Measures to enhance and guarantee Investment Mediterranean€¦ · Measures to enhance and guarantee Investment in the Mediterranean Éric Diamantis, Michel Gonnet and Amal Chevreau

Measures to enhance and guarantee

Investmentin the

MediterraneanÉric Diamantis, Michel Gonnet and Amal Chevreau

D E C E M B E R 2 0 1 0

The analyses developed in the report engage solely their authors and do not represent the official position of the founders of 2IM

T he Mediterranean InvestmentInitiative (www.2IM.coop) isa project led by Caisse des Dépôts

(France), Caisse de Dépôt de Gestion(Morocco) and the Institut de prospectiveéconomique du monde méditerranéensince March, 2009. By bringing togetherthirty public and private, investors fromEuropean countries, South and EastMediterranean countries, Gulf States,but also development multilateralinstitutions, the Initiative had as objectivesto establish a shared diagnosis onopportunities and obstacles to investmentin the Mediterranean region, to identifyfinancial and legal tools to enhance the paceof investment and to formulate concreteproposals so as to encourage businessopportunities.

The proposals formulated within theframework of the Initiative, containedin this report, fit into a dual vision.In the long term, the aim is to establisha comprehensive vision whilst in the shortterm is to propose operational solutions.The long term vision consists in settingup a global financial architecture basedupon a development financial institutionto direct investment into projects that will

build economic structure in the SEMCsover the long-term, rather than intospeculative sectors. The time is now ripeto gradually establish a flexible andambitious financial architecture specificto the region and akin to the Bretton Woodsinstitutions: a Bank, a monetary fund,a guarantee agency, etc.

I n the short term, the aim is to remedythe shortcomings in the legal regimesgoverning investment security in the

region and to set up instruments and toolsfor financing infrastructure and SMEs.If it is to attract investors, theMediterranean region needs to enhanceits business climate and improve investorperceptions of the region. It also needsto endow itself with financial tools thatwill allow it to overcome the difficultiesin financing infrastructure and SMEs.

Time has come to establish a real euro-Mediterranean partnership to accompanythe historical moments the Mediterraneanregion witnesses and favors its emergenceas a complementary and competitive regionwhere solidarity is the rule in the contextof globalization. Measures proposed withinthe Initiative do certainly contribute to it.

PREFACE

MEDITERR ANE AN INVESTMENT INITIATIVE ~ 1

Radhi Meddeb Presidentof IPEMED

2 ~ MEDITERR ANE AN INVESTMENT INITIATIVE

introduction ................................ 3

Current situation of investment in the Mediterranean ..................... 4

Overview of investment financingin the Mediterranean......................... 4

Main obstacles to increased investment in the Mediterranean ..... 7

• FDI volatility and the region’s capacity to attract FDI over the long-term.................................... 7

• Sharp currency fluctuations: euro vs dollar?.................................. 8

• Inadequate SME financing .............. 9

• Structural need for infrastructurefinancing........................................... 11

• Negative perceptions of the business climate ....................... 12

Proposals for the financing of investment in the Mediterranean ..................... 14

Long-term vision: a financialarchitecture for enhanced integration in the Euro-Mediterranean financial area............ 15

• A development financial institution specific to the region .... 15

A practical and operational vision: tools and measures to guaranteeand invigorate investmentin the Mediterranean.......................... 20

• Securing and guaranteeinginvestments for major priority projects............................................. 20

• Financial tools for infrastructureand SME financing........................... 21

• Infrastructure guarantee fund initiated by the EU basedon a list of UfM approved investment projects ......................... 22

• SMEs guarantee fund endowed by the regions and focused on clusters........................................ 23

• Harnessing local savings for long-term investment in the SEMC (infrastructure/SMEs) .................... 25

• Mobilising public and privatestakeholders from North and South to develop joint strategies on information sharing and collaboration ............................. 28

• North-South Mediterranean Union of loan insurers..................... 30

conclusion .................................... 32

Éric Diamantisis an associatelawyer at an inter -national law firm.He is also theVice-President ofIPEMED’s Board.

Michel Gonnet is President ofEudoxia Conseil.Hors class civiladministrator.He served diffe -rent missions atnumerous presti -gious institutions(Groupe Caissed’Epargne, Caissedes Dépôts,Ministry ofEconomy &Finance, etc.).

Amal Chevreau is a public lawscholar specializedin political science.She is a projectofficer at IPEMEDin charge ofagriculture,finance anddecentralizedcooperation.Before joiningIPEMED, shecollaborated formore than 10years withMorocco’sdevelopmentagencies.

ABD u AfricanDevelopment Bank

AFD u FrenchDevelopmentAgency

AFESD u ArabFund for Econo -mic and SocialDevelopment

BRIC u BrazilIndia China

CDC u Caissedes Dépôts etConsignations

CDG u Caissede Dépôt etde Gestion

CDP u Cassadepositi e prestiti

EC u EuropeanCommission

EIB u EuropeanInvestment Bank

ENP u EuropeanNeighborhoodPolicy

ENPI u EuropeanNeighborhoodand PartnershipInstrument

EU u EuropeanUnion

FDI u ForeignDirect Investment

FEMIP u Facilityfor Euro-Mediter -ra nean Investmentand Partnership

IDB u IslamicDevelopmentBank

IFC u Interna tio -nal FinanceCorporation

IPA u Pre-AccessionAssistance

MIGA u Multila -teral InvestmentGuarantee Agency

NIF uNeighborhoodInvestment Facility

OECD uOrganizationfor EconomicCooperation andDevelopment

SEM u Small andMedium Enter -prises

SEMC u Southand East Mediter -ranean Countries

UfM u Union forthe Mediterranean

WB u World Bank

L I S T O F A C R O N Y M S

S U M M A RY

the mediterranean Investment Initiative(2IM) was launched on 13 March 2009 as a part-nership between Caisse des Dépôts, CDC(France), Caisse de Dépôt et de Gestion, CDG(Morocco) and the Mediterranean Economic Fore-sight Institute (IPEMED). The aim of 2IM is tobring together public and private investors with aview to identifying ways and means of increasingthe pace of investment in the South and EastMediterranean Countries (SEMC) and of impro-ving the business climate there. Since 2009,2IM’s main focus has been on three key topics: • How to forge closer links between economicoperators across the Mediterranean region so asto speed up the emergence of an integrated eco-nomic area in the region.• The need to build confidence among economicoperators throughout the region, using the twinpillars of shared responsibility and shared deci-sion-making.• The need to provide a secure investment envi-ronment so as to enhance the region’s attractive-ness and its resilience to economic and financialturmoil.

following 2im’s launch, avenues for furtherexploration were identified and two workinggroups, legal and financial, were established. Theintention was that these would formulate propo-sals for legal and financial tools based on a shareddiagnosis of the region’s weaknesses and advan-tages. The working groups’ findings were submit-ted to and debated by the 2IM steering committee,composed of representatives of AFD, EFG-Her-mès, OECD, PROPARCO, SFI, as well as foundingmembers CDC, CDG, CDP and IPEMED. Theywere also examined in a series of workshops heldas part of the 2IM second plenary meeting on25 February 2010 in Rabat (Morocco) organised byCDG. More recently, they were outlined in a pre-sentation to KfW in Brussels in September 2010.

This report brings together the recommenda-tions of the financial and legal working groups, asset forth in separate, multi-author reports.

Financial group• Investment in the Mediterranean: Current Situa-tion and Ways Forward, Guillaume Almeras &Abderrahmane Hadj Nacer, March 2009. • Tools for Stepping up Investment in the Mediter-ranean, Michel Gonnet, September 2010.

Legal group • Overview of International Legal Mechanisms forProtecting Foreign Investment in the Mediterranean,Sabrina Robert-Cuendet, April 2010. • Proposals for Enhanced Investment Guarantees inthe Mediterranean Region, Eric Diamantis, July2010.

the key findings of the Commission on theFinancing of Co-Development in the Mediterra-nean, chaired by Charles Milhaud, were alsoincluded in this report. The report contains twosections. The first section gives an overview ofthe current situation of investment in the regionand the main barriers to investment. The secondsection outlines proposals aimed at stepping upthe pace of investment in the region. Twoapproaches are suggested: a long-term approachthat seeks to endow the region with a fully-fled-ged financial infrastructure based around a dedi-cated financial institution; and a short-term, ope-rational and pragmatic approach involvingmeasures to guarantee and secure investmentsin the region durably, and the creation of tools tochannel financing into two key sectors: infra-structure and SMEs. l


INTRODUCT ION

Measures to enhance and guaranteeInvestment in the Mediterranean

THE FIRST

SECTION OF THE

REPORT GIVES

AN OVERVIEW

OF THE CURRENT

SITUATION

OF INVESTMENT

WHILE THE

SECOND SECTION

OUTLINES PROPO -SALS AIMED

AT STEPPING UP

THE PACE OF

INVESTMENT

IN THE REGION.

the current investment situation in theMediterranean region presents a highly contrastedpicture. On the one hand, the SEMC enjoy certainadvantages that enabled them to continue tappingforeign direct investment (FDI) and maintaingrowth rates in excess of 3% even at the peak ofthe crisis. On the other hand, the Mediterraneancontinues to have one of the starkest investmentdeficits in the world, particularly in the areas ofinfrastructure and SME financing.

The region stands out for the sheer volume ofits investment needs for the coming ten years, esti-mated at a minimum of around €250bn: €100bnfor energy, €110bn for urban development (water,drainage, waste treatment, urban public transport),€20bn for logistics (ports, airports, motorways),and €20bn for enterprise development support,bearing in mind the 50 million jobs the SEMCneed to create between now and 2020.

Furthermore, although the SEMC had caughtup to a certain extent as regards FDI attractiveness(FDI was hovering around €45bn in 2006), by2009 the global economic crisis had sent FDI intoretreat (a 72% fall in Morocco, and 50% down inIsrael, Lebanon, Tunisia and Turkey)(1). An impro-vement in FDI is not completely off the cards,however, given the cyclical nature of FDI trends inthe region. The SEMC came through the globalfinancial and economic crisis with growth rates ofmore than 3% intact, at least in the short term. ForTurkey, for example, the IMF is forecasting 2011(2)

growth at somewhere in the range of 3-7%.Moreover, according to HSBC, two countries

in the region – Turkey and Egypt – “stand along-side Colombia, Indonesia, Vietnam and SouthAfrica as high growth potential countries, with thepotential to join the ranks of the BRIC”(3).

while multilateral and bilateral internationaldonors have stepped up their financial injectionsinto the region, investments continue to lag farbehind what is needed. The SEMCs’ own invest-ment potential, meanwhile, is constrained by theimperative of fiscal responsibility as prescribedby the World Bank. At the same time, the Medi-terranean region offers genuine advantages in

terms of population size, dynamism, and com-parative resilience to the financial and economiccrisis that affected the European Union countriesso severely.

The total population of the member countriesof the Union for the Mediterranean will reach874 million by 2030 and exceed 900 million in2050(4). The Maghreb and Egypt will each be hometo 130 million people by 2020. Given this upturnin the very building blocks of economic power –population size and level of education (witness theBRIC example) – population size could in timebecome a major advantage for the region.

The first section of this report offers a briefoverview of FDI and financing by a number ofinvestment financing providers in the Mediterra-nean. The main obstacles to investment will alsobe outlined in this section.

Overview of investmentfinancing in the Mediterranean

according to Mediterranean Investment Pro-ject Observatory (ANIMA-MIPO), the number ofnew FDI projects announced in the SEMC is onthe rise again, with 581 projects identified in thefirst three quarters of 2010 compared with 542 intotal for 2009 (a 43% increase). The total value ofthe new projects came to €20.4bn at 30 Septem-ber 2010, compared with €28.6bn in 2009. Theaverage value of an investment project was €35min 2010, compared with €50m in 2009. Growthis also being seen in joint venture creation:362 new joint ventures were set up in the firstthree quarters of 2010, compared with 303 in totalfor 2009. chart 1

Turkey and Israel together are attracting moreinvestment than all of the other countries put toge-ther. Syria and Lebanon registered clear-cutgrowth, with FDI mainly directed to the bankingsector. Syria’s banking sector was opened toforeign investment to a maximum of 60% in early2010. Total announced FDI in Syria came to€2.2bn in 2010, compared with €0.9bn in 2009.


Current situation of investment in the Mediterranean

(1) MilhaudCommission report– May 2010.

(2) Idem.

(3) IPEMED NEWS,September 2010,article by AkramBelkaid, editorialadvisor.

(4) Source:FAOSTAT, © FAOStatistics Division2009, 13 August2009.

THE REGION

STANDS OUT

FOR THE SHEER

VOLUME OF

ITS INVESTMENT

NEEDS FOR

THE COMING

TEN YEARS,ESTIMATED

AT A MINIMUM OF

AROUND €250BN.

In the Maghreb, announced FDI came to €3bn inthe first three quarters of 2010, compared with anannual average in excess of €8bn since 2003.Tunisia scored highest on the number of FDI pro-jects announced, with 92 in the first three quartersof 2010, compared with 78 for 2009 as a whole.

european corporations continued to lead thepack in 2010, with 30-40% of the total number ofFDI projects announced. This notwithstanding,there is a trend towards greater diversity of origin,with emerging countries now accounting for 30%of the total number of announced FDI projects.The Gulf States, on the other hand, are in retreatsomewhat owing to the financial crisis and realestate bubble. chart 2

The SEMC also receive large-scale investmentfinancing from international multilateral and bila-teral funding agencies. According to the MilhaudCommission’s report, the total financial flow tothe region in 2009, aid and loans alike, came toaround €20bn.

The region’s most important multilateral part-ner is the European Union, with €2bn in aid and€5bn in loans granted by the European Invest-ment Bank (EIB). The Agence Française de Déve-loppement (AFD – French development agency)is the largest bilateral donor, with total commit-ments to the region in excess of €1bn. table 1

Below is a more detailed overview of invest-ment inflows in the region.

The European Union (EU) is the region’slargest funding provider.

the eu acts mainly via its European Neighbou-rhood Policy Instrument (ENPI), the Facility forEuro-Mediterranean Investment & Partnership(FEMIP), managed by the European InvestmentBank (EIB), and, since 2008, through the Neigh-bourhood Investment Facility (NIF). The ENPI’stotal allocation amounted to €12bn for the period2007-2013, which represents an increase on pre-vious years.

ENPI credit financing mainly goes to bilateralprojects (country-specific cooperation projects).Loans are also issued to the two ENPI regions(South and East), as well as to regional and cross-border initiatives and mechanisms.

For the period 2007-2013, FEMIP has a budgetenvelope of €8.7bn to finance EU guaranteedloans, and €2.2bn to finance non-guaranteed

loans for enterprise development and financinginfrastructure meeting the priorities definedwithin the framework of the Union for the Medi-terranean.

The NIF focuses mainly on infrastructure fun-ding, and has a budget envelope of €700m for theperiod 2007-2013. Member States have beenasked gradually to match the EU contribution soas to optimise lending leverage. As of the end of2009, projects totalling €4.3bn were financed inthis framework, with a contribution of around€74.8m by the NIF.


8 812 11 828

39 526

66 25859 073

38 738

28 687 27 241

10 000

20 000

30 000

40 000

50 000

60 000

70 000

2003 2004 2005 2006 2007 2008 2009 2010

Prévision

Source : Anima-Mipo

Source : Anima-Mipo

5 000

10 000

15 000

20 000

25 000

2003 2004 2005 2006 2007 2008 2009 2010Prevision

Europe

Golfe

Other States

Med 11

USA Canada

chart 1 Trends in net new FDI € millions

chart 2 Net announced FDI per region of origin € millions

table 1 Multilateral financing per donor € millions, 2009

Donor Amount European Union 2,206.80 European Investment Bank 5,009.00 World Bank Group 3,954.40 EBRD 416.00 African Development Bank 948.20 IDB and AFESD 956.40 Other institutions 805.50

Donor Amount

France 1,292.80 USA 1,183.80 Other States 2,192.90 Arab and Islamic Funds and States 462.20

Total 19,428.00 Source : Milhaud Commission report

By way of comparison, the Instrument for Pre-Accession Assistance (IPA), which provides fundingto potential candidate countries such as Turkey, hasa budget envelope of €11.5bn. The report unders-cores that the ten South Mediterranean countries(205 million inhabitants) received €887m or€4.30/inhabitant under the ENPI in 2009, compa-red with €921m received by the IPA eligible coun-tries (87 million inhabitants), or €10.50/inhabitant.

Other multilateral institutions provide funding that partially meetsthe region’s needs Infrastructure; SMEs, investment guarantees

world bank group (wb) invested a total of€4bn in the region during 2008-2010, brokendown as follows: energy 25%, private sector finan-cing 25%, and transport and water 25% each.International Finance Corporation (IFC), theWorld Bank subsidiary dedicated to private indus-trial financing, invested €860m in equity andloans in the region in 2009. The MultilateralInvestment Guarantee Agency (MIGA) guaran-tees investments in the region against selectedpolitical risks. Its commitment to the region in2009 came to €497m to cover investments inSyria and Turkey. The World Bank also operatesin the region via two funds: • the Global Environmental Facility (GEF) via aprogramme called Sustainable Med launched in2009 with an $800m budget, • and the Clean Technology Fund, which is plan-ning to provide $750m to finance projects underthe Mediterranean Solar Plan.

african development bank group (adb)has increased its financing to the region, with afocus on Egypt, Morocco and Tunisia. In 2009, itstotal commitments came to €948m mainly in theareas of transport, energy and industry.

the islamic development bank (idb) issuedconcession loans in 2008 totalling €567m with amain focus on Tunisia, Morocco and Turkey, nota-bly to finance infrastructure, human developmentand private sector projects.

the arab fund for economic and socialdevelopment (afesd) financed projects totalling€400m in 2008, with a clear preference for theenergy sector.

Bilateral funding is substantialin the region, totalling €4.4bn in 2008

france is the region’s biggest provider offunding after the USA. AFD manages most ofFrance’s commitments to the region, providing€853m in 2009. AFD’s subsidiary PROPARCOprovides capital and credit financing. AFD’s totalcommitments to the region in 2009 came to€1.1bn, with Turkey, Morocco and Tunisia themain beneficiaries. AFD provides private sectorfinancing in the region mainly via its ARIZ fundand the Mediterranean Investment & SupportFacility. France, Germany and Spain provide 42%of the development assistance received by theregion. chart 3

Sovereign investors play a leadingrole in the region, mainly in the areaof enterprise creation

in 2008, kfw made a total of €150m invest-ments of its own. CDC launched Averroès I in2003 and Averroès II in 2009, and plans to invest€50-80m in start-ups. A joint project by CDC(France), CDP (Italy), CDG (Morocco) and EFG-Hermès (Egypt) and EIB led to the launch of theINFRAMED fund, which aims to provide long-term funding to infrastructure projects. TheINFRAMED partners provided the fund with aninitial endowment of €400m, and plans are afootto increase that to €1bn. Further information onthe fund is contained in the second section of thisreport.


France1 100,0024 %

USA1 183,8026 %

Deutschland393,209 %

Spain402,609 %

Japan296,407 %

Other States1 100,825 %

chart 3 Bilateral fundingper country € millions, 2008

Source : Milhaud Commission report

THE ENPI’S TOTAL

ALLOCATION

AMOUNTED

TO €12BN

FOR THE PERIOD

2007-2013.

Joint initiatives are underway aimedat better targeting investments,streamlining the project approval process,and better sharing out risk

afd, kfw and eib have signed an agreementthat seeks to “harmonise their methods of inter-vention in the region and co-finance projects”(5).The same is also being done by donor privatefinancing subsidiaries via European FinancingPartners (EFP), enabling donors to finance pro-jects using the single-window principle.

Most of the funding made available to the region comes from three donors and goes to three countries.

turkey, egypt and Morocco “capture 53% of theavailable aid”(6) and the EU, EIB and the WorldBank are the main donors, “providing 60% of thetotal aid” to the region.(7)

Main obstacles to increased investment in the Mediterranean

the investment situation on the ground in theMediterranean is highly complex, with factorsstemming from the disparate nature of theregion’s economies coming into play: two econo-mies rely on oil exports (Algeria, Syria), three haveclose links with the EU (Algeria, Morocco, Tuni-sia), five have more or less close links with theGulf States or the rest of the world or both (Egypt,Lebanon, Palestine, Jordan, Israel), and Turkey isa special case unto itself. The same heterogeneityis seen in the countries’ links with the EU, asshown by their trade with the bloc: some 50% ofAlgeria, Morocco and Tunisia’s trade is with theEU, whereas for Egypt, Lebanon, Palestine, Jor-dan, Israel and Syria, the figure is around 30%.(8)

Another factor is the remarkably slow progressin Euro-Mediterranean economic integration. Ofthe multiple challenges and obstacles faced by theregion, we have chosen to dwell on five maininvestment obstacles identified in the report pre-pared by Guillaume Alméras and AbderrahmaneHadj Nacer. We believe these to be crucial to the

future of the region, since they “cover the entiregamut of investment financing instruments”(9):• FDI volatility and the region’s capacity toattract FDI over the long-term• Sharp currency fluctuations: euro vs. dollar? • Inadequate SME financing• Structural need for infrastructure financing• Negative perceptions of the business climate.

FDI volatility and the region’s capacityto attract FDI over the long-term

i n 2000-2007, the SEMC managed to close theFDI gap, partly by seeking out diversified sourcesof FDI. The European countries are no longer thesole investors in the SEMC: the Gulf States, Tur-key and the Asian countries are investing increa-singly in the SEMC, to serve local and export mar-kets alike. Moreover, the SEMCs’ output isbecoming ever more sophisticated, research andinnovation are taking hold, and companies areattracted by local specialists who cost less toemploy than their European counterparts. FDI fellin 2008 and 2009 owing to the world financialand economic crisis.

According to the Mediterranean InvestmentProject Observatory (ANIMA-MIPO), “2010 saw acontinuation of the trends recorded in 2009. Foreigncompanies are once again giving the green light toinvestment projects as reassuring economic forecastsare released for the Mediterranean countries (4%growth for the Arab countries in 2010 according tothe IMF), but the projects are smaller in scale andcarry less risk.” Although the Mediterranean coun-tries did not emerge unscathed from the crisis,they did manage to resist by redeploying theirvalue chains and thanks to near-shoring by Euro-pean companies coming under increased compe-titive pressure. European companies have alsostepped up their quest for new sources of growthon what have become increasingly dynamic andless distant markets.

nevertheless, the Mediterranean’s share ofFDI remains inadequate. “FDI flows into the Medi-terranean region account for less than 5% of globalFDI”(10). There are two reasons for this: FDI volati-lity and the incapacity of the SEMC to build a dura-bly attractive image. table 2

Guillaume Alméras and Abderrahmane HadjNacer argue that the following reasons explain theimpact of FDI in the region: “Whereas the task for


(5) Report of theCommissionon financing of co-development inthe Mediterranean,chaired byCharles Milhaud.

(6) Idem.

(7) Idem.

(8) “Crisis and waysout of crisis inFEMIP Mediterra -nean partnercountries”, FEMISE,2010.

(9) “Investment inthe Mediterranean:current situationand ways forward”,Guillaume Almeras& AbderrahmaneHadj Nacer, March2009.

(10) Report of theCommissionon the financing ofco-development inthe Mediterranean,chaired by CharlesMilhaud.

the SEMC was to attract the capitalthey needed, FDI has tended to be pas-sively suffered rather than activelymanaged; investment projects have ledto increased economic activity, but thetrickle-down effect has frequently beenmeagre. According to ANIMA-MIPOestimates, job creation directly attribu-table to FDI in the SEMC (2 millionjobs in six years) has been well below thelevel required, and, more importantly, has been fallingoff in recent years (101,000 jobs in 2006, 86,000 in2007, 76,000 in 2008) owing to a lack of sufficientlydynamic industrial policies. Much of FDI, notably in the energy sector, uses

foreign labour and equipment and leads to exports ofraw or almost raw materials, thereby creating little inthe way of local added value. In the construction andpublic works sector, … FDI is creating increased supplyin a narrow middle and high income segment mainlymade up of outsiders (expatriates, second homes fordiasporas). Parts of the local population and local pro-fessionals are falling prey to an eviction effect (lack ofquality real estate, land price inflation).FDI can also cause large-scale capital flight,

making it tempting to resort to a more closed strategy.The example of Algeria is illustrative in this regard.By way of comparison, countries such as China,India, South Korea (the principle of “filtered” open-ness), Thailand, and, very recently, Brazil, haveimplemented more nuanced and selective strategieswith respect to FDI”(11).

Their main conclusion is that the SEMCs’capacity to attract FDI has to be placed within alarger picture – that of their openness to the EUand to non-EU partners – with two main charac-teristics highlighted: • An influx of FDI from the EU and the GulfStates (before the crisis) seeking to use the SEMCas a production or hosting platform (tourism, realestate) for mainly external markets;• Business flows are developing in parallel bet-ween the SEMC themselves and with new non-EU markets. This is leading to modest inwardsinvestment with a greater focus on local marketsand a strong manufacturing slant.

femise(12) makes the following four points aboutFDI:• The contribution of FDI to economic growthin SEMC depends on whether the country inquestion has opted to improve its business cli-mate, privatise its economy and liberalise its mar-ket, or whether it has decided to continue with a

tightly regulated model. Bearing thisin mind, a distinction needs to bedrawn between countries with a pro-active FDI policy such as Egypt, Tuni-sia, Morocco and Jordan, whereforeign companies play a quantitativerole in economic growth, and coun-tries that are not as aggressive aboutattracting FDI either because of theiralready sizeable economic clout (Tur-

key) or because they have significant financialresources or savings at their disposal (Algeria,Syria, Lebanon). • FDI has become a key factor for economicgrowth. That being said, FDI’s contribution todynamic growth, job creation and economicbalance between territories is not so clear.• FDI can buoy growth over the long-term if hostcountries have the capacity to absorb over time thetechnologies that FDI brings. • A mechanism similar to the ASEAN Compre-hensive Investment Agreement is needed so as tofoster the emergence of Mediterranean-based indus-try champions capable of occupying an importantplace in the global manufacturing architecture.

the milhaud commission underscores theneed for SEMC on the receiving end of FDI to fos-ter a high degree of domestic saving and invest-ment and to provide clear regulatory and legalenvironments conducive to attracting investment.Measures along these lines could have a multipliereffect on FDI and encourage source countries totransfer the technology and know-how needed topreserve or enhance their competitiveness in thecountries where they’ve invested.

Sharp currency fluctuations:euro vs dollar?

the world financial crisis did not leave theSEMC unscathed. It still has the potential to upsettheir monetary balance. Any Euro-Mediterraneanpartnership needs to take this aspect on boardalso. We are not calling specifically for considera-tion to be given to establishing a single currencyin the region, although this continues to be a long-term objective. Such a move would require Statesto agree to relinquish a degree of sovereignty andto coordinate fiscal and tax policies.

A number of pressing issues worthy of consi-deration arise in connection with how the region’s


table 2 Share of Mediterraneancountries in world FDI Total PM World % MC IDE 1995-2005 10.978 741.045 1,48% IDE 2007 55.748 2.099.973 2,65% IDE 2008 54.867 1.720.873 3,19% IDE 2009 32.437 1.114.189 2,91%

Source : UNCTAD, Data Base 2010

(11) “Investment inthe Mediterranean:current situationand ways forward”,Guillaume Almeras& AbderrahmaneHadj Nacer,March 2009.

(12) “Crisis and waysout of crisis in FEMIPMediterra neanpartner countries”,FEMISE, 2010.

economies are aligned with either the euro or thedollar. One of the consequences of the crisis wasa drop in revenue owing to reduced externaldemand; reduced capacity among migrants toremit earnings to their home countries due toincreased host country unemployment, reducedtourism, and reduced FDI. The domestic growthseen over the past few years undoubtedly contri-buted to the overall growth registered in theSEMC, partly thanks to increased privateconsumption. However, domestic growth alonecannot compensate for the drop in exports.Moreover, the SEMC are suffering the fallout fromincreased raw material prices, which among otherthings are eroding purchasing power substantially.

Some of the SEMC import from the EU andpay in euro, whereas their exports to the rest of theworld might be priced in dollars. The currencywars are likely to cause a scissors effect, endange-ring these countries fragile economic growththrough no fault of their own.

The matter of whether or not the SEMC shouldconsider pegging their currencies to the euro des-erves consideration therefore, although this goesbeyond the scope of this report. Sticking to invest-ment matters, Euro-Mediterranean monetarycooperation could be developed in two areas: • Protecting long-term investor financingagainst exchange risks; • For some projects, allow public and privateinvestors from the SEMC to access euro financialmarkets under optimal conditions: in this way, theEU could “compensate” its partners for thestrength of the euro against the dollar by reducingthe cost of raising funding.

the aim would be to create a network of centralbanks of the countries in question so as to fosterinvestment and reassure investors in times of cri-sis that could undermine the SEMCs’ macroeco-nomic fundamentals and perhaps provoke pres-sure on their currencies.

Inadequate SME financing

the creation of smes is crucial to the econo-mies of the SEMCs, since it offers the key to sol-ving their jobs crisis. In 2009, the Maghreb hadmore than two million small and medium enter-prises (SMEs), of which 1.2 million were based inMorocco, 410,000-430,000 in Algeria, and450,000-490,000 in Tunisia(13). The Maghrebalone needs to create around a million jobs a year

for the next 20 years if it is to keep unemploymentfrom rising above its current level.

The economic growth measures put in placeby the SEMCs lack a number of important toolsfor financing SME creation: guarantees, insuranceschemes, local currency loans, exchange risk cove-rage, and direct equity investment. We have iden-tified two sources of financing that could solve theissue of SME capital financing: private equity andfinancial markets.

private equity. Like many other emergingcountries, the SEMC continue to suffer from aninadequate supply of bank-sourced investment cre-dit instruments. Local banks tend to be poorlyequipped to meet the long-term financing needsof businesses. A more specialised array of finan-cing instruments is needed for the financing ofenterprise creation and expansion, as is directaccess to financial markets, so as business do nothave to rely on the products offered by banks alone.

The region’s businesses resemble a pyramid:at the apex, one sees a small number of majorcompanies, which capture the bulk of FDI. Thesebusinesses create much of the region’s addedvalue and inject capital into the economy, but theydo not create enough jobs. At the base of the pyra-mid, one sees SMEs, informal undertakings, andvery small enterprises (VSEs). These create largenumbers of jobs but fall outside the ambit of pri-vate equity. Financing instruments for this groupare totally lacking. For the segment sandwichedbetween the two, investment capital could play apre-eminent role.

Private equity is undergoing rapid growth inthe South and East Mediterranean. Following alearning curve period in 1990-2000 when fundsachieved zero returns on investment and plou-ghed money into their own business development(training of specialists, fieldwork to identify pro-jects, learning about local specificities, buildinglocal regulatory frameworks, finding partners),there are now around forty different private equityfirms managing around 150 different funds.

According to a 2008 study by Anima(14), “320capital investment funds, of which 181 are based inIsrael, have been identified in the SEMC and in Sou-thern Europe … Together, these 320 funds have$40bn in targeted endowments and $31bn in levera-ged capital.”(15)

A number of funds are operating in the earlystage segment in Egypt (EFG Hermès, IT Ven-tures) and Turkey (iLab Ventures, Golden Horn


(13) Afkar review,issue 24.

(14) ANIMA MedFunds: overview ofcapital investmentin the MENA region,September 2008.


THE CREATION

OF SMES

IS CRUCIAL TO

THE ECONOMIES

OF THE SEMCS

AS IT HELPS

SOLVING THEIR

JOBS CRISIS.

Ventures, Isgirisim). A number of countries havestart-up funds dedicated to the early stage segmentin promising economic sectors: ITC (Morocco andTunisia).

However, in the report they published in 2009,Guillaume Alméras and Abderrahmane HadjNacer stated that despite the emergence of a well-anchored private equity capital sector in theSEMC, the sector, owing to its relative youth, islacking in certain areas such as the initial phasesof enterprise development.

Private equity needs to work harder to helpwhat are frequently family-owned SMEs scale upand expand to become more profitable and moreinternational. For although private equity firmshave succeeded in scooping up large sums inrecent years ($15bn over three years), they have notbeen investing enough (15-20% of fund assets).

Another problem concerns investment fundexits. A study by the Moroccan association of capi-tal investors (AMIC) brings together exit data for29 investment exits by Moroccan funds overrecent years. The average gross IRR is 26% for theprojects in question. Net IRR after managementcosts, profit sharing and exchange risk is still at anacceptable level for private European investors(around 15%; other examples mention high mul-tipliers at the time of resale of undertakings, in theregion of 2.5 to 3).

It is important for IRR requirements not to beexcessively high; the return on these investmentsis necessarily below that of some stocks or specu-lative real estate investments. This point needs tobe made forcefully: development capital, whichfinances non-listed SMEs, is by its very natureincompatible with a rapid exit speculativeapproach: industrial value creation is only possiblein a medium term perspective.

private equity is clearly has excellent potentialto finance enterprise creation in the region, provi-ded that underlying constraints are addressed: (i)the region’s negative image; (ii) the need for a sta-ble regulatory framework with a regional dimen-sion if possible, so as to channel savings in a sus-tained manner into the business sphere; (iii) theneed to diversify resources (fund subscribers),because to date, without the major donors (EIB,IFC, ADF-Proparco, etc.), very few funds couldhave got off the ground; (iv) the risk of the currentfinancial crisis being used as a pretext for inappro-priate decisions (higher taxes on funds, restric-tions such as in Algeria, etc.); (v) exchange risks(funds subscribed in euro or in dollars, revenues

in local currencies), bearing in mind that tech-niques for protecting against exchange risks arestill very much in their infancy and that profitabi-lity can only be reliably known at exit, meaning thedate and exchange rate are in the realm of uncer-tainty; (vi) continued efforts to enhance managerand human resource quality; (vii) the need for aclear separation from traditional banking activities(lending, account management) so as to avoidconflicts of interest.

Finally, it is important to have a local presenceon the ground, in each country of operations: it issimply not feasible to “source” projects from theNorth. There is no particular need however todelocalise European fund management teams tothe South; “Maghreb” funds are becoming moreand more common, and the Middle East is attrac-ting local and regional funds. That being said,regional professional forums are an excellent toolfor fostering experience and best practice sharing.

Many European governments (Spain, Franceand the UK, for instance) offer tax incentives to pri-vate equity: governments to the South of the Medi-terranean, which sometimes view private equity asexcessively profitable and needing to be taxed orcontrolled in one way or another, could usefullydraw on the experience of the Northern countries.

capital markets. The MENA region accountsfor only 5.6% of the global capital markets(16).Some of the SEMCs have, however, achieved nota-ble capital market success stories, among themthe Amman Stock Exchange. In terms of thenumber of listed companies (262), Jordan com-pares well with countries much larger: its marketcapitalisation comes to 200% of total GDP, with50% participation by non-residents.

Casablanca Stock Exchange is building tieswith the Union of Arab Stock Exchanges, and alsowith African countries such as Côte d’Ivoire, Sene-gal, and Gabon. Casablanca Stock Exchange is aservice provider to Libreville Stock Exchange, andcooperates closely with Côte d’Ivoire and Senegal.

Yet the dynamism seen in some SEMC stockmarkets is not reflected in massive investment inenterprise creation. The stock exchanges in theSEMC offer limited corporate financing as a com-plement to the already sparse offering elsewhereon the market.

Several factors common to all of the region’scountries explain the under-development andshallow reach of the region’s stock markets. “Someof the factors behind this pertain to the relatively


(16) “Crisis and waysout of crisis inFEMIP Mediterra -nean partnercountries”, FEMISE, 2010.

THE MAGHREB

ALONE NEEDS TO

CREATE AROUND

A MILLION JOBS

EACH YEAR

FOR THE NEXT

20 YEARS

TO KEEP

UNEMPLOYMENT

FROM RISING.

short history of stock market mechanisms in manyof the SEMCs, and to the ingrained habits of localbusiness people at the helm of family owned under-takings who are not accustomed to the reporting andtransparency obligations imposed by the capital mar-kets. That being said, as early as 1992, some 35 ofJordan’s largest corporations were financing morethan 50% of their investments via share issues.The relative weakness of the financial markets is

also due to the weak institutional investment environ-ment, and specifically to the under-development of theinsurance sector, both in terms of quantity and size:Egypt has 21 insurance companies, of which threeplus a reinsurance company control 70% of a marketthat is no larger than 2% of GDP (Jordan’s insurancesector is the largest in the region at 2.5% of GDP). InAlgeria, the insurance market accounted for 0.6% ofGDP in 2005, despite the existence of 16 insurancecompanies (seven of which are public)”(17).

A way of deepening the region’s capital mar-kets and enabling the SEMCs’ stock exchanges tocarry out their role to the fullest extent could be tounite them into a network. They could also esta-blish relations with countries outside the regionwith a view to listing their companies and hand-ling deals originating there in accordance with theone-stop-shop principle. Another approach couldinvolve creating common indexes. Examples ofcooperation already exist, such as the Union ofArab Stock Exchanges, a body whose aim is dia-logue and coordination.

however, the members of the Union of ArabStock Exchanges do not have the same concernsand do not view themselves as reformers. A num-ber of stock exchange operators in the region arefavourable to the establishment of a network ofMediterranean stock exchanges with variable levelsof coordination between the member exchanges.The aim would be to work towards regulatoryconvergence, but also to enable the same asset tobe listed on several exchanges. The creation of anetwork would also be a way of offering a sharedplatform for institutional investors, who tend to beput off by the narrowness of national markets.

Another way of deepening the capital marketswould be to create an index of Mediterraneanstock exchanges, although it would have to be des-igned and run by an internationally recognisedindependent body.

Regardless of how it’s done, the region’s capitalmarkets must be deepened so as to provide localenterprises with non-bank sources of financing. Itwould also give additional investment opportuni-

ties to investors, harness local savings, and offerguarantees to FDI host countries on the durabilityof FDI and its contribution to the host countries’economies.

Structural need for infrastructurefinancing

the semc countries’ investment needs aregargantuan. Two recent studies put at $150-200bnthe infrastructure financing needs of the SEMCsover the coming five to fifteen years:

The EIB estimates that over the next ten years,the South Mediterranean countries alone willneed to invest $100bn in energy, $110bn in urbandevelopment (water, drainage, waste processing,urban transport), $20bn on logistics (ports, air-ports, motorways), and $20bn on enterprise deve-lopment support.

McKinsey, for its part, identified a pipeline ofprojects for the next five years totalling $200bn innine sectors in eleven SEMCs. Taking an equityaverage of 25-40% and a private sector stake of 15-20% for most of the projects, the private capitalneed comes to $30-40bn ($7.5-16 in equity).

It has to be noted that the donors and fundingagencies operating in the region will not be ableto provide that level of financing, even despitetheir increased profile. The amount of financingthey can provide will be well below what is needed(€20bn in 2009).

Apart from aid and loans from the Northerncountries and multilateral funding providers, muchof the financing will have to come from public andprivate, national and international investors fromacross the world. Investors need an ad hoc regimeto make investment in the region attractive and tocommit to long-term investment projects.

Clearly, the task of attracting investment capitalinto projects involving deferred revenue (maturityin the order of several decades) and moderatereturns on investment (in the region of 4-7%) isfraught with difficulty. Above and beyond invest-ment, the main challenge stemming from thefinancial crisis is that of increasing lending, butthis raises equity requirements for banks (BaselIII). Added to this, the resulting liquidity risks onbanks’ balance sheets induce them to accord pre-ference to projects in less risky zones.

Based on these considerations, coordinationand the right policy choices become indispensa-ble. The current lack of cooperation between the



THE DYNAMISM

OF SOME SEMC

STOCK MARKETS

IS NOT REFLECTED

IN MASSIVE

INVESTMENT

IN ENTERPRISE

CREATION.THEY OFFER

COMPLEMENTARY

CORPORATE

FINANCING

TO SEMS.

SEMCs is hampering any efforts to designmethods of coordination that would lead to thecreation of the kinds of financing modalities requi-red by a whole host of infrastructure projects.

The description of the current situation setforth in the report of Guillaume Alméras andAbderrahmane Hadj Nacer reveals that some ofthe SEMCs have large numbers of infrastructureprojects that have yet to be priority ranked in termsof size, timeliness and even importance criteria.

The SEMCs indeed are characterised by bur-geoning infrastructure projects, whereby eachindividual country completely ignores the projectsunderway next door. This makes for competitionbetween the countries at the regional level, moststrikingly in the logistics sector.

This lack of coordination systematically boilsdown to the considerable financing requirements.“A way to estimate them is to reason in terms of grossfixed capital. Taking the latter in the various SEMCsas a base level and assuming that … to meet theinvestment requirements in housing, infrastructure,industrial development, education and training, etc.,it should be at 30% of GDP, the additional invest-ment requirement comes to $200bn for the first yearfor all of the SEMCs together. This is a realisticfigure, bearing in mind that Morocco alone is plan-ning public investment totalling €100bn over thecoming five years”(18).

Clearly then, prioritising among projects is theonly way to meet the necessary goal of mobilisingthe requisite resources. The prioritisation processcould be inspired by the priority objectives of theUnion for the Mediterranean (depollution of theMediterranean Sea, sea and land highways, Medi-terranean solar plan) and could be given a regionaldimension (South-South, South-North) by rankingthe projects in terms of risks and also by adoptinginnovative criteria such as environmental impactand trickle-down effect.

Negative perceptions of the business climate

the mediterranean region hosts a systemof 317 bilateral investment treaties (BITs) signedby and between the countries of the region(19). Theprotections afforded by those treaties almostalways include the following: national treatment, • Most favoured nation treatment, • Fair and equitable treatment, • Guarantees in the event of expropriation,

• Guarantees in the event of losses, • Freedom of transfer, • Umbrella agreement, • Full and total protection and security.

As well as substantial protection, the treatiesafford procedural guarantees that make it possi-ble for an investor to refer a dispute with a hostState to an international arbitration tribunal.Recourse to arbitration can be limited in certaincases; nevertheless, in the Mediterranean regionthe arbitration mechanisms of reference are theICSID mechanism, the UNCITRAL arbitrationrules and the ICC arbitration rules. Some treatiesrefer to less well-known and more specific mecha-nisms such as the Cairo or Istanbul RegionalCentre for International Commercial Arbitration,the International Arbitration Centre of the Aus-trian Federal Economic Chamber, the StockholmArbitration Tribunal, or the Arab InvestmentCourt in the Arab countries. Referring a disputeto one of the two main arbitration institutions,ICSID or ICC, is extremely costly for the parties.Hence, SMEs find themselves excluded from thesystem, which is really only an option for large-scale investors.

Nevertheless, compared with other regions ofthe world, the Mediterranean region from Mauri-tania to Turkey and including Israel and Jordanoffers a lower return on investment, or at least ahigher risk, even though there are subtleties fromcountry to country. Investment in the region isalso more complicated to structure owing to thediversity of the national investment frameworks.

european investors, who continue to be theregion’s main investors, allocate barely 3% of theirFDI to the SEMC, compared with US and Japa-nese companies that direct on average 20% oftheir FDI to their Southern neighbours. Otherinvestors in the region focus essentially on oil andgas (North American investors) and real estateassets offering relatively short-term returns (GulfStates). Many investors say that this is becauselong-term investments in the region are perceivedas risky. This also explains why private investmentfunds authorised by their statutes to invest in theregion are so few and far between. In fact, inrecent times there has been an increase in appli-cations for financial guarantees covering breachof contract risks for contracts involving public andsemi-public partners in Southern countries, andrisk of host countries reneging on their financialcommitments.



(19) IPEMED reporton the currentsituation ofinternational legalmechanisms toprotect foreigninvestment in theMediterranean,Sabrina Robert-Cuendet, April 2010“The countriesconcerned are the EUmember states:Germany, Austria,Belgium, Bulgaria,Cyprus, Denmark,Spain, Estonia,Finland, France,Greece, Hungary,Ireland, Italy, Latvia,Lithuania, Luxem -bourg, Malta, theNetherlands, Poland,Portugal, the CzechRepublic, Romania,the UK, Slovakia,Slovenia, Sweden; and the non-EUMediterraneancountries: Albania,Algeria, Bosnia-Herzegovina, Croatia,Egypt, Israel, Jordan,Lebanon, Morocco,Mauritania, Monaco,Montenegro, thePalestinian Authority,Syria, Tunisia, Turkeyand the Arab League.We also included theagreements conclu -ded by Libya, which isan observer ratherthan member of theBarcelona Process”.

Moreover, the existence of legal instrumentswhose aim is to guarantee investment securitydoes not seem to be having any significant impacton regional risk perceptions: the protections affor-ded by the legal framework on investments arecomplex (different national regimes, the largenumber of bilateral investment treaties andconventions concluded under the aegis of theLeague of Arab States, the Arab Maghreb Union,and the Organisation of the Islamic Conference)and lack precision (the role of the most favourednation clause in extending the applicability ofclauses from one investment protection treaty toanother; differences in jurisprudence from onearbitration tribunal to another, which are costly toinvestigate (higher transaction costs since everyinvestment in the region requires individual ana-lysis on this particular point); costs and timespent settling disputes and enforcing decisionshanded down).

The overall image conveyed by the regionwhen it comes to protecting investments com-pares unfavourably with that of NAFTA, whichhas a system that allows investors to plan invest-ments based on protection standards that are iden-tical throughout the region.

many different stakeholders can offer invest-ment guarantees: national agencies dedicated toprotecting foreign and sometimes domesticinvestments (e.g. COTUNACE in Tunisia), deve-lopment agencies (e.g. AFD), multilateral institu-tions: banks (World Bank, African DevelopmentBank, Islamic Development Bank, SFI, EIB), andguarantee agencies (MIGA, Compagnie Inter-arabe de garantie des Investissements, SociétéIslamique d’Assurance des Investissements et deCrédit à l’Exportation).

However, the financial guarantees offered bythese bodies would be no match for the scale andtimeframe of the region’s investment needs overthe coming twenty years. They are costly to obtainand not always perfectly adapted to projects below$50m (in terms of cost, conditions for activationand the multiplicity of stakeholders involved). Pro-jects under $50m are becoming increasinglynumerous, and their sponsors are frequentlymedium sized companies. Nor are they suited toprojects lasting more than 15 years.

Moreover, while political risk (non-convertibi-lity, non-transfer, expropriation, war, terrorism andcivil disturbances, breach of contract by the Stateor public enterprises) can generally be covered bynational guarantee agencies subject to the

constraints outlined above, this is not the case ofa number of other classes of risk that play animportant role in any investment decision.

Systemic risks such as devaluation or currencydepreciation tend not to be covered, and politicalrisk coverage tends not to extend (notably on mat-ters of sovereignty) to local banks that could beinvolved in project financing in local currency,thus contributing in certain cases to mitigatingcurrency risk. There are financial instruments thatcan limit this type of risk in major projects, but,beyond considerations as to cost, they only applyto projects involving convertible currencies with asatisfactory track record. Moreover, the existing institutional guaranteemechanisms generally do not offer comprehen-sive political/commercial risk protection, evendespite the high demand for such a guarantee,particularly from SMEs. Trials involving separa-ting out political and commercial risks havealready been carried out (and also with respect toEU guarantees of EIB loans outside the EU andguarantees for project financing), but there is nostructured mechanism available on an ongoingbasis because the issue of who will pay compen-sation to investors or banks if a guarantee is acti-vated has yet to be settled.

finally, it is necessary for the various financialguarantee mechanisms, including those availableon the private sector (for coverage periods that aregenerally shorter and under less stable terms thanwith public instruments) to be coordinated sincethe level of coverage (not all cover debt and equityalike and some instruments require a counter-guarantee by the host-State), eligibility, costs andprocedures are rarely identical.

Argentina’s experience has convinced manymajor investors of the need to strengthen the effi-cacy of investment protection mechanisms, parti-cularly in the light of how long it takes to settleinvestor-State disputes and issues with secureenforcement guarantees. l


THE EXISTENCE

OF LEGAL

INSTRUMENTS

AIMING AT

GUARANTEEING

INVESTMENT

SECURITY DOES

NOT SEEM

TO BE HAVING

ANY SIGNIFICANT

IMPACT ON

REGIONAL RISK

PERCEPTIONS.


it is scarcely necessary to belabour the factthat so many structural projects require fundingthat’s above and beyond the capacity of donors andSEMCs to provide. Likewise, the financial and eco-nomic crisis has shown that any country’s FDIattractiveness can be vulnerable to turmoil. Bea-ring this in mind, the aim of our proposals is tomake use of all of the available tools and instru-ments to identify and bring to bear additionaladvantages that have gone unnoticed hitherto.

Our proposals fit in to a dual short-term andlong-term vision. In the long term, the aim is toestablish a comprehensive financial architecturebased around a development financial institutiondedicated to the region. The aim will be to directinvestment into projects that will build economicstructure in the SEMCs over the long-term, ratherthan into speculative sectors.

In the short term, the aim is to remedy theshortcomings in the legal regimes governinginvestment security in the region and to set up ins-truments and tools for financing infrastructureand SMEs.

long-term vision. The considerable financingneeds of the SEMCs mean new opportunities forthe long-term emergence of an integrated finan-cial area in the Euro-Mediterranean region. Thetime is now ripe to gradually establish a flexibleand ambitious financial architecture specific to theregion and akin to the Bretton Woods institutions:a Bank, a Monetary Fund, a guarantee agency, etc.

Europe needs to look for growth drivers in itsimmediate environment as its demographic slow-down and sluggish productivity gains shunt thecontinent onto the sidelines. With the emergenceof new powers in the form of Brazil, India andChina and the severity of the crises underway inperipheral eurozone countries, Europe could finditself with reduced capacity to influence the inter-national regulatory system. For their part, theSEMCs are not in a position individually to faceup to monetary risks, long-term FDI bottleneckrisks, or export risks.

The CONVERGENCE study carried out in 2010by IPEMED demonstrated that an albeit fragile pro-cess of economic convergence between the Northand South Mediterranean is now underway. Massiveinvestments by major European corporations in lowadded-value activities are gradually being comple-mented by the development of integrated productivesystems in various sectors, both high and low tech.The arrival of new companies attracted by the suc-cess of their commercial partners or competitorscould amplify this trend. In some industrial and ser-vice sectors, most of the leading world corporationsare already present in the region.

More generally speaking, a new stage in theprocess appears to be consolidating. Companiesthat are aware of the resources of the South andEast Mediterranean countries have been setting upshop there since the beginning of this century withhigh added-value activities that, if they attain a cri-tical mass, could pull the SEMCs into a virtuousdevelopment circle that would benefit the entireregion. European corporations would preservetheir competitiveness in industry and services, andthe SEMCs would receive a strong economic boost.Complementarities between North and Southcould then be exploited via win-win partnerships.

short-term vision. Our proposals are focusedon means of securing investments and tools forfinancing infrastructures and SMEs, notably viapartnerships. The issue of securing and guaran-teeing investments in the Mediterranean regionis crucial owing to its cross-cutting nature.

If it is to attract investors, the Mediterraneanregion needs to enhance its business climate andimprove investor perceptions of the region. It alsoneeds to endow itself with financial tools that willallow it to overcome the difficulties in financinginfrastructure and SMEs.

We are in favour of implementing a stableregional legal framework to give the region enhan-ced visibility and reassure international and localinvestors. Investors need a harmonised legalregime of investment protection and investor dis-

Proposals for the financingof investment in the Mediterranean

TIME IS NOW RIPE

TO GRADUALLY

ESTABLISH

A FLEXIBLE

AND AMBITIOUS

FINANCIAL

ARCHITECTURE

SPECIFIC

TO THE REGION

ARTICULATED

AROUND AN

MEDITERRANEAN

DEVELOPMENT

BANK.

pute settlement guarantees for strategically iden-tified projects. The aim of having a single regionalinternational agreement with the customary pro-vision on protection of investments, although lau-dable, is not achievable in the near term. A regio-nal treaty on investment protection would raiselegal and political hurdles that could not be resol-ved swiftly. Therefore, the speediest option wouldappear to involve the elaboration under the aus-pices of the general secretariat of the Union forthe Mediterranean of a draft framework agree-ment setting forth a uniform legal environment(with some sections being optional, if necessary)on the protection of investments in the Union forthe Mediterranean States, and a mechanism forrecourse to arbitration.

As concerns infrastructure, only an Infrastruc-ture Guarantee Fund initiated by the EuropeanUnion based on a list of UfM-approved invest-ments would be capable of meeting the financingneeds of the SEMCs. Projects with a regionaldimension should be given priority, as this is away of favouring structure-creating projects thatfoster South-South and North-South integrationand share out the burden of project costs. Whenit comes to SME funding, the Guarantee Fundseems to be the best way of achieving as diverse asource of funding as possible.

there are a number of guarantee funds at thenational level in the North and South alike whoseaim is to foster the establishment and developmentof SMEs by bringing together public and privatestakeholders. EIB plays a key role here, alongsideother international mechanisms such as WorldBank Group/MIGA with its universal vocation andbroad spectrum going from SMEs to infrastruc-ture. Another example is the inter-Arab investmentguarantee organisation, which is based on theMIGA model, or the mechanisms offered by theNorthern and Southern countries (Hermès / AFD/ BFPME Tunisia, etc.). The Mediterranean enter-prise development initiative offers a comprehen-sive approach that could lead to the creation of aGuarantee Fund initiated by the EU. Additionallyand more specifically, we propose the creation of aGuarantee Fund for SMEs that would be repleni-shed by the regions and focused on clusters.

Long-term vision: a financialarchitecture for enhancedintegration in the Euro-Mediterranean financial area

we propose the gradual implementation ofan ambitious financial architecture of variable geo-metry specific to the region, based around a Medi-terranean development bank. The BrettonWoods institutions would be used as an inspira-tion: a Bank, a Monetary Fund, an investment gua-rantee agency, a harmonised regional investmentprotection framework, dispute settlement mecha-nisms, etc. Only in this way will it be possible toremedy the shortcomings identified in the regionby the Mediterranean Investment Initiative.

This kind of architecture is needed so as to:• Support and invigorate investment right at theoutset of enterprise creation.• Develop the region’s capital markets and encou-rage convergence between them.• Strengthen and broaden export guarantee ins-truments.• Provide a comprehensive, shared and concer-ted framework for investment protection.• Guarantee greater monetary stability in theregion.• Bring together existing initiatives and helpreinvigorate investment.• Create conditions conducive to the long-termtransformation of migrant savings into invest-ments.

A development financial institutionspecific to the region

the milhaud commission’s report mentionsthree options with a clear preference for option 2,which calls for the establishment of a financial ins-titution based on existing structures. Option 1 callsfor the establishment of a development bank fromscratch whose capital would be held by the coun-tries and public and multilateral bodies of theNorth and the countries of the South and East ofthe Mediterranean. This option was not retainedbecause obtaining an AAA rating would be extre-mely costly in initial capital. Option 3 calls for theestablishment of a Mediterranean public financingfacility in the form of a subsidiary of public bodiesacting as long-term investors. This option was vie-wed as second rate and would only be consideredas a last resort, because by its very nature a facility


TO ATTRACT

INVESTORS, THE

MEDITERRANEAN

REGION NEEDS

TO IMPROVE

ITS BUSINESS

CLIMATE

AND INVESTOR

PERCEPTIONS

OF THE REGION.


of this type can only harness limited amounts offinancing which would be incommensurate withthe immense funding needs of the region.

Option 2 was chosen because it calls for the esta-blishment of a financial institution dedicated tofinancing co-development in the Mediterranean.One way to achieve this could be through the crea-tion of a subsidiary of EIB for the Mediterranean.Its capital would be open to the UfM member Statesand to the EU, the Gulf States, the World Bank orthe African Development Bank. The institutionwould need to have an AAA rating in order to havethe requisite financial capacity and effectiveness.

We believe strongly that a Mediterranean-focu-sed development financial institution could bringthe region unquestionable added value:• Its creation would send out a strong signal toinvestors. It would help restore confidence ingovernments, banking systems and industrialpartners. Its mere existence would offer securityto savings and investment flows. • It would facilitate the shift from an investmentfund approach to a cross-cutting, regionally inte-grated and sustainable development approach. • It would facilitate the transformation of idleliquidity into long-term resources and foster sta-bility and monetary anchoring.• Even if it contributed only modestly to projectfinancing, the involvement of a Mediterraneandevelopment institution would have a catalysereffect by encouraging commercial banks andother equity investors by reassuring them as toproject feasibility.• It would be focused on key functions aimed atraising the level of economic development of theregion and financing SMEs and the private sectormore generally. • It would help improve the calibre of projectsby bringing to bear expertise and a capacity toidentify and evaluate risk that is largely lacking inthe region. • Finally, only a regional development financialinstitution would be capable of funding cross-cut-ting, ambitious projects such as high speed railnetworks, power inter-connections, internationalhighways, etc. Until now, the Arab Fund for Eco-nomic and Social Development has been the onlybody financing such projects, but its resources aresomewhat limited.

An institution of this type would serve as abridge between public sector and private sector.The States and national and international publicinstitutions participating in it would have a signi-ficant leverage effect on the institution’s public and

private assets thanks to their credibility and publicgovernance function. They would be placing theirmight behind a region-wide innovation effortbased on a strategic vision for economic develop-ment and integration in the Mediterranean.

Looking to how the World Bank has created atthe global level a set of instruments for identifyingprivate sector projects, financing and underwritingthem, and training people to carry them to fruition,the Mediterranean region needs to establish adevelopment bank specific to its region that wouldgradually endow it with these same instruments.The Mediterranean development bank should begiven an even broader mandate that would includethe innovation roles of a business bank, particu-larly business incubation, so as to give new impe-tus to economic and industrial development in theSouth Mediterranean countries.

the mediterranean development bank wouldcarry out four essential functions for the region: • Support for private sector projects, particularlySMEs: identification of projects, but also the roleof business incubator, supporter of private initia-tives, promotion of projects in areas earmarked asstrategic – a framework for action inspired by theeffective strategies seen in East Asia;• Transformation of short-term financial resourcesinto medium- and long-term financial resourcesfor investment. • In a relative near-term perspective, a role ininvestment-related training and experience sha-ring with a view to strengthening the financial sys-tems of the Southern countries and fosteringNorth-South and South-South exchanges. Thiswould necessitate the harmonisation of accoun-ting standards and a substantial improvement inStates’ statistics functions so as to ensure the avai-lability of harmonised statistical data from natio-nal statistics institutes;• In the longer term, a role as investment gua-rantor via a Mediterranean Guarantee Fund forInvestment and Exports (MGFIE).

Supporting the private sector, particularly SMEs

besides needing a source of funding for SMEs,the SEMCs need to create more SMEs. That beingthe case, the primary function of the Mediterra-nean development bank should be to help themdo this by acting as: • A business incubator;

A MEDITERRA -NEAN-FOCUSED

DEVELOPMENT

FINANCIAL

INSTITUTION

COULD BRING

THE REGION

UNQUESTIONABLE

ADDED VALUE.

• A provider of support to enterprise creation insectors identified by each country as strategic andthus to be structured over the long-term;• A body that would identify projects that are via-ble and mature; this will require the bank to deve-lop the capacity to calculate economic risk and torate projects;• A provider of investment and loan guarantees.

Currently, these functions are lacking within thenational banks of the Southern countries andwithin the EIB and other multilateral bodies, whichlack sufficiently close day-to-day contact with SMEsto be able to genuinely support their development.A Mediterranean development bank created by thecountries of the South and North would fill that gapby providing a trusted grassroots body that wouldsupport and promote the private sector.

Transformation of resources from short-terminto long-term

the southern countries have liquidity inabundance. They need to be able to transform theirlocal savings and migrant remittances into long-term investments in credible and structure-givingprojects. Here again, the Mediterranean develop-ment bank would transform a portion of the highlyliquid migrant remittances into long-term savingsthat would be used either to finance or to guaranteethe financing of productive investments. At pre-sent, the Southern banks are failing to secure thiskind of transformation, with a few exceptions suchas in Morocco. The Mediterranean developmentbank would need to build partnerships with privatetrans-Mediterranean consortia with a view to col-lecting migrant remittances. It would enjoy the cre-dibility stemming from its public ownership andits AAA rating in discharging the task of transfor-ming remittances into long-term resources.

Strengthening skills and exchanging experiences

one of the functions of the developmentbank could be to encourage exchanges of expe-rience. According the bank a mandate for fosteringexperience exchange and offering investmentadvice would help build public sector capacity,which in turn would contribute to the developmentand proper management of investment in theMediterranean region. Sharing expertise is notsomething that comes naturally to public authori-ties, although that is less the case in the private sec-tor. There are, however, technical assistance instru-ments that have been put in place by international

financial institutions, the United Nations and theEuropean Commission, as well as by nationalbodies, that seek to support public sector efforts inthe area of investment in the North, South and Eastof the Mediterranean. The Mediterranean develop-ment bank could draw these various strings toge-ther and create a region-wide facility on their basis.A network for training and pooling and sharinginvestment experience would be set up within thebank. The network would be financed by the natio-nal agencies responsible for promoting investment.

Among the roles incumbent on the network ofagencies and the Mediterranean bank would bethe following:• The organisation of a forum for the exchangeof information and for promoting self-assessmentof the service’s technical and economic perfor-mance, etc.• The identification of best practices in the area ofsupervision of contracts involving private sectorparticipation: cost/benefit analysis to inform deci-sions on public or private service providers, the uti-lity of contracting services out, mechanisms forcontract drafting and follow-up, etc. Best practiceswould be established and promoted on the practicalbasis of experience exchanges via exchange forums.• Advice to local authorities: eventually, the bankcould offer its investment expertise to local autho-rities. This service would be remunerated: in thesame way that multinationals receive advice fromthe top business banks, local authorities need tohave access to a paid service involving high calibreassistance. Advisory services would be renderedby consultants and seconded public servants, withthe Mediterranean bank ensuring a constant tur-nover of high calibre advisory staff.

The network would be used to collate an initialdocument database for the use of national agen-cies. The resultant MedStat would fast turn intoprecious tool for the Mediterranean bank and forStates. It would enable the exchange of experienceon financial aspects, as well as on sector-specificprojects (environment, energy, transport, etc.) andeconomic foresight.

A guarantee function via the creation of a Mediterranean Guarantee Fundfor Investment and Exports (MGFIE)

proceeding on the basis of the principle ofvariable geometry, countries that so desire wouldset up within the Mediterranean bank a Mediter-ranean Guarantee Fund for Investment andExports (MGFIE). The idea would be to remedy

THE MEDITER -RANEAN

DEVELOPMENT

BANK WOULD

TRANSFORM

A PORTION OF

THE HIGHLY

LIQUID MIGRANT

REMITTANCES

INTO LONG-TERM

SAVINGS.



the shortcomings of the existing guarantee instru-ments, both national and international. Thoseshortcomings are essentially as follows:• The guarantee systems tend not to be compa-tible (MIGA competes with Coface, etc.), so thatinvestors have no way of escalating the risk of highcost (no reinsurance);• The guarantee systems are not regional inscope and cannot be used to pool risk across anumber of States, even for shared projects;• They lack the capacity to deal with crisis situa-tions, and are incapable of providing fixed rateinvestment convertibility guarantees.

why cover investments and exports alike? • The Southern countries need an instrumentthat will cover their risks related to exports toNorth and South alike. But export credit insuranceis very costly, not always available in all Southerncountries, and not always flexible. The bodies andmechanisms that Southern exporters haverecourse to (ADB, IDB, Société arabe de garantiedes investissements, etc.) do not always have theprofessional capacities or the range of servicesavailable that operators need so as to cover theirrisks. This shortcoming in expertise and range ofservices translates into a higher cost of service,since these bodies frequently prefer to increasetheir fees if unable to estimate the risk preciselyor to reinsure it under acceptable terms. • The Northern countries need to be able tosecure their investments in the South against poli-tical risk, exchange risk, sovereign default risk,and risk of default on an arbitration enforcementruling. Hence the proposal to couple these riskcoverage needs by establishing a fund for invest-ment and export risk coverage.

Compared with the World Bank’s MIGA,which is based in Washington and has no specificmandate for the Mediterranean, the fund wouldhave the advantage of covering investment andexports on the one hand, and of building proxi-mity and therefore trust among the partners onthe other hand. It would serve to regulate invest-ment and export flows within the region: securinginvestments against risks, limiting windfall stra-tegies, notably with respect to relocations fromNorth to South, reduction of the cost of insuringagainst export risks, etc. All of this would applyequally to trade and investment along the North-South, South-North and South-South axes alike.

the advantages of the mfgie would be asfollows:

• It would help establish an integrated economicarea in the Mediterranean; it would involve thepublic and private sectors, the North and theSouth, and would involve the Gulf States too;• It would be established in a progressive andpragmatic manner. It could begin by covering alimited number of countries, demonstrating itsefficacy, and then take in a greater number ofcountries with the attendant higher yields. Asregards investment, it could initially focus morespecifically on projects of general interest to theregion, such as environmental investments;• It would be profitable: like with most other largeinsurers of investments and/or exports, the returnon the capital provided by the States in the form oftheir initial guarantee endowment would be takenfrom the insurance premiums paid by operators;• The participation of States, and notably theNorthern States, would give it (i) sufficient finan-cial wherewithal to cover its risk exposure, and (ii)access to reinsurance at competitive terms;• Its dimension and its expertise would enableit (i) to estimate risks precisely; (ii) to offer a com-plete range of guarantee services required by ope-rators. Its risk rating function would be accessibleto the private sector at affordable prices. It wouldenable the determination of guarantee rates thatcould be used by other national and internationalbodies, and would make re-quotations possible;• It would help overcome the bilateral approachto North-South economic relations in the Mediter-ranean, even if this means sacrificing the traditio-nal support provided by States (particularly in theNorth) to their foreign trade. This would open upavenues for establishing a genuine and coordina-ted Mediterranean trade policy, particularly amongthe European countries.

the mediterranean development bank couldalso carry out two other crucial functions so as tocomplete the financial architecture:

Mediation and arbitration: establishan international dispute settlement centre in the Medterranean (cirdiem)

operators wish to be able to have recourse tointernational law, particularly mediation and arbi-tration. An “International Centre for InternationalInvestment and Export Dispute Settlement in theMediterranean” (CIRDIEM) could be created forthis purpose. The MFGIE could make its servicesconditional upon any disputes being referred toCIRDIEM. Willing States would undertake via an

A MEDITERRA -NEAN GUARANTEE

FUND FOR

INVESTMENT

AND EXPORTS

(MGFIE) WOULD

REMEDY THE

SHORTCOMINGS

OF THE EXISTING

GUARANTEE

INSTRUMENTS.

international agreement to ensure the arbitrationcentre should meet the highest possible standards(the quality of its arbitration judges determines thecredibility of an arbitration centre).

Operators already have a number of arbitrationcentres available to them, notably ICSID, the CairoRegional Centre for International CommercialArbitration (CRCICA) and the Dubai Internatio-nal Arbitration Center (DIAC). CIRDIEM wouldhave its own set of advantages:• It would have a region-wide presence and apurely Mediterranean mandate. The signing of aninternational agreement establishing CIRDIEMwould represent a political commitment to aninternational dispute settlement system thatwould be common and shared rather than distantand imposed from outside. This would make thecentre an invaluable political and economic nego-tiation instrument for the region;• It would have the efficacy and responsivenessof a body that would fast become the instrumentof reference for local operators;• The possibility of tariff equalisation to enableaccess to mediation and arbitration services forSMEs (from the South, but not only), who canrarely afford such services.

It could be created from scratch or based on anexisting body. For example, the CRCICA could beused as a basis, and turned into the reference arbi-tration body for the Mediterranean region. Theway in which it would later become part of theMediterranean bank would need to be defined ata later date. It could also be envisaged that theMediterranean bank would serve as an ad hocregional court of justice of last instance.

The function of giving impetus to prioritisinginnovation and business incubation

in keeping with its mandate as a businessbank, the Mediterranean development bank wouldset itself the goal of innovation and financial engi-neering. It would need to be fairly flexible in itsoperations to be able to adapt and respond to iden-tified needs. In enterprise support, for instance, itwould need to be able to support companies at allstages of their development: start-up, establish-ment, development, transmission, etc. The bank’sbusiness incubation function would be particularlyimportant: besides supporting projects identifiedby economic stakeholders, the idea would be thatthe bank would actively innovate by establishingenterprises and offering turn-key products.

Possible services include project hosting (crea-ting nurseries to facilitate partnerships and expe-rience exchanges), technical assistance for allaspects of a project (commercial, technologicaland industrial, legal and regulatory, financial,human and organisational), and financing (feasi-bility study, then project per se). Seed funds andincubators could be established in each individualcountry based on identified needs and opportuni-ties. By way of example, the development of oil-related sectors and wheat production could beencouraged in Algeria.

As far as the capital and governance of theMediterranean development bank are concerned,the proposal is to have equal participation by thepublic sector, the private sector, and the Arab sove-reign funds. • The private sector stakeholders (North andSouth) would be harnessed to collect savings viaNorth-South consortia;• The public sector stakeholders would providesavings guarantees, enable the transformation ofsavings into long-term resources, provide backingfor borrowing by the bank, and set up the guaran-tee mechanisms. The public sector stakeholderswould include:

- Multilateral financial institutions, notably theEIB, to help finance major infrastructure pro-grammes or take stakes in investment projects;

- National development financing institutions(AFD, KfW, etc.) and willing States from Northand South, the list of which would be expected tobecome longer as the bank demonstrates its effi-cacy. Involvement by a State would mean de factoacceptance of the bank’s activities in its territoryand with respect to its enterprises, with a view tosecuring integration into a regional financial areain which each State will have helped define thecommon rules, instead of countries having tofight for their role in the international arena orconducting their international affairs in a disper-sed manner. • Sovereign funds, notably those based in theGulf, would also contribute to the development ofa Mediterranean region with real potential, wherethey could usefully invest their resources.

the bank’s capital would reach 10 billion euroin five years, of which a quarter could be providedby the EIB (0.5 billion euro per year). With ten bil-lion euro in capital, the leverage effect in terms ofraising funds would be much more considerablethan that of the banks specifically dedicated to theMediterranean today.

THE MGIE FUND

WOULD SERVE

TO REGULATE

INVESTMENT

AND EXPORT

FLOWS WITHIN

THE REGION.


A practical and operationalvision: tools and measuresto guarantee and invigorate investmentin the Mediterranean

our proposals focus on ways of securinginvestments and tools for financing infrastructureand SMEs, particularly via partnerships.

Securing and guaranteeing investmentsfor major priority projects

the matter of securing and guaranteeinginvestments in the Mediterranean is crucialbecause of its crosscutting nature. It is of utmostimportance that the legal framework governinginvestments in the region should be clarified, soas investors can enjoy a harmonised legal regimefor investment protection and guaranteed settle-ment of Investor/State disputes on the basis of abody of integrated case law and within reasonabletimeframes. This clarification of the legal regimeshould be accompanied by the creation of a speci-fic system of financial guarantees against politicalrisk and certain economic risks, some of the costof which could, under certain circumstances, beborne by the public authorities.

A clear and effective legal system dedicated to the protection of strategic investmentsin the Mediterranean.

A legal system for the protection of investmentsunder UfM auspicesas we have seen, although the region hasnumerous instruments affording legal protectionsto investments, their great number and com-plexity offer no clear-cut comparative advantage tothe region as a whole in terms of making it moreattractive. On the contrary, they add considerablyto the cost of conducting analysis and to transac-tion costs. Moreover, the absence of a uniformbody of case law interpreting the provisions ofthese instruments and the lengthy and costlynature of dispute settlement procedures creates aclimate of legal uncertainty that impairs invest-ment activity.

The solution therefore would be to foster har-monised protection of investments.

The conclusion of a regional treaty on the pro-tection of investments that would create an iden-tical legal framework across the region (or witheasily identifiable differences, perhaps with optio-nal or alternative provisions) is doubtless the mostsatisfactory solution from the intellectual stand-point. However, the establishment of a generalregional treaty on the protection of investmentsraises a number of legal and political issues thatwould take an inordinate amount of time toresolve in view of the urgency of the region’sinvestment needs.

This is why it would make sense initially tofocus efforts to simplify the investment protectionsystem on the category of strategic investments,i.e. long-term, structure-giving investments cove-ring groups of countries in the region, as identi-fied by the UfM (for example, a protection instru-ment such as the energy charter treaty was usedas a basis for protecting investments in that sec-tor). At the same time, we could continue to striveto foster longer-term harmonisation between thenational legal systems of the region’s countries,but in another framework.

A regime offering clear legal protection at the regional scale

the idea is to offer a harmonised frameworkthat would ensure the long-term viability of projectscarried out under the auspices of the UfM, and tosecure investments into the Southern countries’infrastructure. Essentially, the treaty in questionwould set forth the rights and obligations of inves-tors in the context of investment projects underconsideration. It would need to contain the usualclauses found in investment treaties, namely:• Definition of investment / investor;• Admission or preliminary establishment;• Fair and equitable treatment;• Non-discrimination, national treatment, MFN;• Expropriation and compensation;• Free transfer of capital;• Settlement of disputes (State / State and inves-tor / State).

The issue of investor nationality and if thetreaty is applicable to investors from outside theUfM needs to be given special attention.

The protections afforded must not be less thanthose existing by virtue of other instruments. Thetreaty should offer a streamlined and uniform fra-mework for investment in accordance with mostrecent best practice in international treaties andjurisprudence on these matters. The legal frame-


WE NEED TO

INSTALL A CLEAR

AND EFFECTIVE

LEGAL SYSTEM

DEDICATED TO

THE PROTECTION

OF STRATEGIC

INVESTMENTS

IN THE MEDITER -RANEAN.

work could possibly serve as a model for other sec-tors and regions.

It would particularly need to include a disputesettlement body that would give access to fast-track justice at a reasonable cost and in accordancewith a uniform body of jurisprudence. The matterof uniform jurisprudence is of particular impor-tance to enhancing perceptions of risk in theregion. There are many ways of achieving this,including drawing on the expertise of the existingarbitration centres using the treaty on the energycharter as a model, for instance. All that is neededis for there to be an integrated supreme arbitrationbody that is capable of acting as court of cassation(review limited to law and to manifest errors ofjudgement, with specific consideration given tocoverage of costs, so as to ensure that the proce-dure is swift and to avoid lengthy delays).

the adoption of a clear and comprehensivelegal framework for the protection of investmentscarrying the UfM stamp of approval would havetwo types of advantages: • The direct advantage of improving the percei-ved attractiveness of the region,• An indirect advantage involving reduced trans-action costs (costs of analysis and investment andexport guarantee costs) and easier access to finan-cial markets (bond issuance, securitisation orequity searches), particularly for the financing ofmajor projects and/or the establishment and finan-cing of investment funds dedicated to the region –markets could be a way of structuring long-terminvestment financing by having market financing,guaranteed commercial debt and/or public debt inthe first 15-20 years (seen as the most risky), andthen financing in later years using local commer-cial banks as a matter of priority.

These advantages would be further boosted bythe establishment of a revamped system for allo-cating financial guarantees.

The investment protection regime needs to be put in place as a matter of urgency

a number of options could be considered asregards the legal means available for setting up theinvestment protection regime.

One option, that of adopting a straightforwarddeclaration enshrining principles derived frominternational practice in the area of investmentprotection and then appending this to eachgovernment contract for approved projects, shouldbe ruled out from the outset. Since such an

approach would not impose anything binding onStates or investors in the event of a dispute, itwould effectively add nothing to the existing ins-truments and would simply render the currentsystem even more complex than it already is.

A second option, which would involve organi-sing a diplomatic conference with the aim ofconcluding a multilateral regional treaty, shouldprobably also be ruled out, particularly in view ofthe time that would be required to bring such anendeavour to fruition.

There is however a third option, that appearsfeasible for rapid implementation. It wouldinvolve preparing under the auspices of the secre-tariat general of the Union for the Mediterraneana draft agreement defining a uniform legal frame-work (that could include optional sections) for theprotection of investments bearing the seal ofapproval of the UfM. The document in questionwould be submitted for ordinary ratification byStates that wish to host such projects, along thelines of the Cape Town Convention on Internatio-nal Interests in Mobile Equipment.

Financial tools for infrastructure and SME financing

we recommend five financial tools for the finan-cing of infrastructure and SMEs in the Mediterra-nean region: • An infrastructure guarantee fund to be initia-ted by the EU based on a list of investment pro-jects bearing the UfM seal of approval.• An SME guarantee fund to by endowed by theregions and focused on clusters.• Modernisation of the financial markets toensure better harnessing of local savings and theirtransformation into long-term investments for theSEMC (infrastructure/SMEs).• The mobilisation of public and private stake-holders from the North and South of the Mediter-ranean to put together joint initiatives on informa-tion sharing and collaboration.• The establishment of a North/South Mediter-ranean Union of credit insurers to act as an inter-face between credit insurance companies fromNorth and South.

MUCH OF THE

FINANCING WILL

NEED TO COME

FROM INVESTORS

OF ALL SHADES,PUBLIC AND

PRIVATE,INTERNATIONAL

AND LOCAL ALIKE.



Infrastructure guarantee fund initiatedby the EU based on a list of UfM approvedinvestment projects

apart from transfers and aid from the Northand other regions of the world to the SEMC, muchof the financing will need to come from investorsof all shades, public and private, international andlocal alike. Clearly, the task of attracting invest-ment capital into projects involving deferred reve-nue (maturity in the order of several decades) andmoderate returns on investment (in the region of4-7%) is fraught with difficulty.

Above and beyond investment, a key challenge,exacerbated by the financial crisis, is that of increa-sing lending, but this raises equity requirements forbanks (Basel III). Added to this, the resulting liqui-dity risks on banks’ balance sheets induce them toaccord preference to projects in less risky zones.

A guarantee instrument would thus appear tobe an ideal vector for focusing public resources,one that would cause the committed resources tomultiply beneficially. Such a tool would need to becompliant with the restrictions on State aid andsubsidies (WTO community law / OECD exportcredit rules). It would also need to be based on aclear body of case law and reasonable processingtimeframes.

At the practical level, an effort needs to bemade to rank projects in order of priority. This isthe sole way of achieving the goal of concentratingthe resources.

The priority ranking should be carried out on thebasis of the priority objectives of the UfM (depollu-tion of the Mediterranean Sea / sea and land high-ways / Mediterranean solar plan), and it should haveregional dimensions (South-South/ South-North).

A pitfall to be avoided would be that of usingcountry risk as a key selection criterion. That beingsaid, it would be useful to develop a system forrating projects for risk but also for their level ofinnovation, the extent to which they contribute tobuilding economic structure, their environmentalimpact, or their trickle-down impact on the broa-der economy.

The following infrastructure could be deemedpriority:• Energy: the production, transport and distribu-tion of electricity, the transport and distribution ofgas, renewable energy;• Transport and telecommunications: airports,air transport, port infrastructure, sea transport,roads and highways, bridges, railways, telecom-munications;

• Environment: water and drainage, solid wastedisposal and processing, anti-pollution measures,irrigation;• Human and social capital: construction of hos-pitals and clinics, construction of schools andtechnical and vocational educational establish-ments, social housing.

A key prerequisite for the success of any UfMapproval label would be to ensure that projects areselected from as broad a base as possible so as toavoid projects being selected from a very narrowbase. More generally, the selection process shouldbe swift, and based on technical, legal and finan-cial expert assessment, with as little red-tape aspossible.

An adapted tool

regime. The scope of the guarantee could gobeyond political risks to cover some economic andfinancial risks too.• Many operators already have provision in placeto cover political risk. By way of example, MIGAcovers four main risks and is gradually makingprovision for a fifth (the last in the list):- Refusal of transfer and non-convertibility(excluding devaluation);- Expropriation (direct and indirect);- Armed conflict and civil disturbances (inclu-ding terrorism and sabotage);- Breach of contract (by a State or a State entity);- Sovereign non-compliance with financial obli-gations.

• A selection of economic and financial risksguaranteed would be determined à la carte depen-ding on the project.- Already therefore, the following would appearto be priority topics for consideration:- Coverage of non-equity loans;- Payment risks in situations whereby the pri-vate partners have complied with their contractualobligations (cf. concessions);- Liquidity risk (beyond 15 years).

The issue of exchange risk coverage (local cur-rency/convertible currency) requires further ana-lysis: covering exchange risk in the framework ofthe existing mechanisms would bring about signi-ficant additional costs. Whereas only private sta-keholders would be exposed to construction risk,the new scope of guarantee under considerationcould be extended to selected operating risks inthe case of concessions. This guarantee mecha-nism would apply not only to international inves-

A GUARANTEE

INSTRUMENT

APPEARS TO BE

AN IDEAL VECTOR

FOR FOCUSING

PUBLIC

RESOURCES

CAUSING

THE COMMITTED

RESOURCES

TO MULTIPLY

BENEFICIALLY.

tors, but also to local banks and investors so as toharness local savings.

The mechanism would need to be based onand fit in with existing international and nationalguarantee systems (co-guarantee/counter-guaran -tee). It could lead to better coordination of relevantinstruments.

Specific guarantee mechanisms could be esta-blished based on this better coordinated basis withthe help of sovereign entities or international ins-titutions in the case of certain UfM approvedinvestment projects. The practical specifics suchas the upper limit per country or per project, theamount of premiums, the guarantee rate (a singlerate or a country/project-specific rate) would needto be determined by the participants of the propo-sed guarantee fund.

The matter of contributions to the guaranteefund from countries outside the region (GulfStates/USA/China, etc.) should also be addressed.A straightforward principle could be adopted: anycompany whose country of origin contributed tothe financing of the guarantee would be eligibleto benefit from the system.

Finally, the entire process would enable theexamination of projects and a swift decision follo-wing negotiations with private partners on thebasis of straightforward and transparent rules.

an expanded supply of investment guaranteeinstruments alongside a redefined and enhancedcommon legal framework for the protection ofinvestment should logically lead to a significantreduction in the cost of risk premiums. The quan-tum of premiums as a function of the risks coveredcould be kept at a high level (MIGA currentlycharges 2% of the amount covered for all long-termpolitical risks). The reduction of the cost of riskcoverage would however continue to be an objectivein providing investment security. This would hap-pen concomitantly with the broadening of thescope of risks covered and the creation of innovativemechanisms based on the existing resources of thefund and closer coordination between its operators.

There would be further scope for reducing thecosts assumed by project proponents in securingtheir investments by allowing for contributionsfrom sovereign entities and international institu-tions to the payment of insurance premiums forselected UfM-approved investments. This avenuedeserves exploration so that if it were to be takenup, it would be in conformity with OECD andWTO rules.

extent. If a decision were to be made to establisha regional UfM infrastructure guarantee mecha-nism at the initiative of the EU, guarantees to UfM-approved investment projects could be structuredin two phases (purely illustrative at this stage):• An initial financing phase (0-15 years):- The equity would be provided by the Northerncountries with the possible participation of theGulf investment funds;- Debt mainly provided by banks from theNorth, co-financed by regional development bankssuch as the EIB and other willing IFIs, togetherwith loan guarantees from loan guarantee agen-cies, in full conformity with applicable internatio-nal rules.- Involvement of a yet-to-be-created infrastruc-ture guarantee community fund.

• A refinancing phase (15/25 years):- Refinancing as a matter of priority by localbanks: the financial risk would be lower (debt lar-gely amortised and revenue flows validated by 15years of operations). Moreover, refinancing in localcurrency would eliminate the exchange risk fromproject financing;- Consideration of securitisation of bank debt inphase 2 by local financial players, with shares tobe sold to local savings account holders;- Possible partial guarantee of securitisationtransactions by the yet-to-be-created infrastruc-ture guarantee fund. This would enable localfinancial institutions to target local savingsaccount holders and enable the latter to contri-bute to the long-term development of their coun-try by purchasing secured bonds in the secondphase of a project’s life-cycle.

SMEs guarantee fund endowed by the regions and focused on clusters

local banks have a short-term focus, aremainly geared to large enterprises, and demandguarantees that SME managers are frequentlyunable to provide. This explains why the East andSouth Mediterranean has the highest rate of self-financing (more than 2/3) among all of the majorgeographical regions of the world.

One of the reasons for this state of affairs fre-quently and justly evoked by banks is the lack oftransparency stemming from family ownership,and the absence of the necessary skills both withinthe SMEs and within the banks themselves to deal

THE MATTER OF

CONTRIBUTIONS

TO THE FUND

FROM COUNTRIES

OUTSIDE

THE REGION (GULF

STATES/USA/CHINA, ETC.)

SHOULD ALSO

BE ADDRESSED.


with SME financing issues. Closer sector-specificanalysis reveals that the existing capital financingmechanisms in the form of venture capital fundsand guarantee funds exclude certain sectors that aredeemed too high a risk, as well as certain key stagesin SME development such as start-up, the secondround of financing during expansion, the exit ofventure capital funds after 5-10 years presence, etc.

Clearly, technical assistance both to SMEsthemselves and to local players (investment banksand funds) is required in order to carry out expertassessment of applications and then offer specifictraining to all of the relevant players in each of thecountries.

the aim of any initiative must be to encouragebanks to increase their volume of lending and tofacilitate investments by local and internationalinvestors by using mechanisms that are asstraightforward as possible so as to encouragebanks and entrepreneurs to take them up.

One of the initiatives launched within the fra-mework of the UfM is the Mediterranean Enter-prise Development Initiative (MEDI). Its aim is tofoster steady and sustainable economic develop-ment in the Mediterranean. MEDI is an initiativeof Spain and Italy, with the support of the EIB.

Our proposal is to establish an SME guaran-tee fund endowed by the regions and focused onclusters. Clearly, the global economic and finan-cial crisis carries the risk of States turning inwardsin a quest for national solutions. In the face ofdelocalisation, renationalisation of certain econo-mic activities no longer seems so far-fetched.

However, globalisation is the driving forcebehind the creation of co-development zones thatare mutually profitable for all participating coun-tries (NAFTA / Mercosur, China-Japan-SouthKorea-SE Asia).

If Europe is to compete with these regionalentities, it needs to open up to the SEMC. The aimis to establish a new economic zone of investmentand consumption capable of competing with thesenew economic blocs. Technology transfers are notonly a way of building export platforms; they willalso serve to establish new consumer markets inthe SEMC, with the attendant jobs- and wealth-creation in North and South alike.

An initiative that would contribute to that goalwould involve establishing a fund bringing toge-ther the regions of Europe (Italy, France and Spaininitially) in partnership with the regions of theSouth and East Mediterranean with a view to crea-ting a specific instrument for supporting enter-

prise creation and development, with a priorityfocus on clusters. Here once again, the aim is toconcentrate resources for better efficacy, and alsoto tie enterprise creation and development to spa-tial planning and regional development objectives.

Crucial to this initiative would be the bringingtogether of the European regions in a guaranteefund in partnership with local banks and interna-tional operators such as the EIB, the nationalCaisses des Dépôts, AFD, etc.

Apart from guarantees, technical assistancewould be provided to entrepreneurs and banks forexpert assessment of applications. A partnershipwith local banks from the South enabling them toincrease their lending capacity to SMEs would beone of the key features of the initiative. The follo-wing operational principles could apply (expertassessment to be analysed further):• For Fund capitalisation of €10m, the objectivewould be a multiplier of 3, or an investment of€30m;• Assuming a guarantee upper limit of 50%, themaximum amount of loans generated by the Fundwould be €60m;• The Fund could apply a loan duration of 3 years(each start-up guarantee provided by the Fundwould expire in its third year);• The €60m total would therefore be multipliedby 3.33 to yield a maximum loans generated totalof €200m.

Eligibility criteria would need to be determi-ned, although conceivably, guarantees would betied to specific activities or specific categories ofentrepreneurs such as beginners, women, specia-lists in innovative technologies, or rural dwellers.There could also be a focus on currently neglectedphases such as start-up or second round of finan-cing, necessary for the development of existingSMEs. These new guarantees would stand along-side existing guarantees (counter-guarantees), theaim being to pool risks.

Clusters would not be limited to the high-techsector bringing together researchers, engineers,entrepreneurs and investors in a Silicon Valleytype arrangement. They would also be closelyinvolved in defining local development projects,such as in the following few examples:• Competitiveness clusters in Sweden based oncooperation between universities and enterprises(example: Kista, which brings together more than600 enterprises working in the new technologiesand telecommunications sectors);• Clusters in Spain, which bring together enter-prises of different sizes in a given sector and in a


AN EXPANDED

SUPPLY

OF INVESTMENT

GUARANTEE

INSTRUMENTS

ALONGSIDE

A REDEFINED

AND ENHANCED

COMMON LEGAL

FRAMEWORK

FOR THE

PROTECTION

OF INVESTMENT

SHOULD

LOGICALLY LEAD

TO A SIGNIFICANT

REDUCTION IN

THE COST OF RISK

PREMIUMS.

given geographical region, not necessarily withR&D as a primary focus;• Production-oriented clusters such as those inItaly, or in France’s local productive services (SPL)set-up. These are networks of enterprises that pooltheir resources and develop complementary facetsof their businesses in a given region with a viewto achieving economies of scale (plant / commer-cial development / HR / training/innovation, etc.).Their success is based on the large numbers of fre-quently competing and constantly innovatingcompanies involved (major companies/SMEs);• Seven development clusters identified underMorocco’s “Emergence II” plan (automotive /aeronautical / food industry and seafood / crafts /textiles / on-board electronics), with an objectiveof 22 international standard integrated industrialplatforms;• Tunisia’s industrial strategy through 2016 forthe creation of clusters in key sectors of the eco-nomy:- Enhancement of existing sectors (textiles-gar-ments / leather and footwear / food industry /mechanical manufacturing / electrical manufac-turing / construction materials industry / phos-phates industry);- Encourage the emergence of new sectors (elec-tronics / automotive and aeronautical parts / tech-nical plastics / pharmaceuticals and paramedical/ ITCs and service centres);- Prepare for the future (mechatronics / biotech-nology / environment, etc.).

technology parks are sprouting up across theMediterranean region: three in Egypt, one in Jor-dan, four in Morocco, two in Syria and five inTunisia. Algeria also has technology park projectsunderway in the petrochemicals and pharmaceu-ticals industries.

The advantage of this approach is that itfocuses resources in specific zones and enablescoordination of existing activities with necessaryfuture steps (start-up, venture capital, loans, andall forms of access to financing). It covers all formsof enterprises (large, small and medium), andurban and rural areas alike:• It is jointly organised with public and privatestakeholders in a given area.• It creates links between higher education andbusiness.• It encourages research and industry to workside by side.• It enables operational project management.

• Finally, it strengthens North-South experiencesharing, co-investment in Southern countries, andtechnology transfers.

a specific guarantee tool would clearly beconducive to developing a network of specialisedfunds that would connect up these enterprise andindustry clusters in the Mediterranean with theirEuropean counterparts, with SME developmentserving as a focal point. France’s DGCIS (directo-rate general for competitiveness, industry and ser-vices) signed with UBIFRANCE in January 2009a convention on the internationalisation of thecountry’s competitiveness clusters.

Such a guarantee fund approach would also fitin well with the EU’s seventh framework pro-gramme for technological research and develop-ment (FP7), given the large number of Southerncountries that are eligible for FP7 (Algeria, Egypt,Jordan, Lebanon, Libya, Morocco, PalestinianAuthority, Syria, Tunisia, as well as Turkey as anassociated country).

Harnessing local savings for long-terminvestment in the SEMC Infrastructures, SMEs

The creation of long-term products for institutionaland private investors

integration between the stock exchanges ofthe Southern and Eastern countries continues tobe worthy of consideration. The development ofcommon indexes, and, once the market achievessufficient depth, of trackers, is something thatcould be promoted on an operational basis.

Cooperation is already emerging between variousstock exchanges in the South (recent example of aTunisian company carrying out its IPO simulta-neously in Tunis and Casablanca). The Casablancastock exchange is pursuing a strategy aimed at see-king closer ties with Sub-Saharan Africa, so as to turnit into the region’s enterprise financing centre.

For the near term, we favour national solutionsbased on the premise that successful solutions willspread by contagion into neighbouring countries.

One of the common weaknesses in theregion’s financial markets is the very low presenceof institutional investors, be these insurance com-panies, health insurance funds, or retirementfunds (less than 3% of GNP compared with 37%for Brazil, 28% for South Africa or 7% for Mexico).

A SPECIFIC

GUARANTEE TOOL

WOULD CLEARLY

BE CONDUCIVE

TO DEVELOPING

A NETWORK

OF SPECIALISED

FUNDS THAT

WOULD CONNECT

UP THESE

ENTERPRISE

AND INDUSTRY

CLUSTERS IN THE

MEDITERRANEAN

WITH THEIR

EUROPEAN

COUNTERPARTS.



The task of developing the market will requirethe harnessing of local savings to a greater extentthan is the case today, and this can only be done bycreating products that foster the kind of long-termsaving that does not as yet exist in the region (lifeinsurance in Morocco is five years). The extremeexample is Syria, where 40% of bank liquidity isidle because of the dearth of investment productsoffered by the central bank (legislation on securiti-sation has been voted but is not yet in place).

The priority therefore is to create fully fledgedbond markets the national level and to make themattractive for local investments. There are econo-mic players who wish to invest in a long-termperspective, but the tax conditions are not suffi-ciently attractive, and products such as payrollsaving accounts and security savings accountssimply do not exist.

Morocco’s Ministry of Finance undertook in2010 to take steps to foster long-term saving. Theaim is not so much to stabilise savings at aroundthe 30% mark, but rather to achieve a shift awayfrom short-term instruments in favour of long-term instruments. A programme contract is to besigned with insurance companies calling uponthem to invest 200 million dirhams in the capitalmarkets, with the aim of doubling that amountwithin five years. A draft law on securitisation wasrecently approved by the Council of Ministers, ope-ning up the door to a new form of financing.Clearly, this stands to benefit the real sector ofMorocco’s economy immensely.

the idea of pre-allocating a portion of long-term savings towards the financing of infrastruc-ture and SMEs is worthy of consideration. Banksin the region do not engage to any great extent ininfrastructure or SME financing, thus a partnershipwith a view to encouraging such activities would beof the essence. Morocco’s CDG plays a key role inthis area in its own country, and could serve as anexample for other countries in the region.

Tunisia’s recent decision to establish a “Caissedes Dépôts” (deposits bank - Caisse) ties in wellwith the objectives outlined above. The objectivesof the Caisse are threefold: to trade on and helpmodernise the financial markets, to finance infra-structure and to finance SMEs.

Investment projects for the financing of infra-structure and those carried out in the frameworkof the EU-initiated guarantee fund could be struc-tured across two phases:

Although it is necessary to create innovativefinancial instruments such as bonds, it is also

important to address the needs of individualsavings account holders and their lack of trust inthe banking system. It is this lack of trust thatexplains their aversion to long-term instruments,and indeed their aversion to holding bankaccounts in the first place.

the “livret a” tax incentivised savings account inFrance for the financing of social housing has beenimmensely successful since it was created, therebydemonstrating the efficacy of such products. Depen-ding on the country, funds collected under such ins-truments could be directed into long-term invest-ment in areas deemed to constitute a nationalpriority, such as SME and infrastructure financing.Consideration could also be given to creating asavings product made up of shares in SMEs.

Consideration should also be given to harnes-sing migrant remittances, despite the significantdrop therein following the financial crisis. Some85% of migrant remittances go to subsidise familybudgets (health, education, etc.), and that looks setto remain unchanged, but there is scope toincrease the share allocated to non-real estateinvestments, which currently is less than 3% oftotal migrant remittances. An attractive and secureproduct needs to be created so as to reduce the stilllarge proportion of undeclared remittances andencourage higher banking penetration, whichcontinues to be a key objective (40% in Morocco,15% in Algeria, 15% in Egypt). Such a pro-activemove would not just concern traditional migrants:it would also seek to bring on board second andthird generation EU residents of Maghreb origininterested in investing in the countries of originof their parents by putting some of their savingsinto new and secure products.

an initiative bringing together banks from theNorth and South of the Mediterranean would bethe only way to reach bank clients from North andSouth and lay the groundwork for a common ban-king market.

One of the key objectives would be to increasebank penetration in the South, reaching out in par-ticular to the beneficiaries of migrant remittances.A cross guarantee-based joint offering could thenbe created targeting migrants from the South resi-ding in the countries of the North, as well as stu-dents, young graduates and entrepreneurs fromthe South seeking to open a bank account, obtaina loan or invest in the countries of the North.

THE CREATION

OF LONG-TERM

PRODUCTS FOR

INSTITUTIONAL

AND PRIVATE

INVESTORS.

The Caisse des Dépôts’ initiative for the creation of a club of long-term investors, and the creationof “Caisses des Dépôts” in the South and EastMediterranean countries

the caisse des dépôts’ initiative for the crea-tion of a club of long-term investors bringing toge-ther public and private operators sharing the samevision is an interesting operational avenue forexploration that should be introduced to new part-ners from North and South.

The establishment on 26 May 2010 of Infra-Med infrastructure fund, the UfM’s first finan-cing instrument made up of Caisse des Dépôts,Cassa Depositi e Prestiti (CDP), European Invest-ment Bank (EIB), Caisse des Dépôts et de GestionMorocco (CDG) and Egyptian bank EFG Hermèsis a concrete example of how the initiative couldbe implemented. The InfraMed Fund is set toplay a central role in channelling investment intoinfrastructure in the South and East Mediterra-nean countries. The Fund includes two local com-partments: one dedicated to Morocco and theother to Egypt.

With an initial €385m endowment (€150mfrom Caisse des Dépôts and CDP, €50m fromEIB, €20m from CDG and €15m from EFG-Her-mès), the Fund is expected ultimately to harness€1bn.

INFRAMED Infrastructure will provide fun-ding for urban, energy and sustainable transportinfrastructure. It will mainly invest in new projectsmeeting basic criteria in terms of environmentalprotection, social impact, transparency and tende-ring, with a view to investing with a longer-termperspective than traditional private funds specia-lising in infrastructure.

Two local funds have been established tofinance projects in the same sectors as those selec-ted by INFRAMED. These are the InfraMaroc andInfraEgypte Funds, each of which will amount to20% of INFRAMED’s commitments with a mini-mum of €100m. Investments in Morocco will belooked after by CDG and those in Egypt by EFG-Hermès. InfraMaroc Fund will have an endow-ment of 100m dirhams. Its target size is 3 billiondirhams, including a minimum commitmentfrom CDG totalling 550m dirhams. The main tar-get country is Morocco, with other Maghreb coun-tries accounting for up to 20% of the Fund’s com-mitments. The Fund will target companies whoseactivity is largely centred on the development, ope-ration, construction and/or possession of infra-structure assets.

The experience of INFRAMED and its localsegments such as InfraMaroc shows that entitiescapable of harnessing and managing savings in asecure manner, attracting tax breaks and investingon the financial markets in a long-term perspec-tive, are increasingly emerging as a high-perfor-mance economic model.

Interestingly, the recent global economic andfinancial turmoil has seen renewed interest in the“Caisse des Dépôts” model. Public financial insti-tutions of this kind with their own resources andno connection to national budgets need to be allo-cated a long-term investor role.

This is due to the generally accepted fact thatprivate markets can only develop if there is a public“catalyst” that takes charge of creating a structuralframework in the country concerned. These kindsof missions involve three main thrusts: working tomodernise financial markets; financing infrastruc-ture; financing the economy with a priority focuson SMEs. In addition to this, most countries wouldalso give consideration to ways of financing socialhousing and local authorities.

Two countries in the region have made thedecision to establish a Caisse des Dépôts: Maurita-nia’s ministry of finance began as of 2009 to lookat ways of harnessing the deposits of publicbodies, of the social security and retirement funds,and of the national savings account, to the task ofdeveloping the country: housing, enterprise crea-tion, local authority infrastructure, etc. The aim isto establish a “Caisse des Dépôts et de Développe-ment” (a development-oriented Caisse).

More recently, on 25 June 2010, Tunisia offi-cially announced the creation of a Caisse to befocused on modernising the financial markets andfinancing infrastructure and SMEs. The aim is forthe Caisse to be operational by 1 January 2011.

At this point in time, when such matters arestill at the gestation stage, there is a real opportu-nity to extend the core membership of the club oflong-term investors beyond the current partnersof the Caisses.

The club under consideration needs to be firstand foremost a venue for exchanging best practicesand business proposals. It was with this aim inmind, that in October 2010 the CDG launched thevery first international forum of Caisses des Dépôts.

Aside from acting as a venue for consideringissues of common concern, the club needs to havea shared vision and to use that vision to come upwith innovative investment tools, as the exampleof Inframed Infrastructure shows.

THE CAISSE

DES DÉPÔTS’INITIATIVE FOR

THE CREATION

OF A CLUB

OF LONG-TERM

INVESTORS

BRINGING

TOGETHER PUBLIC

AND PRIVATE

OPERATORS

SHARING THE

SAME VISION IS

AN INTERESTING

OPERATIONAL

AVENUE.


With a view to expediting this process, the exis-ting nucleus of CDC/CDP/CDG could set up as aconsortium dedicated to supporting the establish-ment of Caisses des Dépôts, with a view to puttingtheir vast experience at the service of States keento avail themselves of it. Support services could beprovided to States in such areas as institutionalmatters (governance, risk management andcontrol, investment doctrines), training in mattersrelated to long-term investment, or the perfor-mance of specific expert assessments (e.g. securemanagement of savings, PPP, financial structu-ring of infrastructure investments, or urban plan-ning and social housing policy).

A number of countries, including Syria, havealready expressed their interest in such an initia-tive. Algeria and Egypt would also benefit immen-sely from such a facility.

Mobilising public and privatestakeholders from North and Southto develop joint strategies oninformation sharing and collaboration

Capital investment

at one end of the scale, one finds major cor-porations that create added value and attract inter-national investors but do not create sufficient jobs(around 100,000 in direct job creation and300,000 in indirect job creation). At the other endof the scale, one finds very small enterprises(VSEs) whose financing needs range from €50-100K. Between the two, there is ample scope forcapital investment in the SME segment. This seg-ment accounts for the bulk of a country’s enter-prises and the bulk of its job creation.

Analysis of the 2007 Medfunds report showsthat while private equity has succeeded in brin-ging in large amounts of liquidity over the recentpast (€15bn over three years), it has not investedsufficiently (15-20% of total fund subscriptions).

Private equity has only recently matured in anumber of countries (Morocco, Tunisia, Egypt, Tur-key, and others). Following a period of learning andinvestment in HR, selection of partners and selectionof projects, returns on investment have gone fromzero (0+) in 1999-2000 to satisfactory levels today.

For second generation funds (an AMIC studybased on exit data for 29 investments of Moroccanfunds over recent years), the average return oninvestment is 26% gross for the projects invested(compared with 11-13% in Europe). Even allowing

for management costs and exchange risk, the 26%gross rate yields a net of 15%.

Exit figures are currently satisfactory. However,although the invested volumes are quite large,there still subsist difficult segments where invest-ment needs are far from being met and whereintervention by government or international ins-titutions such as the EIB is indispensable. Interms of the enterprise creation sequence, onecould mention the start-up phase and the secondround of financing for companies in expansion. Itis also important to note that investment shouldnot be confined to the high technology sectorsalone: traditional sectors such as food and agricul-ture, which create much larger numbers of jobsand contribute to balanced regional development,should also be prioritised.

Another outstanding issue concerns how tofuel the secondary market, which remains largelyunderdeveloped (speculative overvaluation hasbeen observed on some markets). The good newsis that, notwithstanding its shortcomings, venturecapital has a key role to play in non-speculativeeconomic development based on value creation byhigh calibre local teams operating close to theirmarkets, and that those teams are now in place.

Strange as it may seem, the current state of themarket with all of its shortcomings, is likely to attractboth international and local investors (family busi-nesses). The latter are likely to be attracted away fromthe short-term appeals of real estate investment,which used to be more lucrative but which has itslimits and risks as shown by the current crisis.

what will be the determinants of success? Anetwork of venture capital investment companiesfrom North and South has coalesced around Euro-med Capital Forum. This could serve as a catalystand think-tank for improving the legal frameworkand attracting new investments. Informationoutreach and the establishment of an institutionalinformation focal point on venture capital in theSouth and East Mediterranean is a pre-requisite.

Clearly, institutional investors are seeking toincrease their venture capital exposure (accordingto the EMPEA / Coller survey), but weighing upthe various factors they tend to privilege China,India and South America instead of the South andEast Mediterranean, which suffer from a low pro-file. There is thus demand on the part of potentialinvestors for more comprehensive informationand more detailed benchmarks.

The lack of Midcap experience in emergingcountries among potential investors means they


PRIVATE MARKETS

CAN ONLY

DEVELOP IF THERE

IS A PUBLIC

“CATALYST” THAT

TAKES CHARGE

OF CREATING

A STRUCTURAL

FRAMEWORK

IN THE COUNTRY

CONCERNED.

have an all the greater need for information oncountry situations and on the detailed performanceof each fund. Improved databases, corporate com-munication per asset class and region, and theidentification of high-calibre, reliable teams arebecoming key factors in geographical decisions.

We propose working with independent bodiesto build databases/an observatory on existingfunds in the Euromed zone comprising such dataas fund size, performance, and portfolio typology.Annual web-based communication events by theobservatory and an annual flagship event couldturn this into an invaluable tool for all investorsinterested in the region. The forthcoming Euro-med Capital forum to be held in Cairo in Aprilcould be used as an occasion to launch such anobservatory officially.

A yet-to-be-defined working programme couldbe articulated around three priorities:

1. Legal and tax environment stability

venture capital has always evolved and deve-loped in a pre-defined legal framework. Moroccohas yet to create such a framework. Any countrythat wants to foster long-term financing needs towork on tax transparency and particularly on ensu-ring stable rules of the game. Yet currently, theseare subject to change almost on an annual basis.

The aim of legislative harmony across theregion, however desirable it may be, appears unat-tainable. Therefore, the benchmarks that guideinvestors need to have the effect of encouragingcountries to ensure legal stability.

Investment capital, which should not be confla-ted with other more short-term or speculative ins-truments (LBO, hedge funds), has proven its eco-nomic growth and job creation potential, and henceits potential to generate revenue and tax for theState. A simplified and stabilised regulatory frame-work should also attract a portIon of local savings(family office or capital markets) into long-terminvestments that in the past were less lucrative thanreal estate but that create value for the economy.

A final role of the yet-to-be-created observatorycould be to disseminate best practices as far andwide across the region as possible.

2. Foster new teams and new funds

so as to attract investors into all segmentscapable of contributing to the development of theSouth and East Mediterranean economies, deve-lopment capital must not just focus on the high

technology sector but also target the food and agri-culture industry and the traditional sectors in gene-ral, where job creation potential is much higher.

New funds need to be created and new teamstrained. Investors have become ever more deman-ding in view of the increasingly stringent regula-tory constraints, and also because of the largenumber of past project failures in the region.These are a liability for the region compared withother regions of the world.

Creating new teams and funds requires leng-thy financial engineering efforts of around 18months. In addition, it is costly to recruit and trainfund managers, to structure a fund, and to getfund-raising started (€200,000-300,000 to get afund off the ground).

Hence the crucial importance of financing.Local banks are only beginning to move into thesector, but they themselves require training in thisnew activity. This is the reason for the proliferationof training initiatives financed by international ins-titutions (European Commission, AFD, KfW, etc.).

Capital investment funds already present inthe region are the best placed to carry out thesetasks and set up financial engineering companies.A possible solution could be to have externalpublic and private partners (international andlocal) take stakes in the financial engineering com-panies under consideration.

A capital investment fund setting up this kindof financial engineering company would invest inthe management company once it was established(for a €100m fund, the rule is that the manage-ment company would take a €1m stake). Regard-less, it is clear that public support for such privatesector initiatives is indispensable.

Mention deserves to be made of the Moroccangovernment’s initiative to set up public/privatefunds over the period 2009-2015 with a totalpotential budget of 1.05bn dirhams. In the pilotphase, the State will set up two public/privatefunds both focused on development capital andLBO with a total public budget of 350m dirhams.These funds will be managed by private professio-nal operators selected via an expression of interesttender. The target date for establishing the fundsis the end of the second quarter of 2010 at thelatest.

With a view to encouraging private investment,the State adopted a number of incentive mea-sures, including the retrocession of a portion of itsearnings to private shareholders.

Tunisia’s current efforts to structure its systemof SME financing and simultaneously establish a

VENTURE CAPITAL

HAS A KEY ROLE

TO PLAY IN NON-SPECULATIVE

ECONOMIC

DEVELOPMENT

BASED ON VALUE

CREATION BY

HIGH CALIBRE

LOCAL TEAMS

OPERATING CLOSE

TO THEIR

MARKETS.


holding entity under the auspices of the SMEfinancing bank and a Caisse des Dépôts deserveclose attention.

3. Establishment of regional emergingmarkets funds of funds with specialistsin long-term financing

for many years, the development of invest-ment capital in the South and East Mediterraneanhas required a familiarity with the situation on theground, and in particular the local business situa-tion. This meant having national teams in eachcountry.

This requirement was all the more importantfor the absence of clear regulation and the gapingdisparities from one country to another. Havingnational teams in each country is no less impor-tant today.

Whereas investment in the region is more riskythan in a developed country, return on investmentis also much higher. Growth in the South and EastMediterranean countries is going to take place onthe back of enterprises meeting demand on natio-nal, regional and export markets. Growth sectorswill range from high technology goods to consu-mer products as a new middle class with newconsumption habits emerges. This favourable eco-nomic context in what continues to be an uncer-tain environment requires a regional approach,hence the need for regional funds of funds.

A fund of funds managed by professional mul-tidisciplinary teams with in-depth knowledge ofthe region and its stakeholders would be able toidentify experienced teams and create new mana-gement teams in each of the countries concerned.This would enable risk diversification per country;predefined strategies would be followed (minorityvs. majority/ young or mature enterprises, etc.).

Such a diversified portfolio would doubtless beof interest to new investors in the region, since itwould spread their risk across several countriesand more than one fund.

International bodies and local banks (evenfamily offices) would be more than willing tobecome involved in such an initiative insofar as itwould enable new and emerging local teams to getinto place with as a safety net the high standardsof governance provided by the managementteams of the fund of funds.

Subscribers to the fund of funds would be ableto invest directly in the selected primary fundsalongside the fund of funds.

North-South Mediterranean Union of loan insurers

Like their Northern neighbours, most SEMC offertheir national business community mechanismsto support exports and investment abroad. Somecountries target specific sectors, such as high tech.The guarantees on offer are limited however, bothin terms of quantity and in terms of the financingcovered. Local banks, meanwhile, make access toforeign currency loans contingent on companiesdepositing large sums of local currency, whichvery often rules out SMEs.

In the SEMC, public guarantees tend almostexclusively to be limited to insurance againstdefault on payment for exported goods. They donot, by any yardstick, cover the totality of the needsof enterprises exporting to international markets.The guarantee systems in the Northern countries,by contrast, offer sequential coverage: marketprospecting (coverage of part of the cost of pros-pecting incurred if sales are insufficient to recoupthat amount), pre-financing of exports, exchangerisk inherent in an export contract, contract exe-cution and payment, supplier credit guarantee,guarantees with respect to intangible assets(patents, brands, etc.), guarantees with respect torepayment of accounts receivable arising abroad,guarantees for documentary credits, and guaran-tees with respect to political risk exposure.

A Mediterranean Union of credit insurerswould be tasked principally with promotingcooperation between operators by doing the follo-wing: • Encouraging the harmonisation of financialstatement disclosure regulations;• Creating networks of existing sources of infor-mation to enhance information reliability;• Involving trade missions, banks and other ins-titutions in data collection and forging links bet-ween operators;• Organising co-insurance to spread out risk andenhance services to operators;• Fostering expertise pooling and building onsynergies;• Working to establish a debtor black list;• Facilitating unpaid debt recovery.

generally speaking, needs and requirements areconsiderable, and there is no scope for increasingeither private or public resources. The only solu-tion therefore, is to optimise resources. There is ashared responsibility to take action on the part ofthe Northern and Southern countries. The


VENTURE CAPITAL

SHOULD NOT BE

CONFINED TO THE

HIGH TECHNOLOGY

SECTORS

ALONE BUT ASLO

FOOD AND

AGRICULTURE,WHICH CREATE

MUCH LARGER

NUMBERS

OF JOBS.

consensus is that the guarantee fund instrumentoffers the best approach and the greatest leverageeffect.

The EU needs to come up with an initiative forthe creation of an infrastructure-specific guaranteefund, using as a starting point the investmentpriorities set forth in the relevant UfM documents.The recently established secretariat in Barcelonawould be the ideal institution to manage such afund. An instrument of this kind is the only wayof financing the vast majority of the projects iden-tified, notably when it comes to bank lending.

This should not be seen as excluding the kindsof initiatives that Northern countries could electto become part of with respect to specific projects:the regions guarantee fund could be given its ini-tial momentum by Italy and France. Its focus onclusters would make it possible, once the initiativehas been launched, to forge links between theregions of the North and those of the South.

the modernisation of the South’s financialmarkets is obviously a task for the authorities ineach of the countries concerned, with a strengthe-ned South-South cooperation dimension if at allpossible. Modernisation is expected to lead to localsavings being directed into job-creating invest-ment projects (SMEs, infrastructure) via securelong-term investment instruments, that will bene-fit the countries’ economies.

Thus, the emergence in the Southern coun-tries of Caisses is likely to accelerate the entire pro-cess: such Caisseswill quickly turn into major mar-ket players and long-term investors, attracting ininternational and local private operators.

The success of all of the actions outlined abovewill depend on the credibility of the reformsundertaken and the level of confidence they instil.High levels of investor confidence can only beachieved via the creation of a clear and stable legalenvironment. Only this will lead local (institutio-nal and private individual) and internationalplayers to commit themselves to the market forthe long-term. Principles of good governancemust at all times stand to the fore.

State intervention, although indispensable inthe current times of crisis, is only legitimate to theextent that it attracts and supports the activity ofprivate operators, both lenders and investors. Thisis the pre-requisite sine qua non for private initia-tives to develop and flourish, as illustrated byEuromed Capital Forum in the area of investmentcapital.

In terms of governance, while the Funds willbenefit from support from the European Com-mission (infrastructure guarantee fund) orregions yet to be identified (SME specific fundsto be financed by the regions), they will need tobe sufficiently open to allow a maximum numberof institutional and private investors from theUfM countries and other international investorsto participate financially.

Investors and donors will need to have votingrights proportional to their contributions. Benefi-ciary SEMCs should also entitled to contribute todecisions on the granting of guarantees and finan-cing to one project or another. This kind of invol-vement is crucial to ensure that the SEMCs takeownership of the projects, which in turn will haveto have a regional character. Moreover, involvingthe SEMCs will send out a strong signal in favourof the new mode of parity North-South gover-nance enshrined in the founding principles of theUfM. The new governance approach marks animportant political step forward compared to theBarcelona process. At the very least, it will need tobe implemented at the level of expert assessments,which must absolutely not be imported from theNorth to the South.

there is also a need to coordinate with existinginitiatives: several funding agencies and bilateraland multilateral investors are already involved inthe financing of major projects in the Mediterra-nean region. Despite the financial contributionsof the EU and the other funding agencies in theregion, the infrastructure and SME financingneeds of the SEMCs are immense. The instru-ments proposed in this report are an addition tothe initiatives underway, and are not intended tocompete with them. In the area of infrastructurefinancing, for example, we accorded preference toinstruments specific to projects with a strongregional dimension that have already been preli-minarily examined by the North and South jointlyand to which the countries in question have com-mitted already.

The variable geometry principle that applies toregional projects more than to purely bilateral pro-jects is another project selection criterion. Ourproposals on SMEs seek to increase the role oflocal banks. We highlight the need for local banksto be less risk averse by supporting SMEs at thestart-up and development phases. We also proposetools aimed at securing SME financing via thefinancial markets and via local authorities. l

STATE

INTERVENTION,ALTHOUGH

INDISPENSABLE

IN THE CURRENT

TIMES OF CRISIS,IS ONLY

LEGITIMATE TO

THE EXTENT THAT

IT ATTRACTS

AND SUPPORTS

THE ACTIVITY

OF PRIVATE

OPERATORS,BOTH LENDERS

AND INVESTORS.


(ii) the creation of a system of financial guaranteesof greater volume, greater risk coverage and easieraccess, based on pooled public resources and pri-vate financing.

guaranteeing investments will not beenough however: also needed are efforts to har-monise in other areas, particularly in the areas ofcommercial law (e.g. law on sureties, law onpublic-private partnerships, etc.) and technical andregulatory standards, and continued concertedaction in the area of fiscal policy.

more generally, there is a need for enhancedsharing of information and expertise between thecountries of the region, North and South alike,particularly in the area of PPP negotiations. States,when affording legal security to investors, musthave a proper understanding of the scope of theguarantees afforded, and there must be balancednegotiation of investor-State contracts.

there are of course other measures that needto be adopted, particularly with respect to streng-thening the transformative role of banks and capi-tal markets, improving labour productivity, and soforth. That being said, an improved legal andfinancial framework for investment should beenough to kick-start the process of reallocatingcapital at reasonable cost to projects deemed ofstrategic value. Such projects include structure-giving investments in energy, water and transport,and also the creation of investment funds dedica-ted to the region that will benefit SMEs too. l

the south and east Mediterranean countrieshave immense financing needs with respect tomajor, structure-giving investment projects. Thereare resources out there, but, with few exceptions,public resources are becoming scarce and privateresources, including those of the South and EastMediterranean countries, tend to be invested inshort-term instruments or in regional blocs withstronger growth rates or lower risk factors.

the mediterranean region is seen as anagglomeration of different legal and economic sys-tems with few real ties between them. It is truethat legal systems and standards differ from coun-try to country; intra-regional trade comes to lessthan 8% on average of the region’s total trade. Theoverall investment image of the region is harmedtoo, making it a less attractive investment destina-tion than other regions of the world. The invest-ment protection instruments traditionally used inthe region are not equal to the task of reducingperceived risks to a level sufficiently low to triggerthe kinds of investment volumes required by theregion.

it is therefore necessary to revamp thelegal and financial framework governing the pro-tection of investments by (i) putting in place aninternational treaty that would create a specificlegal protection regime for UfM project at the levelof the region (or, at the very least, at the level ofthose countries opting in to the treaty), with pro-vision on a dedicated dispute resolution bodycapable of developing a clear body of case law, and


AN IMPROVED

LEGAL AND

FINANCIAL

FRAMEWORK FOR

INVESTMENT

SHOULD BE

ENOUGH TO KICK-START THE

PROCESS OF

REALLOCATING

CAPITAL AT

REASONABLE

COST TO PRO -JECTS DEEMED

OF STRATEGIC

VALUE.

CONCLUS ION

Abderrahmane Hadj Nacer et Guillaume Almeras, Investmentin the Mediterranean: Current Situationand Ways Forward, March 2009

Sabrina Robert-Cuendet, Overviewof International Legal Mechanismsfor Protecting Foreign Investmentin the Mediterranean, April 2010

Report of the Commission onthe Financing of Co-Development in the Mediterranean,chaired by Charles Milhaud, May 2010

Eric Diamantis, Proposals for EnhancedInvestment Guarantees in theMediterranean Region, July 2010

Michel Gonnet, Tools for Stepping upInvestment in the Mediterranean,September 2010

Ipemed News n°13, September 2010

Crisis and ways out of crisis in FEMIPMediterranean partner countries,FEMISE, 2010

Mediterranean Investment ProjectObservatory (ANIMA-MIPO), 2010

B IBL IOGRAPHY

IPEMED, Economic Foresight Institute for the Mediterranean region, is a general interest institute, created in 2006. As a think tank promoting the Mediterranean region,

its mission is to bring the two shores of the Mediterranean closer, through economic ties. Privately funded, it is independent from political authorities.

President: Radhi Meddeb; Founder and General Delegate: Jean-Louis Guigou

‹ www.ipemed.coop

Measures to enhance and guarantee Investment Mediterranean€¦ · Measures to enhance and guarantee Investment in the Mediterranean Éric Diamantis, Michel Gonnet and Amal Chevreau

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