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Economic and monetary challenges - Juncker Plan: first lessons from the past six months?
The specificities of the risk profile of the projects financed by the EFSI compared to those financed by the EIB
By Fayolle Ambroise - Vice-President, European Investment Bank (EIB)
The EFSI is now fully operational. At end-February, the EIB Group – i.e. the European Investment Bank and the European Investment Fund which mainly looks after small and medium-sized businesses, approved over 150 transactions under EFSI. This breaks down into a total of EUR 9bn of direct financing, including EUR 6.7bn from the EIB and EUR 2.3bn from the EIF. The value of the projects and the investment triggered by EFSI comes up to more than 60 billion euros, after just a few months of operation. In particular, more than 110 000 SMEs and mid-caps have received EFSI support.
Under the EFSI infrastructure and innovation window, projects driving clean energy investments have been supported such as an equity-type financing for an innovative fund investing in offshore wind, biomass and transmission projects in Denmark. Another example of EFSI project is the EIB financing for a French pioneering programme to trigger energy efficiency investments in private homes. Transport, telecommunication, innovative research projects or healthcare infrastructures have also been supported.
While this represents a very encouraging start, there is still a long way to go to reach the EUR 315 bn investment target over a three-year period of time.
The launch of the Investment Plan for Europe by the European Commission and EIB aims at boosting confidence and reducing the significant investment gap (estimated to around 15% below the 2008 investment level). This is the case despite high liquidity, because of limited acceptance of risk, including following the Banks’ deleveraging process.
The question that was put forward in view of my contribution to the Eurofi High Level Seminar was about the specificities of the risk profile of the projects financed by the EFSI compared to those financed by the EIB.
This question requires first an important clarification:
EFSI is not a separate entity as such. Despite its name, EFSI is not a Fund, but a guarantee provided by the the EU budget (for an amount of EUR 16bn) and by EIB (with a EUR 5bn contribution). EFSI projects are part of the EIB activities and all EFSI operations will be on EIB’s balance sheet. For instance, in the Infrastructure and Innovation Debt Window of the EFSI, the EU budget is providing a Portfolio First Loss Piece of EUR 11bn, on the basis of which the EIB targets to provide EUR 44bn financing, therefore keeping EUR 33bn of residual risk tranche.
Does this mean that EFSI is just business as usual for the EIB?
It is clearly not the case, as EFSI will drive the EIB towards riskier projects. Whilst the EIB Group has been supporting higher projects for a long time, EFSI provides EIB with additional risk bearing capacity to drastically increase the scale of these operations both in number, amount, and complexity, to help accelerate and increase investment in Europe.
Projects financed under EFSI have a higher level of risk or address market failures or sub-optimal investment situations and could not have been supported, or not to the same extent, by the EIB without the support of the EFSI EU guarantee. The decision of providing the guarantee is taken on each project by an independent committee called Investment committee.
The impact is not small. Before the launch of the Investment Plan for Europe, the so-called EIB’s “Special activities” (i.e. riskier) operations accounted for about EUR 4-5 bn of EIB financing per annum. With EFSI, the level of riskier operations will reach EUR 20 bn per year.
Increasing EIB’s risk taking capacity is the main feature of EFSI. Additionality of EFSI operations, which is at the core of EFSI conception by European legislators, is defined by the level of risk. While the EFSI Regulation leaves the flexibility to include into the EFSI portfolio operations of all risk categories, it creates a clear link between “Additionality” and “Risk”.
To make full use of that additional risk bearing capacity, EIB is developing various new products that will allow for higher risk taking. In particular, the EIB is working on a new equity strategy in order to address the increased demand in this sector.
In addition, EIB is currently designing new forms of cooperation:
• coordination agreement with NPBs, as well as designing various new products for NPB/NPIs.
• blending with EU funds, in particular the European Structural and Investment Funds
• designing investment platforms
• co-financing with Sovereign Wealth Funds and other institutional investors.
This initiative needs to be completed by an important second pillar of the Investment Plan. The increase of advisory services through the European Investment Advisory Hub is a key element of the success. It will also accelerate the building of a project pipeline.
Finally, the Juncker Plan also includes a very important target to implement structural reforms in all Member states aiming at improving the investment climate. Although EFSI will bring major changes for the financing of riskier projects, the improvement of this framework would be instrumental to increase financing of private investors to benefit projects all over Europe. The European Commission has set out priority initiatives which would help remove existing single market barriers, including the Capital Market Union, the Digital Single Market, and the Energy Union. In addition, to help Member States, the Commission has mapped the main challenges to investment at national level. Making progress on these initiatives will be crucial to deliver the Investment Plan for Europe and significantly improve the business environment in Europe.