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A First Assessment of MEDA Economic co-operation - Interview of Marco Mazzocchi Alemanni

Whereas private sector financing has been central to the thinking of Euro-Mediterranean economic decision-makers, and as the Mediterranean region has witnessed a growing movement of privatisation, the EU’s economic co-operation with those Mediterranean Partners that receive individual or ‘bilateral’ aid has played a very substantial role.

Relevant programmes and projects accounted for over 37% of amounts committed in 2002 by the European Commission’s EuropeAid Cooperation Office in the South Mediterranean, Near and Middle East area.

This was a total amount of € 600 million in the period 2001-2002.

This type of co-operation is part of the second chapter (economic and financial) of the Barcelona Process. Activities in this area are in the context of preparations for the Euro-Mediterranean Free Trade Area, and they are meant to help with the implementation of Association Agreements. Bilateral economic co-operation is made up of two complementary components: structural adjustment, which is channelled to states, and support to the private sector, which goes directly to businesses.

Within the European Commission’s EuropeAid Cooperation Office (South Mediterranean, Near and Middle East Directorate) the unit entrusted with economic and commercial co-operation started work under Marco Mazzocchi Alemanni who headed it for 2 years before being promoted as Head of another unit in the same Directorate. Euromed Special Feature asked him to describe the state of play of that co-operation.
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Euromed Special Feature: What do you think has been the most striking aspect of bilateral economic co-operation under MEDA over the last few years ?
Marco Mazzocchi Alemanni: On the organisational side it has to be noted that with the creation of EuropeAid within the European Commission in January 2001 economic co-operation units were established that brought together operations for the private sector, and structural adjustment. Let me remind you that support to the private sector is made up of sectoral operations whereas adjustment is an instrument, not a sector. Integrating those two types of operations into a single unit, however, has generated really interesting synergies, as we have been able to build adjustment programmes some of whose aspects aim at improving the business environment, that is facilitating operations for the private sector, and in some cases privatisation operations. There are synergies that we have already developed, but we believe there is still much scope for action in this respect. Most Mediterranean Partners see two major components in the Association Agreements. One of them is the price to pay as a result of tariff dismantling, which is also linked to the WTO framework. The second one is the other side of the tariff dismantling coin, which is the absolute and urgent need for economic upgrading. Regrettably some Partners do not look beyond. Besides, our Partners also view the MEDA financial instrument as partly made to compensate for the costs that upgrading entails for them. Hence the significance of instruments particularly well endowed financially and perceived as fast disbursement operations, that is to say structural adjustment operations. This is why the synergy of two very fertile instruments within EuropeAid’s Mediterranean Directorate has led to setting up a new unit, which over two years could get major projects approved for a total of € 600 million (€ 460 million of which for 7 adjustment programmes). That unit made disbursements for € 446 million over the same period. Let me recall that MEDA funding as a whole amounts to around € 700 million a year.

Structural adjustment attracted two main types of criticism, one saying it imposes damaging constraints on Partners, and the other arguing it doesn’t go far enough. What is your assessment of MEDA operations in this area ?
It seems those two types of criticism are at opposite ends, which goes to show that we have steered a middle course in our operations. That’s a good thing, which is an indication of rigorous work. It has been rigorous because we have to reconcile the need to ensure maximum impact of the reforms we want to support in the Partners with the necessity to be realistic. This means we must not require from our Partners reforms so radical as to prevent them from implementing them in the usually very short time span allocated to adjustment operations. We also have a financial regulation that entails inevitable constraints. There is a very important principle to such adjustment operations as we have managed. They must not be born only out of the brains of Europeans, still less of European officials, but they have to be derived from our Partners’ requirements and priorities. These have to be voiced by them, and we have to play a catalysing role with those reforms somehow, and this in two ways. First, when the authorities in a given country want to start a reform project that affects substantial interests, they need to be able to demonstrate to their public opinion and their Parliament that those reforms have to be carried out, but also that Europe is ready to help them in the process through financial support. Second, adjustment programmes are generally endowed with considerable funding that aims to at least partially cover transitory costs, that is costs brought about by reform in a given sector, at least while it’s being put into place. Therefore adjustment operations are best characterised by those two components. As a conclusion, I would say we have to strike the right balance between the requirement of breaking with the past somehow, and the realistic possibility of implementing those reforms in a limited time span.

Co-ordination with other world donors has been highlighted in MEDA programming for 2002-2006. Given the substantial role of players other than the EU, what do you make of the impact of such co-ordination on economic co-operation ?
We have excellent co-ordination with other donors. First we have very close, I would say high quality co-operation, with World Bank authorities to such an extent that in many cases we run parallel operations. These are jointly prepared, and funded in parallel. This shows a very high degree of co-operation and mutual trust. With other international bodies there is less co-operation. As to our Member States, they have practically no role on adjustment, but they run some rather significant private sector development programmes. There is a certain degree of information exchange between us, but there is scope for improvement. The Commission for its part has made very substantial efforts lately in the way of co-ordination, both in Brussels within competent bodies such as the MED Committee, and on the ground through the very transparent work of our Delegations.

There is the notion of macro-economic support with social sector conditionality. How in your opinion do the economic and social fields of activity link together ?
There is no difference. Any type of reform can fall within the scope of an adjustment operation, and the way conditionality is set out and formulated is paramount. Let me give you an example. The biggest structural adjustment programme in our portfolio today concerns the water sector in Morocco, a country where water is a relatively scarce resource. This is a major piece of economic reform. One part of this adjustment programme has consisted in ensuring that the consumer price of urban drinking water on the one hand, the price of rural water on the other, and that of agri-industrial water vary independently. We know that those three sorts of water are subsidised in that country. But the highest subsidy as a percentage is that paid to the agri-industrial sector, and obviously an increase in the consumer price will have a very different impact on each of the three categories. Therefore we have advocated a re-balancing of those prices. We haven’t changed anything on rural water, but we have acted massively on agri-industrial water. So you see there is some social conditionality. There are other ways of acting in the social area that have already been tried in other programmes, such as setting literacy rate targets for rural populations or for women. There is a whole range of instruments. No artificial rift must be set between economic and social adjustment. There is no barrier between the economic and social fields.

How does economic co-operation help promote foreign investment in a region whose image in this respect is much less positive than most other areas’ in the developing world ?
I think adjustment operations help reforms already featured on the Partners’ agendas. By so doing they can improve the business environment, and thus make the Partners relatively more attractive to foreign direct investment (FDI). Mediterranean countries’ needs of this type of investment exceed existing levels by far. We are doing our bit, but I believe that much more should be done. We could act through additional support to our Member States in insuring foreign private investment against political risks. I think however that we haven’t got the tools to do that. Let me give you one more example. In some Mediterranean countries we have ongoing projects that are called ‘guarantee funds’, and generally meant for local SMEs. They are managed here from Commission headquarters. But normally it’s not our job to manage guarantee funds, or foreign investment insurance for that matter. That brings us to the fact that the Mediterranean is the only region in the world with no regional development bank. This is a situation I view as very serious. The EU Spanish Presidency proposed several scenarios in this regard. The one that was accepted is the less ambitious, so we now have a timid start with the FEMIP (Facility for Euro-Mediterranean Investment and Partnership), which is attached to the EIB that is itself primarily designed to act within the EU. But it’s true that meetings have been scheduled. That’s the future. We’ll see.

A significant movement of privatisation is being observed in nearly all Partners, to a varying degree. What is the role of MEDA economic co-operation in this process ?
First of all privatisation is not an end in itself, though in largely state-run economies such as those of Mediterranean countries much remains to be done. There is a huge waste of resources that can be avoided. For the most part there are two ways in which we can do something relevant. The first is to encourage privatisation through structural adjustment programmes. We have done so successfully in several Mediterranean countries and I guess there is one sector in which we can play a particularly useful role in this regard, and that is the banking sector, intermediary financing. It is the economy’s main driving belt in every country, and often enough in the Mediterranean Partners the banking system has remained primitive. It is thus in need of private funding. Our second means of action consists in supporting privatisation processes at their most sensitive and expensive stage, that is the preparation of privatisation files. Privatisation is a very complex and expensive process that can only be carried out by a few merchant banks around the world. We are currently conducting a thoroughly innovative experiment in Algeria, where an ambitious privatisation programme has difficulty getting off the ground. We had to review one of our programmes completely to switch from training components to merchant bank financing for putting together privatisation files. The relevance of this is twofold. On the one hand we fund the transitory costs of privatisation operations, which would otherwise be borne by the State budget, which would in turn provide those who oppose privatisation with a case for stopping or hampering the process. On the other hand we promote transparency in the privatisation process by involving international merchant banks. Privatisation the world over is too often perceived as an exceptional opportunity of getting hold of public property for next to nothing. Therefore that process has got to be as transparent as possible. We make sure that happens by acting positively, as in the Algerian case. But we can also act negatively, as sometimes we refrain from disbursing tranches of structural adjustment earmarked for privatisation programmes that are not run in a transparent way. This represents both a shortfall for the State concerned, and a signal to the market. Of course the dark side of privatisation is its social cost. We should be able to shoulder part of the burden through the funding of social safety net projects, all that relates to social security systems. This is part of the 3rd chapter of MEDA.

Business Centres and the launching of Industrial Modernisation Programmes are prominent achievements, in spite of huge differences between countries. What do you think are the most positive experiences to be drawn from such activities ?
The first MEDA projects were projects of that kind. Besides we held a very important conference in January here in Brussels, which for the first time brought together not only European, but also Mediterranean players. Those programmes are working well, and they are well, even very well received in all countries where they are implemented, namely almost all Mediterranean Partners. However the upgrading process called for by the Association Agreements and WTO requirements cannot be carried out solely by means of one or two EU funded programmes. Our industrial modernisation and business centres programmes can provide paths and offer models, but they have no ambition to upgrade a country’s every industrial sector, and I think some countries have understood that. The first one has probably been Tunisia, now followed by Morocco. Therefore economic upgrading has also, and mainly got to be tackled by national bodies, and not only public ones. Major efforts have to be made by the private sector. Failing that, when tariff dismantling comes, businesses will be forced to comply by market forces. Operations currently carried out are good, sometimes too big because our Mediterranean Partners ask us to get involved in too many operations and mechanisms. I would also like to recall that those upgrading programmes are essentially providing technical assistance, an activity which is almost exclusively in the hands of European consultancy firms, that is European experts or local experts sub-contracted by European consultants. This is not adapted to local realities. In some specific projects we have put in the requirement of setting up local consultancy systems, which have several advantages, not only in terms of cost. National consultancy has to be encouraged because we operate in intermediate development countries where qualified local consultants are available. Therefore we are to direct our industrial modernisation programmes in such a way that the various consultancy tasks and missions are screened so as to determine the level of know-how they require. Whenever technical qualifications are available locally consultancy missions will be entrusted to local consultants. If not, European consultants will be approached.

How do you assess the quality and degree of co-operation with authorities in the Mediterranean Partners ?
The degree of co-operation can vary widely. Some Partners have a rather money-oriented notion of their relations with us. They have felt that there was no getting away from the Association Agreement, and so they view the MEDA Programme as a way to partly compensate for the costs incurred because of those relations. Other Partners, most of them, have already had a reform programme in place regardless of their relation with us. Those countries are spurred by a strong desire and ambition to reform their economies, and their societies as well. Those are the Partners with whom we find the most response. Some Partners are very well organised to derive short-term financial advantage, and others are better equipped for benefiting from a more political relationship. The MEDA region is among all geo-political areas with which we have established institutional co-operation relationships the one that has recorded the highest rate of democratic deficit. This is a reality we have to work with every day. We have to be able to measure out and grade different types of operations, and the extent to which we get involved, in view of each Partner’s determination to get on with reform.

How in your opinion as a former Commission Head of Delegation does devolution to the Delegations (or ‘deconcentration’) impact on economic co-operation ?
I believe a situation where our Delegations get flooded by micro-management tasks has to be avoided at all costs. Anyway devolution is still at an early stage. While preparing projects, however, we have to make sure the Delegation’s involvement in their management is not too heavy-handed. Our operations must be significant enough in size for their numbers to be brought down. Otherwise our Delegations risk becoming vast accounting and auditing offices, in which case they won’t be able to play their political-diplomatic role, nor their role in the programming of co-operation, and in the co-operation relationship as a whole. We therefore have to design projects that spare us the problem of falling into this trap. It is not easy. All this applies to private sector projects that might become very demanding towards our ‘de-concentrated’ Delegations. As to structural adjustment, I think we have found a reasonable balance with joint management by headquarters and Delegations. Administrative management is almost entirely devolved to Delegations while major decisions are taken at headquarters in consultation with Delegations. As a former Head of Delegation I consider this as an indispensable tool for protecting our Delegations and Heads of Delegation, who would otherwise be subjected to extremely strong pressure from our Partners. When you have to decide whether a few dozen million euro should be disbursed, pressure can be very high.

Brussels,04 28 2003
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