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Commission favours establishment of EIB majority-owned subsidiary for the Mediterranean

The Commission has adopted today a Communication to the Council recommending the incorporation of the EIB's operations in the southern Mediterranean into a majority-owned subsidiary, with a special mandate to promote private sector development and investment in the region.

One year after the establishment of the Facility for Euro-Mediterranean Investment and Partnership (FEMIP) and in line with the Barcelona European Council mandate in March 2002, the Commission has prepared an Extended Impact Assessment.

FEMIP's incorporation into a subsidiary would facilitate and accelerate the shift of operations to private sector support, under a financial institution tailor-made for this particular mandate, and providing all state-of-the-art financial products geared towards private sector finance. The EC, Member States and also Mediterranean Partners would be expected to take minority participation in the new subsidiary, which would increase ownership of the EU financial co-operation with Mediterranean Partners and facilitate the interaction with structural reforms aiming at establishing a more business friendly environment in the region.

Commission President Romano Prodi said: “We have an obligation to do the maximum in order to address the obstacles to growth in the Mediterranean partner countries. Public investment has proved insufficient and private investment has been suffering from numerous obstacles: financial, regulatory, and administrative. In the context of our wider Europe strategy we have to take a courageous approach and put our money where our mouth is. Creating an EIB subsidiary dealing exclusively with Mediterranean partner projects need not be an expensive option. And the catalyst effect of such an institution is huge in terms of long term interaction with local economic reforms and long term political commitment and visibility for Europe. It is an opportunity that Europe should not miss.”

A generally weak private sector and an unfavourable business environment in the southern Mediterranean impede growth in the region. Unless this situation is reversed Mediterranean Partners will not be able to offer sufficient growth and an acceptable future to their growing population and workforce. Following this diagnosis, a dynamic redirection of the Euro-Mediterranean financial cooperation was decided in March 2002 in Barcelona to address private sector financing needs, and led to the creation within the EIB of FEMIP, the Facility for Euro-Mediterranean Investment and Partnership, to operate and develop the Bank's operations in the southern Mediterranean.

FEMIP was launched in October 2002. While expected to significantly increase the volume of EIB lending in the region, it was given the particular mandate to focus its operations on private sector development. FEMIP has performed well in its first year, with new operations worth € 1.8 billion, out of which about 60% went to private sector support.

The ECOFIN and European Council in March 2002 had requested that a decision on the incorporation of this facility into an EIB subsidiary be considered after one year and this review is now expected to take place before the end of 2003. To facilitate this review, the Commission carried out an Extended Impact Assessment (EIA) on the FEMIP. Impact assessments are used by the Commission as a tool to improve the policy development process and are to be carried out for all major initiatives. The EIA report from Commission services is being made public together with the present Communication. Having examined the functioning of FEMIP, it assesses the two core options - developing FEMIP or establishing a subsidiary- and their potential impact on a number of criteria.

Based on these assessments, the Commission considers that both options - FEMIP's development or its incorporation into an EIB majority-owned subsidiary - can have a positive contribution on private sector development :

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

Subsidiary. Overall, the incorporation of FEMIP into a majority-owned subsidiary, tailor-made to meet private sector development needs, is expected to build on EIB's expertise and leverage, while enjoying some risk-taking activities, better suited to private sector finance. It would hence be expected to have a higher impact on private sector development in the region. The new institution would have a high degree of political visibility and enable a higher level of ownership with the participation of Mediterranean Partners in the institution's capital and governance. It would thus facilitate interaction with local economic reforms to promote a more business friendly environment. Capitalisation costs related to minority shares subscriptions by the EC and Member States could to a greater or lesser degree be compensated by savings from the EC budget. The incorporation of FEMIP into a subsidiary could either cover its full portfolio, thereby providing a significant revenue stream for the new subsidiary, or only be partial, limited to private sector operations, thereby initially requiring a more limited capital base and lower capital subscriptions.
The Commission concludes that a subsidiary with adequate mandate and governance arrangements may have a higher impact on private sector development and that FEMIP's incorporation into an EIB majority-owned subsidiary should therefore be considered favourably.

A number of consultations are now foreseen, in particular with the Bank, Member States and Mediterranean Partners, before the Ecofin Council examines this issue in November.

Brussels,10 20 2003
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