This week I had the opportunity to attend a forum organised by the European Investment Bank, (EIB) in Warsaw, Poland, dealing with the topic "Investing in the New Member States." The EIB is, of course, the EU's bank and is a non-profit institution. It was set up to provide loans financed by borrowing on the capital markets rather than drawing on budgetary resources. The EIB often co-finances projects with the Commission - which manages the EU's grant funds, primarily the structural and cohesion funds.
The EIB also finances projects in combination with governments and private investors. The primary aim as stated today is to promote economic and social cohesion in the enlarged EU. In 2003, the EIB lent some €42 billion, of which €34 billion went to EU member states, €4.6 billion to accession countries and €3.4 billion outside the EU.
The bank has an excellent credit rating and hence borrows on capital markets world wide at attractive rates, mostly through bond issues. It then passes on those advantages to its customers, often financing up to 50% of a project for 20 or more years, depending on the project. On average, it finances about 30% and the bank tries to act as a catalyst, encouraging other financiers to become involved. As at the end of last year, its total outstanding loans were €248 billion.
The EIB shareholders are the 25 EU member states. Its capital is currently €164 billion with 5% paid in. Malta is today also a shareholder, and I was quite pleased to meet Malta's member on the board of the EIB in Warsaw, who occupies the position of director-general in the Ministry of Finance in Malta. By following actively what is going on in the various EU bodies, it is the only way to ensure full involvement in this new experience for Malta.
The use that Malta makes of this financing resource clearly depends on the economics of this source of funds compared with other alternatives, including that from the not insignificant, local financial resources. However, it is likely that with the advent of the structural funds, plus also the presence of an entrepreneurial private sector, Malta will soon be on the list of borrowers from the EIB.
As far as I am aware, Malta has made little use of this funding source. Of course, projects must be sensible and intended to stimulate the economic development of the country. However, given Malta's crucial dependence on the external market, whether it is tourism, manufacturing or other services, there certainly is scope for further investment and its funding, possibly also through, in part, the EIB.
The president of the EIB, Philippe Maystadt, in his excellent introduction, noted the following: "Up to now, the EIB has been the single most important source of external funding for the new member states - the bank's lending since 1990 amounts to €27 billion. Now, the EU structural funds are set to become a highly significant source of external finance. They are, however, not intended to replace private capital, but to provide additional resources to co-finance investment projects - the structural funds and national budgets on the one hand, and private capital on the other. The need for infrastructural investment in the new EU countries is enormous and cannot be financed without raising private capital."
The above clearly shows how the EIB often gets involved as a second or third source in the funding of a project. This is the new reality that the new member states, including Malta, will have to start thinking of. The second point is that with the addition of the structural funds, investment in the new member states' infrastructure will increase significantly, heralding a new economic growth phase in these countries. Clearly, Malta must also form part of this new impetus to development, and will have opportunities which can be translated into a faster economic growth.
The EIB president continues: "Now that the new member countries have access to the Structural Funds, their interest in private-public partnerships (PPPs) for infrastructure investment has been re-awakened. Through grants from the Structural Funds, many PPPs could be turned into profitable operations. PPPs make it possible to overcome budget shortages and move ahead with investment. But their key value is that they focus minds on the viability of projects and enable infrastructure to be built and operated more efficiently, with the State capitalising on the private sector, aimed at creating a more efficient public sector. When budgets run out, the public sector has to become more efficient anywhere in Europe. The EIB has experience of PPPs throughout Europe and has to date lent some €14 billion for around 160 PPPs. And we would like to bring that experience and knowledge to the new member states."
This raises an interesting point, especially relevant to Malta. The EIB should not be viewed simply as a financing source - important as this is - but can also be of use in innovative ways of looking at infrastructural projects and how these can be funded and managed more efficiently and effectively than in the past.
At the EIB forum there where many interesting presentations, including from the Polish Prime Minister, who in the middle of a domestic political controversy, found the time to address the forum and make a very valid contribution, emphasising that the central and eastern European countries should no longer be called countries in transition since this step form communist systems to market oriented economies had been passed.
Another extremely valid contribution was from the new Commissioner for Regional Policy, the Polish Danuta Hubner, who showed a very deep and crucial understanding of the regional policy of the EU and how this can be made more effective.
The deputy Prime Minister and Minister of Finance of the Slovak Republic explained how the government had reduced the income and corporate tax rate to 19%, and argued very persuasively that there must not be a single tax structure across the EU, but countries must be allowed to set there own priorities on income tax issues.
During a formal dinner in the evening, I happened to be sitting close to the economic advisor of the Slovak minister, who specialises in macro-economic models. He explained to me how the final proposals on the tax structure were first simulated through the model he was responsible for, so as to get a first impression of the likely impact. As might be expected, our discussion turned a bit technical and for a while we were living in a different world!
Finally, I was quite positively impressed by a presentation of Professor Collignon, from the London School of Economics, who gave an illuminating assessment of the trends in Foreign Direct Investment in most of the new member states. He also emphasised the point that the EIB should not only look at financing inflows into the new member states, but also investment from entrepreneurs in the new member states that might be directed into other member states, depending on the areas of prominence and expertise of the new members.
In Malta's case, an example which readily comes to mind is investment in the tourism industry, where local entrepreneurs have accumulated significant success stories, and where local expertise may be much more useful for developing the nascent tourism sectors of many of the other new member states.
Collingnon's message to the EIB was that funding this flow of investment is also important so as to integrate better the new member states in the EU's capital markets and overall economic framework of the EU. A point which should be of some interest to the many entrepreneurs in Malta who, I am sure, have been exploring ways of extending local expertise beyond Malta's shores. This is also part of economic development that needs to be nurtured.