| 7th EURO-MED INFORMATION AND TRAINING PROGRAMME FOR DIPLOMATS
MEDITERRANEAN ACADEMY OF
DIPLOMATIC STUDIES 19.11-22.11.1999 The Role of the European Investment Bank in the Mediterranean Partners Chairman, Ladies and Gentlemen, On behalf of the EIB, it is a great honour and pleasure for me to participate to the programme for a second time, address this distinguished audience, and meet partly familiar faces around the table, particularly at the present time when one can happily say that it seems that "the winds of political and economic change" are starting shy to blow again through the Middle East region, its environs, and the Mediterranean area as a whole. Before starting my address, I should like to thank the organisers for the timely and useful initiative. I am sure that the programme will help once more everyone to appreciate better the difficult and inter-related problems facing the region, and to review the new business and investment opportunities emerging in response to these challenges. The timing makes the review very interesting, as the European Union (EU) itself, is also undergoing profound change. Europe is now moving into an extremely interesting phase in the history of its integration - not only it has embarked on creating a unified economic and monetary zone with the Euro as its single currency, it is also launching itself forward on a major expansion, preparing the way to welcome new member states from Central and Eastern Europe and the Mediterranean. And what makes this even more exciting for me, is that my institution, the European Investment Bank (EIB), as the Union's financing arm, is playing a central role in these events. Of course, I will approach the general discussion on the potentials and perspectives for economic co-operation between the European Union and the non-Union member Mediterranean countries, from the very specific angle of the EIB lending in the area, and its contribution to the Barcelona process. The EIB: a force for European integration First of all, what is the European Investment Bank? Set up under the Treaty of Rome in 1958, with headquarters in Luxembourg, the EIB has spent the last 40 years working hard at bringing about greater integration in the European Union's Member States. Our primary role is to promote the cohesion and balanced economic development of the European Union, by making long-term loans for sound capital investment projects. The bulk of our lending some 70% last year goes to assisted areas for regional development and towards investments linked with the other objectives of the Banking sectors such as transport and communications, energy, environmental protection, and industrial projects large and small that will enhance Europe's competitiveness. The scale of this financing is very large. Last year, out of a total lending of over EUR 29.5 billion, some EUR 25 billion went to the European Union. To put this into perspective, as the Bank only lends on average for about a third of the cost of a project, its financing went towards investment representing some 5% of total gross fixed capital formation in the EU. While our "raison d'être'' is to finance largely the physical integration of the European Union, as a self-financing institution, we have to have recourse to the capital markets to finance our activities. So much so, that today we are one of the largest international capital market AAA operators - certainly by far the largest of the multilateral financing institutions. Our extensive presence on these markets has enable us to play a crucial role in the 1980s in development of the Euro's older sister - the ECU, and pioneering the way to the Euro with an intensive pro-active euro-strategy on the capital markets, Just for the record, the EIB’s owned by fifteen European Union Member States, who provide us with subscribed, guaranteed capital. They have only ever paid in a minimum amount. Our outstanding loans are more than EUR 155 billion. For meeting the requirements of the statutory ceiling for our lending activities, as a gearing of the Banks capital, and to allow the Bank to operate into the next millennium, our Governors, the EU's Finance Minister, have increased our subscribed capital later to EUR 95.5 billion as of 1st of January 1999. This represents an increase by over 60%. 1 believe this is the largest ever capital increase granted to any international bank and it gives the EIB a rock solid basis to continue our operations through this critical transitional period well into the next millennium. This concentration on investment' to stimulate sustainable growth and employment within the Union is not at the expense of our lending outside the Union. Indeed, our lending in some 120 non-Member countries in support of EU external co-operation and development policies, has over the years constantly increased, reaching a total of nearly EUR 4.5 billion in 1998. We are in this way active in Africa, the Caribbean and the Pacific (under the Lomé Convention), in Asia and Latin America, in Central and Eastern Europe, and - most importantly to you - in the Mediterranean region. EIB operations outside the Union are pursued in parallel with the general political agreements concluded between the Union and countries or groups of countries. These agreements are wide-ranging in scope, covering trade, social affairs and general policy issues. They also contain financial clauses which are the concrete reflection of Community development aid and co-operation policies, implemented in conjunction with the Bank and on the basis of mandates which it accepts at the request of the European Council or - in the case of operations in partner countries in Africa, the Caribbean and the Pacific - at the collective request of the Member States of the Union. These lending mandates are designed to support the Union's policies in relation to partner countries, while the task of identifying and appraising projects to be financed is entrusted to the Bank. Such operations under mandate are supported by a system of blanket guarantees intended to cover the risks attached to operations in these countries. But the dominant feature of the Bank's lending outside the Union last year was the EUR 2.3 billion for projects in the ten applicant countries of Central and Eastern Europe and Cyprus. This was a combination of the traditional mandate and the new Pre-Accession Facility launched last January and expiring next January. We have directed it in support of the objectives of the pre-accession partnership agreements, with particular priority for transport, energy and telecommunications links, and projects to improve the environment. As a bank the EIB raises the bulk of its financial resources on capital markets. It is market oriented and provides long-term loans to public and private borrowers for projects, which are economically and ecologically justified, technically viable, and financially sound. Both in its borrowing and lending the EIB works closely with numerous banks and financial institutions. Its prime position on capital markets endorsed by its 'AAA' rating - enables it to borrow on the finest terms available. Operating on a non-profit basis, it passes on this advantage to its borrowers. Interest rates for each currency reflect the market cost of EIB's borrowings, plus a margin to cover its own costs. The EIB offers loans tailored to the project needs in terms of amount, maturity, currency mix, interest rate formula and repayment conditions. A tangible contribution to EU enlargement: EIB's pre-accession facility The EU is now preparing for the most difficult and complex enlargement. It faces the adhesion of over 80 million people with a current per capita GDP only a third of the EU average, and with huge deficiencies in physical and institutional infrastructure and environmental standards in some of the candidate Central and Eastern European countries. At present, in the countries applying for EU membership, Bank operations are conducted primarily on the basis of the general mandate covering Central and Eastern Europe, under which loan funds totalling EUR 3 .5 billion have been made available to all these countries over the period from 1997 to 2000. In the case of Cyprus, operations are mounted under the Euro-Mediterranean Partnership spanning the same period. Additionally in 1998, determined to make an active contribution to the strengthened pre-accession strategy laid down by the Vienna European Council and in view of the opening of accession negotiations with the 11 applicant countries, the Bank initiated its EUR 3,5 billion pre-accession lending facility, financed entirely from its own resources and without Community guarantee cover. Parallel management of the mandate and the pre-accession facility enables the Bank to finance without discrimination investment in all the countries seeking to join the European Union. Combined management in 1998 of operations under mandate and the pre-accession facility boosted the Bank's activity by over 54% compared with 1997. Loans amounted to EUR 2.4 billion, as against 1.5 billion the year before. Of this amount, almost half was drawn from funds available under the pre-accession facility and another half was deployed under the mandates. Since 1990, financing operations in the candidate countries have amounted to EUR 8.8 billion, including EUR 1.4 billion under the additional pre-accession facility, launched by the EIB at the start of 1998. The bulk of EIB's financing went to support the upgrading of key communications and energy infrastructure. The investment financed focused on economic integration, both with the Union and within the region, and on support for the adoption of the EU's rules, regulations and standards (acquis communautaire), with particular emphasis on environmental protection. In order to ensure optimum use of banking and budgetary resources, the EIB works in co-operation and synergy with the PHARE Programme and other Union financing facilities. It also co-operates closely with other multilateral financing institutions in the region, in particular the European Bank for Reconstruction and Development and the World Bank. Being established already as the largest international lender in the candidate countries, EIB's role in furthering development is crucial. The level of its financing will continue to grow in the run-up to accession. Priority will be given to modernising infrastructure, such as transport, telecommunications and energy, environmental protection investment, and productive industry, in particular SMEs. As the enlargement process develops, the FIB will build increasingly close relations with the applicant countries, who will become shareholders and members of the Bank once they have gained entry. As efficient capital markets are crucial to the integration of the economies of these countries with the European Union, the Bank is contributing actively to the development of financial markets in the countries applying for membership of the Union, as it has done in the past in Denmark, Ireland, Greece, Portugal and Spain, notably by issuing borrowings in several of the currencies concerned. Drawing on our experience and capacity in the opening up and internationalisation of financial markets we have been present on the Euro-markets for the Czech koruna, Estonian kroon and Polish zloty and has launched the first AAA issue on the domestic market for the Hungarian forint. This strategy helps to boost market efficiency, while channelling savings to productive projects in need of local currency financing, in order to minimise the exchange risk borne by promoters. EIB's Role in the Mediterranean region The EIB's primary role concerns the economic integration of the European Union. This will remain the case, but, in the framework of the Union's external co-operation policies, the Bank has an increasingly important role, outside the Union. One of the most important of these areas is the Mediterranean region, where our operations started in the early '60s and now include Algeria, Cyprus, Egypt, Gaza/West Bank Autonomous Territories, Israel, Jordan, Lebanon, Malta, Morocco, Syria, Tunisia and Turkey. The progress in our activity in this area has been remarkable. EIB average annual lending in the area has been at FUR 80 million in the late seventies. It increased to EUR 200 million towards the end of the eighties, It went up to EUR 640 million under EIB's "Redirected Mediterranean Policy", and at present, with an average lending of some FUR 1 billion per year the FIB is a major player in EU partner countries of the Mediterranean region. In the Mediterranean region, the FIB operates at present in the context and support of the Euro-Mediterranean Partnership, adopted in Barcelona in 1995, and which complements the EU Member States' own bilateral co-operation policies. Under the current Euro-Mediterranean Partnership Agreement, the EIB is committed to lend up to EUR 2 310 million during the period 1997-1999 for investment projects in 12 Mediterranean countries. In addition, FIB is able to offer interest subsidies for environmental projects and Risk Capital in the form of equity or quasi-equity; both funded from the EU Budget. The first priority of the Euro-Mediterranean Partnership, under which the Bank provides financial assistance, is to promote long-term growth and stability in the countries concerned. The gradual establishment of a trade area extending from the Arctic Finland to North Africa and Middle East between now and the year 2010 should lay the foundations for closer economic integration between the two shores of the Mediterranean. Economic development of the Mediterranean area will depend to a significant extent on expanding and strengthening links with the European Union, a large neighbouring market of some 400 million consumers, Aware of the crucial importance of good communication links between the EU and these countries, Governments on both sides, as well as the EU - and the EIB as its project financing institution - are thus concentrating efforts on extending the intra-EU Trans-European networks (TENs) for transport, telecommunications and energy also to the Mediterranean region. Countries in the Mediterranean region have over the past decades made efforts to develop national infrastructure, with the support of the EIB and other multilateral and bilateral financing institutions. It is clear though that in the new framework emerging in the region, laying the basis for peace and balanced development depends on greater economic integration. In this new setting, our efforts are being concentrated on constructing regional infrastructures and links essential for trade, personal exchanges, and a fair and balanced distribution of common resources. This requires a new approach to infrastructure. National authorities have to develop a wider view: a pan-Mediterranean approach, Their planning cannot stop at borders if they are to optimise projects' cost-efficiency and gain full economic benefits of their logical share in economic growth in the Mediterranean basin. North-South co-operation in the Mediterranean region is well under way. East-West has to be strengthened. Developing and modernising the old historical trading patterns is only a first step. Other local linkages with intra-regional importance are required to be identified to encourage economic growth. Without them, economic growth will be difficult and slow. The donor community and international financial institutions, in co-operation with the Mediterranean countries, have available great resources for implementing these trans-national and intra-regional infrastructures, Preparatory work is being carried out in a number of areas such as transportation, energy, telecommunications, water management... The European Union, through the Commission, is taking an active role in financing the preparatory studies for a number of projects, mainly in water management, transport and energy. The EIB is attentively following developments and looks forward to having the opportunity of evaluating how and which investments to support best. There are mainly three types of regional projects acquiring EIB finance.
It has been traditionally the role of the public sector to plan and finance the provision of infrastructure. Under the new regional framework, however, the private sector must have a greater role not only in the financing of the projects, but also in the planning and management. Many of the projects being discussed provide benefits for the population, but at the same time could generate revenues to cover not only their operating costs, but also go towards meeting their capital cost. The involvement of the private sector would provide an element of commitment to the cost recovery of projects, which is rarely achieved by the public sector. A judicious blending of public and private involvement in the design, construction, operation, ownership and finance of infrastructure holds out a number of potential attractions: better identification of good projects, improved recognition and management of project risks and higher efficiency. The Bank's contribution is based on a 40 year experience, and its approach is that of financing specific projects, We hope therefore at the co-operation of the Mediterranean countries in defining and bringing forward " bankable" infrastructure projects. The long experience of the Banking Public/Private Sector Partnerships (PPPs) for infrastructure finance within the Union, is now being transferred to countries outside the Union, particularly in the more liberalised, stable middle income countries, where there is a growing demand for investment finance for joint ventures and BOO/BOT-type arrangements with European companies in all the main economic infrastructure sectors. In such cases, the Bank does not only complement local and other international sources of finance, but acts as a catalyst, helping "things to happen". The market generally interprets the Bank's agreement to fund a project as a result of sound appraisal and financial prudence. Over the fast five years the EIB has [ant in the Mediterranean countries a total of EUR 6.3 billion in regional projects. Examples include the North-African Coastal highway, port modernisation in Tunisia, Jordan, Lebanon, Turkey and Morocco, air transports in Malta, Cyprus and Egypt, the gas pipeline Algeria-Spain, the Moroccan-Spanish, as well as Turkish-Syrian electricity interconnections, the joint-venture refinery MIDOR in Egypt. Through this regional project financing, the EIB aims at the efficient functioning of a common market increased competitiveness of the private sector and geographic expansion of its activity and inter-regional cohesion. Given the scarcity of water resources in the region, worsening environmental degradation and the high degree of urbanisation, protection and rehabilitation of the environment represent a priority objective for the Bank in the region. Since 1994, more than EUR 1.2 billion has gone into establishing water reserves and distribution networks and waste water collection and treatment facilities, helping to preserve the shared among this countries precious MARE NOSTRUM, The EIB has also set up, jointly with the World Bank (and with the support of the European Commission and UNDP) a "Mediterranean Environmental Technical Assistance Programme" (METAR), which has been in operation since the start of 1990. Deploying grant aid, this programme is designed to support financing of feasibility studies. With some EUR 600 million lent since 1994, the EIB has also contributed to the industrial development of the Mediterranean countries, either through assistance for major or via funding for establishment of modern industrial estates. Moreover, the Bank is stepping up, in virtually all the Mediterranean countries, its system of global loan financing, with local commercial or development banks channelling the funds to SMEs, a facility which has benefited thousands of small-scale productive investment schemes in industry and tourism also here in Cyprus. In the spirit of the Euro-Mediterranean Partnership, first launched at the Barcelona Conference in November 1996, the great majority of the governments of the non-member Mediterranean countries have demonstrated that they have the will to undertake the structural, legislative and sectoral reforms needed to institute a market economy, contributing to lasting economic growth and creating a climate conducive to mobilising national savings and attracting foreign capital. It is against this background that we embarked upon the mandate for action in the Mediterranean up to the year 2000, for EUR 2 310 million, involving financing instruments tailored to the structural adjustment needs of the non-member Mediterranean countries. When economies are liberalised, one of the first consequences is the patent need to expand the existing financial systems. Features common to all the countries concerned are the small scale of these systems and a limited variety of available products. While small and medium-sized enterprises (SMEs) are generally under-capitalised, in the non-member Mediterranean countries this state of affairs is exacerbated by the difficulties promoters have in bolstering the financial base of their businesses owing to a dearth of specialised financial institutions. The Bank is therefore seeking to play a part in liberalising the financial sectors it will use as intermediaries in its operations by making available to them more efficient financial products and supporting the creation of new facilities, such as investment funds and venture capital or development capital companies. Our objective is to be oven more closely associated, than now, with the development of the Financial Sector in Mediterranean countries, using this sector as a vector for its operations. Having opted to establish a market economy, the non-member Mediterranean countries associated with the Union through the Partnership will need to. |