EVALUATION OF FINANCIAL ASSISTANCE FOR THE MEDITERRANEAN COUNTRIES MANAGED BY THE EIB ON BEHALF OF THE EC

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1 EVALUATION OF FINANCIAL ASSISTANCE FOR THE MEDITERRANEAN COUNTRIES MANAGED BY THE EIB ON BEHALF OF THE EC FINAL REPORT May 2001 MAIN DOCUMENT Eva - EU Association DRN ECO IDD SYNERGIE NCG c/o NCG - Nordic Consulting Group a/s Kirkevej 8, DK-2630 Taastrup Telephone (+45) Fax (+45) ncg@ncg.dk

2 Eva - EU Association DRN ECO IDD SYNERGIE NCG c/o NCG - Nordic Consulting Group a/s Kirkevej 8, DK-2630 Taastrup Telephone (+45) Fax (+45) ncg@ncg.dk This report was prepared by a team of consultants from the EVA-EU Association for the Evaluation Unit of the Joint Relex Service (SCR) of the European Commission. EVA-EU is a European association composed of DRN (I), ECO (D), IDD (UK), NCG (DK) and Synergie (B). NCG is the leader and the contact point for the Association. The views and opinions expressed in this report do not necessarily reflect those of the European Commission. The European Commission does not guarantee the accuracy of the data included nor does it accept responsibility for any consequences of their use. Final Report, May 2001 Page ii

3 Table of Contents PAGE: LIST OF ANNEXES LIST OF TABLES, FIGURES, BOXES LIST OF DEFINITIONS LIST OF ACRONYMS IV V VI VII 0 EXECUTIVE SUMMARY...VII 1 INTRODUCTION THE EVALUATION ORGANISATION OF THE EVALUATION STRUCTURE OF THE REPORT EC FINANCIAL CO-OPERATION STRATEGIES AND INSTRUMENTS IN THE MEDITERRANEAN REGION AN HISTORICAL PERSPECTIVE THE PRESENT FRAMEWORK FINANCIAL INSTRUMENTS USED THE EIB AND THE MEDITERRANEAN REGION THE USE OF EC BUDGETARY RESOURCES FOR EIB OPERATIONS THE MANDATE OF THE EIB TYPES OF INVESTMENT FINANCING THE DECISION-MAKING PROCESS FOR "MANDATE" OPERATIONS THE DECISION-MAKING PROCESS MONITORING OF PROJECT IMPLEMENTATION OVERALL PROGRAMME RELEVANCE EVALUATION OTHER ASPECTS OF THE CURRENT CONTEXT GENERAL RELEVANCE COMPARATIVE ADVANTAGE OF AND ALTERNATIVE TO EIB LENDING IN MEDITERRANEAN COUNTRIES EVALUATION OF A SAMPLE OF PROJECTS: A SYNTHESIS SAMPLE OF PROJECTS VISITED FIELD EVALUATION: A SYNOPSIS FIELD EVALUATION: RELEVANCE FIELD EVALUATION: EFFICIENCY FIELD EVALUATION: EFFECTIVENESS FIELD EVALUATION: IMPACT FIELD EVALUATION: SUSTAINABILITY EVALUATION OF THE OVERALL EIB PROGRAMME FINANCED WITH EC BUDGET FUNDS PROGRAMME-LEVEL EFFICIENCY PROJECT LEVEL EFFICIENCY Final Report, May 2001 Page ii

4 7.3 EFFECTIVENESS IMPACT SUSTAINABILITY CONCLUSIONS AND RECOMMENDATIONS IMPROVING COMPLEMENTARITY OF EIB AND EC ACTIVITIES IN MEDITERRANEAN COUNTRIES STREAMLINING THE DECISION PROCESS INCREASING THE FOCUS ON VENTURE CAPITAL CREATION CREATING A TECHNICAL CO-OPERATION FUND DEFINING THE ENVIRONMENTAL TARGET OF THE PROGRAM IMPROVING MONITORING OF EIB-MANAGED OPERATIONS RENEGOTIATING THE EC-EIB AGREEMENT ANNEXES...45 List of Annexes A. Evaluation of a sample of EIB Operations financed with EC budget funds B. EIB's Risk Capital Operations financed with EC budget funds, , IV Protocol and MEDA C. EIB's Subsidised loans (subsidy financed with EC budget funds, MEDA period D. EIB Operations structure E. List of people met F. List of documents consulted G. Logical framework and methodology of the evaluation H. Duration of the approval process (Fax EIB Délais de decision ) I. Reference Terms for the evaluation Final Report, May 2001 Page iii

5 List of Tables Table 2.1: Three Phases in the EU-MED Relationship... 3 Table 2.2: Progress on Euro-Mediterranean Association Agreements... 4 Table 2.3: financial resources for the Euro-Mediterranean co-operation ( )... 5 Table 2.4: MEDA funds compared with EC-financed and EIB own resources loans... 7 Table 3.1: EIB Own-resources Loans to MED partners (MEuro) Table 3.2: Concessionality of subsidised EIB environmental loans Table 3.3: Risk Capital Operations - Amounts by protocol ( ) Table 5.1: Selected macro-economic indicators for some MEDA countries, 1998 ($ mio) Table 5.2: Debt Outstanding estimation for selected MEDA countries A comparison between EIB, IFC and IBRD as of June 30, 1999 (in US$mio) Table 6.1: Basic data of projects visited Table 6.2: Sample compared to the amount of funds managed by the EIB on behalf of the EC30 Table 6.3: Quantified scores of field evaluation Table 7.1: EIB subsidised financing by environmental sub-sector, MEDA List of Figures Figure 2.1: Tentative Logical Framework of MEDA Regulation... 6 Figure 2.2: Use of MEDA envelope... 6 Figure 5.1: EIB loans to Mediterranean partner, distribution by sector Figure 5.2: EIB loans to Mediterranean partner, distribution by partner Figure 5.3: EIB loans to Med partners: subsidised and non-subsidised loans Figure 5.4: EIB loans to Mediterranean partners, by protocol Figure 5.5:Risk Capital by Country Figure 5.6: Risk Capital by Protocol Figure 5.7: Simplified logframes of Risk Capital and Interest Subsidies List of Text Boxes Box n. 1: EIB Governing bodies 9 Box n. 2: EIB interest rates 11 Box n. 3: Conditional loans 16 Box n. 4: The World Bank, analytical and advisory services 17 Box n. 5: METAP 17 Box n. 6: Grants at the WB 18 Box n. 7: Article 14 Committee 18 Box n. 8: MED Committee 19 Box n. 9: Country eligibility IDA/IBRD 26 Box n. 10: Interest subsidies 28 Box n. 11: Capital venture 33 Box n. 12: Co-ordination with other donors 34 Box n. 13: Sustainability 35 Box n. 14: Procedural delays 36 Box n. 15: Management fees of some development banks 37 Box n. 16: EIB and financial intermediaries 38 Box n. 17: Impact 40 Box n. 18: Sustainability criteria at the EIB 43 Final Report, May 2001 Page iv

6 EC/MEDA and its institutional and Regulatory Framework: some definitions Association Council (AC). An Association Council will be established to oversee the progress of the EMAA in each country. It will meet at least yearly to discuss issues arising within the framework of the EMAA. The AC is chaired on a rotating basis by the Government and the European Council and draws its members from these two sources and from the Commission. An Association Committee under the AC will be established with the day-to-day responsibility of implementing the EMAA. MED Committee (or the article 11 committee) is the management committee for EU-MED aid. In addition to financing proposal for projects, the MED Committee also, for instance, gives its opinion on the RIP, NIPs, tendering procedures, and guidelines concerning MEDA teams. National Indicative Programmes (NIPs). Country programmes prepared according to MEDA Regulation and Guidelines. Should include indicative, financial figures, and outline programme contents. Regional Indicative Programme (RIP). Regional programme and strategies prepared according to MEDA Reg. And Guidelines. Accounts for approx. 10% of MEDA reference financial figure. Should be linked to NIP and vice versa, to ensure complementarity. Project Document. Or financing Proposal. Presented to MED Committee for approval. Should fall within NIP & RIP. Provides details of project contents following LFA principles. Financial Agreement (FA). Formalising Project Document as agreement between Commission and MED partner. FA is prerequisite for spending (except in areas listed under Framework Convention). MEDA teams. Administrative and technical support to the Commission, approved by the Budget Authority. Financed over the MEDA budget line. 39 experts assist Commission headquarters, and 54 are supporting Commission delegations in MED countries (except in Malta, Cyprus and Israel). Source: COWI, Evaluation of Aspects of EU Development Aid to the MED Region Final Report, May 2001 Page v

7 List of acronyms and abbreviations AFD Agence Française de Développement (French Development Agency) CED Credit Examination Department EC European Commission EIB European Investment Bank ESMP Eastern and Southern Mediterranean Partners 1 EU European Union FDI Foreign Direct Investments FI Financial Intermediary GDP Gross Domestic Product IFI International Financial Institution KfW Kreditanstalt für Wiederaufbau (German Development Bank) MEDA Mesures D Accompagnement (Accompanying measures) MEP Member of the European Parliament METAP Mediterranean Environmental Technical Assistance Programme RCO Risk Capital Operation SME Small and Medium Enterprises UK United Kingdom WB World Bank 1 Algeria, Cyprus, Egypt, Israel, Jordan, Lebanon, Malta, Morocco, Syria, Tunisia, Turkey and the Palestinian Authority. Final Report, May 2001 Page vi

8 0 EXECUTIVE SUMMARY Objective of the evaluation 1. The present evaluation covers activities corresponding to Euro 752 million that the European Commission (EC) has entrusted to the European Investment Bank (EIB) in order to provide Eastern and Southern Mediterranean Partners 2 with financial assistance in the form of (i) interest subsidies on EIB loans to Mediterranean partners and (ii) risk capital operations. The evaluation, in conformity with Article 15 of the MEDA Regulation 3, will serve as the basis for a discussion of the current relationship between the two institutions and for the improvement, where possible, of the future performance and impact of EC-financed EIB operations in the Mediterranean region. As this evaluation was ongoing, MEDA regulation was amended 4. Some of the changes introduced in MEDA II address perceived shortcomings of the MEDA I regulations, also identified in this evaluation. Background 2. Co-operation between the European Community and non-member Mediterranean countries has progressed for the last 40 years, with ever-increasing political and strategic commitments. Starting with a series of Financial Protocols, which covered in fiveyear periods and defined the technical and financial details of the co-operation, the system has become an authentic political and economic Euro-Mediterranean Partnership (EMP), with common strategic interests and the political objective of creating a Euro-Mediterranean Free- Trade Zone by On the economic front, this undertaking demands support for a gradual process of structural reforms emphasising (i) the liberalisation of trade, (ii) the modernisation of the institutions and (iii) the development of the private sector. The main financial tools of the Euro-Mediterranean Partnership are (i) the MEDA budget line B of the E.C budget, managed according to the rules set up by the 1996 MEDA regulation, amended in 2000, and (ii) EIB loans.to Mediterannean countries, funded from EIB own resources without interest subsidies. Object of the analysis 3. Interest Subsidies (IS) on EIB loans have been made available since the first protocol and totalled approximately Euro 470 million for the whole region in the period During the period covered by the protocols, interest subsidies, in the form of a rebate of two percentage points, benefited all EIB loans to Mediterranean partners who had expressed a preference for this type of instrument. Since the end of the protocols, interest subsidies have been made available to all Mediterranean partners but are applied only to loans in the field of the environment, as a rebate of three percentage points. Interest subsidies reduce the cost of long-term investments and can generate financial leverage, 5 making large amounts of funds available at a relatively low cost in terms of grant resources: subsidised investments in the period amounted to about Euro 2,900 million. 4. Risk capital funds were introduced under the third protocol, in They are intended to facilitate private or mixed undertakings in productive sector companies, particularly when these operations can bring together European and Mediterranean partners. Risk capital operations (RCO) have totalled Euro 282 million since 1988, with almost 60% financed under MEDA regulation ( ). Risk capital operations are one of the main instruments for fostering private sector development in the region, and they have been assigned the objectives 2 Algeria, Cyprus, Egypt, Israel, Jordan, Lebanon, Malta, Morocco, Syria, Tunisia, Turkey and the Palestinian Authority. 3 Council Regulation (EC) No 1488/96 of 23 July OJ NO. L 189, 30/07/1996 pp The acronym MEDA stands for MEsures D Accompagnement (Accompanying Measures). 4 Council Regulation (EC) No. 2698/2000 of 27 November 2000 amending Regulation (EC) No. 1488/96 on MEDA. 5 The notion of leverage does not necessarily imply additionality, therefore it does not imply that such loans would not have been realised without the relevant subsidies. Final Report, May 2001 Page vii

9 of supporting (i) the creation and development of financial institutions, (ii) the restructuring and modernisation of the private sector and (iii) the privatisation of public enterprises. Relevance 5. Interest subsidies and risk capital complement the mix of co-operation measures available, combining loans and grants and introducing a financial leverage effect 6 on the EIB's own resources. These financial instruments are considered very relevant to the specific objectives of the Euro-Mediterranean Partnership and to the needs of recipient countries. Interest subsidies on environmental loans could contribute to achieving sustainable, balanced development in the region, improving the living conditions of Mediterranean citizens while concomitantly improving or protecting natural resources and having a direct or indirect link to productive sectors such as industry, tourism and agriculture. At the same time, confining their use almost exclusively to loans in the water sub-sector rather than loans covering the whole field of the environment, limits their relevance and their potential effects on the economy and the environment of the region. Risk capital operations are considered highly relevant instruments for the modernisation of financial systems and private sector companies as well as for the privatisation of public enterprises. They are designed to provide much-needed long-term funds for setting up or promoting productive companies, while at the same time strengthening local financial institutions. Their nature has evolved over time to accompany the evolving conditions of local financial systems. Nonetheless some additional steps, mainly a shorter exit clause, would be required to improve the use of this tool in the promising sector of venture capital. However, the vague definition of specific objectives, detailed procedures, selection criteria, quantified performance indicators and target beneficiaries 7 at the EC-EIB level (both within MEDA regulation and in the EC-EIB agreement) makes it very difficult to monitor and control the implementation of these measures. Field-level evaluation 6. A sample of eight projects in four countries (Egypt, Jordan, Morocco and Tunisia) was selected for field-level evaluation in accordance with the EC s standard criteria of relevance, efficiency, effectiveness, impact and sustainability. The field-level evaluation provided the basis for assessing the effectiveness of the programme as a whole. The sample represented 32% and 18% of risk capital operations and subsidised loans respectively, financed under MEDA and off-protocol. Relevance was very high for subsidised loans: these were heavily concentrated in the water sub-sector and supported investments of high public interest but modest financial returns. Relevance for RCOs was good: three were conditional loans supporting the development of local financial systems and one was a conditional loan fostering a Euro-Med industrial joint-venture. Efficiency was satisfactory for all projects, with only minor procedural delays. Although the level of collaboration with the local EC delegation was generally poor, this aspect has been addressed by the new MEDA regulation (Art. 4, concerning on the spot coordination). Effectiveness was satisfactory although RCO objectives had no quantifiable indicators and results were difficult to gauge in the short-term. Potential impact was rated high for the environmental project and satisfactory for the RCOs, where a more innovative approach might have had a greater impact on the economy. Sustainability appeared doubtful for both categories of projects, although the financial involvement of financial intermediaries in risk capital operations, which has been an EIB policy since 1995, is very likely to improve this aspect in the long term, since intermediaries will monitor these operations more closely. 6 Leverage effect happens when a small force is multiplied, producing a force greater than the one applied. In this case, relatively small amounts of EU grants, in the form of interest subsidy, are able to mobilise large investments (financed by the EIB and other donors) by making them less expensive to the client, hence more attractive. The leverage ratio is the proportion between the value of the interest subsidies granted and the value of subsidised loans provided. A ratio of 1:6 means that every Euro of interest subsidies attracted 6 Euro of subsidised loans. This notion of leverage does not necessarily imply additionality, and therefore it does not imply that these types of loans would not have been realised without the subsidies. 7 For example, in MEDA regulation subsidised loans are targeted towards a generic field of the environment with no quantitative indicators provided. Final Report, May 2001 Page viii

10 Efficiency 7. Process-level efficiency is hampered by the complexity of the approval procedures, which are necessary to ensure that the projects comply with the policy framework of the MEDA regulation and are coherent with EC activities in the region. This makes a multiple-tier approval system necessary, including a dual-committee (Article 14 Committee and MED-Committee) procedure, which causes long delays while providing relatively little added-value to overall political coherence. It should be noted, however, that the recent modification of MEDA regulation has streamlined the decision-making procedures. As far as the cost-effectiveness of the operations is concerned, the EIB offers very competitive terms to local financial operators. However, the annual cost of EIB management of RCOs on behalf of the EC has not been revised for some ten years and would seem to be ripe for review. The long reimbursement periods for RCOs reduce the turnover of funds. Monitoring of the implementation of EIBmanaged operations focuses on the financial aspects rather than on results or socio-economic impact. Monitoring by the EC, based almost entirely on documents transmitted from the EIB, suffers from the same limitations. Effectiveness, impact, sustainability 8. Interest subsidies provided a financial leverage effect of about 1:6, on EIB resources: Euro 470 million of subsidies allowed the mobilisation of subsidised loans amounting to Euro 2,900 million. The global leverage effect on external funds 8 is almost double and has been estimated at 1:11.5. Interest subsidies in the environmental sectors have targeted mostly the water sub-sector. While this does not seem to have reduced the effectiveness of the operations, given that all the funds available for this kind of operations have been committed, it corresponds to the investment policy of the EIB rather than the indications of MEDA regulations. In order to achieve a more effective and country-specific targeting of environmental sub-sectors, investment policy and quantified objectives must be defined beforehand 9 and referred to in the EC-EIB co-operation agreement. RCOs have been effective both in strengthening the financial sectors and in supporting the creation and growth of SMEs. The prevailing conditions in MEDA countries have probably led the Bank to prefer traditional banks to non-bank institutions as financial intermediaries. Nonetheless, non-bank venture capital companies are emerging and are being increasingly associated with these kinds of operations. When local financial intermediaries are remunerated exclusively on the performance of beneficiary companies and are financially involved in the operations, the effectiveness of the programme in terms of the creation of viable private companies and sustainable jobs increases. Nonetheless, due to the lack of defined quantified objectives in MEDA I regulation and in the EC-EIB agreement, it is particularly difficult to make a final evaluation of the global effectiveness and impact of ECfinanced EIB operations. Sustainability, on the other hand, appears to be uncertain for both kinds of operations. Sustainability of environmental loans could be increased by improved political dialogue, possibly through strengthened strategic co-operation with the EC. Sustainability of RCO would benefit from increasing the role of specialised venture-capital companies. General conclusions Generally, these instruments have provided satisfactory results and a high degree of relevance to the specific objectives of the Euro-Mediterranean Partnership and to the needs of the region. Nonetheless, the potential of these instruments in terms of relevance, effectiveness, impact and sustainability could be increased. The evaluation considers the following factors amongst the principal causes of this less than optimal performance: 8 All funds, including EIB resources but excluding government co-financing. The EIB finances up to a maximum share of 50%. Under MEDA, each Euro of EIB funds in subsidised loans was accompanied, on average, by 0.91 Euros of co-financing. 9 Article 5 of the new MEDA Regulation stipulates: The Commission, in liaison with the Bank, shall ensure that programming of measures concerning interest rate subsidies (and risk capital) is complementary to, and coherent with, the national and regional strategy papers, indicative programmes and financing plans. 10 For conclusions and recommendations, the figures appearing between brackets refer to the main sections of the report dealing with the issue in question. Final Report, May 2001 Page ix

11 (i) a somewhat passive role of the EIB in targeting sectors and beneficiaries [3.2, 6.3, 7.1, 7.2, 7.4, 8.3]; (ii) limited complementarity with EC activities in the region [4.1, 6.4, 6.5, 7.1-3, 8.1, 8.4, 8.7]. The improvement of the strategic dialogue between the EC and the EIB, a more proactive role of the latter in targeting sectors and beneficiaries of EC-funded activities, as well as more effective monitoring by the EC are considered the primary fields of intervention, which will be necessary to improve the performance of these instruments in the near future. Recommendations Legal, institutional and operational changes in the procedures and mechanisms that regulate the objectives of the Euro-Mediterranean Policy and the collaboration between the two institutions should be discussed. These changes would most likely concern the inter-institutional agreement between the EIB and the EC, which should be renewed to take into account the evolution of Mediterranean countries since 1992 and the amendments to MEDA regulation. (As already noted, MEDA regulation has been amended during the execution of the present evaluation. Most of the recommendations presented here have already been put into practice by the new MEDA regulation). T 1. Mechanisms and procedures to increase the quality and quantity of exchanges between the EC and the EIB should be identified and activated, including greater involvement of EU delegations, definition of monitoring criteria and responsibility, increased integration of IS and RCO at the programming and strategic level; (4.1, 6.4, 6.5, 7.1, 7.2, 7.3, 8.1) 2. The evaluation of political coherence currently made by the MED Committee at the final stage of the approval should be introduced at the programming level, by including RCO & IS in the strategic papers and national/regional indicative plans; (4.1, 7.1, 8.1) 3. EIB should select and direct intermediaries to focus RCO as much as possible on venture capital creation rather than on quasi-loan operations; (3.2, 5.2, 7.4, 8.3) 4. Specific targeting of the private sector should become a priority for RCO operations and should translate into precise targeting criteria and earmarking of EU funds in MEDA regulation; (2.3, 2.4, 5.1, 5.2, 7.3, 7.4, 8.3) 5. Remuneration of the EIB for service rendered to the EC in managing budgetary resources could be linked to EIB performance in reaching specific targets; (5.3, 7.1, 7.2, 8.3, 8.7) 6. RCO and IS should be associated with grants aimed at enhancing their relevance, impact and sustainability. The use of technical assistance for project identification and feasibility, investor mentoring, monitoring and evaluation should be envisaged; (4.1, 5.2, 8.4) 7. A Technical Co-operation Fund should be created to complement loan activity with grant or reimbursable technical assistance with the objective of increasing transition impact; (4.1, 5.2, 8.4) 8. A more precise definition of target sectors ( the field of the environment ) and quantified indicators and criteria should be incorporated into the policy framework or included at the strategic programming stage; (5.2, 7.3, 8.5) 9. Increased political dialogue to promote sustainability and transitional impact should be sought, by involving the Commission and its Delegations more closely in project identification, appraisal and monitoring; (6.4, 6.5, 7.1, 8.1) 11 See previous footnote Final Report, May 2001 Page x

12 10. The feasibility of alternative ways of managing interest subsidies and RCOs should be evaluated and discussed, including the involvement of different financial intermediaries; (5.3, 7.1, 8.7) 11. Projects in the environmental sector should encompass all relevant sub-sectors and particularly those that could contribute to the modernisation of the economy; (5.2, 6.3, 7.3, 8.5) 12. EC-financed investment operations should focus on sustainability and impact in addition to sound banking principles; (4.1, 4.2, 6.7, 7.2, 7.3, 7.4, 7.5, 8.7) 13. The monitoring of operations carried out by the EIB should be improved and should include monitoring of transitional impact and financial, economic and social sustainability. Financial provisions for these services should be included in the EC-EIB agreement; (3.1, 4.2, 8.6, 8.7) 14. The EC-EIB agreement should be amended to include precise objectives, a clear investment policy for risk capital and clear and useful reporting standards. (3.1, 4.2, 7.1, 7.3, 8.1, 8.7) Final Report, May 2001 Page xi

13 1 INTRODUCTION 1.1 The evaluation The European Investment Bank (EIB) is a key player in the implementation of EU policies for economic development in the Mediterranean partner countries. This role goes back to the 1960s, when the EIB started its loan operations in that region, financed by its own resources. At present, the operations undertaken by the EIB are financed either from its own resources or from that part of the EC budget for external operations in Mediterranean countries that is managed by the EIB on behalf of the EC. The latter type of operations can take the form of risk capital or interest subsidies, which are the main focus of this evaluation. Article 15 of the MEDA Regulation specifies that an evaluation of EC-financed EIB operations in the Mediterranean region must be carried out in order to appraise their performance, suggest possible ways of improving the effect of future activities and enhance the collaboration between the EIB and the EC. This report presents the results of an evaluation undertaken in compliance with the aforementioned Article 15. This evaluation covers the following aspects of EC-EIB cofinancing in the Mediterranean: 1. The history and management of EIB financing in the MED region 2. The procedures, mechanisms and dialogue between the EC and the EIB 3. An analysis of the performance of the overall programme 4. Conclusions and recommendations. The conclusions and recommendations should provide the concerned parties with the basis for discussions, which will lead to concrete decisions. The implementation of these decisions should bring about improvements in the future performance of EC-financed EIB operations in Mediterranean countries, and, thereby, further EU objectives of fostering economic and social development in beneficiary countries and promoting closer economic integration between the EU and the Mediterranean region. 1.2 Organisation of the evaluation The evaluation has been divided in three phases, as set out by its terms of reference (Annex I): (1) The first phase began in April 2000 with a desk study and data gathering and ended in May 2000 with the presentation of an inception report. This included an inventory of projects financed by the EIB in Mediterranean countries, the presentation of the evaluation methodology, a list of questions for the field visits and a work-plan for the second phase. (2) The second phase has included field visits to a selected sample of projects and countries (Jordan, Egypt, Tunisia and Morocco). It began in May 2000 and ended in November 2000, when the consultants and the Evaluation Unit reached an agreement on the content of this report. (3) In the third phase, ongoing, the EC Evaluation Unit will submit the report to the EIB and EC stakeholders in question. After receiving and reviewing their comments, a final report will be prepared. Final Report, May 2001 Page 1

14 1.3 Structure of the report This report follows the structure proposed in the terms of reference and is divided into 4 main sections: Section1: Brief factual summary of the history and management of EIB financing in the MED region. Chapter 2 presents a brief historical review of the EC/MEDA institutional and regulatory framework, indicating the co-operation instruments and the institutions involved. Chapter 3 presents the EIB and its Mediterranean strategy in co-operation with the EC. This chapter deals with the financial instruments and their characteristics, such as interest rate structure and the pricing and the global risk approach of the EIB vis-à-vis the Mediterranean countries. The use of EC budgetary resources for EIB operations is also analysed along with data, which presents the distribution per country, per period and per concept of committed funds. Section 2: Analysis of procedures, mechanisms and dialogue between the EC and the EIB (coherence and monitoring) Chapter 4 focuses on the decision-making process and the implementation procedures and monitoring process of both Subsidised loans and Risk Capital Operations financed through the EIB. This chapter also presents a complete description of the existing dialogue process between the EIB, the EC, the Member States and the beneficiary countries. Section 3: Analysis of the performance of the overall programme Chapter 5 presents the overall relevance evaluation. Chapter 6 is dedicated to summarising the evaluation of the projects visited during the field mission. Chapter 7 focuses on the overall evaluation of the EIB programme financed by EC funds according to the five evaluation criteria of Relevance, Efficiency, Effectiveness, Impact and Sustainability. Section 4: Conclusions and recommendations Chapter 8 presents the conclusions and recommendations of the evaluation. Final Report, May 2001 Page 2

15 2 EC FINANCIAL CO-OPERATION STRATEGIES AND INSTRUMENTS IN THE MEDITERRANEAN REGION 2.1 An historical perspective The co-operation between the European Community and non-member countries of the Mediterranean region covers the last forty years. A first generation of Association Agreements between the European Community and some Mediterranean countries was signed in the 1960s and the early 1970s with Greece, Turkey ( ), Malta (1-4-71) and Cyprus (1-6-73) 12. These agreements provided for a phased approach to the establishment of a customs union and eventually paved the way for accession to the EU. They were accompanied by financial and technical co-operation Protocols. For the other Mediterranean countries, no explicit policy framework for governing the relationship with the EU was put into place until In 1972, the Heads of State of the then European Community adopted the Global Mediterranean Policy (GMP) as a political framework for bilateral agreements with Mediterranean countries. The focus was on trade issues, with unilateral free entry into Community markets for manufactured products (not agricultural products or services) originating in Mediterranean countries. The GMP marked a turning point and led to the creation of a first generation of bilateral co-operation agreements during the first half of the 1970swith Algeria, Egypt, Jordan, Lebanon, Morocco, Syria, Israel and Tunisia. These agreements went into effect in 1978/79. The details of the financial co-operation between the EC and these countries were embodied in Protocols attached to the Agreements. Financial Protocols were signed for five years and included details on the volume and allocation of EC grants as well as EIB loans. The first protocol was signed in 1976 and was valid until 1981, the second from 1981/82 to 1986, and the third from 1986/87 to Political framework Table 2.1: Three Phases in the EU-MED Relationship An emerging relationship Protocol Period MEDA Period Period Global Mediterranean Policy, GMP (1972) Co-operation Framework Funding Framework Association agreements (w/ Cyprus, Malta and Turkey) Trade Accords Protocols for the three countries with Association Agreements New Mediterran ean Policy, (NMP) Co-operation Agreements 1 st, 2 nd & 3 rd protocols Source: Evaluation Aspects of EU Development Aid to the MED Region, th protocol and horizontal cooperation Barcelona Declaration Euro-Mediterranean Partnership Euro-Mediterranean Association Agreements EMAA (over time replacing Co-operation Agreements) MEDA Regulation In December 1989, the Council adopted the New Mediterranean Policy (NMP), a new policy framework focused around six components: Supporting the process of economic reform; Supporting private investment activity; 12 Greece joined the EU. The other three are currently candidate member states. 13 Protocol period for Turkey, Malta and Cyprus were different. Final Report, May 2001 Page 3

16 Increasing bilateral and EU financial aid; Improving access to the EU market; Integrating Mediterranean countries in the EU's move towards a single market; Strengthening the economic and political dialogue at the regional Mediterranean level. A fourth financial protocol was signed for the period 1991/92-95, but starting in the early 1990 s, the challenge of economic globalisation began to push the EC towards a more policy-oriented approach. As a result, co-operation agreements of a financial and technical nature (the Protocols) were destined to evolve into a genuine partnership with common strategic interests. 2.2 The present framework This process culminated in 1995 with a multi-lateral international agreement (the Barcelona Declaration) between the 15 EU Member States, the Commission and the 12 Mediterranean partners. This Declaration laid down the foundations for the Euro-Mediterranean Partnership (EMP), which encompasses three domains of co-operation: Political and security co-operation to establish an area of peace and stability Economic and financial co-operation to create an area of shared prosperity Social, cultural and human co-operation to develop human resources, promote understanding and foster exchanges between societies. The Barcelona Declaration signalled the start of a real partnership process between the EU and the Med region. Its ambition has been the establishment of a common area of economic integration, democracy and peace. From an economic perspective, the fulfilment of this ambition demands a gradual process of structural reform, emphasising: Trade liberalisation Institutional modernisation (new role for the state, restructuring of financial markets), and Private sector development Political priority was given to the creation of a WTO-compatible Free Trade Zone 14 between the EU and the Mediterranean countries, setting 2010 as a target date. In this context, negotiations were started on a new generation of Euro-Mediterranean Association Agreements (EMAA), which are gradually replacing the co-operation agreements. Tunisia, Israel, Jordan, Morocco and Palestinian Authority have already signed an EMAA, while negotiations with Algeria, Syria, Egypt and Lebanon are ongoing. Table 2.2: Progress on Euro-Mediterranean Association Agreements Partner Conclusion of Signature of Entry into force negotiations agreement Tunisia June 1995 July 1995 March 1998 Israel September 1995 November 1995 June 2000 Morocco November 1995 February 1996 March 2000 Palestinian Authority December 1996 February 1997 July 1997 Jordan April 1997 November Egypt June 1999 Lebanon, Algeria, Syria In progress - Update with new dates & events Source: European Commission. 14 Free trade in manufactured products only. Trade in agricultural products and services will be progressively liberalised through reciprocal preferential access. Final Report, May 2001 Page 4

17 2.2.1 MEDA MEDA Regulation 15 amended in the year 2000,is the successor of the Financial Protocols. Through MEDA, EU budgetary resources can be channelled to various projects and activities in the Mediterranean countries with the purpose of accompanying the reform of economic and social structures in the framework of Euro-Mediterranean partnerships" thus addressing the second domain of co-operation of the Barcelona Declaration and contributing to the creation of an area of prosperity and stability in the region. The main financial tool used for grants within the framework of the Euro-Mediterranean Partnership is currently the MEDA line B of the E.C budget managed according to the rules set up by the 1996 MEDA regulation, amended in In order to achieve those objectives, the programme covers three main sectors: 1. The support of structural reforms, economic transition and private sector development; 2. The promotion of cross-border co-operation 3. The strengthening of the socio-economic balance A tentative and simplified logical framework of the MEDA Regulation, presenting the different levels of objectives and domains, is proposed on page 6. The MEDA financial envelope spans the period and constitutes an important increase in financial resources available for EU-MED co-operation, as shown in the following table. Table 2.3: financial resources for the Euro-Mediterranean co-operation ( ) Period Grants EIB Loans Dates & Risk Capital First protocol Second protocol Third protocol Fourth protocol and horiz.l co-operation ,305 3,018 MEDA ,424 3,900 Source: Evaluation of Aspects of EU Development Aid to the MED Region, Final Synthesis Report, page 9 COWI, 11/98. This renewed financial commitment is a clear indication of the increased political relevance of the new Euro-Mediterranean Partnership, compared to previous co-operation periods. The ambitious programme of political objectives is inserted within a framework of partnership relations with their own specific institutional and operational instruments. The political goals of the EMP must be considered in the implementation of the MEDA Programme and reflected in the National and Regional Indicative Programmes. The financial envelope 16 of MEDA for the period amounts to 3,424.5 million. About 88% of MEDA resources are channelled bilaterally to 9 Mediterranean partners (all but Cyprus, Israel and Malta, due to their relatively high GDP). The remaining 12% of resources are reserved for regional activities under the Regional Indicative Program, from which all the partners are eligible to benefit. 2.3 Financial instruments used EC financing to Mediterranean countries has normally been provided in the form of either (i) grants or (ii) loans. In addition to the more traditional forms of financing, such as technical assistance programmes, the grants also include interest subsidies for loans provided by the EIB from its own resources. Loans using EC resources, previously managed by the EC itself, currently exist only in the form of risk capital and are managed by the EIB on behalf of the 15 Council Regulation (EC) No 1488/96 of 23 July OJ NO. L 189, 30/07/1996 pp The acronym MEDA stands for MEsures D Accompagnement (Accompanying Measures). 16 The correct term is financial reference amount Final Report, May 2001 Page 5

18 Commission. This evaluation, therefore, concerns the following two sets of instruments that the EIB manages on behalf of the EC: EC grants used as interest subsidies in EIB loans to Mediterranean partners; Risk Capital Operations (RCOs), which are a reimbursable facility. Objective (Development objective) Initiatives of joint interest (Objectives) Areas of EU support (Outputs) Measures of support (Activities) Financial Reference (Inputs) Figure 2.1: Tentative Logical Framework of MEDA Regulation Long-term stability and prosperity in the Mediterranean region Strengthened political stability and democracy Improved socioeconomic balance Participation of civil society in planning and implementation of development measures Improvement of social services, especially health, family planning, water supplies, sanitation, housing Upgrading of economic infrastructure, particularly transport, energy, rural development, information, telecommunications Fight against poverty Environmental cooperation Integrated development of human resources Euro-Mediterranean freetrade area created Economic transition Job creation and Private sector development, including improvement of the business environment and support to SMEs Promotion of investment, industrial co-operation and trade Upgrading of economic infrastructure, possibly including financial and taxation systems Support to structural adjustment and reform programmes Development of economic and social cooperation Regional and crossborder co-operation Establishing and developing structures for regional co-operation between Mediterranean partners Improvement of the regulatory framework and small-scale infrastructure projects in border-crossing facilities Establishing the infrastructures for regional trade Decentralised co-operation Euro 3,424.5 million: Grants Risk capital Interest subsidies on EIB environmental loans In grey text, main items relevant to EIB mandate Source: elaboration from the MEDA Regulation (Preamble, Articles 2, Annexe 2). The total amount of funds managed by the EIB on behalf of the EC in the period corresponds to Euro 752 million, of which Euro 470 million for interest subsidies and Euro 282 for RCO. During the period , MEDA financial resources managed by the EIB on behalf of the EC have represented about 9% of total MEDA resources (see pie-chart to right). The total amount of EIBmanaged resources corresponds to about 300 million, of which (i) 166 million for interest subsidies and (ii) 135 million for RCO. Figure 2.2: Use of MEDA envelope Despite the fact that these figures appear relatively modest, when compared to the whole MEDA envelope, it is important to remember that the nature of interest subsidies is to produce a financial leverage effect. As a matter of fact, during the MEDA period, for instance, Interest subsidies were capable of attracting additional financing in the ratio of 1 to10: for every Euro of Final Report, May 2001 Page 6

19 interest subsidies, borrowing countries were able to collect 10 Euro of investments funds, with the EIB s own resources representing about 42% of the funds. 2.4 The EIB and the Mediterranean region The European Investment Bank (EIB) traditionally has played an important role in providing EU financial assistance to Mediterranean partner countries. Since the mid-1970s, its lending activities in these countries have been expanding continuously: annual average EIB lending amounted to about 80 million in the late seventies, rising to around 200 million in the late eighties and about 650 million in the first half of the nineties. In , an average annual lending volume of some 1 billion has made the EIB a major player in the region. The MEDA Regulation outlines the current general rules that apply to the co-operation agreement between the EU and the Mediterranean region and specifies the role of the EIB within MEDA policy framework. MEDA specifies that EIB-managed operations may receive ECbudget funds from the MEDA envelope for the purpose of 17 (i) Implementing risk-capital operations and (ii) subsidising interest rates for EIB loans relating to environmental projects. Through these two specific instruments, the EIB has been assigned a key role in the implementation of the Barcelona Declaration, namely: Contributing to achieve sustainable, balanced development in the region through investments in the environmental sector, thus: helping local Governments to define new policies to protect natural resources; increasing sustainability and promoting privatesector participation; improving the living conditions of Mediterranean citizens; having a direct or indirect link to productive sectors such as industry, tourism and agriculture; Providing Risk capital to make funds available to undertakings (private or mixed) in the production sector, in particular those that can bring together natural or legal persons who are national of a Community Member State and non-member Mediterranean nations or territories 18. These funds complement the important resources that the EIB disburses to Mediterranean countries from its own resources. A comparison between the global MEDA envelope, its provisions for interest subsidies and RCO and the EIB s own resources is presented in Table 2.4 below. Table 2.4: MEDA funds compared with EC-financed and EIB own resources loans Total MEDA allocation MED Partner Amount % of total Risk Capital Operations (See table 3.3) Amount (MEDA) % of MEDA EIB Loans receiving EC interest subsidies (table 3.2) Amount of subsidises Loans Interest Subsidies (MEDA) Interests as % of MEDA EIB Own-Resources Loans (table 3.1) Amount Compared to MEDA Algeria 164 5% 11 6,7% 0 0 0% ,2% Cyprus n.r. 60 Egypt % 31 4,5% % ,6% Jordan 254 7% 10 3,9% % ,8% Lebanon 182 5% 0 0,0% % ,9% Malta Morocco % 45 6,9% % ,2% Palest. AA 111 3% 14 12,6% % ,0% Syria 99 3% 0 0,0% 0 0 0% 0 0,0% Tunisia % 30 7,0% % ,7% Turkey % 12 3,2% % ,7% Regional % 10 2,4% ,0% Tech. 63 2% 0 0,0% 0 0,0% Assist. TOTALS 3, % ,310 This comparison intends to provide orders of magnitude only, given that MEDA and EIB resources are allocated over different periods (5 and 3 years respectively). 17 MEDA regulation, Article 6, paragraph 2 18 MEDA Regulation, Article 6, paragraph 4. Final Report, May 2001 Page 7

20 The details of procedures and mechanisms that affect the use of these resources are presented in the following chapter. Final Report, May 2001 Page 8

21 3 THE USE OF EC BUDGETARY RESOURCES FOR EIB OPERATIONS 3.1 The mandate of the EIB How does the EIB operate? The creation of the European Investment Bank (EIB) was foreseen in the Treaty of Rome (1957), which instituted the European Community. The EIB was founded in 1958 as an autonomous European institution whose members are the EU Member States. The EIB is the EU s long-term-lending institution. Its task is to contribute to the integration, balanced development and economic and social cohesion of the Member countries. Consequently, its main mission is investment activities inside the EU. The EIB operates along the same principles as most other multilateral development banks. Member states contribute capital ( 100 billion), most of which is not paid-in but callable ( 94 billion) 19. On the strength of this callable capital, the EIB borrows funds on international financial markets, up to a ceiling of 250 billion. Using this capital, the Bank finances investment projects that must be viable in four fundamental respects: economic, environmental, technical and financial. Box 1: EIB governing bodies The Member States are the owners of the EIB and assume ultimate responsibility through the Board of Governors, to which each Member State contributes one member. Generally, the Governors are ministers of finance who meet once a year in their capacity as EIB members. They define the Bank s lending and operational policies and decide on capital increases. The Governors appoint the members of the Board of Directors, the Management Committee and the Audit Committee. The Board of Governors delegates much of its power to the Board of Directors, which has sole power for making decisions on loans, guarantees and borrowings. Directors are nominated by Member States and appointed by the Governors for a renewable period of 5 years. Each Director has one vote. Germany, France, Italy and the UK each have three directors; Spain has two and the other Member States one each. According to the EIB, its financial soundness and standing "derives from the strength and commitment of its shareholders, the independence of its professional assessments, and its record of achievement". These elements, together with the guarantee mechanism, enable the EIB to obtain a top credit rating 20 and to borrow mostly by means of public issues at very attractive interest rates, usually below the rate directly available to its clients. The funds raised on capital markets are passed on by the EIB to its clients, adding a small margin that allows the Bank to cover its operational costs and portfolio risks (see Box 2). From 1958 until the end of 1999, the EIB s total lending amounted to co-operation to about 300 billion, out of which 120 billion has been repaid and 180 billion left outstanding. The general lending policy of the Bank does not set any upper limit on the size of a project. However, the EIB normally restricts its exposure to no more than 50% of the total cost of an investment project. The remainder is co-financed by the promoter and/or other international financial institutions. Concerning individual loans, the EIB generally prefers to finance not less than the equivalent of 12, 5 million. Nonetheless, smaller loans are normally available via global loans through partner banks. Generally, the duration of loans is up to 20 years, including a grace period of up to 5 years. The grace period is calculated as the duration of activities plus one year. The duration of the loan is normally equal to the economic life of the project. Lending of EIB resources to non-member countries can be divided in two categories: 1. lending "under mandate" on the request of the Council of the EU, where guarantee features follow the rules described below, and 19 All figures in this section are taken from the EIB Annual Report The EIB has a triple A rating with Standard & Poor's. Final Report, May 2001 Page 9

22 2. lending outside of those mandates, where there is no EU security and loans are provided at EIB s full risk 21. The levels of coverage and the financial arrangements of the guarantees have evolved over time and according to the non-member region concerned. EIB lending under the Mediterranean Financial Protocols was covered by a 75% EC budget guarantee, and by a 70% MEDA guarantee. From 2000 onwards, the EC has agreed to provide a global guarantee of up to 65%, irrespective of the region concerned. These guarantees have an impact on the EC budget because financial provisions have to be set aside to cover possible calls on them. In the past, the EC has been called upon twice to cover sovereign risks under EIB loans, in war-torn Yugoslavia and in Lebanon 22. The EIB does also, of course, require guarantees from the borrower. When the loans are to public borrowers, this involves a guarantee from the borrower s government. If the borrower or guarantor is a State, no other security is required. In other cases, EIB loans are conditional upon the provision of adequate security: principally, a guarantee from one or several (in the case of syndication) banks or corporations, normally rated at least A+ (by Moody s or S&P). The EIB is further protected by its status as a de facto preferred creditor in international markets, like any Multilateral Bank. This means that any default on EIB loans will automatically cut off the borrower from any other official lending. This guarantee has also allowed the EIB to avoid rescheduling its loans to Paris Club countries (Jordan, Egypt, Morocco, Algeria) that underwent external debt rescheduling. This system of guarantees covers the risk of EIB lending to nonmember states, considerably reducing the risk of losses for the EIB. Nonetheless, it must be noted that the guarantee is only for coverage of commercial risk while political risk (war, expropriation, etc.) is covered by the guarantee agreement granted by the member states of the Bank. Unlike a commercial investment bank or other Multi-lateral banks (e.g. the World Bank, see box in 5.1.2), the EIB does not vary its on-lending interest rate with reference to specific country or project risks. All countries and projects can borrow at the same rate. The EIB supports the EU's co-operation and development aid policies in over 120 countries in Africa, the Caribbean and the Pacific, in the Mediterranean region, in Central and Eastern Europe, and in Asia and Latin America. At the end of 1999, the EIB had lent a total of approximately 21 billion to nonmember countries, accounting for 7% of its total lending activities. Lending under the Mediterranean Financial Protocols accounted for 5.2 billion and lending under the Euro-Med Mandate for 2.3 billion up to In addition, the EIB received 282 million out of the EC budget, to be used for risk capital operations on behalf of the EC in the period (see table 3.3). For its intermediation in risk capital operations, the EIB charges the EC a 0.65% commission fee, plus a front-end commission of 1.50% on credits booked. This commission fee is probably justified by the additional management cost, which is caused by the financial, legal and administrative complexity, of these operations, normally broken down into a multitude of small loans requiring time-consuming follow-ups The 1992 EIB-EC Convention and its amendments EIB operations in non-member countries, including the Mediterranean partners, are carried out in support of EU external policies and agreements (such as the Association Agreements with the Mediterranean Partners). The EIB does not finance investment activities in countries that have no agreements with the EU. 21 The EIB looks for adequate securities according to its credit risk policy. The volume of these loans is increasing and corresponded to 30% of EIB s activity outside the EU in year Until a few years ago, the EC would act under its guarantee on a case-by-case basis when a specific loan problem occurred in a recipient country. In 1992, at the request of the Court of Auditors, the EU created a Global Guarantee Fund (GGF), as part of its own budgetary provisions against lending risks. The GGF was meant to cover losses on all EU, Euratom and EIB loans. For EIB loans, the EC credits this Fund with an amount equivalent to 5.85 % of the loan, that is a 9% provision rate on 65% of the value of the loan. In return, the Council demands that 30% of EIB loans be extended to the private sector. Final Report, May 2001 Page 10

23 In 1992, the EC and the EIB signed a Convention regarding the management of financial aid to Mediterranean countries. The Convention provided the EIB with a "mandate" to manage: 1. EC-financed interest subsidies to loans financed on the EIB s own resources; 2. Special Loans 23, including the recovery of loans that were managed directly by the EC prior to 1992; 3. EC-financed Risk Capital operations (mainly conditional loans and equity financing to the private sector and to SMEs) Under this mandate, the EIB acts on behalf of the EC, as far as EC budgetary resources are involved 24. The EIB implements its mandate within the limits of the annual financial commitments, authorised by the EC after the annual budget has been approved. The Bank is bound to inform the Commission about the operations it plans to conduct and must, in particular, demonstrate that the operations will be consistent with the Community s policies. The Bank must present the Commission with an annual report on the implementation of operations financed by EC funds. This convention establishes the conditions of the Bank s remuneration for services rendered to the EC in execution of its mandate: Box 2: EIB interest rates So far, on large investment projects the EIB charges a fixed rate plus a small margin. The fixed rate is calculated daily by the EIB on the basis of the cost of its own resources while the margin is intended to cover the cost of the operation. Recently the EIB has adopted a variable rate When an eligible EIB loan is approved, the Commission provides interest subsidies up to 3 percentage points. Interested subsidies are a grant to the recipient partner, which the EC pays to the Bank by calculating the differential of interest between the full rate and the subsidised rate. Whether it is a fixed or a variable rate and whenever it applies, the EIB receives from the Commission a flat 3% interest subsidy, which is passed on to the Borrower. MEDA II is now launching a new rate structure in order to replace the flat 3% interest subsidy. The interest subsidy will be equal to 50% of the market rate but will not be superior to 3% For risk capital operations, a front-end commission of 1,5% for each credit opened and a management fee of 0.65%/year on the outstanding amounts; For special condition loans 25, a management fee of 0.65%/year of the outstanding amount per year (0.50% for contracts signed before the signature of the EC-EIB agreement); For special credits, issued by the EC itself in previous years, a recovery commission of 0.10% of the outstanding amount per year. The convention also establishes that the responsibility of the Bank is limited to the good execution of the mandate, in conformity with good banking practice. In 1996, following the Barcelona Declaration and within the framework of the Euro- Mediterranean Partnership, the EIB proposed 26 to accompany the modification of the 1992 convention with a memorandum, defining objectives and amounts of RCO. The proposed memorandum defined the objectives of risk capital operations as follows: 1. To support the creation and development of financial institutions 2. To support the restructuring and modernisation of the private sector 3. To support the privatisation of public enterprises. The proposed memorandum also suggested that the Bank could engage in risk capital operations within a three-year provisional budget envelope, that was to be defined jointly by the EC and the EIB, and which was to be revised annually. The annual amount to be earmarked for risk capital operations was to be budgeted by the EC at least two months ahead of the annual 23 Under the Protocols 1 and 2, the Maghreb and Mashreq countries received Special Loans with a 40-year term limit at 1% interest and a 10 year grace period. These loans were originally decided upon and managed by the EC. From 1986 onwards, under the Third Protocol these Special Loans have been replaced by Risk Capital operations. 24 This is in conformity with art. 105 of Financial Rules of 21/12/1977 of the General Budget of the European Community, stating that the Commission can, on behalf of the Community, give the Bank a mandate to manage sections of the Community development credits. 25 These do not include Subsidised Loans 26 Fax of Mr. A. Seve (EIB) to Mr. Renier (EC) on January 15 th, Final Report, May 2001 Page 11

24 budget. The proposal was never formally accepted by the EC and in January 1997, the convention was modified only to formally include MEDA Regulation in the EC's Mandate to the EIB. However, the amendment of the MEDA regulation in the year 2000 introduced new rules for RCO. Art. 5.5 (3 rd paragraph) now stipulates that projects relating to risk capital shall be incorporated by the Commission, on the basis of proposals made by the Bank, into a regional financing plan, as appropriate. The projects shall take the form of a risk capital facility with an allocation for financing risk capital operations over a multi-annual period. 3.2 Types of investment financing The funds allocated by the EIB to Mediterranean partners countries come either from the Bank s own resources (loans) or from the budget of the European Community (risk capital and interest subsidies) Interest subsidies on the EIB s own-resources loans Table 3.1 presents an overview of EIB loans by Mediterranean partner over the period , including the value of EC-financed interest subsidy. The EIB has approved loans to Mediterranean partners for 7,5 billion, 39% of which ( 2.9 billion) received EC-funded interest subsidies. Table 3.1: EIB Own-resources Loans to MED partners (MEuro) st PROT. 2 nd PROT. 3 rd PROT. 4 th PROT. OFF-PROT. 27 MEDA TOTAL COUNTRY ALL Subs. ALL Subs. ALL Subs. ALL Subs. ALL Subs. ALL Subs. ALL Subs. Algeria Cyprus Egypt Israel Jordan Lebanon Malta Morocco Palest. AA Syria Tunisia Turkey Total * * 2902 Source: European Investment Bank ALL = Total amount of EIB Loans (own resources) Subs. = Amount of loan benefiting of interest subsidies * Includes 50 MECU of exceptional aid, unallocated by country During the Protocols period, EC interest subsidies could benefit all EIB loans to MED partners, and the maximum subsidy was limited to 2 percentage points 28. In the post-protocol period, i.e. under Off Protocol and MEDA financing, the interest subsidy could benefit only to EIB loans in the environmental field, with a maximum of 3 percentage points. Some 30% of all Off-Protocol EIB loans benefited from an interest subsidy. For the MEDA programme, 27% of the EIB loans benefited from interest subsidies (see table 3.1). The total amount spent by the EC on interest subsidies for EIB loans to Mediterranean countries was, at the end of 1999, 470 million: 214 million 29 under the four protocols, 120 million 27 Off Protocol defines a financial envelope approved by the EC to complement the fourth Protocol for Risk capital operations and interest subsidies managed by the EIB on behalf of the EC. The fourth Protocol and Off Protocol cover the same period of time ( ) and share a similar goal but differ slightly in the conditions: while the fourth protocol subsidised up to two percentage points of interests of all loans for specific Mediterranean countries, Off-Protocol subsidised up to three percentage points of interests but only for environmental loans, disregarding the geographical destination of the same, with 3 % points of the interest rate. 28 Except for Malta and Cyprus that received a subsidy of 1.5 percentage points during the Third Protocol period. 29 The evaluation mission submitted written requests to both the EIB and the EC but neither provided the details of this figure by protocol and/or by country. Final Report, May 2001 Page 12

25 under Off-protocol arrangements and 135 million under MEDA (see Table 3.2). This corresponds to 21% of the total amount of the loans approved by the EIB under MEDA and Off- Protocol and to 16% of all subsidised loans in the period , i.e. a leverage factor of 1:6 (subsidy/loan) 30. All data in Mio Euro (Unless otherwise specified) Table 3.2: Concessionality of subsidised EIB environmental loans Off Protocol Amount of subsidised loans Amount of interest subsidies Amount of subsidised loans MEDA Amount of interest subsidies TOTAL (Off-protocol + MEDA) Total subsidised loans Total interest subsidies % subsidy Algeria 50 10, ,8 21,6% Cyprus 25 5,1 30 7, ,1 22,0% Egypt , , ,4 19,2% Israel 10 2,4 0 0,0 10 2,4 24,0% Jordan 13 3,1 40 1,5 53 4,6 8,7% Lebanon 50 10, , ,3 20,9% Malta 15 2,8 0 0,0 15 2,8 18,7% Morocco 31 7, , ,3 25,4% Palest. AA 30 7, , ,7 20,8% Tunisia 57 13, , ,0 23,6% Turkey , , ,1 23,5% Total , , ,5 21,5% Risk capital operations Risk capital operations (RCOs) were introduced in 1988, under the Third Protocol. However, amounts have increased significantly only in the MEDA period, to reach a cumulative total of 282 million at the end of 1999 (see table 3.3 below). Morocco, Tunisia and Egypt together have absorbed almost two thirds of all risk capital funds for the Mediterranean countries. Table 3.3: Risk Capital Operations - Amounts by protocol ( ) 3 rd Pr. 4 th Pr. Off-Pr. MEDA Total Partner (Euro Mio) Algeria Cyprus Egypt Jordan Lebanon Malta 2, ,5 Morocco Palest. AA Tunisia Turkey Regional Total 42, ,5 Source: EIB Risk capital invokes the idea of venture capital, taking equity investments in fledgling firms with high potential, in order to help them acquire financial maturity before they have access to market financing, generally through an IPO (Initial Public Offering). EIB RCOs have accompanied the evolution of local financial systems towards this private equity approach. Most EIB RCOs consist of long-term conditional loans extended to Financial Intermediaries (FIs) in order to foster equity or quasi-equity investments in small & medium sized enterprises. These loans may involve, in some instances, a high degree of risk and may therefore justify the expression "risk capital operations". In addition, their term limits can be very long - up to 25 years, sometimes with up to 20-year grace periods. These features underscore the element of risk. 30 This does not necessarily imply any additionality. Final Report, May 2001 Page 13

26 There are two main categories of RCOs: (i) conditional loans and (ii) direct equity participation presented below Conditional loans To make Risk capital available to the largest possible number of companies, it is normally deployed via local Financial Intermediaries (FI) that have been granted an EIB global loan for financing small and medium scale enterprises. These loans may be granted either through a trusted financial intermediary or through a group of intermediaries (the APEX formula). Conditional loans are long-term reimbursable facilities extended to FIs (Financial Intermediaries) to finance equity or quasi-equity investments in SMEs' projects. One of the main identifying features of RCO is that they allow FI s to adapt remuneration and repayment conditions to the results of the financed project, normally in the form of shares of profits, dividends or capital gains. Repayment of such risk capital operations is therefore conditional on the success of the Final Beneficiary (FB). Conditional loans are thus similar to Equity- type loans and to French "Prêts Participatifs". In order to involve the Financial Intermediaries (FIs) more directly in the results of the Final Beneficiaries (FBs), since 1995 the EIB has been asking FIs to contribute up to 50% to the equity investments. The EIB does not take a direct equity participation in the FBs; only the FIs do. Then they submit a request to the EIB for a 50% refinancing of their participation in the FBs. With this new policy the EIB expects to increase the efficiency of risk capital operations Direct equity participation The EIB also takes equity participations, on behalf of the Community, in the capital of Banks or businesses. These are normally minority stakes of a temporary nature and are usually limited to financial establishments, like venture capital companies.the Bank limits its participation in any specific company to 30%. In some cases, it sits on the board of administrators, as in the case, for example, of Moussahama, a venture capital company in Morocco. This is not always the case, as in Egycap, an Egyptian venture capital, set up as a 10-year closed-end Fund to which the EIB has subscribed 15%. Final Report, May 2001 Page 14

27 Box 3: Conditional loans In EIB terminology a conditional loan was originally a very Long-Term Loan (up to 25 years) with sometimes very long grace periods (up to 20 years), extended to Governments, National Agencies, Public Companies, Local Banks (Financial Intermediaries- FIs) or Investment companies. The purpose of these loans was generally to finance equity investments made by Financial Intermediaries -most of the time local National development or commercial bankswhen financing projects, enterprises, SMEs or equity companies. The concept of the conditional loan has evolved over the years and has become more sophisticated. Since 1992, there is no payment of interests involved in the Conditional loans. Therefore the word loan can be misleading and a more exact definition would be reimbursable facility : The EIB is seeking remuneration linked to the performance of the final beneficiaries, in the form of profits, dividends or capital gains. Furthermore, since 1996, these loans tend to have a shorter term limit (10 to 15 years). In order to increase the involvement of financial intermediaries in the monitoring of final beneficiaries, since 1995, the EIB has been asking the FIs to contribute up to 50% to the equity investments, i.e. becoming a partner of the company. This ratio can be limited to 25% if these Financial Intermediaries extend long-term loans to the final beneficiaries. The final objective of the Risk Capital Operations is asset creation by final beneficiaries. Although conditional loans are normally very risky, the risk of losses for the EIB itself is nil, because the risk is borne by the EC. Taking participations in start-up SMEs is not easy and requires very selective eligibility criteria. There is no Government guarantee involved like in own resources loans and not even the FI s guarantee. In practice it s a venture capital operation without a short-term exit strategy: the FI, on behalf of the EIB, can remain a partner of the company for the duration of the loan, currently established at a maximum of 20 years. Final Report, May 2001 Page 15

28 4 THE DECISION-MAKING PROCESS FOR "MANDATE" OPERATIONS 4.1 The decision-making process Project appraisal and credit report Unlike other international financial institutions (e.g. the World Bank, see specific box), the EIB doesn t always take part in the identification phases of projects it will eventually finance, as the EIB may (see also Box on METAP) receive a Feasibility Study and Business Plan for a project directly from the promoter. Box 4: The World Bank Analytic and Advisory Services The World Bank (WB) undertakes a broad range of analytic and advisory activities to support its development mission. Research by the Bank's Development Economics Vice Presidency informs the WB s work on broad issues such as the environment, poverty, trade and globalisation. The WB s country clients benefit from a tailored program of economic and sector work (ESW) geared to their specific development challenges. Like in any bank, the Credit Department processes the credit applications. The EIB Credit Department is organised by geographic area 31. The EIB Med Desk makes its first selection from the project proposals received. A team comprising an economist, an engineer, and a credit officer normally produces the Credit Report. A credit analysis is completed in less than 90 days, on average. The Credit Report is mainly based on the assessment of a proposal s risk. This implies: A review of the credit request (products & markets, production & supplies, strategy etc.) A Credit Evaluation (reason to borrow and purpose of the loan, source of repayment, the loan security, structure and pricing of the credit, etc.) A Credit Action to approve or decline the credit, negotiates with the borrower the terms and conditions of the loan, defines the loan documentation, and when everything is in order, disburses the loan. The EIB has no formal Loan Policy Guidelines but follows an internal Standard Procedure Manual that provides general guidelines. The Credit Department adheres to the eligibility criteria contained in the Financial Protocols and the MEDA regulation. Priority is given to the sectors identified by the EC. For subsidised MEDA loans, eligibility criteria must be satisfied especially in the areas of water supply, sanitation and environment. ESW examines a country's economic prospects, including, for example, its banking or its financial sectors, and trade, poverty, and safety-net issues. The Bank s diagnostic work is shared with clients and partners, and draws on their diagnostic work. The results often form the basis for assistance strategies, government investment programs, and projects supported by IBRD and IDA lending. Source: The World Bank Box 5: METAP METAP is the Mediterranean Environmental Technical Assistance Programme, based in Cairo and created by the EC, the EIB, the UNDP and the World Bank. Its first phase (METAP I: ) provided beneficiary countries approximately US$13.8 million in technical assistance. Priorities included: integrated water resource management; solid and hazardous waste management; marine oil and chemical pollution prevention and control; and coastal zone management. The second cycle of METAP (METAP II: ) provided approximately US$17.2 million in technical assistance, and focused on programming for water, urban environmental management, institutional development and capacity building. METAP's first two phases identified investment projects, strengthened capacity in national and local environmental institutions, promoted sustainable environmental policy actions, and created the first professional networks in the region. Those activities have also influenced or resulted in US$1.6 billion in on-going or planned investments. The third phase of METAP has created a Project Preparation Unit, funded by Switzerland, the EIB and the World Bank, with the purpose of assisting Mediterranean countries in preparing investment projects in the field of the environment. EIB s reason for not always carrying out Source: METAP identification missions depends on staff limitations and the absence of a physical EIB presence in the countries concerned. Nonetheless, this is done by choice: other financial development institutions (the EBRD and the World Bank, for instance) are heavily involved in the appraisal of the projects they will eventually finance, and 31 The EIB Mediterranean Credit Desk is within the "Directorate for lending outside the European Union" and is responsible for the 12 Mediterranean partners. The Med Desk is divided in two Units covering roughly the Maghreb (plus Turkey) and the Mashreq (plus Middle East, Cyprus and Malta). It has a staff of eleven professional officers. Final Report, May 2001 Page 16

29 they accompany their implementation and monitor their results and impact throughout the project cycle. However, the EIB has set up, together with the Commission, the World Bank and the UNDP, a regional facility called METAP (Mediterranean Environmental Technical Assistance Programme) based in Cairo, with the purpose of assisting Mediterranean countries in identifying and preparing environmental investment projects (see specific box). METAP is particularly involved in the preparation of projects receiving interest subsidies. The approach described above is somewhat in contrast with the need to adhere to a designated framework of policy priorities and to respond to the specific strategic mandate defined by the MEDA regulation, and it seems to correspond more to the approach of a commercial bank than that of a development bank. The possibility of using grants to leverage financial and human resources by providing technical assistance (like TACIS/EBRD) or by increasing the level of policy dialogue (like World Bank/ESW) to improve the regulatory Box 6: Grants at the World Bank Grant-making has become an important complement to the Bank's lending services. Grants are seed money for pilot projects. They support innovative, cutting-edge approaches and technologies. Through grants, the Bank leverages its financial and human resources as well as its convening power to combine forces with partner organisations in pursuit of shared regional and global objectives. In FY99, Bank grants helped to catalyse nearly $1 billion worth of activities. Source: The World Bank framework and eventually the sustainability of projects doesn t seem to be a current option in Mediterranean countries, although the EIB has recently started to offer them in Eastern European countries. An increased strategic linkage with EC activities would probably allow the creation of functional combinations with EC grant aid and programmes in the region Credit approval procedure The Credit Report is reviewed and approved by the EIB s Division Head, the Department Head and the General Manager of the Associated Countries, before being submitted to the Managing Committee 32 of the Bank, which gives its final opinion. As far as co-operation between the Commission and the EIB is concerned, the MEDA Regulation requires that the EIB financing proposal for individual projects involving risk capital or interest subsidies be submitted to the Article 14 Committee. After it has received a favourable opinion from the Article 14 Committee, the Credit Report has to be approved by the Board of Directors of the Bank. The Director General for Economic and Financial Affairs of the European Commission (DG-ECFIN) is a Member of the EIB Board. Box 7: Article 14 committee A Committee consisting of the representatives of the Member States, chaired by the representative of the Member State currently holding the chair of the Board of Governors of the Bank. Its secretariat is provided by the Bank. A representative of the Commission shall take part in its proceedings. The Bank shall submit to the Article 14 Committee, for its opinion, proposals for subsidised loans in the field of environment and for risk capital operations. The Commission representative shall convey to that committee the position of his institution on the project concerned, and in particular on its conformity with the objectives of MEDA regulation and with the general guidelines adopted by the Council. On the basis of that consultation, the Bank shall forward the project to the Commission, in accordance with its statute. In addition, the Article 14Committee shall be informed by the Bank of the non-subsidised loans that the Bank plans to grant from its own resources. Source: Articles 11, 12, 13 & 14, MEDA Regulation, 2000 Once the Board of Directors of the Bank approves the Credit, the proposal is sent to the EC (DG External Relations/ Directorate Middle East- South Mediterranean) for the financing decision. The Commission will circulate the Credit Report to the various DGs concerned, for an interservice consultation. If there are no objections, the EC will then submit a draft decision authorising (or not) the interest subsidy for a specified amount to the MED Committee for the final decision. The Commission then forwards its decision to the Bank. 32 The Managing Committee meets every week Final Report, May 2001 Page 17

30 Risk capital operations follow the same procedure but do not require the review by the MED committee. 4.2 Monitoring of project implementation Monitoring by the EIB Monitoring of operations in the Mediterranean countries is done by the EIB Med Desk. Monitoring of loans is done by Credit officers, who accomplish this task through (i) desk reviews and (ii) field visits. Desk reviews monitor documents received from promoters of large investment projects and from financial intermediaries. For subsidies loans, monitoring consists in examining the Project Progress Reports that promoters must regularly submit until the completion of the project. This enables the EIB to Box 8: MED committee The MED Committee is composed of representatives of the Member States and chaired by the representative of the Commission, who shall not vote. A representative of the Bank shall take part in the proceedings, without the right to vote. The representative of the Commission shall submit to the Committee a draft of the measures to be taken. The Commission shall adopt the measure envisaged if they are in agreement with the opinion of the Committee. Following the opinion of MED Committee, the Commission takes (or refuses) a financing decision. Both Committees shall act by a qualified majority in accordance with Article 148(2) of the Treaty. The votes of the representatives of the Member States shall be weighted in accordance with that Article. Source: Articles 11, 12, 13 & 14, MEDA Regulation, 2000 keep an eye on any delays and compare the appraisal costs to the initial forecasts. After the project is finished, the desk officers review the Completion Reports that are prepared six months after the end of project activities. For RCOs, Desk officers are responsible for approving (or not) the allocations selected by financial intermediaries and for monitoring disbursements. Financial intermediaries are contractually required to deliver a project status report at least once a year. Field visits of EIB senior credit officers to investment promoters and to financial intermediaries are done frequently (at least 4/year). These visits are intended to give senior officers of the Bank the occasion to monitor the implementation of the loans, but also to be in touch with local clients and to look for new project opportunities. In 1993 the EIB decided that since risk capital operations pose greater risks and demand more administrative work than normal loans, new procedures were needed, as follows: External consultants are contracted with the purpose of assessing the performance of all RCOs. Project assessment has already been carried out for four MED partners (Cyprus, Jordan, Morocco and Tunisia), and others will follow. These consultants perform the duties that in commercial banks are normally accomplished by the Credit Examination Department officers, who assign risk ratings to credits, allowing their bank to take corrective steps in case of non-performing projects. The second step consists in entrusting the administrative paperwork of RCOs to local "Management Agents" (normally local audit companies) in MED countries 33 with several FIs. This measure was implemented three years ago in Tunisia, and now in Egypt, Morocco and Jordan. The main task of these agents is to review and manage all documents received from the FIs. Monitoring by the EIB can, therefore, be considered as efficient and effective (and it has received full marks by the court of auditors 34 :) but it mainly concerns financial and banking aspects: relatively little attention is given to transitional and socio-economic impact 35. Nonetheless, the mandate of the EIB does not request this kind of monitoring; the EC should expressly demand the type and the format of the monitoring data they need. 33 Apart from Malta, Cyprus and Jordan, where there is only one FI, the Bank is dealing with several FIs in other MEDA countries. 34 Special report 1/98 of 31/03/98 35 For instance, the monitoring of the number of jobs created appears to be the simple calculation of the number of jobs in the businesses financed, with no analysis of the impact of the investments realised. Final Report, May 2001 Page 18

31 4.2.2 Monitoring by the EC The EC does not monitor directly the implementation of EC-financed activity projects by the EIB since this task has been mandated to the EIB and since EC staff is normally overwhelmed with the monitoring of activities managed directly by the Commission. A similar situation occurs with EIB-managed investments in ACP countries. However, the EC is responsible for determining that the results of operations managed by the EIB under the mandate are performed in coherence and complementarity with the relevant MEDA policy framework and objectives. Recently, The Court of Auditors has stigmatised weak EC monitoring of activities mandated to the EIB 36 : the Commission monitoring of those operations entrusted to EIB management was poor ( ) as displayed in the minimal use of the informative documents sent by the EIB. Nonetheless, contacts between the EIB and the EC extend beyond the mere credit approval process. The Tripartite Agreement between the EIB, the EC and the Court of Auditors (1992) establishes that the three institutions will maintain a three-way flow of information with regard to activities in which the Bank is acting as the manager of EC resources and the Court of Auditors has the authority to audit these activities. The agreement also requires the EIB to provide monitoring documents to the EC on a regular basis. Apart from this formal flow of documents and information, geographical desks maintain informal contact with their counterparts at the EIB to discuss operational implications. They hold one co-ordination meeting at the programming level - per year. At the Management Level, the Mediterranean Directorate and the Horizontal Unit in that Directorate hold management meetings with the EIB once or twice per year. Although current EC monitoring of activities (co)financed by budgetary resources and managed by the EIB is within the provisions of MEDA Regulation 37, it is insufficient to ensure that these activities satisfy the criteria of efficiency (in the allocation of budgetary resources), effectiveness (in attaining EU policy objectives) and sustainability (in the long-term). MEDA provisions should take into account the complexity of the activities involved and earmark additional resources needed to implement adequate monitoring activities, to be realised either by the EC or the EIB. 36 Special report 1/98 of 31/03/98 37 MEDA Regulation, Article 15(1): The Commission shall, together with the Bank, examine progress achieved in implementing the measures undertaken pursuant to this Regulation and shall submit to the European Parliament and the Council an annual report [that] shall contain information on the measures financed during the year [ ] and provide assessment of the results obtained. Final Report, May 2001 Page 19

32 5 OVERALL PROGRAMME RELEVANCE EVALUATION 5.1 Other aspects of the current context Description and analysis of all EIB projects in MEDA countries Since 1974, the European Investment Bank has drawn on its own resources to fund projects in the Mediterranean region. In addition to global (multi-sector) loans, the Bank has financed four major economic sectors, namely: Energy, Transport, Water and Industry. These four sectors plus the global loans account for 90% of all activities financed by the EIB in MEDA countries. The remaining 10% of activities fall under the category of Other, of which agriculture accounts for 50% with telecommunications and urban infrastructures sharing most of the remainder. Figure 5.1: EIB loans to Mediterranean partner, distribution by sector Figure 5.2: EIB loans to Mediterranean partner, distribution by partner Final Report, May 2001 Page 20