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Impact of structural funds and new financial instruments on long-term investment in Europe

Impact of structural funds and new financial instruments on long-term investment in Europe CIPFA Europe Annual Seminar 15 October 2014 Leopold Mantl, European Commission. Challenges for long- term financing. Europe's infrastructure challenge.

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Impact of structural funds and new financial instruments on long-term investment in Europe

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  1. Impact of structural funds and new financial instruments on long-term investment in Europe CIPFA Europe AnnualSeminar 15 October 2014 Leopold Mantl, European Commission

  2. Challenges for long-termfinancing

  3. Europe's infrastructure challenge • Annual investment in infrastructure in Europe is estimated at EUR 450bn (3.6% of GDP) • Infrastructure investment needs in European transport, energy and broadband networks by 2020: • Between EUR 1,500bn and EUR 2,000bn • National government and EU budgets are limited More private financing needed • Long tenor bank financing is constrained Need to massively develop non-bank financing

  4. Europe's research challenge • Debt: • 150 000 to 500 000 innovative SMEs originating bankable operations not supported by the market. Funding gap: between €112 bn and €375 bn. • For innovative midcaps the average total annual demand for debt financing is estimated to be €250.5 billion for debt financing. • Equity: • For SMEs, financing gap is some €800 million per year. • For innovative midcaps, the average total annual demand (2011 figures) for equity finance is estimated to be just under €39 billion for equity

  5. Europe' SME Challenge (I) • 28 million SMEs in the EU: • account for more than 99% of all companies • employ 66.5% of all private-sector workforce • Micro-businesses dominate employment in some countries: Italy (48%) and Greece (57%) • Very flexible • Stable employer, source of organic growth and innovation Share of total number of companies Source:Eurostat, Commission Communication on Modern SME policy for Growth and Employment

  6. Europe's SME Challenge (II) • Europe moves out of the crisis, but supply of credit remains constrained as banks deleverage, accumulate capital and repair balance sheets. • Continuing market gaps and deficiencies in debt and equity markets for financing of enterprises, and especially SMEs • 75% of SMEs dependent on external financing • 'access to finance' the second most pressing problem for Eurozone SMEs, right after getting customers • venture capital fundraising and investment levels at one quarter of 2006 levels 6

  7. Europe's response to the challenge • Outlined in Commission Communication on long termfinancing (COM/2014/0168 final) and Commission Political Guidelines • Mobilising private sources of long term financing (banks, insurance companies, pension funds, private savings accounts) • Developing European capital markets • Enhancing the sider framework for sustainable finance (corporate governance, accounting standards, tax and legal environment) • Improving SME access to finance • Making better use of public funding to obtain EUR 300 billion in additional investments • EU budget • EIB/EIF • National promotional banks, export credit agencies 7

  8. The role of the Union budget

  9. Europe 2020 - The basis for the MFF 2014-20

  10. The Europe 2020 strategy and the EU budget Improved alignment of funding policies and financing instruments: • Thematic concentration of investments on the priority objectives of the Europe 2020 Strategy • Specific objectives, targets and monitoring • Conditionalities • Result-orientation and performance reserves • Increased use of innovative financial instruments (enhancing the leverage effect)

  11. EUR bn (2011 prices) 160,0 MFF '00 - '06: EUR 878.5 bn MFF '07 - '13: EUR 993.6 bn COM '14 - '20*: EUR 1033.2 bn 150,0 EUR 1.0 bn MFF 2014-2020 : EUR 959.9 bn 140,0 EUR 5.6 bn '07 - '13 average EUR 141.9 bn '14 - '20 average 130,0 EUR 137.1 bn Committment ceiling of MFF 2000 - 2006 for EU - 15/25 Committment ceiling of MFF 2007 - 2013 for EU - 27 120,0 Committment ceiling of updated COM proposal for MFF '00 - '06 average 2014 - 2020 for EU - 28 (June 2012)* EUR 125.5 bn 110,0 Commitment ceiling of MFF 2014-2020 100,0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 * ITER and GMES outside the MFF Comparison of ceilings 2000-2020 (EUR bn) N.b.: For better comparability, the level of the COM proposal in this depiction does not include ITER, GMES and the Agri-Reserve. If they were included, the COM proposal would read 1045.3 bn and the difference with the MFF 2014-2020 would be 85 instead of the 73 bn shown above.

  12. Comparison of ceilings 2000-2020 (% GNI)

  13. The EU intervention model – new MFFhalf of the budget and EIB are growth related (together 1.0% of GDP) EU Budget (size ~ 1% GDP EU p.a.) EIB (lending volume ~0.55% GDP p.a.) EU budget 2014 – 2020: € 960 bn (MFF -Multiannual Financial Framework) EIB as of 2013 (€ 70 bn p.a.) € 50 bn normal programme and € 20 bn additional programme for 4 objectives (innovation and skills, SMEs, clean energy and modern infrastructure) 13

  14. Competitiveness (Heading 1a) + EUR 34 billion Youth Employment Initiative, EUR 6 billion. New

  15. EU budget – types of intervention • Grant funding (non-reimbursable) • Introducing financial mechanisms which will enable the mobilisation of third-party funds as leverage on EU funds. • PPP • Financial instruments • Trust funds

  16. Financial instruments

  17. What are EU Financial Instruments? • Equity/risk capital,e.g. venture capital to SMEs with high growth potential or risk capital to infrastructure projects • Guarantees to financial intermediaries that provide lending to e.g. infrastructure projects, SMEs, persons at risk of social exclusion • Other risk-sharing arrangementswith financial intermediaries in order to increase the leverage capacity of the EU funds • or a combination of the above with other forms of EU financial assistance in single instruments (e.g. grants) 17

  18. EU Financial Instruments: Why? • 3 types of benefits • Policy impact – effective way of delivering on policy objectives, financial intermediaries pursue EU policies • Multiplier effect – multiplication of scarce budgetary resources by attracting private resources to financing public policy objectives • Institutional know-how– EU can use the resources and expertise of financial intermediaries • As a result: Financial instruments are a recognised political priority (Europe 2020 Strategy, Communication on a Budget for Europe 2020, instruments for the 2014-2020 MFF) 18

  19. EU Financial Instruments: When? • Guiding principles: Financial instruments and grants are complementaryfinancing tools. Financial Instruments: • Address market gaps or sub-optimal investment situations in economically viable projects • Funding gaps e.g. due to general economic uncertainty, high business/innovation risk, high transaction costs, asymmetric information • Ensure EU value added • Effective targeting of policy goals • Catalytic effect on existing similar MS schemes or private investment, no crowding out • Provide leverage • Attract private investment greater than EU contribution 19

  20. Lessons learned • Importance of capitalising on best practices and more consistency in governance, supervision and control of future financial instruments. • Need to strike the right balance between the EU's legitimate reporting and supervision needs and attractiveness for market participants. • Need for smart design: • Addressing market needs; • Alignment of interest with intermediaries, rather than multiplication of control requirements, integrated assurance building; • Market distortions to be at necessary minimum. 20

  21. Future: Smarter Design • Streamlined implementation modalities with standardised contractual arrangements including management structures, reporting, fees, etc. Simplification. • Continuing to offer both pro- and countercyclical instruments to respond to market needs. • Increased effectiveness and efficiency: • Fewer instruments with larger volumes, ensuring critical mass; • Enhanced alignment of interest with financial intermediaries (through fees, incentives); • Single entry point; • Possibly greater leverage thanks to risk-sharing with IFIs (debt instruments with first-loss-piece coverage; • Coordination with the Structural Funds; • Minimisation of overlaps. 21

  22. EU financial instruments 2014-2020: State of Play The New Regulatory Environment 3

  23. EU financial instruments 2014-2020: State of Play Internal Instruments/1: Overview All these instruments are managed by the EIB – EIF 11

  24. EU financial instruments 2014-2020: State of Play Internal Instruments/2: types of instruments 12

  25. Infrastructure: two level approach • Trans-European level: Projects of Common Interest • Transport: Trans European Networks (TEN-T) • Energy: Trans European Networks (TEN-E) • Telecommunications and ICT services  The Connecting Europe Facility: EUR 33bn ('14-'20) • Regional level: Structural funds • Funding of infrastructure projects: Transport, Energy networks, Energy efficiency, Urban development, ICT • But also other areas: Research, Education, Competitiveness Total Structural fund envelope: EUR 366bn ('14-'20)

  26. Project Bonds: Funded vs. Unfunded Solution Funded credit enhancement - Mezzanine loan Unfunded credit enhancement - Guarantee Public bond issueorprivate placement SPV Project Costs Project Bonds Target rating SPV Project Costs Project Bonds Target rating Public bond issueorprivate placement Project Bond Investor Project Bond Investor EIB Guarantee 20%max EIBSub-debt 20% of bond issue max Equity Equity EIB Sub-debt participation can be combined with different types funding sources (bonds and other senior loans) EIB Unfunded Sub-debt participation can be flexibly used and structured in order to ensure target rating.

  27. COSME Loan Guarantee Facility financial intermediaries can create products suitable for their particular markets Provides a frame free of charge Capped portfolio guarantees guarantees focus on transactions with a higher risk profile Strict focus on additionality Working capital, investment loans, subordinated loans, bank guarantees, leasing Wide range of interventions min. 12 months (transaction) – max. 10 years (guarantee) Duration ≤ € 150,000: for any type of SME > € 150,000: under conditions Amount

  28. Member States Application to call for expression of interest; demand driven Entrusted entity Joint EC/ EIB SME initiative € € € Financing

  29. Accountingrules • Accounting officer of the Commission adopts accounting rules, based on IPSAS • Financial instruments are covered by AccountingRule 11 • Financial data to be provided by entrusted entities according to a standardised reporting format 29

  30. Conclusions • In addition to a regulatory intervention, the Union can support long term financing through its budget • Given that the Union budget is limited in size compared to the EU GNI, it is important to leverage EU funds • Well designed Financial instruments are an efficient way to do so 30

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