European Investment Bank (EIB) Vice President Philippe de Fontaine Vive was in Cairo this week. He spoke to Niveen Wahish about what is needed to make the most of EIB financing Egyptian natural gas will soon be reaching Jordan's power plants, industries and consumers. The natural gas will be delivered by 2006, via a 393-kilometre pipeline that will be constructed across Jordan, from Aqaba to Rehab, by the Egyptian Natural Gas Holding Company (EGAS). Funded by a 100-million euro loan agreement from the EIB, this project is the second phase of the Arab gas pipeline. The first phase of the pipeline runs from Taba in Egypt to Aqaba in Jordan and was inaugurated in the summer of 2003. It is part of a larger project that aims to extend the pipeline to Lebanon, Syria, Turkey and eventually Europe. The project's funding is part of EIB's Facility for Euro-Mediterranean Investment and Partnership (FEMIP), which aims at helping Mediterranean partner countries (Algeria, Egypt, Gaza and the West Bank, Israel, Jordan, Lebanon, Morocco, Syria, Tunisia and Turkey) modernise socially and economically and integrate regionally in the run-up to the creation of a Euro-Mediterranean free trade area in 2010. It does this by promoting private sector development, particularly foreign direct investments in small and medium enterprises (SMEs) and supporting projects that aim at establishing a favourable climate for private investments, such as infrastructure projects. The gas pipeline is considered by EIB as an ideal project for financing as it will encourage regional cooperation and benefit Egypt by providing a source of hard currency. European and international companies participating in the exploration and production sector will also benefit. Speaking at a press conference, Philippe deFontaine Vive expressed his bank's willingness to finance subsequent phases of the project. So far, most EIB financing has been absorbed by infrastructure projects. Second to infrastructure, the EIB views the energy sector as one of the most promising arenas in Egypt. Speaking to Al-Ahram Weekly, Vive said he was convinced that the energy sector "will remain for a while a crucial sector". Other potential investment opportunities lie in the tourism sector, which Vive said is "underdeveloped in Egypt". Producing consumer goods for the local market and possibly for export are also blossoming investment opportunities. According to Vive, there have not been many initiatives by the private sector. In fact, only 37 per cent of EIB lending in Egypt during past five years has been to the private sector. "Investors seem reluctant to come to Egypt," he said, adding that lengthy administrative processes in Egypt are hindrances to investment. In the meantime, Vive said that the EIB cannot find financial institutions willing to act as intermediaries to provide EIB financing to small- and medium-sized projects. "They do not seem to be interested in SMEs," he said. Currently, projects costing over 25 million euros are negotiated directly with EIB headquarters in Luxembourg. According to Vive such projects are too costly in terms of procedure for SMEs -- which is why financial intermediaries, such as banks or funds, are needed. Nonetheless, the EIB hopes to encourage greater use of its loans by the private sector through the regional office for Mashreq countries that they opened in Cairo last year. Vive believes that Egypt in particular could make more use of EIB loans. Currently, Egypt is EIB's main client, accounting for 18 per cent of EIB lending to the region. During the period of 1992-2003, Egypt took out around 2.258 billion euros in EIB loans. However, he pointed out that Tunisia, which is much smaller in size than Egypt, is their second client, accounting for 15 per cent of their lending. He believes this to be an indicator of the underdevelopment of the market and the economy in Egypt. Vive also highlighted that reforms carried out by the government are of crucial importance in encouraging the establishment and sustainability of projects. He said that all donor agencies are reluctant to finance water and wastewater projects because they feel that the tariff structure is distorted, which leads to the unsustainability of the project. Vive believes that the widely anticipated government reform of the water tariff structure will lead to a re-emergence of investment in the sector. Another step that may encourage greater usage of EIB loans in Egypt could come at a future date when the bank is able to lend in local currency. According to Vive, in the future the bank may consider issuing bonds in local currency in order to have adequate funds to lend in local currency. That would provide long-term loans and overcome any problems associated with repaying loans in hard currency. Currently the bank has not been faced with that problem as most projects were paid for through the national budget or were export-oriented projects whose revenues were in hard currency. However, he pointed out that issuing bonds in local currency will take some time to initiate and is ultimately a decision to be made by the Egyptian government. Currently the bank is considering this issue in Morocco. The EIB has lent in local currency previously in some Eastern European countries, such as Poland and Hungary, with success. Vive was in Egypt this week to take part in the ministerial committee meeting of FEMIP that took place in Alexandria last Monday. The meeting was attended by the finance ministers of the 10 Mediterranean partner countries, as well as 25 EU member states and representatives of the European Commission, the World Bank, the International Monetary Fund and the African Development Bank. The ministerial meeting focussed a variety of issues among which the importance of privatisation. According to Vive, speaking during a press conference following the meeting, privatisation was viewed by all participants in the FEMIP meeting as a cornerstone to economic reform. He said that the EU's newly acceded countries presented their experience in this area. Vive also stressed that the bank does not impose privatisation on anyone, nor does it dictate what institutions ought to be privatised. The meeting, however, did discuss the importance of privatising the banking and transportation sectors. The FEMIP may assist with privatisation in the form of technical assistance and contribute to equity financing of companies after privatisation. It will also support privatisation of public services and utilities. The ministerial meeting also discussed new financing tools for SMEs. Among these was a trust fund to which a number of EU member states expressed intention to contribute. In 2003, the first operational year since the launch of FEMIP, EIB lending in Mediterranean partner countries reached 2.1 billion euros. Total EIB financing for the period of 1974-2004 in Mediterranean partner countries reached 14.9 billion euros. FEMIP has set a target of eight-10 billion euros of funding to Mediterranean partner countries by 2006.
