commission, but also Mediterranean Partners and International Financial Institutions

1 Ref. SEC (2002) 218.
2 COM (2003) 104 final of 11.3.2003

2

                                                
are represented in the PDCC. The second meeting of the PDCC was held on 3 April
2003 in Istanbul.

The review requested by the Council in March 2002 is now expected to take place in
the  Autumn  of  2003,  i.e.  one  year  after  the  launching  of  FEMIP.  To  facilitate  this
review,  the  Commission  launched  an  Extended  Impact  Assessment  (EIA)  on  the
FEMIP.  Impact  assessments  are  used  by  the  Commission  as  a  tool  to  improve  the
policy  development process and  are  to  be  carried  out  for all  major  initiatives3.  The
EIA report from Commission services has now been completed in September 2003.
Having examined the current status quo for FEMIP, it assesses the two core options -
developing  FEMIP  or  establishing  a  subsidiary-  and  their  potential  impact  on  a
number of criteria. The purpose of an EIA is not to draw policy conclusions, but to
provide facts and analysis on the design of options and their impact, so as to clarify
the implications of policy choices to be made.

Commission  services  consulted  the  main  stakeholders  in  this  process,  in  particular
Mediterranean  Partners.  Overall,  while  a  number  of  the  latter's  representatives
enquired on the features of each option and the nature of the choice to be made, those
which expressed a view recognised that the creation of a subsidiary would allow for
more  ownership  and  would  be  seen  as  a  strong  and  visible  political  commitment.
Some in particular inquired on the costs of the products to be offered by a subsidiary
and how they would compare with current terms available under FEMIP.

Taking  the  findings  of  this  forward-looking  Extended  Impact  Assessment  into
account, and based on the limited experience with FEMIP since its start, the present
Communication  aims  at  providing  elements  that  will  allow  the  Council  to  take  the
decision  it  announced  in  March  2002.  Against  the  background  of  the  need  to
stimulate  private  sector  development  in  the  Mediterranean  region,  it  examines  the
relative merits of the various options, looks at their costs and gives recommendations
on the possible ways ahead.

2. 

THE PRIVATE SECTOR DEVELOPMENT PRIORITY

Over  the  last  decade,  economic  growth  in  the  Mediterranean  Partners  has  been
insufficient to absorb a growing workforce. The lack of private sector4 development
is seen as a key explanation for this situation, which deteriorated further over the last
two years. Enhancing the role of the private sector in the region should therefore be a
key  objective  for  the  medium  and  the  long  term.  SMEs  in  particular  need  to  be
provided with the appropriate financial products to support their investment needs.

Countries  in  the  region  have  been  slow  to  shift  the  emphasis  from  the  State  to  the
market with the State still heavily involved in the real and financial sectors in many
countries,  in  particular,  Syria,  Algeria  and  Egypt,  discouraging  investment.
Privatisation  has  generally  proceeded  slowly,  although  this  is  only  one  aspect  of
private  sector  development.  Existing  enterprises,  especially  SMEs,  are  not  well
prepared  to  face  growing  international  competition  and  will  need  to  undertake
important investments to increase their level of productivity. New entrepreneurs find

3 Communication of the Commission on Impact Assessment. 5.6.2002 COM(2002) 276.
4  Private  sector  enterprises  are  in  this  Communication  understood  as  enterprises  controlled  by  private

shareholders.

3

                                                
it  difficult  to  enter  markets  and  the  reform  process  is  delayed  or  stalled.  In  the
Mediterranean region much needs to be done to modernise company law, investment
codes  and  customs  and 
legal  frameworks  (contract
tax  regulations.  Weak 
enforcement and property rights) contribute to uncertainty and lower investment. The
level  of  foreign  direct  investment  (FDI)  to  the  Mediterranean  has  been  low  by
international  standards  and  has  not  kept  pace  with  the  global  expansion  in
international capital flows. A comparison between current investment needs and the
characteristics of the supply of financial capital in Mediterranean Partners points to a
mismatch between supply and financing needs, long term  investment finance  being
difficult to mobilise.

The  primary responsibility  for the  current  private sector environment  and  its  future
developments  lies  with  Mediterranean  Partners.  They  need  to  foster  private  sector
development  by  establishing  business  friendly  environments  and  streamlining  the
often  bloated  public  sector.  A  functioning  financial  services  sector  is  also  a
fundamental  condition  for  stimulating  private  sector  investment.  However  the
difficulties  of  local  private  sector  firms  make  it  even  more  important  to  have  an
instrument  -from  the  supply  side  of  finance-  able  of  meeting  the  challenges  of  a
difficult environment. SME access to finance, especially to long term instruments has
remained very limited and should also be addressed. Just waiting for a change on the
demand side may not lead to any rapid results.

Private sector development is a key element of the EU’s Euro-Mediterranean policy,
as enshrined in the Barcelona Declaration and the bilateral Association Agreements.
Under  the  agreements'  economic  framework,  trade  liberalisation  measures  will
stimulate  private  sector  investment  and  thereby  enhance  the  competitiveness  and
growth  prospects  of  Mediterranean  economies.  The  EU  and  its  Mediterranean
Partners need a dynamic instrument and corresponding relationship, able to support
private  sector  operations  through  the  provision  of  hands-on  private  banking  advice
and finance and, in the longer run, to develop domestic long-term credit markets. The
often  unfavourable  private  sector  environment  in  the  region  makes  the  case  for  a
tailor-made private sector development instrument even more compelling.

For these reasons, the Commission considers FEMIP's private sector mandate to be a
crucial  feature.  Support  to  private  sector  development  was  already  considered  the
key priority in its February 2002 Report to the Council. The EIB and Member States
concurred with the Commission and the March 2002 Ecofin Council5 recognised the
need to stimulate private sector development in Mediterranean Partners, in order to
facilitate a higher level of economic growth consistent with the growth of the labour
force  in  the  region.  The  establishment  of  FEMIP  was  a  very  important  first  step,
notably because for the first time a shift of Euro-Mediterranean financial cooperation
towards private sector finance was decided.

5 Conclusions of the 14 March 2002 Ecofin Council meeting.

4

                                                
3. 

OPTIONS  FOR  THE  DEVELOPMENT  OF  THE  EURO-MEDITERRANEAN  FINANCIAL
COOPERATION

The forthcoming Council review now needs to conclude which is the most suitable
instrument  -FEMIP  or  a  subsidiary-  to  accompany  and  accelerate  the  shift  of
operations in the Mediterranean to private sector development.

To  this  end,  two  core  options  are  being  analysed.  The  first  option,  developing
FEMIP,  therefore  starts  from  the  hypothesis  that  the  existing  operations  of  FEMIP
are continued and further developed. The second option is that of incorporating all or
part of the FEMIP portfolio into an EIB majority-owned subsidiary.

The two options considered

The first option is defined as a further development of the newly established Facility, with
a private sector development mandate. This would entail possible adjustments in the Bank's
financial  policies,  and  more  specifically  as  regards  its  operations  in  the  Mediterranean.
Under  this  option,  FEMIP  would  remain  a  department  within  the  Bank,  operated  by  EIB
staff  as  presently,  potentially  increasing  their  number.  FEMIP  would  thus  continue  its
operations and develop its products as far as possible under the general umbrella of the EIB,
notably  its  statute  and  financial  policies.  The  Facility  would  continue  to  operate  mainly
under Council lending mandates, for the time being with the Community Budget guarantee,
and  with  the  contribution  of  the  EC  budget  mainly  for  technical  assistance  support  to  its
operations,  risk  capital  operations  and  interest  rates  subsidies  for  environmental  projects.
Operations  would  remain  centrally  managed  from  Luxembourg,  with  a  few  regional  or
country offices.

The  second  option  is  defined  as  the  establishment  of  a  majority-owned  EIB  subsidiary.
Under this option, part or the totality of the Bank's portfolio of assets in the Mediterranean
would  be  incorporated  in  the  subsidiary.  The  new  subsidiary  would  have  its  own  staff,
statute,  and  financial  policies  and  be  entrusted,  like  FEMIP,  with  a  private  sector
development  mandate.  Staff  would  be  substantially  increased  in  order  to  enable  the
resource-intensive  development  of  its  private  sector  operations.  The  new  subsidiary  would
offer a broad range of financial products. It would have a profile close to that of multilateral
development banks, in particular a financial standing and a capital base aimed at securing a
best creditor status and a Triple A rating. Operations would be centrally managed from its
headquarters,  with  an  important  role  devoted  to  local  country  offices.  The  assumption  is
that,  while  the  Bank  would  retain  a  majority  shareholding  position  in  the  subsidiary,  its
capital  would  be  opened  to  Member  States,  the  European  Community  and  also  to
Mediterranean Partners. Its governance would reflect this opened shareholding structure.

In  analysing  these  two  core  options,  assumptions  had  to  be  made  regarding  their
various  features.  These  assumptions  do  not  necessarily  mean  that  the  option
eventually decided by  the Council  should  have  those  features,  for  instance  because
there  are  overlaps  between  both  options  and  because  certain  features  may  evolve
over  time  or  depend  on  political,  institutional  or  budgetary  considerations.

3.1

First option: retaining and developing FEMIP

The establishment of FEMIP

The EIB has a long experience in the Mediterranean and has established a portfolio
of operations -worth around € 10 billion projects approved- and a business network

5

which  makes  it  presently  one  of  the  main  players  among  International  Financial
Institutions active in the region. The establishment of FEMIP as an EIB instrument
decided in 2002 enabled the Bank to maintain the continuity of its operations in the
Mediterranean,  and  Mediterranean  Partners  to  benefit  from  the  EIB  operational
capacity  and  favourable  lending  conditions.  The  Bank  lends  to  Mediterranean
Partners’  beneficiaries  under  Council  mandates.  The  current  mandate  foresees  a
lending envelope with the Community Budget guarantee of up to € 6.4 billion over
the period 2000-2007 and is presently the subject of a Mid-Term Review. Under the
general  external  lending  mandate  the  Bank  also  lends  to  Turkey  under  a  Special
Action  Programme  (up  to  €  450  million)  and  Terra  (up  to  €  600  million)  specific
envelopes.  In  addition  to  this  general  mandate  a  special  €  1  billion  envelope  was
established  in  the  EIB  in  2000  after  the  Nice  European  Council,  without  the
Community  Guarantee,  to  finance  major  trans-regional  transport,  energy  and
environmental projects in the region.

The  bulk of these operations have traditionally been  public  sector  operations.  On  a
number of projects which are not covered by a sovereign guarantee the Bank applies
the  risk  sharing  mechanism  whereby  it  covers  the  commercial  risk  from  a
commercial  guarantor,  while  the  political  risk  is  covered  the  Community  budget.
Risk  sharing  at  this  stage  currently  represents  15%  (some  4%  without  Turkey)  of
Bank lending operations in the region achieved on a mandate and assimilated basis,
to  be  compared  with  a  Council  objective  of  30%  for  operations  under  the  total
external  mandate  in  each  region.  Projects  financed  with  “global  loans”  through
financial  intermediaries  also  contribute  to  private  sector  development  to  the  extent
that SMEs are the main final beneficiaries, even though most intermediary financial
institutions  are  public-owned  banks.  Altogether,  the  Bank’s  combined  activities  in
favour of private sector development, including corporate loans and global loans on
own resources, and risk capital on EC budget resources, represent over the last three
years around 30% of the Bank’s activities in the Mediterranean.

In  order  to  develop  FEMIP,  the  Bank  established  the  FEMIP  department  as  a  cost
centre  and  increased  its  staff.  By  Mid-2003  there  were  25  persons  working
exclusively  on  FEMIP  (and  roughly  another  additional  25  full  time  staff  involved
inside  the  Bank  by  providing  support  assistance).  The  Bank  expects  to  recruit
between  12  and  18  additional  staff  and  to  reach  a  total  staff  of  around  40  persons
working only on FEMIP by end 2003. Staffing needs are currently being reassessed.

The Bank's October 2002 Business Plan for the Facility foresees:

– 

– 

a  sizeable  increase  in  lending  over  2003-2006,  up  to  a  level  of  around  €  2
billion  per  year  by  the  end  of  period,  compared  with  some  €  1.4  billion
commitments in 2001;

a  gradual  shift  of  operations  towards  the  private  sector.  Following  the  first
Business Plan would imply that by 2005-2006 private sector operations would
still  represent  a  minority  share  of  the  Bank's  annual  lending.  The  Bank  has
acknowledged  the  private  sector  priority  and  established  a  private  sector
operations division within the FEMIP department.

The development  of operations  since  the  establishment  of  FEMIP  tends  to  indicate
that  the  Business  Plan’s  conservative  estimates  can  be  exceeded:  FEMIP  has
performed  well  over  its  first  year  of  operations.  Since  the  establishment  of  the
Facility in October 2002,  and by  August 2003, 63 %  of operations  in volume have

6

been committed in favour of private sector support. This pattern however remains to
be  confirmed  over  a  longer  period  as  this  share  of  private  sector  operations  is
contingent upon a small number of large operations. Past and recent experience tend
to confirm that it is a challenging task for the EIB, as well as for other IFIs, to focus
their activities in the Mediterranean on private sector development.

The  Community  strongly  supports  EIB  activities  in  the  region,  notably  through
sizeable contributions from the EC budget:

provisioning  of  the  EC  budget  guarantee  fund  :  each  €  1  billion  of  Bank-
i./
FEMIP  guaranteed loans requires  € 58.5  million of provisions  from  the  reserve  for
guarantees;

ii./
interest rates subsidies for environment projects, paid from the MEDA budget,
for which amounts vary considerably every year (possibly around € 30 million on a
long term average);

iii./
risk  capital  funds  from  the  EC  budget  (mainly  financed  from  MEDA).  The
Commission  has  pledged  €  150  million  risk  capital  support  over  the  period  of  the
business  plan  (2003-2006);  under  its  current  statute6  the  Bank  cannot  normally
commit  equity  funds  from  its  own  resources;  current  arrangements  through  the
provision of risk capital funds from the  Community budget, managed by  the Bank,
allow to compensate for this statutory limitation;

technical  assistance;  one  of  the  main  changes  in  the  context  of  the
iv./
establishment  of  FEMIP is  that  significant MEDA  grant resources  have  been  made
available  to  finance  technical  assistance.  In  June  2002,  the  Commission  pledged  a
package  of  €  105  million  technical  assistance  to  support  FEMIP  projects  over  the
period 2003-2006. This package implies a considerable increase of funds devoted to
technical assistance (from € 3 million before FEMIP) to € 25 million annually under
FEMIP.

This  support  has  been  made  available  to  the  Bank  under  the  assumption  that  a
majority of EIB commitments in the region would go to the private sector at the end
of  this  period.  Community  support  is  however  costly  and,  in  order  to  ensure  long
term sustainability of the instrument, it will require recurring commitments from the
Community budget (see also costing elements below).

Further developing FEMIP

In  order  to  increase  FEMIP’s  impact  on  private  sector  development  and  keep  the
share  of  private  sector  financing  above  50  percent,  it  is  assumed  that  a  number  of
adaptations/innovations can be brought into the current instrument:

– 

an  increased  recourse  to  local  financial  institutions  to  channel  loans  to  local
firms,  notably  SMEs,  can  play  a  catalytic  role  to  support  the  local  financial
sector’s  supply  of  finance  geared  towards  local  entrepreneurs’  needs,  notably
micro-credit and risk capital ;

6 Article 20 of the EIB statute forbids the Bank of engaging into equity operations.

7

                                                
– 

– 

– 

exploring  the  possibility  for  the  EIB  to  borrow  on  local  capital  markets  and
lend  to  local  borrowers  in  local  currencies.  This  would  avoid  exchange  rate
risks  for  private  sector  borrowers  who  focus  on  local  rather  than  export
markets;

new  financial  products,  notably  SME  guarantees  with  the  support  of  the
European Investment Fund’s experience and know-how; to the extent that the
EIB’s  statute  can  be  amended,  in  particular  Article  20  (2)  which  excludes
equity  participation,  the  EIB  could  also  increase  its  risk  capital  activities  by
providing own resource equity;

enhancing the Bank’s risk profile by accepting single borrower guarantees and
reviewing current  guarantor  rating requirements,  pursuant  to  Article  18(3);  to
the  extent  that  Article  18(3)  can  be  amended,  significantly  reviewing  the
Bank’s  financial  policies  by  enhancing  the  Bank’s  risk  profile;  concurrently,
the Bank could modulate its private sector loan pricing and provisioning policy
in function of the enhanced risk profile;

– 

increasing  the  Bank’s  leverage  on  other  sources  of  finance  by  limiting  its
relative share of each project financed and developing syndicated loans.

Overall, FEMIP's activities on own resources benefit from the EIB leverage to
raise a high amount of funds on the market at favourable borrowing conditions,
owing to the Bank's best creditor status. They further benefit from the Bank's
low  operating  costs  which,  with  the  support  of  the  Community  guarantee,
enable FEMIP to offer attractive lending conditions. However, the EIB current
statute  and  corporate  culture  make  it  challenging  for  FEMIP  to  shift  its
operations  and  to  have  a  catalytic  role  on  private  sector  development  in  the
Mediterranean.  Provided  a  number  of  enhancements  can  be  brought  to  the
Facility,  notably  to  introduce  a  less  risk-averse  behaviour,  FEMIP  could  over
time enhance its contribution to private sector development in the region.

Second option: incorporating part or the totality of FEMIP into an EIB majority-

3.2
owned subsidiary

The  second  possible  option  in  order  to  enhance  the  Euro-Mediterranean  financial
cooperation and shift the emphasis of its support to private sector development is the
establishment of a majority-owned EIB subsidiary, incorporating part or the totality
of FEMIP's operations. A number of arguments have been examined, notably in the
context  of  the  Extended  Impact  Assessment,  on  the  rationale  for  this  incorporation
into a subsidiary.

Risk profile : the current conservative risk profile of the Bank which, according to its
statute, cannot commit equity resources and needs to secure adequate guarantees for
its lending operations, makes it difficult for FEMIP to shift its operations to private
sector development; this however may to some extent change if amendments to the
Statutes recently approved by the EIB Board are approved by the IGC and ratified.

Intensity  of  resources:  private  sector  development  is  a  resource-intensive  process,
notably in terms of staff, as shown by the experience of other  IFIs entrusted with a
private  sector  mandate  (the  IFC  and  the  EBRD);  a  dedicated  instrument  may  more

8

easily  depart  from  current  EIB  staffing  standards,  although  there  is  no  absolute
impediment to increasing staff resources within FEMIP.

Corporate culture: in spite of a high proportion of private sector lending in its intra-
EU operations, the Bank is still highly specialised in public infrastructure finance and
has  over  time  developed  a  corporate  culture  which  reflects  this  specialisation;  a
subsidiary would facilitate the shift to a more merchant banking culture.

Partnership  :  the  current  instrument  reflects  the  decision-making  process  and
governance on EIB operations within the EU, which means that EIB Mediterranean
lending  projects  are  approved  by  the  Bank's  board  as  any  other  project,  without
Mediterranean  Partners  having  any  say;  the  Bank  has  however  established  a
consultative  board,  the  PDCC,  which  discusses  the  Facility's  main  orientations  and
its  business  plan.  A  new  subsidiary  would  be  opened  to  Mediterranean  Partners
which  would  be  offered  a  stake  in  the  new  institution.  This  would  increase  the
ownership/partnership of the instrument.

in 

Interaction with local economic reforms. A subsidiary with increased staff dedicated
to  private  sector  banking,  providing  a  hands-on  due  diligence  of  private  sector
local  economic  reforms.
projects,  would  be  superior 
Mediterranean Partners’ representatives in the subsidiary's board -provided the latter
subscribe a share of the capital- could also play an important role in this respect. This
dynamic  interaction  could  facilitate  the  establishment  of  a  more  business-friendly
legal  and  economic  environment  in  the  region.  Furthermore,  it  would  provide  an
incentive for the Partners to make more optimal use of the other instruments of the
Euro-Mediterranean Partnership.

interacting  with 

Long term political commitment and visibility. The incorporation of FEMIP as a new
institution would no doubt represent a strong political commitment and give a long
term perspective and sustainability  to the  Euro-Mediterranean financial cooperation
geared  towards  investment  finance.  Rather  than  depending  on  annual  budgetary
commitments, the EU’s interest would be entrenched in the form of its participation
in the capital of the subsidiary. It would also give a high degree of visibility to this
political commitment.

The  Commission  has  examined  two  possible  sub-options  as  regards  the  possible
establishment of an EIB-majority owned subsidiary.

Sub-option 1: full incorporation of FEMIP into a majority-owned subsidiary.

Under  this  first  variant  of  the  subsidiary  option,  the  totality  of  FEMIP's  existing
portfolio, i.e. about € 10 billion (approved operations) would be incorporated into the
new subsidiary. This would have a number of advantages:

– 

– 

– 

the  subsidiary  would  immediately  benefit  from  a  revenue  stream  on  existing
operations which would contribute to its financial sustainability;

existing teams and staff could, to a large extent, constitute the core of the new
institution's  personnel  and  bring  in  their  experience  of  Mediterranean
operations;

the blend of public and private sector operations in the same institution may be
complementary  as  there  are  a  number  of  borderline  projects  such  as
privatisation  operations,  or  public-private  partnerships  such  as  BOT  -build-

9

operate-transfer-  infrastructure  projects  which  could  benefit  from  this  dual
public-private banking approach.

The new institution would need to be secured  with  a  capital  base  reflecting its  risk
profile  and financial standing with a best  creditor status.  If  the  Community  Budget
guarantee is  extended  to  the new subsidiary's  operations,  at  least  for  political risks,
its gearing ratio could be set at an intermediate level between the current EIB gearing
ratio  of  operations-to-capital  of  2.5  :  1  and  the  usual  gearing  ratio  of  development
banks, i.e. 1 : 1.

The  contributions  to  the  capitalisation  of  a  new  subsidiary  would  depend  on  the
composition  of  its  ownership.  While  the  EIB  would  bring  in  its  portfolio  and
subscribe  the  totality  or  a  large  share  of  its  majority  stake  with  the  incorporated
assets,  other  shareholders  -  Member  States  and  the  European  Community  -  would
need to subscribe their paid-in share through cash payments. The amounts concerned
(see  below  costing  elements)  are  contingent  on  the  relative  share  of  minority
participations  and  the  proportion  of  paid-in  capital.  If  Mediterranean  Partners  are
offered a stake in the new institution and thus subscribe a share of the capital, they
will have to contribute to its capitalisation as well.

Sub-option  2:  incorporating  only  FEMIP's  private  sector  projects  into  a  private-
sector-only EIB majority-owned subsidiary.

Under this variant of the option to establish an EIB subsidiary, only the private sector
operations of the Bank would be incorporated into the new institution. The remainder
of  FEMIP  activities  in  the  Mediterranean  -mainly  public  infrastructure  projects-
would  remain  within  the  EIB  itself.  This  option  is  thus  a  dual  one  combining  a
continuation  of  EIB  public  sector  activities  in  the  Mediterranean  Partners  with  a
subsidiary mandate restricted to the private sector inside the EIB group. A number of
arguments can be considered in favour of this option.

Capitalisation needs would be limited, even assuming a 1 : 1 gearing ratio, since the
size of the portfolio of operations to incorporate would be much lower - maybe € 1 to
2  billion  pending  assumptions  on  the  delineation  of  private  sector  operations  to
incorporate. There would be no need to secure a new capital base for the bulk of the
Bank's  existing  projects  -  mainly  public  infrastructure  projects-  and  for  the  future
share of operations related to public sector lending. The contributions to the capital
of the Community and Member States would hence be lower than in the case of a full
incorporation of FEMIP.

The EIB-FEMIP's high efficiency as regards public lending would be retained. EIB-
FEMIP public lending - i.e. the bulk of its current operations, mainly in the field of
infrastructure  -  has  performed  well  over  the  past  and  current  external  lending
mandates and is considered particularly efficient given the EIB's recognised expertise
in  this  area  and  its  high  cost-effectiveness.  This  efficiency,  combined  with  the  EC
budget  guarantee, translates into  low lending  rates and allows  for  the  EIB  to  be  an
important player in the field of infrastructure finance in the Mediterranean. Under a
dual  FEMIP-public  sector  and  subsidiary-private  sector  option  this  important  asset
would not be jeopardised.

Flexible risk profile and pricing policies. The new subsidiary's risk profile would be
adjusted  to  private  sector  development  needs.  The  new  subsidiary  would  adopt  a

10

pricing policy in line with its costs and risk profile. Lending rates oriented towards
market  interest  rates  would  reduce  the  scope  for  price  distortions  and  potential
crowding out effects on other lending institutions.

Compatibility  with  existing  Community  guarantee  arrangements.  The  EC  budget
guarantee  on  the  bulk  of  the  Bank's  external  lending  contributes  to  the  Bank's  low
lending  rates,  since  the  EIB  is  not  carrying  the  eventual  risk  of  default  on  its  own
accounts. A mid-term review of EIB external lending mandates for the period 2000-
2007 is expected to take place in the Council at the same time as the current FEMIP
review. The Commission is expected to propose for this mid-term review to endorse
a  continuation  until  January  2007  of  Community  guaranteed  external  lending
mandates.  Under  a  dual  FEMIP-public  sector  and  subsidiary-private  sector  option
there would be no immediate need to discontinue or modify the guarantee regime for
public  sector  operations  and  to  modify  public  sector  lending  rates.  Private  sector
lending of a new subsidiary would de jure fall outside the scope of the existing EC
budget guarantee which only applies to existing Council mandates which the EIB is
entrusted with.

Overall, the incorporation of FEMIP into a  majority-owned subsidiary, tailor-
made  to  meet  private  sector  development  needs,  is  expected  to  have  a  higher
degree of flexibility in addressing those needs, including through the adoption of
a less risk adverse profile, better suited to private sector finance. It would hence
be  expected  to  have  a  higher  impact  on  private  sector  development  in  the
region.  The  new  institution  would  have  a  high  degree  of  political  visibility.  A
higher  level  of  ownership  with  the  participation  of  Mediterranean  Partners  in
the  institution's  capital  and  governance  would  also  facilitate  interaction  with
local  economic  reforms  to  promote  a  more  business  friendly  environment.
Capitalisation  costs  related  to  minority  shares  subscriptions  by  the  EC  and
Member  States  could  to  a  greater  or  lesser  degree  be  compensated  by  savings
from the EC budget. The incorporation of FEMIP into a subsidiary could either
cover  its  full  portfolio,  thereby  providing  a  significant  revenue  stream  for  the
new subsidiary, or only be partial, limited to private sector operations, thereby
initially  requiring  a  more  limited  capital  base  and lower  capital  subscriptions.

4. 

COSTING ELEMENTS

Both core options -developing FEMIP and a subsidiary- have a number of budgetary
implications.  FEMIP  operations  will  remain  "notionally"  covered  by  a  share  of  the
EIB's  capital,  5%  of  which  is  paid-in  (Member  States  budget  contributions).
Moreover, FEMIP is rather costly for the EC budget (provisioning costs, EC budget
support).  Member  States  may  want  to  consider  additional  contributions  to  further
develop  FEMIP,  notably  related  to  the  establishment  of  a  donors'  Trust  Fund  now
being considered by the Bank.

FEMIP's  incorporation  into  a  subsidiary  would  have  budgetary  implications;
-  direct  capitalisation  costs  for  the  minority  shareholders,  in  particular  the  EC,
Member  States  and  possibly  Mediterranean  Partners  which  would  be  higher  than
equivalent "notional" capitalisation costs of the EIB;
-  possible  savings  of  provisioning  costs  from  the  EC  budget  if  the  Community
budget guarantee is fully or partially lifted ;

11

-  possible  savings  from  the  EC  budget  on  risk  capital  funding;  to  the  extent  that  a
subsidiary  would  not  be  constrained  by  current  limitations  of  the  EIB  statute;  the
subsidiary  would  be  able  to  commit  risk  capital  from  its  own  resources  instead  of
from EC budget funds.

The conclusion of this comparison7 is that, while all options have a cost:
- retaining FEMIP with its main existing features will require sustained, and possibly
higher,  Community  Budget  support  in  order  to  guarantee  its  operations,  and  to
finance  its  risk  capital  operations,  technical  assistance  and  interest  subsidies  for
environmental projects;
-  assuming  that  the  EC  and  Member  States  take  a  significant  stake  in  a  new
subsidiary, FEMIP's full incorporation into a subsidiary could be more costly from a
consolidated  EU  perspective  than  retaining  the  Facility,  in  spite  of  a  number  of
possible  savings  related  to  de-programming  risk  capital  support  from  MEDA  or  to
the reduction or cancellation of provisioning EIB own resources loans. Seen from a
more restricted EC budget perspective the impact of an incorporation of FEMIP into
a subsidiary could vary over the long term, pending assumptions;
-  FEMIP's  partial  incorporation  into  a  subsidiary  may  not  be  substantially  more
costly  over  the  long  term  from  a  consolidated  EU  perspective  than  retaining  and
developing FEMIP - under a number of assumptions it may even be cheaper-. Seen
from a restricted EC budget perspective it would potentially be cheaper owing to the
above mentioned savings made on the EC budget support.

Additional EC budget expenditure related to a subsidiary's capitalisation would have
to  remain  compatible  with  the  current  Financial  Perspective's  tight  budgetary
margins. On an illustrative basis, in case of a full incorporation of FEMIP already in
2004 and assuming a € 25 billion long term portfolio of operations:
- with a 2:1 operations-to-capital gearing ratio, an EC 10% participation in the new
institution, and a 10% paid-in capital released over 10 years, the Community Budget
would have to contribute with annual payments of € 12.5 million in 2004, 2005 and
2006;
- with a 1:1 gearing ratio, an EC 10% participation in the new institution, and a 20%
paid-in  capital  released  over  10  years,  the  Community  Budget  would  have  to
contribute with annual payments of € 50 million in 2004, 2005 and 2006.

7 See Extended Impact Assessment, notably section III.4.3.

12

                                                
Such amounts may already be fully or to a large extent secured from savings realised
from MEDA (deprogrammed risk capital support as of 2004; some 122 million over
2004-2006)  and  appear  compatible  with  the  Financial  Perspective.  The  range  of
possibilities as outlined in the table below is however broader, pending assumptions
to  be  made  on  the  main  parameters  (gearing  ratio  between  1  and  2.5,  EC
participation  between  5%  and  25%,  paid-in  between  10%  and  25%).  Assuming  a
release  of  capital  contributions  over  10  years,  this  could  imply  annual  budget
in  2004,  2005  and  2006.
payments  between  €  5  and  156  million 

EC paid in contribution to the capitalisation of a subsidiary
            Annual average budget impact - extreme values

€ million

Share of paid in capital :

10%

25%

Full incorporation
of FEMIP (1)
Gearing ratio
2,5

1

EC capital share
25%

5%

5

62,5

12,5

156

Partial incorporation
of FEMIP (2)
Gearing ratio 1

EC capital share
25%

5%

4

9

19

47

(1) Assuming a portfolio of operations of € 25 billion
     Capital paid in over 10 years

(2) Assuming a portfolio of operations of € 7,5 billion.
     Capital paid in over 10 years

A  partial  incorporation  of  FEMIP  (for  instance  under  the  "private-sector-only"
alternative mentioned above) would be less costly and would be compatible with the
Financial Perspective. On  an illustrative basis, assuming a € 7.5 billion portfolio of
operations, a 1:1 gearing ratio, an EC 10% participation in the new institution, and a
10%  to  20%  paid-in  capital  released  over  10  years,  the  Community  Budget  would
have  to  contribute  with  annual  payments  of  €  7.5  to  15  million  in  2004,  2005  and
2006.  The  full  range  of  possibilities,  with  a  1:1  gearing  ratio  and  under  the  same
other assumptions as above implies possible annual contributions between € 4 and 47
million already in 2004, 2005 and 2006.

Any choice of extension or reconsideration of the EC budget guarantee as regards the
subsidiary's lending operations would also need to be made consistent with the Mid-
Term  Review  of  the  Bank's  external  lending  mandates  due  to  be  examined  by  the
Council at the same time as the FEMIP review.

5. 

CONCLUSION

A  generally  weak  private  sector  and  an  unfavourable  business  environment  in  the
Mediterranean  impede  growth  in  the  region.  Unless  this  situation  is  reversed
Mediterranean Partners will not be able to offer sufficient growth and an acceptable
future  to  their  growing  population  and  workforce.  Upon  this  diagnostic  a  dynamic
redirection  of  the  Euro-Mediterranean  financial  cooperation  was  decided  in  March
2002 in Barcelona to address private sector financing needs, and led to the creation
of FEMIP.

13

The establishment of an instrument to catalyse private sector investment and reforms
in  the  region  is  however  representing  a  challenge  for  the  EIB.  The  successful
development  of  the  Facility  will  to  a  large  extent  rely  on  the  EIB’s  overall
institutional  environment  which  plays  a  decisive  role  in  shaping  its  main
characteristics. FEMIP, as operations from the Bank more generally, benefits from a
high degree of efficiency in terms of leverage and cost-effectiveness provided by this
belonging to the EIB. The establishment of a more flexible instrument with different
statute,  increased  dedicated  staff  and  a  new  corporate  culture  and  governance,  by
incorporating  FEMIP  into  a  majority-owned  subsidiary  designed  to  meet  private
sector financing needs, would increase the instrument's effectiveness, i.e. its capacity
to meet its private sector mandate objectives, at a limited cost.

The Commission therefore concludes that, although both the development of FEMIP
and  the  setting  up  of  an  EIB  majority-owned  subsidiary  for  operations  in  the
Mediterranean could provide a significant contribution to private sector development
in  the  Mediterranean,  a  subsidiary  entrusted  with  the  means  corresponding  to  a
strong private sector mandate would have a higher impact. A subsidiary is expected
to  have  a  higher  degree  of  flexibility  in  addressing  private  sector  needs,  including
through  the  adoption  of  a  less  risk  adverse  profile,  better  suited  to  private  sector
finance,  with  the  full  range  of  state-of-the-art  fianncial  products  geared  to  private
sector finance. Capitalisation costs related to minority shares subscriptions by the EC
and  Member  States  could  to  a  greater  or  lesser  degree  be  compensated  by  savings
from the EC budget.

FEMIP's  incorporation  into  a  subsidiary  would  also  increase  the  ownership  and
visibility  of  the  instrument,  ensure  the  long  term  sustainability  of  the  Euro-
Mediterranean financial co-operation and adequate governance arrangements would
provide  a  stronger  interaction  with  the  Mediterranean  Partners  in  ensuring  the
necessary  reforms  on  their  side.  In  the  Commission’s  view,  it  should  therefore  be
retained  as  the  preferable  option.  However,  if  the  Council  considers  that  the
subsidiary option cannot be pursued at this time, the Commission would recommend
that FEMIP should as a first stage be retained and further developed, and it should be
agreed to incorporate it as a second stage into an EIB majority-owned subsidiary.

Subject  to  the  Council's  own  conclusions,  the  Commission  is  ready  to  make  the
necessary legislative proposal allowing for the setting up of an EIB majority-owned
subsidiary, incorporating part or the totality of  FEMIP's outstanding operations and
entrusted  with  a  private  sector  mandate,  with  a  Community  participation  as  a
shareholder.  In any event, such a Commission proposal will remain consistent with
the existing Financial Perspective.

ANNEX : Executive Summary of the Extended Impact Assessment.

14

Commission services Extended Impact assessment.
Executive summary8

ANNEX

Over  the  last  decade  economic  growth  in  the  Mediterranean  Partner  countries  (“the
i.
Mediterranean”)  has  been  insufficient  to  absorb  a  growing  workforce.  The  lack  of  private
sector development is seen as a key factor explaining this situation, which deteriorated further
over the last two years. Enhancing the role of the private sector in the region should therefore
be a key objective for the medium and the long term. This requires in the first place a more
business  friendly  environment.  In  this  context,  a  comparison  between  current  investment
needs and the characteristics of the supply of financial capital in the Mediterranean also points
to  a  mismatch  between  supply  and  financing  needs,  long  term  investment  finance  being
difficult  to  mobilise.  SMEs  in  particular  need  to  be  provided  with  the  appropriate  financial
products to support their investment needs.

In order to address  these  needs,  in  March  2002  the  Ecofin  and  European  Council  in
ii.
Barcelona  decided  to  enhance  the  existing  activities  of  the  European  Investment  Bank
(EIB) in the Mediterranean through the creation of a Facility within the Bank. Private sector
development was considered a key priority. The Bank has proceeded rapidly with the setting
up  of  the  Facility  for  Euro-Mediterranean  Investment  and  Partnership  (FEMIP).  FEMIP
started its operations on 1 September 2002 and was officially launched at a meeting held in
Barcelona on 18 October 2002.

iii.
The  Ecofin  and  European  Council  nevertheless  considered  that  the  question  of
whether  to  incorporate  this  facility  into  an  EIB  majority-owned  subsidiary  should  be
considered one  year after  the launching of the  Facility.  The  review  requested  by  the  Ecofin
and the European Council one year after its creation is subsequently scheduled to take place
in Autumn 2003.

In  order  to  prepare  the  ground  for  the  line  to  take  in  this  review,  the  Commission

iv.
decided to conduct an Extended Impact Assessment9.

Impact Assessments

Impact Assessments are used by the Commission as a tool to improve the policy development
process and are to be carried out for all major initiatives10. Impact Assessments examine the
main  choices  in  view  of  a  policy  decision  to  be  made  and  outline  their  potential  impacts,
from  an  ex-ante  perspective.  They  identify  the  likely  positive  and  negative  impacts  of
proposed  policy  actions,  enabling  informed  policy  judgements  to  be  made  and  to  identify
trade-offs in achieving competing objectives.

Preliminary  draft  assessments  may  be  prepared  in  the  early  stage  of  the  process.  Extended
impact assessments - as in the present case - are meant to be prepared before the key decision
intervenes.

8

9

10

The  full  text  of  the  Commission  services  working  paper  Extended  Impact  Assessment  on  "Shaping  support  to  private  sector
development in the Mediterranean" is being made publicly available together with the present Communication.
Commission Work Programme 2003, Ref. COM(2002) 0590, Annex 2.
Communication of the Commission on Impact Assessment. 5.6.2002 COM(2002) 276.

15

                                                
v.
Options.  Two  schematic  policy  options  have  been  considered  for  this  impact
assessment. For the sake of comparison in the present assessment, certain assumptions have
been made in order to define each  of  these  options.  This  schematic  approach  should  not  be
seen as prejudging  their ultimate  design.  Another  possible  option where  the  current  Facility
would stay in place without being further enhanced is considered as the baseline case forming
the starting point for these two options.

vi. The first option is defined as a further development of the newly established Facility
(Developing FEMIP, referred to as the "FEMIP" option in this report), with a private sector
development mandate. This would entail possible adjustments in the Bank's financial policies,
and  more  specifically  as  regards  its  operations  in  the  Mediterranean.  Under  this  option,
FEMIP  would  remain  a  department  within  the  Bank,  operated  by  EIB  staff  as  presently,
potentially increasing their number. FEMIP would thus continue its operations and develop its
products  as  far  as  possible  under  the  general  umbrella  of  the  EIB,  notably  its  statute  and
financial  policies.  The  Facility  would  continue  to  operate  mainly  under  Council  lending
mandates,  for  the  time  being  with  the  Community  Budget  guarantee,  and  with  the
contribution of the  EC  budget  mainly  for  technical  assistance  support  to  its  operations,  risk
capital  operations  and  interest  rates  subsidies  for  environmental  projects.  Operations  would
remain centrally managed from Luxembourg, with a few regional or country offices.

vii.  The  second  option  is  defined  as  the  establishment  of  a  majority-owned  EIB
subsidiary  (“subsidiary”).  Under  this  option,  part  or  the  totality  of  the  Bank's  portfolio  of
assets  in  the  Mediterranean  would  be  incorporated  in  the  subsidiary.  The  new  subsidiary
would have its own staff, statute, and financial policies and be entrusted, like FEMIP, with a
private sector development mandate. Staff would be substantially increased in order to enable
the resource-intensive development of its private sector operations. The new subsidiary would
offer a broad range of financial products. It would have a profile close to that of multilateral
development banks, in particular a financial standing and a capital base aimed at securing  a
best  creditor  status  and  a  Triple  A  rating.  Operations  would  be  centrally  managed  from  its
headquarters, with an important role devoted to local country offices. The assumption is that,
while  the  Bank  would  retain  a  majority  shareholding  position  in  the  subsidiary,  its  capital
would  be  opened  to  Member  States,  the  European  Community  and  also  possibly  to
Mediterranean Partners. Its governance would reflect this opened shareholding structure.

In  order  to  conduct  an  assessment  of  the  two  options  a  number  of  impact  criteria
viii.
were defined.  These  include the  effectiveness  of  options  in  achieving  policy  objectives  and
their efficiency taking into consideration resource mobilisation. The impact on private sector
development  has  been  a  core  benchmark  in  assessing  the  options.  Furthermore,  consistent
with the conclusions of the Gothenburg European Council of 15-16 June 2001, impact criteria
have  been  examined  in  the  present  report  covering  a  broad  sustainable  development
perspective, including the economic, financial, employment and environment dimensions.

ix.
Consultation  of  stakeholders.  Commission  services  have  maintained  close  contacts
with  the  EIB  services  in  the  course  of  the  present  assessment.  Mediterranean  Partners  were
consulted as the main stakeholders in this process. While a number of Mediterranean Partners'
representatives  enquired  on  the  features  of  each  option  and  the  nature  of  the  choice  to  be
made, those which expressed a view recognised that the creation of a subsidiary would allow
for more ownership and would be seen as a strong and visible political commitment. Some in
particular  inquired  on  the  costs  of  the  products  to  be  offered  by  a  subsidiary  and  how  they
would  compare  with  the  current  terms  available  under  FEMIP.  Enterprise  confederations

16

which were also consulted emphasised SME11 financing needs and called for a reinforcement
and  a  diversification  of  the  supply  of  finance.  Commission  services  also  had  a  number  of
informal  contacts  with  the  European  Investment  Fund  (EIF),  the  World  Bank,  the
International  Finance  Corporation  (IFC),  the  African  Development  Bank  and  the  European
Bank for Reconstruction and Development (EBRD).

x.
Effectiveness.  As  regards  effectiveness  -  mainly  in  meeting  the  core  objective  of
supporting  private  sector  development  -  the  estimated  impact  of  the  two  options  is  not
invariant to the underlying assumptions. Nevertheless, it is clear that each option has a distinct
impact on meeting private sector investment needs of the region and contributing to growth.
A  number  of  other  objectives  have  also  been  assessed,  namely  the  capacity  of  supporting
local  financial  sector  development,  addressing  local  SME  needs  and  financing  key
transnational infrastructure projects as well as public-private partnerships.

xi.
As a baseline case, FEMIP has, owing to the strong commitment of its dedicated staff,
quickly  become  operational.  It  benefits  from  the  EIB  corporate  environment,  its  logistic,
infrastructure  and  experience.  Under  the  FEMIP  option,  private  sector  operations  can  be
increased from their current modest level, using local financial institutions to channel loans to
local  firms,  notably  SMEs.  However,  developing  the  private  sector  orientation  under  this
option is a real, although not impossible, challenge given the need to adapt a number of the
EIB's  statutory  provisions  and  standing  practices  for  this  purpose  across  the  Bank,  in  the
absence of any similar private sector mandate for the remainder of EIB operations.

The subsidiary option could be more effective than the FEMIP option in meeting the
xii.
private  sector  development  mandate  by  adopting  a  less  risk-averse  profile  than  the  EIB,
developing  a  pro-active  institutional  capacity  through  a  high  level  of  staff  resources
dedicated  to  private  sector  banking,  ensuring  more  proximity  to  local  operators,  pursuing
market-oriented  pricing  policies  to  cover  both  enhanced  risk  taking  and  higher  operating
costs,  as  well  as  offering  the  full  range  of  state-of-the-art  financial  products  geared  to
private sector finance for which the local supply is presently limited.

xiii.
Efficiency.  Under  the  baseline  status  quo,  the  current  FEMIP  instrument  is,  as  it
stands,  very  efficient  in  terms  of  costs  and  leverage  as  regards  the  Bank's  own  resource
operations. It benefits from the EIB’s low cost borrowing conditions and of synergies with the
Bank's other  activities  and departments.  It provides low  cost  loans  to  Partner  Countries  and
has  a  high  leverage  on  other  sources  of  finance  raised  on  the  market  to  carry  out  its
operations. In terms of proportionality of means mobilised to implement lending operations
the  FEMIP  option  can  be  considered  as  providing  a  higher  leverage  as  regards  its  own
resource operations than a subsidiary. This comparison is hampered by the fact that under the
current  statutes,  the  FEMIP  option  would  rely  on  external  funding  for  its  risk  capital
operations.

xiv.
Under  the  subsidiary  option,  operations  would  need  to  be  secured  with  capital
reflecting  the  risk  profile,  and  may  –subject  to  the  risk  profile  retained-  require  a  lower
capital-to-operations gearing ratio, which may have to be reduced from the current 2.5:1 EIB
overall  ratio.  The  percentage  of  paid-in  capital,  to  secure  the  subsidiary  with  an  adequate
working  capital,  would  need  to  be  higher  than  the  current  EIB  5%  paid-in  capital.  The
counterpart  would  be  the  capacity  to  develop  a  broader  offer  of  financial  products  and  to
conduct risk capital operations independently from external funding.

11

Small and Medium Sized Enterprises (SMEs). EC usual definition: enterprises of less than 500 employees

17

                                                
xv.
Assuming that the Community and Member States take a direct participation, they will
have to contribute to its capital. The  extent of this support would be subject to the eventual
features of the subsidiary and be compensated to a greater or lesser degree by savings from
the  EC  budget  since  MEDA12  risk  capital  support  and  the  provisioning  of  loans  in  the
Guarantee Fund for external lending would no longer be needed, at least in part.

xvi.
For Mediterranean Partners, the enhanced features of the subsidiary option compared
to  FEMIP  would  imply  correspondingly  higher  interest  rates  and  a  possible  capital
contribution if they were offered a stake  in the institution. These potential  cost  implications
are the counterpart of increased ownership of the instrument and additional benefits in terms
of private sector development.

Subsidiarity will continue to be better ensured by retaining a Community instrument -
xvii.
FEMIP  or  a  subsidiary-  than  through  a  multiplication  of  national  financing  schemes.  A
Community direct stake in a subsidiary can already be financed under the current Financial
Perspective and would moreover contribute to enhancing cooperation with other Community
instruments  such  as  MEDA  and  securing  consistency  with  the  policy  objectives  of  the
Community  in  the  Mediterranean.  Any  choice  of  extension  or  reconsideration  of  the  EC
budget guarantee as regards the subsidiary's lending operations would also  need to be made
consistent with the current Mid-Term Review of the Bank's external lending mandates.

xviii. Sustainable development. Assuming that a subsidiary would broadly adopt the EIB's
existing environmental policies and continue its operations in this area, the options have been
found  to  be  neutral  in  terms  of  environmental  impact.  While  it  has  not  been  possible  to
identify  a  quantified  impact  of  the  existing  EIB  operations  on  employment  in  the
Mediterranean, a subsidiary is estimated to be potentially more effective over the long term
in  contributing  to  employment  creation,  mainly  because  of  its  higher  effectiveness  in
stimulating  private  sector  development.  Adapting  and  developing  FEMIP  would  however
have a positive impact as well.

Partnership  with  Mediterranean  Partners  eligible  to  FEMIP  operations  is  currently
xix.
ensured  through  their  presence  in  FEMIP's  consultative  board,  the  Policy  Dialogue  and
Coordination  Committee  (PDCC).  This  board  only  has  a  consultative  role  and  FEMIP's
governance,  being  subject  EIB  rules,  does  not  ensure  any  co-decision  with  Mediterranean
Partners.  The  subsidiary  option  would  enhance  ownership  if  the  beneficiaries  of  its
operations  were  offered  a  stake  in  the  new  institution.  They  would  thus  participate  in  its
governance as full partners.

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The MEDA programme established under Council Regulation (EC)1488/96 is the principal financial instrument of the European
Union  for  the  implementation  of  the  Euro-Mediterranean  Partnership.  The  programme  offers  technical  and  financial  support
measures to accompany the reform of economic and social structures in the Mediterranean partners.

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