Evaluation Report. EIB financing with own resources through global loans under Mediterranean mandates. Operations Evaluation (EV) Synthesis Report

Evaluation Report Operations Evaluation (EV) EIB financing with own resources through global loans under Mediterranean mandates Synthesis Report

EIB financing with own resources through global loans under Mediterranean mandates Prepared by Operations Evaluation Juan Alario Patricia Castellarnau External Consultant: DFC S.A. Robert Wilson (team leader) Alain Davet Philippe Nouvel December 2004 * * * NOTICE The EIB has an obligation of confidentiality in relation to the financial intermediaries and owners and operators of the projects referred to in this report. Neither the EIB nor the consultants employed on these studies will disclose to a third party any information that might result in breach of that obligation, and the EIB and the consultants will neither assume any obligation to disclose any further information nor seek consent from relevant sources to do so.

GLOSSARY DFIs EIB EV EIA FEMIP FIs FB GLs IFI MPCs MDBs MED region NPLs OpsB OJEU PJ SMEs TA Development Finance Institutions European Investment Bank Operations Evaluation of the EIB Environmental Impact Assessment Euro-Mediterranean Investment and Partnership Financial Intermediaries Final beneficiaries of the GL Global Loans International Financial Institutions Mediterranean Partner Countries Multi-lateral Development Banks This includes the following countries: Algeria, Egypt, Jordan, Lebanon, Morocco, Syria, Tunisia, Malta, Cyprus, Turkey, Israel and Gaza-West Bank. Non Performing loans Directorate for Lending Operations-Outside Europe Official Journal of the EU Projects Directorate Small to medium-sized enterprises Technical Assistance

TABLE OF CONTENTS EXECUTIVE SUMMARY 1 FEMIP GENERAL COMMENTS ON THE REPORT 4 TABLE OF RECOMMENDATIONS 5 1 INTRODUCTION 8 1.1 THE MEDITERRANEAN MANDATES 8 1.2 THE FINANCIAL SECTOR IN THE MEDITERRANEAN COUNTRIES 9 2 EIB OBJECTIVES AND FINANCING THROUGH GLOBAL LOANS IN MEDITERRANEAN PARTNER COUNTRIES 11 2.1 BACKGROUND 11 2.2 OBJECTIVES OF EIB GL 11 2.3 EIB FINANCING THROUGH GL 12 3 PERFORMANCE OF THE GLOBAL LOANS EVALUATED 15 3.1 EVALUATION APPROACH 15 3.2 RELEVANCE 17 3.3 EVALUATION OF THE FINANCIAL INTERMEDIARIES 17 3.4 THE EIB GL 18 3.5. AGGREGATE GL PERFORMANCE 21 4 EIB VALUE ADDED 22 4.1 FINANCIAL 22 4.2 DEVELOPMENT OF THE FIS 23 5 EIB MANAGEMENT OF THE PROJECT CYCLE 24 5.1 IDENTIFICATION AND SELECTION 24 5.2 APPRAISAL 24 5.3 FOLLOW UP AND MONITORING 25 5.4 ENVIRONMENTAL ASSESSMENT 26 5.5 PROCUREMENT 27 5.6 CO-OPERATION AND CO-ORDINATION WITH OTHER EU INSTITUTIONS AND MDBS 27 6 LESSONS LEARNED AND RECOMMENDATIONS 29 APPENDIX 1 - SUMMARY OF MEDA GLOBAL LOANS ON OWN RESOURCES SIGNED BETWEEN 1979 AND 2003 31 APPENDIX 1 - EVALUATION SUMMARY 33 APPENDIX 2 - SUMMARY OF THE RATINGS OF THE GL EVALUATED 35 APPENDIX 3 - EVALUATION CRITERIA 36

EXECUTIVE SUMMARY The Bank s activities in the Mediterranean region 1 started in the late seventies, as part of the bilateral Financial Protocols signed between the European Community and Mediterranean Partner countries. In 1997, the EUROMED mandates replaced the former Protocols and the latest mandate covers the period up to 2007. The Bank s main priorities under the EUROMED mandates are: Private sector development, including support for SMEs and joint ventures between EU and Mediterranean Partner Countries (MPCs) enterprises; Upgrading of economic infrastructures, including those necessary to encourage interregional trade. The level of cooperation and assistance to the region has broadened and deepened over time, which has also led to a more prominent role for the EIB. In 2002, the European Council gave a new mandate to the Bank - the Facility for Euro-Mediterranean Investment and Partnership (FEMIP), which expanded the Bank s lending in the region and has a particular focus on developing the private sector. This evaluation covers EIB financing with own resources through global loans (GLs). This type of financing has amounted to EUR 2.02 bn for the region up until end 2003. Most of the lending has gone to Turkey (47%), Tunisia (18%), Israel (11%) and Morocco (11%). The main focus of the evaluation is the GL as a financial instrument, not the investments financed by the GL. However, a sample of sub-projects funded has been reviewed in order to assess whether the selection procedures used by the FIs ensure that sound and relevant projects were funded, and to estimate the value added of the GL to the final beneficiaries. The main objective of GLs is to channel EIB funding to sound and relevant investments that are below the threshold for EIB direct lending; primarily to SMEs and later to a range of small agricultural and public sector infrastructure projects (including environmental and energy savings). For an in-depth evaluation, EV selected a sample of ten GLs from operations signed in the period 1994-2003. In selecting the sample, a reasonable spread of operations across targeted sub-sectors and the countries 2 of the region was ensured. The operations were evaluated based on the internationally accepted evaluation criteria (see Appendix 4) of relevance, efficacy, efficiency and sustainability. Against these criteria and using a 4-level rating scale, one operation was rated 4 (good), 5 were rated 3 (satisfactory) and four were rated 2 (unsatisfactory). None were rated 1 (poor). 1 This includes the following countries: Algeria, Egypt, Jordan, Lebanon, Morocco, Syria, Tunisia, Malta, Cyprus, Turkey, Israel, and Gaza-West bank. 2 No operation in Israel could be selected for evaluation as none of the GLs in the period considered were substantially disbursed at the time of the evaluation. 1

Relevance All the GLs evaluated are clearly consistent with the objectives of the EU mandates, as well as with national objectives and beneficiaries requirements. Thus, the rating of the relevance criteria was good for all the operations evaluated. The six GLs evaluated targeting SMEs, including tourism, support the development of the private sector in the region. In several cases, the GLs contributed to specific national programmes aiming at modernising or enhancing the competitiveness of SMEs. The other four GLs evaluated contributed to different objectives, such as upgrading economic infrastructures, agricultural development, environmental investments by enterprises and energy saving investments. Performance of the financial intermediaries The financial situation of the Financial Intermediaries (FIs) evaluated varies from satisfactory to unsatisfactory, except in one case where it was rated poor. The main problem of the FIs evaluated, and of the banking sector in the region in general, is the high proportion of non-performing loans (NPL). In the FIs evaluated, NPL represents between 22 and 45% of the total loan portfolio in recent years, with the exception of the Turkish bank evaluated, where this percentage is around 7% to 8%. Since the Bank s appraisal in mid 1990s, FIs evaluated have significantly improved their organisation and procedures, particularly their credit analysis. This in part is the result of government programmes to improve the effectiveness and soundness of the banking sector, often supported by international organisations, as well as a response to increasing competition in their traditional markets. Despite the challenges faced, all the FIs evaluated were considered sustainable, except one, due mainly to its high level of NPLs. Performance of the EIB Global Loan The total amount of the global loans has been substantially committed and disbursed in all the cases evaluated. However, only in a minority of cases have their specific objectives been fully met. This is due to financing going to larger projects than originally foreseen and/or financing going to sectors or projects not initially foreseen. The duration of the sub-loans was normally between 4 and 8 years, including the grace period, except in one case where it was 15 years. The duration of the EIB GL was significantly higher (normally 12-15 years expect in one case where it was 18 years). The longer duration of the EIB loan encourages the FIs to provide the final beneficiaries with loans of longer duration. It is the Bank s policy to allow market forces to determine the on-lending conditions, although, in a few cases, the EIB applied specific on-lending conditions. The credit quality of the projects financed by the EIB GLs was similar or slightly better than the total loan portfolio of the banks financed. In several cases, arrears on repayments were caused by delays in implementing the projects and the impact of the slowdown of the economy. This is related to the degradation of the political and economic context of the region in recent years. On the positive side, most of the investments financed are achieving or surpassing the initial objectives, particularly those aimed at exporting manufactured products. The information on the quality of public infrastructure projects was very limited. However, in one of the GLs targeting this type of project, it was found that some of the projects financed faced significant implementation or sustainability problems. 2

EIB value added The financial value-added provided by the EIB to these operations has generally been found to be significant or high; because throughout the region medium-long term financing (MLT) has been in limited supply and access to the international financial markets was also restricted. The fact that the EIB is a regular provider of MLT funding to the evaluated FIs has provided reliable support to the gradual modernisation and expansion of the private sector in the region. However, this financial value added is being eroded in certain countries, as there is an increasing availability of MLT funding from the local market. In addition, as the loans provided by the EIB were in foreign currencies, foreign exchange cover was an important issue in all the GL assessed. The EIB s pragmatic and non-bureaucratic approach was clearly valued by the FIs and final beneficiaries visited. Improving the organisation of the FIs or institutional development in general was not a specific policy objective of the EIB at the time these GLs were approved. Therefore, it is not surprising that the EIB has contributed little to FI development in the GLs evaluated. However, this has changed since the establishment of the Technical Assistance facility under the FEMIP, aimed at supporting institutional and policy reform and the privatisation process. EIB management of the project cycle The identification and selection by the EIB of FIs suitable to receive an EIB GL was rated good or satisfactory in all the cases evaluated. However, the choice of FIs eligible for a GL was limited by the Bank s requirement of a government or first class international bank guarantee for the GL financed with own resources. The main strength of the EIB appraisal process, as perceived by FI clients, is the capacity to complete the appraisal quickly by comparison to other MDBs. In this respect, the flexible and pragmatic approach of the EIB is highly appreciated when compared to that of other MDBs active in the region. The appraisals carried out by the Bank were rated satisfactory in most of the operations reviewed. However, it was found that the appraisal often lacked enough depth to add significant value, particularly the analysis of the organisation and procedures of the FI, including environmental and procurement issues. Once the GL has been approved, the EIB focus has been seen to be on signing, committing and disbursing the loan as quickly as possible. In certain cases, some of the objectives and sometimes specific conditions, mentioned at appraisal were not adequately reflected in the finance contract or side letter to the contract, or were later waived or modified. In all GLs evaluated the quality of the follow up was poor or unsatisfactory, except in one case. There was normally no ongoing analysis of the FIs situation, except for repeated operations with the same FI. In addition, the Bank has very little information on the investment soundness and development impact of the sub-projects financed. In order to face these deficiencies, the Bank is reinforcing the GLs follow-up. 3

FEMIP GENERAL COMMENTS ON THE REPORT FEMIP notes with satisfaction that the Global Loans made in the Mediterranean Region during the period 1989 to 2001 have been consistent with the objectives of the EU mandates and the economic policies of the countries concerned, have been fully disbursed in most cases under review, and that the value-added provided by the EIB has generally been highly rated. Although the selection process of Financial Intermediaries (FIs) has been satisfactorily rated, the report highlights the high proportion of non-performing loans of FIs evaluated, which reflects the overall problems of the banking sector during the period. The report identifies several areas of possible improvement of EIB's approach to GLs in the region, in particular: (i) a greater attention to the needs of smaller enterprises (ii) the capacity building of financial intermediaries (iii) the widening of EIB's financial products (iv) increased monitoring of FIs and sub-project, with respect inter alia to the environmental impact of sub-projects. All the global loans evaluated have been extended before the launching of the Facility for Euro-Mediterranean Investment Parnership (FEMIP) in 2002. Under the FEMIP, SME lending and capacity building have been identified as key priorities for the Bank's activities in the Mediterranean region. A "Special Femip Envelope" (SFE) has been introduced in the course of 2004 to provide funding to projects or financial intermediaries with a higher risk profile; the issuing of local currency denominated bonds is being sought, with Morocco as a "show-case". The Technical Assistance component of FEMIP provides an important instrument to enhance the quality and developmental impact of EIB operations in the area. Four TA programmes targeting SME funding and FIs capacity building have already been launched in the region. The FEMIP Trust Fund has been established in 2004 and will focus on providing further technical assistance in favour of private sector funding. The opening of regional or local offices in the region is also assisting the Bank in identifying the needs of smaller enterprises and selecting local beneficiaries, as well as monitoring the Bank's projects and sub-projects and coordinating with other donors. New posts of monitoring assistants were created at FEMIP's headquarters in Luxembourg with a view to intensifying monitoring activities and better defining future operations. A memorandum of understanding has been signed with the IBRD (World Bank) and the EU Commission in May 2004 enhancing donor coordination in the Mediterranean region, with the development of the private sector as a priority. In addition, the environmental assessment for GLs has been reinforced in the Bank's 2004 environmental policy statement. 4

TABLE OF RECOMMENDATIONS EV Recommendation 1. Adapt guarantee requirements for GLs enabling the Bank to finance more private sector banks without the requirement of a government guarantee and offer new products, such as financing in local currencies (Sections 2.3, 4.1 and 5.1). 2. When necessary, assist FIs through technical assistance thereby encouraging their development and financial sector reform. Such programmes also need to be carefully co-ordinated with other donors to avoid overlapping or duplication of effort (section 4.2). Accepted Yes / No Yes, with limitations due to local context for local currency issues and lending. Yes. Ops B / PJ Comments Under the reinforced FEMIP, the Bank has decided to broaden the range of eligible counterparts for its own resources loans. It can now lend to eligible local banks without government or international guarantees under the Special FEMIP Envelope (SFE). The Bank is also considering the possibility to provide financing in local currencies in MED in order to enhance the competitiveness of its own resources loans. Discussions are being held in this respect with the Moroccan Government and local financial institutions to implement a regulatory framework acceptable to the Bank. However, local currency funding will depend on the Bank s competitiveness, in particular in situations where local banks are extremely liquid in local currency. The Bank is already assisting FIs in the region, when appropriate, using the FEMIP Technical Assistance (TA) facility (TA has been set up under FEMIP in Syria, Tunisia, Egypt and Lebanon). The main objective of on-going TA operations is capacity building at the FI s level, where other donors are rarely found. TA is being considered for sector reform under the Trust Fund, in full coordination with other donors. 5

3. During appraisal, better analyse the FIs organisation and procedures and ensure that the areas to be improved are addressed. In particular, the Bank should carry out a more rigorous analysis of the FIs capability and commitment to developing its business in the sub-sector targeted by the GL and ensure that the Bank s environmental and procurement guidelines are understood and applied. The latter is mainly required for GLs targeting public infrastructures (Sections 5.2, 5.4 and 5.5). 4 Support FIs that aim at developing financing to smaller enterprises in the region and link, when necessary, such operations to smaller enterprises support programmes that assist them to develop bankable projects (Sections 2.3 and 3.4). Yes. Yes, with limitations inherent to the GL structure. Ops B notes that the appraisals reviewed were rated satisfactory in most cases, but agrees that there is room for improvement. At present, in the context of FEMIP, Technical Assistance funds are used to address specific FI's weaknesses by reinforcing FI's technical capacity and improving internal processes, including environmental assessment capabilities and procedures. In addition, it is proposed that, although the Project Directorate (PJ) does not normally contribute to the appraisal of global loans, technical expertise be requested from PJ for certain environmentally sensitive sectors and projects. In addition, sub-projects requiring an Environmental Impact Assessment (EIA) must be assessed independently by the EIB, in line with the Bank's guidelines. The monitoring of procurement practices will be reinforced. Financing smaller enterprises was not a specific objective of the MED mandates. It is however a priority for the FEMIP, which provides instruments (see in particular references to SFE and TA above) to contribute to this objective. In particular, FEMIP seeks to support FIs that aim at developing financing to smaller enterprises in the region and link, when necessary, such operations to SME support programmes that assist them to develop bankable projects. However, FIs will retain the final decision since they are carrying the financial risk on the final beneficiary. FIs lending to smaller SMEs amount to higher risks that FIs may be unwilling to take, or to take at significantly higher margins (reflecting the risk). 6

5. Assure that all the objectives and specific conditions pertaining to a GL operation are reflected in the Finance Contract or Side Letter to the Finance Contract and that their implementation is followed up (Sections 3.4 and 5.5). 6 Assess the investment soundness and developmental impact of a sample of sub-projects financed, following conclusion of the allocation period of each global loan, in particular for a repeater operation, including site visits to a sample of sub-projects financed (Sections 3.4.3 and 5.3). 7 Improve monitoring of the financial situation and organisation of FIs, through regular reporting. In case a FI does not comply with its reporting requirements, a field mission might be necessary (Sections 5.3). Yes. The objectives of the mandates and of the specific GL are often general and thus difficult to translate into specific conditions. Ops B agrees that there is scope to better reflect them in the Financial Contracts or the Side Letters in the context of measures to increase its value added (pillar 3). In addition, FEMIP s TA budget provides additional scope for reinforcing conditionality. FIs reporting is currently being reviewed with a view to introducing improvements in the course of 2005. Yes. The monitoring of allocations, including site visits, is carried out, but, as the report states, not on a systematic basis. Ops B need to reflect on the appropriate ways and resource allocation to perform these activities, by focusing for instance on value added and environmental soundness, and without creating additional work for the FIs. The assessment recommended is an expost activity that Ops B should carry out in cooperation with PJ and possibly EV. In this respect, Ops B is also considering the possibility of introducing a balanced scorecard for GL. Yes. Follow up of the FIs is usually done on a regular basis, but reports are not systematically prepared, especially when no major issue is identified. However, there is scope for the improvement of FIs reporting requirements and the Bank s monitoring through selected financial ratios and more focus on organisational aspects. More consideration could also be given to field missions when the information is limited. 7

1 INTRODUCTION 1.1 The Mediterranean mandates The European Investment Bank s (EIB) activities in the southern and eastern non-member countries of the Mediterranean Region have developed within the framework of the European Union s political and economic relationships with the Region. The main goals of the EU s policies towards the region have been political as well as economic. Beginning in the late1970s 3, a series of Cooperation Agreements were signed between the European Community and Mediterranean Partner Countries (MPCs), which included bilateral Financial Protocols providing for loans from the European Investment Bank and grants from the aid budget of the European Commission 4. In 1992, the Horizontal Financial Cooperation Programme was adopted as an instrument for reinforcing financial assistance to the region. This facility provided for additional financing on EIB own resources and risk capital finance on a first come first served basis and was implemented in parallel with the balance of funding under the Third Financial Protocols. The Barcelona Declaration adopted by the 15 Member States and the 12 MPCs 5 established a framework for broader and deeper co-operation. The former Financial Protocols were replaced by the EUROMED resolution and, as far as the Bank was concerned, resulted in a new Mandate for operations in the region, EUROMED. The new mandates laid down three objectives for future co-operation being: The foundation of a common area of peace and stability. The progressive establishment of a free trade area between the EU and the MPCs though Association Agreements. The development of human resources, cultural understanding and exchanges between civil societies. The areas in which the EUROMED mandates expected that the Bank would enhance its activities were implicit in the broader objectives set out in the EUROMED Resolution, especially: Private sector development, including support for SMEs and for joint investment between EU and MPCs enterprises. Upgrading of economic infrastructure including that necessary to encourage interregional trade such as telecommunications, transport and power. The EUROMED I Mandate covered the period 1997-2000 and established a ceiling on own resources financing of 2310 MEUR for the period. This mandate was followed by EUROMED II covering the period 2000-2007 and the ceiling on own resources finance was extended to 6425 MEUR. In addition these mandates include risk capital financing and interest subsidies for environmental projects. Following the conclusions of the Presidency of the Nice Council in 2000, the Bank was invited to finance projects of mutual interest between EU and Partner countries without recourse to the EU guarantee for political and commercial risk (up to 1bn EUR). 3 Prior to this an Association Agreement had been signed between the EC and Turkey with similar objectives. 4 Interest rate subsidies of 2% were provided on EIB loans and financed from the grant budget. Risk Capital was introduced under the Second Financial Protocol (funded by the Commission but managed by the EIB). 5 Algeria, Egypt, Jordan, Lebanon, Morocco, Syria, Tunisia, Malta, Cyprus, Turkey, Israel, and Palestine. 8

In 2002, the European Council called for a further initiative in the Mediterranean region. The possibility of creating a new financial institution with a dedicated mandate for the MED region was mooted, but attracted limited support from either Member States or MPCs. Instead the Facility for Euro-Mediterranean Investment and Partnership (FEMIP) was approved giving additional financial objectives for the Bank in the region with a particular focus to developing the private sector. Aside from the political factors that may have influenced this decision (increasing instability in the region), it was widely recognised that the economic reform process in the MED region needs to be deepened and accelerated. The main changes to the EIB s remit resulting from the establishment of FEMIP are the following: Increase the Bank s financing with own resources in the region by up to EUR 1.5 billion in the period 2003-2007. Lending on own resources to be complemented by risk capital operations whose use will be extended through the creation of new financial instruments. A Technical Assistance facility for the identification, design and management of new investment projects and to support policy reform and privatisation processes. The creation of a Supervisory Ministerial Committee composed of representatives of Member States, MPCs and Experts Committees. The establishment of decentralised operational EIB offices in the Region. In terms of financial products, under the current mandates the EIB offers: the standard senior loan on own resources, risk capital that can be used for different purposes (equity or quasi equity participations, etc.) and interest subsidies for environmental projects. Country framework agreements Under the Financial Protocols, the Bank lending to individual MPCs was carried out within the framework of a bilateral agreement between the European Community and each country. With the phasing out of the Financial Protocols a new legal structure was required to provide the Bank with the necessary guarantees regarding tax exemptions and availability of foreign currency that were implicit in the Protocols. In their place, framework agreements have been signed between the Bank and each country that are then ratified by the legislative assembly of the country concerned. The agreement allows the Bank to finance projects in both the public and private sectors in the host countries and sets out withholding tax exemptions. In addition the Government undertakes to make foreign currency available for the servicing of debt by EIB borrowers. Procedures are also agreed through which the selection of projects to be financed by the Bank is subject to the agreement by the Bank s counterpart Ministry (generally Finance or Planning). Thus through the Framework Agreements the de jure preferred Creditor Status of the Bank has been preserved. 1.2 The financial sector in the Mediterranean countries There are major differences in the level of development of the financial sector in the Mediterranean countries (Maghreb, Mashreq and Turkey). While its development 6 is relatively high in Turkey, Jordan and Lebanon, it is still low in Algeria and Syria. 6 From Evaluating Financial Sector Development in MENA: A new methodology and some results. IMF papers. 9

However, there are some common features. In the majority of MED countries, bank ownership remains primarily in government hands, while private banks still represent a small share of the market and focus on a limited clientele. There is still a high level of intervention of the governments in credit allocation. Public financial institutions continue to be utilised as instruments of the government to develop sectoral policies. However, Governments are progressively putting in place alternative means to pursue their sectoral policies and at the same time reducing the role of public financial institutions in policy implementation. Since the early-mid 1980s certain countries have been implementing wide-ranging programmes to progressively liberalise their economies and to make them more open and competitive internationally. Substantial funding from international financial institutions, including the EIB, has supported these programmes. In this context, the banking sector has progressively been liberalized, restructured and open to foreign investment; although the progress has been rather slow in most countries. Central banks have played a lead role in this process and they have progressively put in place prudential regulations to force banks to improve their financial situation and management. These programmes should facilitate access of the private sector to financing, which is at present significantly limited, particularly medium-long term financing. Despite the efforts aiming at strengthening the banking sectors, many banks in the region are affected by significant problems, of which, the high level of non-performing loans (NPL) is by far the most important (see the share of NPL in the FI evaluated in 3.3). Although the proportion of NPL s in banks total assets had progressively decreased in the 1990s in most of the countries, it has generally increased in recent years. This is the result of the impact of the economic slowdown, linked in part to the stagnation of some structural reform programmes and growing instability in the region. 10

2 EIB OBJECTIVES AND FINANCING THROUGH GLOBAL LOANS IN MEDITERRANEAN PARTNER COUNTRIES 2.1 Background The global loan 7 mechanism was pioneered by the World Bank (WB) in the 1960s as a means to allow the bank to finance small investment projects promoted by private sector investors through local financial intermediaries in the countries of its operations. Since most commercial banks had neither the appetite nor the capacity to handle SME lending, the WB frequently provided support for the creation of dedicated DFIs 8, in which the Government was the only or principal shareholder (for example IDB Jordan and DIB Egypt). During the 1980s many DFIs were discredited due inter alia to lending to connected parties and political interference. Portfolio quality was also affected due to the absence of adequate forex risk cover schemes when sub-loans were granted in local currency and the currency subsequently underwent substantial devaluations. The WB moved away from direct lending to DFIs to wholesale Apex operations under which the second tier financial intermediaries were often private commercial banks, although the lending was channelled through specialised units set up within Ministries of Finance or Central Banks. Most MDBs initially adopted the World Bank 9 model for financing small investments, and the EIB was among them. EIB global loans were first deployed in Member States, replicating the World Bank model, and notably in Italy. The overarching aim of such operations was to finance projects too small to benefit from direct loans, rather than assisting financial sector or institutional development. The mechanism was extended to support small infrastructure projects including energy saving investments, pollution abatement and small infrastructures. It was in this context that the Bank s Global Loan operations in the Mediterranean Region began in the early eighties 10. 2.2 Objectives of EIB GL Whilst the Financial Protocols were in force (up to 1996), the Bank s lending strategy in each MPC was determined by the Programming Document, which was the output of the joint Programming mission carried out by the Commission and the Bank. Commonly, the Programming Document identified support to private sector development and/or SMEs as a priority objective. Therefore, the mounting of Global Loan operations in the region up to 1996 can be said to have been in line with general objectives agreed between the Bank and Government. Between 1996 and 2002, Global Loan operations appear to have been carried out on a rather ad hoc basis in terms of lending strategy. Unlike other MDBs, the EIB did not adopt the practice of drawing up Country Strategy Papers as part of the participative process in designing future lending programmes to replace the Country Programming exercise. This more flexible approach does not seem to have affected the volume or quality of the lending through GLs, but may have reduced the scope for identifying new sectors which might have benefited from GL lending. 7 The World Bank and other MDBs more commonly use the acronym LOC (lines of credit) to describe such operations. 8 Development Finance Institutions 9 Other examples being the Inter American Development Bank, the African Development Bank and, more recently, the European Bank for Reconstruction and Development. 10 An exception was Turkey, which had signed an Association Agreement with the Community in 1962. Global loan operations though TSKB began earlier than those in other MEDA countries. TSKB was established along the lines of the classic DFI model with WB assistance, but has since been wholly privatised. 11

This situation has changed significantly with the creation of FEMIP. The general objectives for EIB lending in the MED region have been formally extended to include financial sector development and addressing the constraints to private sector development. The institution of a new governance structure through FEMIP provides a medium through which MPCs will participate with the Bank in the definition of pluriannual business plans, which better cater for their development needs. Thus a strategic framework now exists under which new Global Loan operations will form an integral part of a jointly determined lending programme for each country. In the past it has not been the Bank s usual policy to include conditionalities related to FI organisation and procedures or institutional issues in its Global Loan contracts. The FEMIP governance process may allow the Bank to become more pro-active in the reform process, whether of the financial sector or the targeted sub-sector by including conditions in its future loan agreements. The specific objective of Global Loans has been to channel EIB funding to investments which were below the threshold for EIB direct lending - primarily to SMEs and later to agricultural and a range of small public sector infrastructure. The selection of strong financial intermediaries, which have proper organisation and sound procedures in place, is a further and important operational objective since in a GL the FI is the Bank s direct borrower and because the appraisal of sub-projects financed is delegated by the EIB to the financial intermediary. It was therefore an important objective to demonstrate that the FI has the capacity to appraise sub-projects in accordance with the EIB s own standards. Finally, a further consideration relates to possible market distortions in GL operations. Since the phasing out of interest subsidies on its loans to the region, the EIB has had a clear policy objective of non-distortion of local financial markets. Onlending rates were therefore only capped if, due to lack of competition, there was a risk of opportunistic pricing in the market. 2.3 EIB financing through GL A summary of own resource Global Loans signed in the MED region between 1979 and 2003 is provided in Appendix 1 11. In total, 70 loans have been signed for EUR 2.02 bn. Most of the lending has gone to Turkey (47%), Tunisia (18%), Israel (11%) and Morocco (11%), followed by Egypt, Jordan and Lebanon. No GL operation on own resources has been established in Algeria or Syria, and an operation set up in Gaza-West Bank had to be cancelled due to the deteriorating situation in the territories. Initially, Global Loan operations were mainly to public sector DFIs because this facilitated obtaining the government guarantee which the EIB required. However the use of the Apex structure has broadened the number of banks participating in global loan operations to privately owned commercial banks in a number of countries in the region. Furthermore, the increased availability of risk capital has enabled the Bank to diversify its financial products to the region in a significant way 12. 11 Based on information taken from the Bank s internal database. This excludes some operations signed, but under which no disbursements took place (e.g. CIB Egypt). 12 For example the financing of venture capital and equity funds 12

Figure: EIB financing in MED with own resources through Global Loans 450 400 350 300 250 200 150 100 50 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Although financing (signatures) through GLs has significantly increased in recent years (see figure), there has been a decrease in the number of new operations signed in most countries of the region since 1995, with the exception of Tunisia and Turkey. This is due to three factors: The problems faced by many public sector FIs has led to a decrease in the number of FIs which could be considered as meeting the EIB s selection criteria and has not been offset by a portfolio diversification towards private sector banks; Private sector banks could not provide adequate guarantees at cost which would make the GL competitive for on-lending to SMEs; Increased use of the Apex structure, which has resulted in an increase in the number of participating FIs, including private banks, if not the number of operations. Global loans have been utilised for financing a diversity of sub-sectors in the MED region: SME financing Global Loans to provide finance for SMEs constitute the most significant portion of the EIB s own resource Global Loan portfolio. Several operations have focused on export oriented SMEs, both because of their contribution to foreign exchange earnings at the national level and also because, in the absence of an exchange risk cover mechanism they are of course better positioned to service a foreign currency loan. The increasing amounts allocated per GL since 2000 in Tunisia and Turkey suggests a significant market for the product when appropriately designed to address the needs of SMEs and where efficient FIs can be identified. It may be noted that Tunisia and Turkey are two of the countries in the region where financial sector reform has progressed furthest. As regards to SME financing, a legitimate question is what constitutes an SME. The standard reference used in the GL evaluated has been in most of the cases the standard EU definition 13. This definition appears over-dimensioned in the low-middle income countries, which make up the MED region, with the possible exception of Turkey. 13 Up to 500 employees and total assets of not more than EUR 75 million. 13

Small infrastructure financing Global Loans have been utilised for financing small infrastructures, usually but not always, sponsored by municipalities initially in those countries where a specialised FI had been set up for this purpose. Agricultural development Initially a number of Global Loans were made to support on-farm investments through state-owned agricultural credit institutions. Since these specialised in subsidised credit, their interest in borrowing from the EIB waned with the phasing out of interest subsidies under the Third Financial Protocol. Furthermore, because of poor credit practice, by the early 1990s most faced serious financial difficulties and could no longer be regarded as suitable candidates for GL financing. Environmental and energy savings projects Own resource Global Loans have also been used to finance small scale projects aimed at pollution abatement in Egypt, Turkey and Tunisia. The achievement of the specific objectives of the GL for environmental projects was unusually low, which raises doubts as to the selection of the FI or the structuring of the loan. Only one operation for financing a small project leading to energy savings has been mounted in the region (in Turkey), probably given the fact that the rational use of energy has been a lower priority for most MED countries in recent years. 14

3 PERFORMANCE OF THE GLOBAL LOANS EVALUATED 3.1 Evaluation approach This evaluation considers Global Loans on own resources only, but there are close crosscutting links with the other instruments provided in the region, particularly Risk Capital. It is a part of an on-going evaluation of the EIB financing with own resources under the Mediterranean mandates, and complements the EU Commission s evaluation, 14 which covered the financial assistance to MPCs in the form of interest subsidies on EIB loans and risk capital operations. The main focus of the evaluation is the GL as a financial instrument, not the investments financed by the GL. However, a sample of sub-projects funded has been reviewed in order to assess whether the selection procedures used by the FIs ensure that sound and relevant projects were funded, and to estimate the value added of the GL to the final beneficiaries. The performance of a Global Loan has been evaluated using three main criteria and for each criterion the relevant internationally accepted evaluation criteria are indicated (Appendix 4 presents the definition of the evaluation criteria): Relevance of the operation: consistency on the one hand, in relation to the objectives of the EU mandates, EIB and, on the other, in relation to the national policies and beneficiaries requirements (relevance). Evaluation of the FI: organization, financial situation (mainly portfolio quality) and sustainability (efficacy, efficiency and sustainability). Evaluation of the EIB GL: Amounts disbursed versus initial expectations, quality of the projects financed; on-lending conditions and sustainability of the projects financed (efficacy, efficiency and sustainability). To ensure comparability, EV has prepared guidelines for assessing the different GLs (Appendix 2 presents the template use in the evaluation of each operation). The comparison of the ex-post results with the expectations and objectives at appraisal is used as the basis to evaluate the operation. An operation that has achieved and surpassed all its objectives will be rated good (efficacy), while the rating will be less than satisfactory if some or all the key objectives have not been achieved. In this evaluation of GLs operations, it has been possible to separate the relevance and sustainability criteria from the other criteria, but it was difficult to separate efficacy from efficiency, and thus these criteria are evaluated together. The evaluation of a FI compares the current situation of the FI with the situation at appraisal. It assesses the improvements in its organisation and in its financial situation. Concerning the organisation, it has been assessed whether it allows the selection of sound projects. We have not established explicit benchmarks 15 to evaluate the financial situation of the FI, such as minimum Return on Equity, for instance. This reflects the fact that the Bank does not apply explicit benchmarks at appraisal that could be used as a reference in the evaluation. 14 Eva-EU Association, Evaluation of financial assistance for the Mediterranean countries managed by the EIB on behalf of the EC. Final report May 2001. Evaluation Unit of the Joint Relex Service of the European Commission. 15 Depending on the operation, the financial situation was assessed by comparing the key financial ratios of the intermediary with similar institutions in the country. When there was not a reference financial institution, the rating reflected the financial situation in recent years and the trends of key ratios (improving or worsening). 15

Similarly, the evaluation of the EIB GL has taken as a basis the expectations and objectives of the GL defined at approval. In this respect the key criteria considered have been the following: The total amount disbursed in relation to initial expectations. Achievement of the specific objectives of the GL, such as whether the financing has gone to SME, sectoral priorities if any. The investment soundness of the sub-projects financed, including environmental and procurement aspects. Sustainability of the projects financed. In addition, the EIB value added and the management of the project cycle by the EIB has been evaluated. EIB value added covers the financial value added and the EIB contribution to the development of the FIs. EV selected a sample of ten Global Loans from the own resources GL signed in the period 16 1994-2004 and substantially disbursed at the time of the evaluation. In selecting this sample account was taken of the need to ensure a reasonable spread of the operations evaluated both across sectors targeted and the countries 17 of the region. Five of the operations selected targeted SMEs and the other five aimed at financing small municipal infrastructures, environment, tourism, agriculture and combined heat and power stations. The operations selected were carried out in Turkey, Egypt, Jordan, Morocco, Tunisia, and Lebanon. The evaluation started in November 2003 and has been developed in three sequential phases: A general overview of EIB financing through GL under Mediterranean mandates and the operational framework set up by the EIB to develop this type of financing. Individual evaluation of the ten operations selected. Six evaluations included a visit to the FIs, a sample of sub-projects financed and meetings with other relevant parties (Central Banks, Delegations of the EU Commission in the country, other IFIs, relevant Ministries, etc.). The other four evaluations were based on desk review of the Bank s files. In all cases meeting were held with the operational staff responsible for the operation. Synthesis report, presenting the main findings of the previous phases and drawing conclusions and recommendations. The EV team carried out the first phase of the evaluation; while the external consultants carried out the second phase and prepared the first synthesis report. Based on this, EV produced the final report. 16 All the GL selected were signed in the period 1994-2000, except one GL targeting the agricultural sector that was signed in 1993. This is to include one GL of this type in the sample. 17 No operation in Israel could be selected for evaluation as none of the GLs in the period considered were substantially disbursed at the time of the evaluation. 16

3.2 Relevance All the GL evaluated are clearly consistent with the objectives of the EU mandates and with the national objectives. Thus the rating of the relevance criterion was good for all the operations evaluated. The six GL evaluated targeting SME, including tourism, have supported the development of the private sector in the region. They are consistent with the beneficiaries requirements and country need, in the sense that they provided medium-long term financing to SMEs, which has been found to be in limited supply in the respective countries. In several cases, the GL contributed to specific national programmes aiming at modernising or enhancing the competitiveness of the SME sector ( mise à niveau programme in Tunisia, development of the industrial and tourism sectors in Jordan, support of a Master Plan to rebuild and develop tourism in Lebanon, etc.). A large part of the financing for SMEs went to exporting manufacturing companies, due to the fact that the financing provided was often in foreign currencies; and thus indirectly it has consolidated or increased manufactured exports in the region. This is an important objective in the MED region, considering the general low level of development of this type of exports. In addition, the project financed contributed to employment creation. The average investment per job created ranged between 52 000 EUR/Job to 180 000 EUR/job, which is high. However, these indicators must be treated with caution, since during the evaluation it was noted that in several cases the number of jobs actually created was significantly different from the figures notified to the Bank when the sub-loan was appraised by the FI. This evaluation recommends that improvements should be made to the follow up of the development impact on operations financed (see 6). The four GL targeting small public infrastructures, environment, agricultural development and energy savings projects were also fully consistent with the objectives of the mandates and national objectives. The GL concerning the upgrading of economic public infrastructures target priority investments for urban and rural municipalities (mainly urban and rural roads) with a significant impact on the quality of life for the populations living in those areas. One GL aimed at complementing available long-term financing for anti-pollution investments by enterprises in the productive sector. A third GL aimed at modernising and increasing the competitiveness of the agricultural sector and had a dual objective to both finance very small on-farm investments and large agro-processing ventures. Finally, a GL supported energy saving investments, by financing combinedcycle plants and combined heat and power plants, either through direct on-lending or via leasing arrangements. 3.3 Evaluation of the financial intermediaries Of the Global Loans evaluated, five operations involved a single FI, four were APEX operations involving three or more banks, and in one GL the intermediary was not a financial institution (it channelled the sub-loans to the banks financing the projects). The five direct GLs were repeat operations to FIs, which had previously benefited from EIB Global Loans. With the exception of the Apex loans, most of the FIs involved in the operations were development banks. These development banks have been created by governments to support economic development through the provision of medium to longterm finance to specific sectors. 17

The financial situation of the FIs evaluated varies from satisfactory to unsatisfactory (none were rated good ), except in one case that it was rated poor. As indicated previously, the main problems facing the banking sector in the region is the high proportion of non-performing loans (NPL). In the FI evaluated in Jordan, Egypt, Tunisia and Morocco, NPL 18 have represented between 22% and 45% of the total loan portfolio in recent years. However, the situation is better in the Turkish bank evaluated, as the percentage is around 7% to 8% of the total gross portfolio. Generally, the financial situation of the intermediaries has not been widely at variance with banking sector benchmarks in that country. Thus their problems reflect the overall problems of the banking sector in the country during this period. In most cases, the performances of FIs evaluated have been negatively impacted by the recent economic slowdown (such as in Egypt and Tunisia). The Apex loans have been channelled through Central Banks. In these cases, the EIB does not usually analyse or, even receive, information regarding the financial situation of the participating banks on a regular basis. Since appraisal by the EIB, the FIs evaluated have generally improved their management and procedures, as well as diversify their activities. This has been the result of government policies to improve the banking sector and development of the competition in their traditional markets (MLT financing). In addition, the development the FIs evaluated has often been supported by MDBs, bilateral development agencies (KfW in particular) and other international organisations (such as the EU Commission). Despite the challenges faced, all the FI evaluated 19 were considered sustainable, with one exception. The high volume of NPL raised serious concerns among donors as to the continuing viability of this institution. At their instigation, two successive restructuring plans were adopted to address the situation. The latest plan is still under implementation. 3.4 The EIB GL 3.4.1 Commitments and disbursements Seven GLs have been fully committed and the other three were only partially committed at the time of the evaluation (one 67%, another 82% and the third 33%, the balance of the latter having been cancelled). Therefore, in terms of disbursement and commitment of the loan to specific projects, the general objectives of the operations have been met. However, only under 3 GL out of the 10 evaluated, the specific objectives mentioned in the GL were found to have been fully met. The main reason for this assessment has been that in several cases the financing has gone to larger projects than originally foreseen and/or some sectoral objectives have not been met. Five GL targeted specific sectors. In three of these, the specific objective was only met to a rather limited extent. This finding indicates that targeted GLs need special attention at appraisal in order to ensure that demand exists in the sub-sector and that the FI has the capability and appropriate lending strategy to meet that demand. 18 The percentage of NPL in relation to the total portfolio is not comparable, as the criteria to define a NPL vary from one country to another and this percentage integrates different types of NPL. 19 The FI evaluated are fewer than the FI participating in the GLs evaluated, as for few of them information was not available. The FIs for which no information was available were the ones covered by a desk review and for 2 banks in an APEX involving 4 banks in total. 18

In a few cases it was found that sub-loans had been repaid early and there was insufficient information available in the EIB files on the re-use of the funds in such cases. In one GL, a technical assistance fund to assist companies in project preparation was set up and funded from the lending spread. However, the fund was found to be under-utilised. This was due to competition from another TA facility financed by the European Commission that made the fund slightly redundant and a lack of publicity by the intermediary regarding the availability of fund to potential beneficiaries. 3.4.2 On-lending conditions Loan duration of the sub-loans was normally significantly shorter than the duration of the EIB loan. The duration of EIB GL was12-15 years for all the operations evaluated, except one where it was 18 years. In the early operations this duration included the loan disbursement period, but in the recent GLs, the duration was established at each disbursement. The minimum duration of the sub-loans, including the grace period, was 4 years and the maximum 8 years, although in one instance a 15 year duration was allowed. The longer duration of the EIB loan encourage the FIs to provide loans of longer duration to final beneficiaries. As the duration of the sub-loans is shorter of the EIB loan, the funding provided by the EIB was available to finance other projects when the sub-loans were repaid. In no case evidence was found of follow up on the revolving use of funds. Probably one case would provide an example of this analysis, but the other operations have mainly been signed too recently for the funds to have revolved. In a few cases the EIB applied specific on-lending conditions. This reflects the Bank s policy that on-lending by FIs should be at market-related interest rates. However, marketrelated rates may not exist or market rates many not be a good indicator of long term funding costs. When this situation arises, as it does in some MED countries, EIB internal procedures are followed and a basis for setting the on-lending rates is agreed with the FI. In the operations evaluated the on-lending conditions to FB are rarely discussed in the appraisal reports. The use of the spread between the EIB funds and the rates applied by the FIs was specified in one case (to fund the technical assistance fund mentioned above). 3.4.3 Quality of the projects financed The Bank has very little information on the quality of the sub-projects financed. This is due to the fact that the EIB does not request the intermediaries to send information on expost results of the projects financed. For the operations evaluation information on the quality of the projects was only available for those GL subject to an in-depth evaluation with field visit (6 out of 10). For 4 out of the 6 in-depth evaluations with field visit, the information on the quality of the projects financed was available and for the other 2 it was available for a few cases. In these four cases the credit quality of the sub-loans was similar or slightly better than the total loan portfolio of the banks financed (see 3.3.). This seems to indicate that the expected credit quality was not a criterion to decide which projects the FI propose for refinancing by the EIB 20. Also, the review of selected projects funded under the EIB indicates that allocation decisions were overall sound, even if some ultimate beneficiaries are in arrears vis-à-vis the intermediaries. As most of projects financed operate in competitive markets, the credit quality of the investments financed would be a good proxy for the project quality. This implies that 20 However it should be pointed out, that an analysis of the quality of the projects financed by the EIB is relevant of the quality of the whole portfolio of the FI only when these are representative of the whole portfolio of the FI, which is the case for only a minority of the GL evaluated. 19

projects that have been well implemented and are achieving their operational objectives should be able to service the loan 21. The high level of NPLs in certain FIs reflects the higher risk involved in lending to private sector projects in the region. The evaluators did not necessarily consider this as a reflection of mismanagement by the FIs except in one case. Other FIs indicated that although several companies financed under the GLs were now in arrears, most should be able to clear them in the near future. Examples of projects financed A Jordanian pharmaceutical company started production in 1979 with Australian assistance. Thanks to the EIB financing the company was able to expand under international licenses and start selling in the EU, Arab countries, Eastern Europe and Russia. The project financed by the EIB created some 10 jobs, but the company grew rapidly and it now has 1000 employees, some of whom are highly qualified. The EIB loan was used to increase the capacity of a cheese production factory for domestic consumption in Turkey and to transform whey into whey powder (that is exported). The investment has meet additional demand (without additional employment) and has also solved the environmental problem of eliminating whey. A GL financed 3 three-star hotels in Jordan. Generally, this category of hotels has not performed well in this country: too expensive for local tourism and not luxurious enough for foreign tourists. One hotel was sold and the loan reimbursed earlier, another loan was rescheduled and the third is repaying its loan on time. In 2003, the government decided to pay the interest on the loans to help the tourism sector until April 2004. On lending terms were 8 years, including a one-year grace period, which may have been too short for this type of investment. In Egypt a sub-loan was used to finance the production expansion of beach, terry and kitchen towels using local cotton. The company exports almost 100% of production (50% to the US and 40% to Europe). The investment results in the creation of 178 new jobs. Although the factory is presently in rather antiquated premises, the company pays particular attention to meeting environmental standards, particularly waste water treatment. A loan in Tunisia was used to finance the expansion of a factory producing decorated glass houseware for the local market. The new facility is now operating at full capacity. The promoter is also completing another project in association with a foreign investor. The company employs about 130 people, it registered losses until 2003 due to a price war with a competitor, but its debt servicing is regular. Another sub-loan in Tunisia was used to finance the expansion, quality improvement and diversification of an agro industry enterprise, which currently employs 30 persons. Completing the project took 1.5 years more than anticipated because of technical reasons. The financial situation of the company is weak linked to the delay in completing the project, but its debt servicing is regular. The company is pleased with the rapidity of response from the FI and the EIB. Visits to a sample of sub-projects financed provide indications on the type of problems faced by FBs. In several cases, delays in servicing the loans were caused by the impact of the slowdown of the economy and/or delays in implementing the investments. Several projects were affected by the degradation of the political and economic context of the region that had severe consequences for those companies, which had expanded their production primarily to serve the Middle-East market. Tourism projects in Jordan (and probably the Lebanon) have been affected by the reduction of tourist arrivals, due to the ongoing Israeli-Palestinian conflict, and the Iraq situation. 21 However, it was found that some projects were able to meet their debt obligations despite making losses, thanks to the support of the main shareholder. 20

On the positive side, many of the investments financed have met or exceeded the initial objectives. Many of those projects export a large part of their production. These include companies in different manufacturing sectors, such as textile, paper, automotive components or glass wool. A common thread in most of these success stories was good management, including mitigating environmental impacts. The GL to finance small public infrastructures is a different case, in that the credit quality of a sub-loan was found not to be linked to project quality. The outcome of the field visit showed that projects with unsatisfactory outcomes had been financed, although the credit quality was acceptable. For example, one of the projects visited, a rural road, which the FI had indicated as having been completed, was found to be only half finished when the evaluation team visited the project. Furthermore the completed portion showed signs of deterioration, which raise substantial concerns as to its sustainability. This example suggest that in general the indicators of the credit quality of the project financed through GLs for public infrastructures need to be complemented with others indicators in order to be able to assess whether the projects financed are sound investments. 3.5. Aggregate GL performance As previously mentioned, the operations have been evaluated based on the internationally accepted evaluation criteria (see definitions in Appendix 4). All the operations were rated using a 4-level rating scale (4-good, 3-satisfactory, 2-unsatisfactory and 1-poor). The ratings on the total GL performance reflect a judgment on the FI and on the EIB GL, in accordance with the evaluation approach presented under 3.1. The EIB performance has been assessed separately, considering two aspects: the EIB value added and the EIB management of the project cycle (see sections 4 and 5). Against these criteria, one operation was rated 4 (good), 5 were rated 3 (satisfactory) and four were rated 2(unsatisfactory) - (see the detailed rating in the table in Appendix 3). The relevance of the operations was rated good for all the operations evaluated. The unsatisfactory rating reflects mainly a partial achievement of the main objectives of the GL (efficacy criterion), as noted in section 3.4. Although the organisation and management and the financial situation of some few FI was rated less than satisfactory, only in one case these two factors lead to give an unsatisfactory aggregate rating. It was not possible to rate efficacy and efficiency separately. All the FI evaluated were rated satisfactory or good in relation to their sustainability, except two. In one case the rating was poor because of the high proportion of NPL that threaten the long-term viability of the FI. In another case, the rating was unsatisfactory because of the increase of NPL, but the FI was considered, overall, sustainable. As for the sustainability of the projects financed, a proportion of them were not financially sustainable or at risk of not being sustainable as reflected by the low credit quality. This reflects the risks involved in private sector projects in the respective countries. For this reason, despite the relative low credit quality, the rating was considered satisfactory to good in all the cases except one, where it was poor. In 5 cases the information available was insufficient to rate this criterion. Three of these cases were operations evaluated based on desk reviews (due to the limited information available in the Bank s internal files). 21

4 EIB VALUE ADDED Given the relatively narrow operational objectives defined (see 2.2 above) the Global Loan mechanism as deployed by the EIB may be considered to have been a fairly effective delivery mechanism in meeting such objectives in the past. This section presents the evaluation of the financial value added and of the EIB contribution to the development of the FIs. The financial value added is analysed by comparing the financing provided by the EIB with alternative term finance available to the FIs at the time the operations were decided. 4.1 Financial The financial value-added provided by the EIB in these operations has been found to be generally high or significant, except in three operations where it was rated medium. This is because throughout the region there has been a limited availability of mediumlong term financing. Raising term finance in the domestic financial markets was generally difficult at the time the GLs were established. This was due to lack of liquidity as well as high interest rates. However, this is gradually changing in some countries and the FIs evaluated are increasingly able to raise term finance in the local markets at reasonable terms. Generally, the banking sector in the region has limited access to international finance markets. Therefore, MDBs, including the EIB, are contributing to increasing the availability of this type of finance. In one of the countries evaluated (Tunisia), the FI mentioned that MDBs, other than the EIB, were no longer inclined to provide significant funding in the targeted sectors, and the EIB GL has covered the financing gap. In one country, it was noted also that quite a few bilateral development agencies had lines of credit available through the banking sector for investment by private companies, but the conditions attached to such lines of credit limited their utilisation. The fact that the EIB is a regular provider of MLT funding, through successive GLs to the evaluated FIs, is a significant benefit, because EIB funding is a reliable support to the progressive modernisation and expansion of the private sector in the region. When financing from other donors was available, EIB financing complemented the finance provided by the other donors. Only in one case, competition from other lines of credit extended by other MDBs contributed to delaying the commitment of the loan, but the GL was fully committed within an extended allocation period. As the loans provided by the EIB were in foreign currencies foreign exchange risk cover was an important issue in all the GL assessed. In some cases the Government provided the exchange risk cover and in others it was borne by the final beneficiaries. In the latter, most of the final beneficiaries were able to bear the exchange risk as they had significant revenues in foreign currencies. Nevertheless, in certain countries (Lebanon and Turkey for instance), the high level of dollarisation of the economies was seen as a factor that mitigated forex risk even for non-exporting industries. In one case, EIB funding in foreign currencies was blended with term finance in local currency, which enabled the FI to leverage its lending mainly to medium sized investments. In a GL aimed at financing environmental projects, the EU provided a subsidy of 3%. The government covered the foreign exchange risk for a commission of 1% taken from the subsidy, with the remaining 2% of the subsidy to fund feasibility studies of projects submitted for financing. 22

To conclude, by increasing long-term finance available, the EIB GLs have had a positive and significant impact on the development of the targeted sectors. The field mission to the projects financed in the private sector confirmed that the financing provided contributed significantly to the consolidation or the expansion of the company activities 22. In addition, those FIs and the final beneficiaries visited during the evaluation clearly valued the EIB s pragmatic and non-bureaucratic approach; as well as the quick processing of loan application compared to other MDBs. 4.2 Development of the FIs Improving the organisation and procedures of the FIs or broader institutional development in general was not a specific policy objective for the EIB at the time these GLs were approved. This situation has since changed and the aim of increasing the effectiveness of the FIs and the long-term development of the financial sectors is a specific objective in FEMIP, with, if appropriate, the provision of technical assistance. Therefore, it is not surprising that the EIB has hardly contributed to FI development in the GLs evaluated. Nevertheless where specific weaknesses were identified at the time of appraisal, the Bank could have done more to address these mainly by appropriate loan conditionalities. Generally, most of the FIs evaluated have significantly improved their organization and procedures since the GL were established. As mentioned before, this is largely the result of the programmes to restructure and liberalise the banking sector, often supported by international organizations; including the progressive introduction of prudential regulations by Central Banks. The EIB may have been able to provide some transfer of know-how through its appraisal and follow up. However, the appraisal of the organisation of the FI has generally lacked the depth to add much value and the dialogue with FIs was too limited to add significant value. Some value added may have arisen as a result of the questions raised on subprojects during the approval process of individual allocations. However this has probably diminished over time due to the streamlining of approval processes. 22 This is because the availability of the term finance provided by the EIB GLs was critical to the realisation of most of the projects funded. 23

5 EIB MANAGEMENT OF THE PROJECT CYCLE 5.1 Identification and selection In all the GLs evaluated the management of this part of the project cycle was rated good or satisfactory. The Bank has always required a government guarantee for GL financed with own resources in the MED region, which limits the choice of FIs mainly to those with public ownership. Nevertheless it is apparent that governments in the region are less and less willing to provide such a guarantee as a result of policies to limit recourse to external debt or divestment of their participation in FIs. An exception is where an Apex structure can be identified, which satisfies the requirement for a sovereign guarantee and therefore allows the participation of private sector banks at the second tier intermediary level. However the evaluation showed that in these cases insufficient consideration was given to the selection of intermediary banks in terms of their capability and willingness to lend to the targeted sector. When using Apex mechanism the Bank should ensure that there is a genuine commitment of selected second tier banks to expand activity in the targeted sector during appraisal, especially when targeting the SME sector. 5.2 Appraisal The main strength of the EIB appraisal process, as perceived by FI clients, is the capacity to complete the appraisal quickly by comparison to other MDBs, despite the complications that are often involved in the setting up of a GL, particularly an Apex structure. In this respect, the flexible and pragmatic approach of the EIB is highly appreciated when compared to that of other MDBs active in the region. The appraisals carried out by the Bank were rated 23 satisfactory in most of the operations reviewed and only in one case it was rated poor. The appraisals rated satisfactory reflect the focus of the appraisal on the key issues of the operation. The approach to appraisal was seen to be rather different from one operation to another. This can be justified in some cases (i.e. dedicated GL); but in general it reflects the fact that the procedures manual does not include a reference GL template that loan officers can follow. For the appraisals rated less than satisfactory, the main reason was that the appraisal did not sufficiently analyse the conditions or possibilities of achieving the specific objectives. This was particularly the case for GLs that target a specific sector or type of project. In the case of repeater operations the analysis of the use of the previous GL was usually superficial. The quality of the sub-projects financed under the previous GL was not analysed. Similarly, the analysis of whether or not the specific objectives of the previous operation had been attained was rarely carried out. During appraisal of repeater operations, sufficient time was not allowed for visits to a sample of the sub-projects financed. 24 23 The appraisal objectives specified in the Bank s procedures manual have been used as a reference. 24 The Report on Allocations, which is usually presented to the Bank s Board following allocation and full disbursement of a Global Loan, only contains information taken from the original allocation fiche. Visits to sub-projects during the evaluation showed key data such as project outturn cost or jobs created (hence development impact) having major variations compared to initial assumptions. 24

The organisation and procedures of the FI were also often superficially analysed in the appraisals of the GLs evaluated. The level of the analysis has even decreased over time, due to the streamlining of the appraisal procedures. On the other hand, whilst the financial analysis of the FIs was seen to vary significantly in depth and quality, this has generally improved over time. The EIB environmental and procurement approach in the GLs, as well as the EIB cooperation with the EU commission and with other IFIs, are analysed in subsequent sections of this Report. 5.3 Follow up and monitoring Once the GL has been approved, the EIB focus has been seen to be on signing, committing and disbursing the loan as quickly as possible. In certain cases, some of the objectives indicated in the Board Report were not adequately reflected in the finance contract or side letter to the contract. In a number of cases, certain conditions were later waived or modified. This was the case for the maximum limit established for the projects or allocations to be financed under the GL or the sectoral or project objectives of the GL. However, a looser interpretation of the specific objectives of the GLs has some disadvantages. An example is the use of the EU definition of SMEs in markets where this is clearly inappropriate. Those FIs which have received loans from the EIB on a regular basis have no incentive to assist smaller companies that have more difficult access to finance. Even using this generous definition, some examples were found where sub-loans had been approved for companies that would not be considered SMEs within the EU. In all the GLs evaluated the quality of the follow up and monitoring was rated poor or unsatisfactory, except in one case that it was rated satisfactory. Although the Finance Contracts give the Bank the right to request information on sub-projects, the Bank rarely requested such information. Consequently there is little information on file, which would enable an ex-post assessment to be made of the development impact of sub-projects financed. On the other hand, it should be noted that all the FIs evaluated regularly monitored the financial position of the companies/institutions they financed. However, for the GLs targeting small public infrastructures and environmental projects, the FIs had limited information on the achievement of the specific objectives of the projects financed. The follow up and monitoring process could contribute significantly to the development of the FI as well as providing regular feedback on the financial situation of the FIs and the impact of the operation on final beneficiaries. However, due to the very limited monitoring carried out by the EIB, this is rarely happening in practice. In many of the operations evaluated, the allocation procedure commenced with a detailed dossier for the first operations submitted and later progressed to a simplified fiche procedure. Once the simplified fiche procedure was followed, the reasons for rejecting certain sub- projects were not always provided in sufficient detail for the FI to understand clearly the reasons for the rejection. Although contacts are generally maintained with the FI at management level during the allocation period, there were no examples of mid-term monitoring reviews taking place in order to ascertain whether the availability of the EIB loan was impacting the way the FI was carrying out its business or for the checking of samples of sub-projects financed. However, as noted above, the development of the FI was not an explicit objective of the EIB follow up, but as indicated, this is an approach the EIB will encourage in future, possibly using the TA funds available under FEMIP. 25

5.4 Environmental assessment The EIB approach for GLs in the region is that the FI is responsible for checking the environmental impacts of the projects as well as compliance issues and the EIB validates the assessment carried out by the FI on the basis of a dossier or a fiche. During the EIB appraisal, the capability of the FI to carry out environmental due diligence should be validated. The approval of an allocation with significant impacts, including projects that require an EIA, is normally subject to the presentation by the FI and approval by the EIB of an environmental dossier. Environmentally-sensitive projects have been normally excluded from GL on the basis that the FI is not able to carry out an environmental assessment of the same quality as the EIB. This approach became more formalised with the introduction of an environmental fiche in 1994. Since 2000, the Bank s environmental experts are no longer directly involved in appraisal. In early 2003, the Bank established standard contract provisions that impose an obligation on the FI to verify compliance by the final beneficiary with the relevant environment regulations of the country where the project is located, though this should be reviewed in the light of the greater emphasis now placed in EU law by the 2004 Environmental Policy Statement. In early 2004, the Environmental Unit of the EIB established revised guideline for FI handling EIB GLs 25 outside the EU. These guidelines require the FI to fill a standard environmental fiche and for the projects where an EIA is required or should be considered under the EU legislation, they should be separately appraised by the EIB. In the 2004 environmental policy statement, it is indicated that the environmental assessment for GL should demonstrate the capacity and capability of the intermediary to apply an environmental approach equivalent to that applied by the Bank in its direct lending operations. However, an assessment by the EIB of the environmental capacity and capability of the FI is not covered in the guidelines. Whilst the EIB s environmental policy has become stringent in recent years, practice has not always followed the stated objectives. In the past, the analysis of the FI s environmental capacities and procedures has generally been rather superficial or lacking in the GL evaluated, especially in the more recent operations 26. Hence EIB is exercising a lot of trust when delegating authority to the FI in this area. The selective vetting of individual allocations, particularly the early submissions, in order to check whether the FI is applying an acceptable environmental due-diligence is usually too limited and in any case rarely involves those areas of the Bank with the necessary expertise to do this. 25 This guideline concerns GLs where the Bank requires FIs, for any allocation proposal, to submit a dossier summarising the information necessary for the economic, financial, technical and environmental appraisal of the venture concerned. 26 In most of the MED countries environmental laws have been put in place fairly recently and environmental regulatory institutions are generally weak. This implies that the FI should have an acceptable environmental due diligence in place, as it often cannot rely on the institutions of the country. In addition, the EU policy is normally tighter than the environmental policy in the MED countries thus implying that the Bank should check whether the assessment carried out by the FI is in line with EU policy, when relevant. 26

5.5 Procurement For sub-projects financed under a GL the Bank requires that the procurement of works, goods and services follows the same approach as for individual loans. This means that for the projects in the public sector, the EU procurement procedures (or similar) are applied, including publication on the OJEU, if contract amount is above the relevant threshold. The difference in a GL operation in comparison with an individual loan is that the FI is responsible for ensuring that the EIB procurement guidelines are applied, instead of the EIB. Procurement is an important issue, especially when the GL is used to finance public infrastructures, including energy projects. In such cases the FI should ensure that Bank s procurement procedures are applied. In the three public infrastructure GLs evaluated, bidding procedures were analysed at appraisal. In the earlier operations, when the Bank s experts on procurement were involved, the analysis was quite detailed, but became rather superficial in the more recent evaluations (no analysis of the national legislation and differences with EU procurement legislation). Specific recommendations raised at appraisal were often not reflected in the contracts or side letters. Procurement procedures were not validated by the EIB during the allocation phase, as information on procurement is rarely included in the project fiches. 5.6 Co-operation and co-ordination with other EU institutions and MDBs Whilst institutional links with the European Commission have been a significant factor in determining the evolution of the Bank s mandates in the region, co-ordination at the operational level appears to be more tenuous. EC programmes in the MED region since 1995 have included substantial TA support for privatisation, the SME sector and regulatory and legal reform. Although some synergies between these programmes and the Bank s Global Loans 27 have been established there would appear to be scope for greater co-ordination in this area. The strong linkages established with the ELCIM programme in the Lebanon were an exception rather than the rule. On the other hand, until FEMIP, the Bank had limited resources itself for technical assistance either for project preparation or institutional development (unlike its peer group MDBs). Finance for technical assistance might have been requested from the EC on a case-by-case basis, but the slowness of the Commission s approval procedures and the rigidities of its budgetary system have acted as strong disincentives for the Bank to seek funding for TA through this window. The level of co-operation and co-ordination with other EU institutions was thus found to be generally low, albeit not always considered necessary for some operations. A number of cases were found where co-ordination with other donors who were targeting the same sector and/or FI was lacking. Whilst faced with the very problematic situation of a particular FI, EIB let other donors take the lead in discussions with the Government and then fell in line with their decision to cancel ongoing loans to the troubled institution. 27 Examples are the mise à niveau programmes in Morocco and Tunisia, and the Industrial Modernisation Programmes in Egypt and Jordan. 27

The evaluators also observed that the EIB needed to more carefully assess its value added vis-à-vis other donors in using a specific instrument for a particular development objective, and to evaluate the benefits and risks attached to using this specific instrument. While contributing to increasing the available long-term resources is by itself a worthy objective, and earmarking them for a priority area is also valuable, it is also important to carefully assess ex-ante the ingredients that are necessary to meet effectively a specific agreed objective. Nevertheless it must also be recognised that lack of effective mechanisms for co-ordination is a problem common to many other MDBs. 28

6 LESSONS LEARNED AND RECOMMENDATIONS This Evaluation has reviewed Global Loan operations that have been carried out in the MED region over a 10-year time frame during which the Bank s mandate has evolved considerably both in its scope and in terms of resources allocated. Internally the Bank has also undergone significant changes in its organisation, partly as a response to the larger role it has been called upon to play in the region and partly as a result of changes in internal processes, which have also had a broader impact on its approach to GL financing. The conclusions that can be drawn from the evaluation take account both of these developments and they should be forward looking to be of relevance. The operational implications of FEMIP are an increase of the volume of operations from EUR 1.5 billion per annum to more than EUR 2 billion per annum over this period. It is expected that the 45 % of additional operations to the region will be to the private sector. In recent published statements the Bank s has underlined the importance of creating sound and favourable conditions for SME development 28 and reform of the banking sector 29 as being key components in its strategy for the region. The Bank has introduced organisational changes to reflect the fact that the Bank by virtue of its recent mandates has been positioned to become the major MDB lender to the region, particularly to the private sector. These policy objectives in turn have implications both for the strategy and implementation of own resource Global Loan. The recommendations have been formulated firstly on the findings of the evaluations and, secondly, taking into account the objectives of the FEMIP mandate. The first consideration when formulating the recommendations is that in order to fulfil its FEMIP mandate to develop the private sector, the Bank s GL will play a significant role in its own resource lending to the private sector. This is because GLs allow the Bank to reach the SMEs in the region, which represent the largest part, if not all, of the private sector in many of these countries. In addition, SMEs also account for a substantial part of employment. The Bank will have to seek to broaden the range of Financial Institutions through which it engages in traditional Global Loan financing, including institutions with majority private sector ownership. This will also facilitate the use of GLs as a means of stimulating financial sector reform in the MPCs. In the past, the requirement of a government guarantee has limited the private sector banks that can be financed by the EIB. Therefore, it is proposed that the bank accepts a wider range of guarantees and offers new products (lending in local currencies). In addition, risk capital resources will be used to diversify the range of financial instruments and to provide specialised finance. With the new mandates, the Bank has become the major MDB lender in the region and as such will be called upon to play a greater role in creating a favourable environment for the development of the private sector - and particularly in underpinning financial sector development and reform in the region. The funds now available for technical assistance can be used to assist FIs, thereby encouraging their development and financial sector reform in general. Nevertheless, such programmes also need to be carefully co-ordinated with other donors to avoid over-lapping or duplication of efforts. 28 Conference on Private Sector Development in the Mediterranean countries: the role of the EIB in London on 22 nd January 2004. 29 Statements at the FEMIP Ministerial meeting held in Alexandria, Egypt, on 7 th June 2004. 29

In a significant proportion of the GLs evaluated, the specific objectives of the operation were only partially achieved. To face this issue, the Bank should undertake a more rigorous analysis of the FI s capability and commitment to developing its business in the sub-sector targeted by the GL. The Bank should more closely follow up the achievement of the specific objectives. The GLs targeting SME have in general failed to reach smaller size companies, although these companies play a significant role in economic development and generating employment. This is linked to the fact that most of the FIs are unwilling to finance these companies for credit risk considerations, or simply because they do not know how to approach financing them. In addition, small companies often need assistance to prepare bankable projects. Therefore, it is recommended that GLs support FIs that aim to develop financing to smaller enterprises 30 in the region and link, when necessary, such operations to smaller enterprises support programmes, which would assist them in developing bankable projects. The evaluation suggests that there is a gap between the EIB environmental policy objectives and what has been done in practice by the EIB. To address this gap it is recommended that the FIs environmental capacity and procedures be more rigorously analysed at appraisal, involving, if necessary, the Bank s environmental experts. It is also suggested that the Bank independently assesses the environmental analysis for a sample of operations carried out by the FIs. Similarly, EIB guidelines on procurement should be adequately reflected in the side letters of the contracts, when relevant (mainly for GLs financing public infrastructures) and the project fiches should contain sufficient information on the procurement procedures applied. Finally, from this evaluation it appears that follow up of GL operations should be reinforced and improved. The Bank has both an interest and an obligation to assess the investment soundness and developmental impact of the investments it is financing through Global Loans including their environmental impact. 30 An example of this is the Small Enterprises Loan Programme (SELP) launched by the European Union in Turkey. EU Press release October 13, 2004. 30

Appendix 3 Appendix 1 - Summary of MEDA Global Loans on Own Resources signed between 1979 and 2003 EUR millions Country Date Name Mandate Sector Disbursement Contract % Disb. Egypt 1979 DIB 1 Ist Fin. Prot. SME 14.93 15.00 100 1983 DIB II 2nd Fin. Prot. SME 25.00 25.00 100 1988 EDBE 1 3 rd Fin.Prot. SME 7.55 25.00 30.19 1996 Pollution Abatement Horizontal Environment 5.53 15.00 38.65 2000 IDBE III Meda II SME 5.01 50.00 10.02 2001 EDBE II Meda II SME 17.43 30.00 58.10 Sub-total 75.45 160.00 Gaza West Bank 1995 Cairo Amman Bank Med off Protocol SME 5.87 10.00 58.72 Sub-total 5.87 10.00 Israel 1981 IDBI I Ist Fin.Prot. SME 15.00 15.00 100 1981 IDBI II Ist Fin.Prot. SME 15.00 15.00 100 1984 IDBI III 2nd Fin.Prot. SME 20.00 20.00 100 1986 IDBI IV 2nd Fin.Prot. SME 20.00 20.00 100 1989 IDBI V 3 rd Fin.Prot. SME 23.00 23.00 100 1990 IDBI VI 3 rd Fin.Prot. SME 34.00 34.00 100 1993 IDBI VII 4th Fin.Prot. SME 30.00 30.00 100 1995 IDBI IX 3rd Fin.Prot. SME 6.43 33.00 19.47 1995 IDBI IX 4th Fin.Prot. SME 4.89 33.00 14.82 6.1.1.1 Sub-total 168.32 223.00 Jordan 1979 IDB I Ist Fin.Prot. SME 6.00 6.00 100 1983 IDB II 2nd Fin.Prot. SME 5.00 5.00 100 1983 JCO 2nd Fin.Prot. Agriculture 0.35 1.50 23.04 1983 ACC I 2nd Fin.Prot Agriculture 1.50 1.50 100 1984 CVDB I 2nd Fin.Prot. Infrastructure 2.50 2.50 100 1988 IDB III 3 rd Fin.Prot. SME 10.00 10.00 100 1988 CVDB II 3 rd Fin.Prot Infrastructure 0.51 2.50 20.23 1988 ACC II 3 rd Fin.Prot Agriculture 8.00 8.00 100 1990 IDB IV 3rd Fin.Prot. SME 12.50 12.50 100 1991 IDBI SE 3rd Fin.Prot. SE 3.00 3.00 100 1994 IDB V 4th Fin.Prot. SME 10.00 10.00 100 1997 IDB VI Meda I SME 20.44 30.00 68.13 6.1.1.2 Sub-total 79.80 92.50 Lebanon 1998 Apex Hotel renovation Meda 1 Tourism 30.00 30.00 100 1999 Apex Ind. Modernisation Meda 1 SME 30.00 30.00 100 6.1.1.3 Sub-total 60.00 60.00 Morocco 1981 Maroc PMI Ist Fin.Prot. SME 15.00 15.00 100 1984 CNCA 1 2 nd Fin. Prot. Agriculture 20.00 20.00 100 1985 CNCA II 2 nd Fin Prot. Agriculture 8.50 8.50 100 1988 CNCA III 3rd Fin. Prot. Agriculture 50.00 50.00 100 1993 CNCA IV 4 th Fin. Prot. Agriculture 16.24 50.00 32.49 1995 BNDE/BMCE 4th Fin. Prot SME 5.01 10.00 50.06 31

Appendix 3 1995 BNDE/BMCE 4th Fin. Prot SME 5.00 20.00 25.02 1995 FEC 3 rd Fin. Prot. Infrastructure 10.00 10.00 100 1998 FEC II 4 th Fin. Prot. Infrastructure 33.74 33.74 100 Sub-total 163.49 217.24 Tunisia 1979 BDET Ist Fin. Prot. SME 12.00 12.00 100 1984 BNDA I 2nd Fin. Prot. Agriculture 5.00 5.00 100 1985 BNDA II 2 nd Fin. Prot. Agriculture 7.00 7.00 100 1985 BNDA BATEAUX DE PECHE 2nd Fin. Prot. Fisheries 4.50 4.50 100 1985 BNDA UCP 2 nd Fin. Prot. Unknown 2.93 7.00 41.46 1986 BNDA III 2 nd Fin.Prot. Agriculture 14.00 14.00 100 1987 BNDA III B 2 nd Fin.Prot. Agriculture 1.10 1.10 100 1988 BDET II A 3 rd Fin. Prot. SME 12.00 12.00 100 1988 BNDT 3rd Fin. Prot. Tourism 10.00 10.00 100 1988 BNDA Reamen. 2 nd Fin. Prot Agr. infrastructure 18.00 18.00 100 1989 BNDT II 3 rd Fin. Prot. Tourism 17.00. 17.00 100 1990 BDET III A 3rd Fin. Prot. SME 12.00 12.00 100 1992 BDET IV A 3 rd Fin. Prot. SME 25.00 25.00 100 1993 BNDT III 4 th Fin. Prot. Tourism 35.00 35.00 100 1995 FODEP Horizontal Environment 15.00 15.00 100 1998 Entreprises Tunisieenes A Meda 1 SME 50.00 50.00 100 2000 Entreprises Tunisieenes B Meda II SME 25.00 25.00 100 2001 Entreprises Tunisieenes II Meda II SME 100.00 100.00 100 Sub-total 365.53 369.60 Turkey 1979 TSKB A 3 rd Fin. Prot. SME 15.00 15.00 100 TOTAL Loans signed 1979 SYKB A 3 rd Fin. Prot SME 5.00 5.00 100 1980 TSKB B 3 rd Fin. Prot SME 30.00 30.00 100 1980 SYKB B 3 rd Fin. Prot. SME 10.00 10.00 100 1997 Apex GL Meda 1 SME 50.00 50.00 100 2000 Apex GL II Meda II SME 50.00 50.00 100 1999 Industrial Heat and Power Meda 1 Infrastructure 40.00 40.00 100 2000 Ind. Pollution Abatement Meda II Environment 8.83 70.00 12.61 2000 Terra 2 A Terra facility SME 75.00 75.00 75.00 2001 Terra 2B Terra facility SME 34.76 75.00 46.35 2001 Industrial Sector GL II Meda II SME 125.00 125.00 100 2003 Industrial Sector GL III Meda II SME 86.05 200.00 43.02 2003 Industrial Sector GL III Turkey Sp. Action Facility SME 86.05 200.00 43.02 6.1.1.4 Sub-total 615.69 945.00 70 1534.15 2017.60 32

Appendix 3 Appendix 2 - Evaluation Summary EVALUATION CRITERIA 1. RELEVANCE Comments Rating Private sector development, including support for SME and joint investment between EU and MP enterprises Support for economic transition and the establishment of the Euro-Mediterranean free trade area Regional and cross-border co-operation Support for poverty alleviation and social cohesion Upgrading of economic infrastructures 2. FINANCIAL INTERMEDIARY Organisation and management, including: Credit assessment Risk management Environmental assessment Procurement (when relevant, mainly for public infrastructures) Financial situation, including: Evolution of assets Non performing loans Profitability ratios Sustainability of the FI 3. EIB GLOBAL LOAN Amounts disbursed versus initial expectations Total amount Achievement of specific objectives Quality of the projects financed Credit quality Environment or other issues (if relevant) 33

Appendix 3 On-lending conditions Margins applied by the intermediary Use of the spread between market and EIB rates Sustainability of the projects financed 4. QUALITY OF THE OPERATION (2+3) 5. TOTAL GLOBAL LOAN PERFORMANCE (1+4) 6. EIB PERFORMANCE A. EIB value-added Financial: Financial intermediary Final beneficiary Institutional development of the FI: Organization and management in general Environmental assessment Procurement (if relevant) B. Management of the project cycle Identification and selection Quality of appraisal Quality of follow up and monitoring C. Co-operation/co-ordination with EC and other MDBs D. Would have TA improved the performance of the operation? Ratings are based on a 4-level scale: poor, unsatisfactory, satisfactory and good. 34

Appendix 4 Appendix 3 - Summary of the Ratings of the GL Evaluated EVALUATION CRITERIA 1 2 3 4 5 Desk review 1. RELEVANCE Good Good Good Good Good Good 2. FINANCIAL INTERMEDIARY Organisation and management Satisf. Satisf. Satisf. Unsatisf. Too limited info. to judge Financial situation Unsatisf. Satisf. Satisf. Not relevant Too limited info. to judge Sustainability Satisf. Satisf. Unsatisf Not relevant Too limited info. to judge. 3.EIB GLOBAL LOAN Amounts disbursed versus initial expectations Quality of the projects financed 6 Desk review Too limited info. to judge Too limited info. to judge. Too limited info. to judge 7 Desk review Good 8 9 10 Desk review Good Good Good Poor Satisf. Good Good Poor Satisf. Good Good Poor Satisf. Good Good Good Good Good U nsatisf. Unsatisf. Unsatisf. Poor Satisf. Good Satisf. Unsatisf. Limited info. (1) Satisf. Too limited info. to judge Too limited info. to judge. Too limited info. to judge. Unsatisf. Credit quality: Good, but project quality, no suffic. info. Good Good On-lending conditions Satisf. Good Satisf. Good Satisf. Satisf. Satisf. Good Good Good Sustainability of the projects financed Satisf. Limited info. (1) Satisf. Too limited info. to judge Too limited info. to judge Poor Too limited info. to judge Satisf. Good 4. QUALITY OF THE OPERATION Too limited info. to judge. Unsatisf. Satisf. Satisf. Unsatisf. Unsatisf. Unsatisf. Poor Satisf. Good Satisf. (2+3) 5. TOTAL GL PERF. Satisf. Satisf. Satisf. Unsatisf. Unsatisf. Unsatisf. Unsatisf. Satisf. Good Satisf. (1+4) (1) Detailed information available for two out of four banks involved in the GL. 35

Appendix 3 Appendix 4 - Evaluation Criteria Project performance is assessed using the core evaluation criteria as defined by the Evaluation Cooperation Group (ECG), which brings together the operations evaluation units of the multilateral development banks (World Bank group, regional development banks, and EIB), in line with the work of the OECD- DAC Working Party on Aid Evaluation, and adapted to meet the particular operating needs of the EIB. Evaluations take due account of the analytical criteria used in the ex-ante project appraisal and the strategy, policies and procedures that relate to the operations evaluated. Changes in EIB policies or procedures following project appraisal, which are relevant to the assessment of the project, will also be taken into account. Relevance is the extent to which the objectives of a project are consistent, on the one hand, with the relevant EU policies (the Treaty, Directives, Council Decisions, Mandates, etc.) and the decisions of the EIB Governors, and an the other, on the beneficiaries requirements, country needs, global priorities and partners policies. Concerning the relevance to EU policies, reference is made to the relevant EU policies in the context of the Article 267 of the Treaty that defines the mission of the Bank and the EIB related policies. Outside the Union, the main reference are the Community's relevant external policy objectives considered in the specific mandates given to the EIB by the Council of the European Union and the EIB interpretation of them. Efficacy (or effectiveness) relates to the extent to which the objectives of the project have been achieved, or are expected to be achieved, taking into account their relative importance, while recognizing any change introduced in the project since loan approval. Efficiency is the measure to which project benefits/outputs are commensurate with resources/inputs. For the ex-ante appraisal, a project's efficiency is normally measured through the economic and financial rate of returns. In public sector projects the economic and financial rate of returns often are not calculated ex-ante. In those cases the efficiency of the project is estimated by a cost effectiveness analysis. Sustainability relates to the likelihood of continued long-term benefits and the resilience to risk over the intended useful project life. The assessment of the project's sustainability varies substantially from one case to another depending on circumstances and takes into account the issues identified in the ex-ante due-diligence carried out by the Bank. Among the issues reviewed in the assessment are: Technical and management issues, mainly willingness, capacity and funding to carry out the necessary maintenance of the project in order that it can reach its useful life; Government commitment, regulatory environment and socio-political support (this is particularly important in weak institutional context such as in some developing countries); Financial sustainability for revenue generating projects, whether there is a significant risk that those revenues become unacceptably low, e.g. that they cannot cover at least the operating and maintenance costs; Environmental sustainability, whether there are environmental risks that might be a significant threat to the future operation of the project. Others issues that might affect the continued long-term benefits during the useful project life. 36

EUROPEAN INVESTMENT BANK OPERATIONS EVALUATION (EV) In 1995, Operations Evaluation (EV) was established with the aim of undertaking ex-post evaluations both inside and outside the Union. Self-evaluation was introduced in 1999. Within EV, evaluation is carried out according to established international practice, and takes account of the generally accepted criteria of relevance, efficacy, efficiency and sustainability. EV makes recommendations based on its findings from self-evaluation and ex-post evaluation. The lessons learned should improve operational performance, accountability and transparency. Self-evaluation, based on a project scorecard system, is carried out by the operational directorates. EV coordinates this process, and prepares an independent annual self-evaluation report. Each ex-post evaluation involves an in-depth evaluation of selected investments following which a synthesis report is produced and sent to the Management Committee. The Management Committee then decides if the report is to go to the Board and be published on the EIB Website, in keeping with the importance the Bank attaches to transparency. The following thematic ex-post evaluations have been published on the EIB Website : 1. Performance of a Sample of Nine Sewage Treatment Plants in European Union Member Countries (1996 - available in English, French and German) 2. Evaluation of 10 Operations in the Telecommunications Sector in EU Member States (1998 - available in English, French and German) 3. Contribution of Large Rail and Road Infrastructure to Regional Development (1998 - available in English, French and German) 4. Evaluation of Industrial Projects Financed by the European Investment Bank under the Objective of Regional Development (1998 - available in English, French and German) 5. An Evaluation Study of 17 Water Projects located around the Mediterranean (1999 - available in English, French, German, Italian and Spanish). 6. The impact of EIB Borrowing Operations on the Integration of New Capital Markets. (1999 available in English, French and German). 7. EIB Contribution to Regional Development A synthesis report on the regional development impact of EIB funding on 17 projects in Portugal and Italy (2001 available in English (original version), French, German, Italian and Portuguese (translations from the original version)). 8. Evaluation of the risk capital operations carried out by the EIB in four ACP countries 1989-1999 (2001 - available in English (original version), French and German (translations from the original version)). 9. EIB financing of energy projects in the European Union and Central and Eastern Europe (2001- available in English (original version), French and German (translations from the original version)) 10. Review of the Current Portfolio Approach for SME Global Loans (2002 available in English (original version), French and German (translations from the original version)). 11. EIB Financing of Solid Waste Management Projects (2002 available in English (original version), French and German (translations from the original version)). 12. Evaluation of the impact of EIB financing on Regional Development in Greece (2003 available in English (original version) and French (translation from the original version)). 13. Evaluation of Transport Projects in Central and Eastern Europe (2003 available in English (original version). 14. EIB Financing of Urban Development Projects in the EU (2003 available in English (original version), French and German (translations from the original version)). 15. Evaluation of the Projects Financed by the EIB under the Asia and Latin America Mandates (2004 available in English (original version), French, German and Spanish).

EUROPEAN INVESTMENT BANK OPERATIONS EVALUATION (EV) 16. Evaluation of EIB Financing of Airlines (2004 available in English (original version) French and German) 17. EIB financing with own resources through global loans under Mediterranean mandates (2005 - available in English (original version)). These reports are available from:eib website: http://www.eib.org/publications/eval/. E-mail: EValuation@eib.org