- Isabelle Goubin – Director of the Treasury, Ministry of Finance, Luxembourg
- Anne Bucher – Director for structural reform and competitiveness, DG for Economic and Financial Affairs, European Commission
- Levin Holle – Director General, Financial Markets Policy, Federal Ministry of Finance, Germany
- Dominique Riquet – MEP, Vice-Chair of the Committee on Transport and Tourism and President of the long term investment and reindustrialisation intergroup
- Jean-Jacques Bonnaud – Independent Director, EUROFI
- Franco Bassanini – President, Long-Term Investors’ Club (LTIC)
- Laurent Clamagirand – Group Chief Investment Officer, AXA Group
- Ambroise Fayolle – Vice-President, Management Committee European Investment Bank (EIB)
- Dennis Gepp – Senior Vice President, Managing Director and Chief Investment Officer, Cash,Federated Investors (UK) LLP
- Odile Renaud Basso – Deputy Chief Executive Officer and Director of Savings Funds, Caisse des Dépôts Group
1. Context and general principles of the Juncker Plan
There is a need for a European boost to investment since, in the wake of the financial crisis, overall investment in Europe has declined significantly to between €230 to 350 billion. In addition, the situation is not consistent as some countries have infrastructural needs, which are hampered by a lack of credit, while others do not lack funding but require credible projects. Investment are restricted not because of a lack of liquidity, but a lack of risk-bearing capacities hindering commercial banks and private investors from injecting sufficient money into the economy.
In such a context, the Juncker Plan is expected to provide solutions for both shortcomings, notably through the creation of the European Fund for Strategic Investments (EFSI), which will mobilise €315 billion of additional investments in higher risk projects on a portfolio basis in key investment areas - digital, transport and energy – as well as small and medium-sized enterprises.
The Juncker Plan also aims to unlock the full potential of investment in Europe by establishing a pool of credible projects and - in its final stage – contributing to the removal of investment obstacles in Europe by improving regulatory predictability, suppressing regulatory barriers and also extending the single market. Indeed, there are a number of inefficiencies, which are disrupting any efficient channelling of funds towards the real economy. In addition, the Juncker Plan established the European Fund for Strategic Investments (EFSI), which is a €16 billion guarantee from the EU budget, combined with a €5 billion allocation of the EIB's own capital, which will significantly increase the volume of higher risk projects supported by EIB Group financing operations.
2. The EU parliament supports the Juncker Plan as one of various elements to improve the EU's competitiveness and relaunch growth
The European Parliament has strongly supported the idea of stimulating growth and jobs, and fully endorses the three-pillar approach proposed, including the development of a dedicated guarantee mechanism provided to the EIB group that has a maximum leverage effect.
It is very important for the Parliament that the projects, which could not be financed or not to the same extent or under the same conditions, are targeted to achieve an effective additionality.
Lastly, the encouragement of a more investment-friendly environment, notably through the Advisory Hub, enhanced cooperation between national promotional banks and the development of investment platforms at regional and national levels are also important for the success of the global mechanism.
However, the Juncker Plan cannot be considered as the only response, as there is still a delay with the completion of the European single market and structural economic reforms are also required.
3. Main features of the EFSI
The investment plan is based on three pillars.
The first pillar is the EFSI, which, through a €21 billion endowment - €5 billion contribution by the EIB and €16 billion guarantee from the EU budget - is expected to raise €315 billion of investment in total. Past experience has shown that this is quite a realistic leverage ratio. There is no pre-allocation of funding to any specific sectors or countries. EFSI allows the EIB to enhance its risk taking capacity. However, a project that is under EFSI follows the same kind of due diligence and appraisal work as a non-EFSI project at the EIB.
The second pillar targets advisory services to reach bankability for the EFSI. The so-called EFSI Advisory Hub, which is a single point of contact for technical assistance to help investment promoters, provides advice, guidance and concrete assistance in shaping projects. This pillar also encompasses a Project Portal, an online database with information on investment plans to encourage the channelling of financing into the real economy. For this to be effective, everybody needs to be mobilised at European, national, regional and local levels, i.e. the stakeholders in the field, in the financial sector, in national promotional banks, in the private sector, and in governments, to make sure that the best possible projects are to be financed through the EFSI. While the bulk of the projects financed by the EFSI will be national, some will also be cross-border.
The third element is the regulatory pillar, which will address financial and non-financial regulatory obstacles at national and EU levels that cause a lack of legal certainty or impede operators when making investment decisions.
In such a context, the Juncker Plan, together with the flexibility and modernisation of state aids, is making big changes to the EU's investment and economic policies since these policy actions are introducing new principles and building a new investment framework. In particular, the flexibility the Golden Rule allows investments under the Juncker Plan to possibly be excluded from the reporting of state indebtedness (but not under the excessive deficit procedure). In addition, the effective additionality of EFSI intervention will re-level the playing field for the various projects in the context of economic divergence in the EU.
Lastly, national promotional banks are expected to be complementary to the market so as to crowd in private investors. Provided that national promotional banks know their own countries and their own specific features best, they should work closely with the EIB.
4. Actual achievements with the implementation of the Plan
The first six months of 2015 were used to lay down the Juncker Plan's legal basis. The EU passed legislation relating to three key instruments: the EFSI, the Hub and the Project Portal. In July, the President of the European Commission and the President of the EIB signed an agreement. In Q4-2015, the EFSI's governance structures – notably the Steering Board and Investment Committee - are being put in place.
In the meantime, the EIB has been pre-financing some of the projects while waiting for the EFSI to become fully operational. 27 operations had been approved by the EIB Board by 22 October, covering 13 Member States, across eight sectors, for a total EFSI financing amount of €4.0bn and expected to generate ca €19.5bn of investments.
Similarly, the European Investment Fund (EIF) - the entity within the EIB that is in charge of funding funds for SMEs - has signed 340 operations targeting SMEs in 11 Member States.
The Hub is starting to recruit technical assistance, while it is liaising with the Joint Assistance to Support Projects in European Regions, the European Bank for Reconstruction and Development, the European Public Private Partnership Expertise Centre, and with the national promotional banks.
5. Attracting private investors and reassuring them that they will not be crowded out
EFSI financing can be accessed via the EIB standard entry points, including its offices in Luxembourg and in various Member States, as well as through partners, such as promotional banks.
However, achieving the ultimate goal of €315 billion will need support from the private sector, including investors such as insurers. In this respect, although it will become more apparent in the near future, the Juncker Plan's governance needs to be clarified as it represents a complex machine for bringing together national promotional banks, the European Commission, the Parliament plus the specific features of each separate country. A clear pipeline also needs to be created to avoid private investors being crowded out.
Indeed, today, some of the projects are still being financed through public funds: this will not create a pipeline. In addition, there have been many announcements regarding Juncker projects, but some of these projects do not qualify.
The key for investors in the next few months, once the entire framework has been completed, will be to see how projects will be managed: rigorous discipline must be enforced to select appropriately qualifying Juncker projects.
To attract private investors, the risks and rewards must be clear. High-quality projects will certainly be those that are meaningful in respect of their size and feasibility, and those with widespread benefits for EU communities. Lastly, what appears to be challenging nowadays is to find business opportunities with reasonable rates of return, fulfilling the long-term earnings requirements of aging populations: indeed, the money will come from those who will not see the benefits of the projects being funded. Ultimately, the appropriateness of the projects has to be assessed by both private investors and those distributing public money. Looking beyond the mere financial benefits, this will ensure appropriate feedback for both national and European policymakers on the conditions and policies, which are necessary to foster this investment.
6. Avoiding national bias and favouring national policies effectively fostering sustainable investment
It is in the best interests of all that the funds should go to the best-qualified projects. However, one risk is a possible geographical bias, which makes the money go back to the countries that have contributed to the EFSI. To avoid such a situation, two things are extremely important: no national quota exists and there is a single European governance structure that exclusively involves the Commission and the EIB, in which no Member State representative decides on the projects.
One important obstacle to promoting a project is lack of vision as this prevents the economic agents from correctly anticipating policymakers' targets, particularly in the Eurozone. In the medium term, firms and economic agents in general need to be sure that the Eurozone policy is consistent with national economic policies. It is essential to have detailed discussions involving not only the European Parliament, but also national parliaments.
7. Financing Greenfield projects and bundling smaller projects to enhance the Juncker Plan's reach
From practical experience, it appears that there is a great deal of money willing to be invested in infrastructure projects carrying a relatively low risk level. The situation is particularly difficult with Greenfield projects.
Whereas some EFSI investments require the aggregation of smaller projects, raising funds for these projects is difficult. This is the case for broadband infrastructure and energy transition, climate change investment, etc. where there is a very local approach, not a national one. Consequently, the issue is how to aggregate smaller projects in order to make them interesting for investors and for the EIB. This is one of the main areas of discussion between the EIB and national development banks.
8. Creating sound market place financing for SMEs
Although Europe will not fully adopt a US type financing-model, the big challenge faced in terms of SMEs involves making the shift from classic bank financing towards more market-based financing. In France for example, some market-based instruments have therefore been created in which investors are grouped together in common funds in order to provide equity or debt financing. This is proving to be an appropriate way forward as institutional investors have to get used to this kind of financing. However, additional tools such as guarantee mechanisms might also be required to mitigate the risk in SME financing.
9. Consistent EU-wide investor protection rules are vital
Most investors are likely to use the services of professional advisors and specialists, as they simply do not have the depth of knowledge required to evaluate the investment opportunities available. This difficulty is compounded by the fact that investors have a wide range of investment needs, from very short-term cash investments to medium-term and even longer-term arrangements. This is the case especially for investments and projects that are more complicated, riskier or longer-term, such as for SMEs. This difficulty is exacerbated whenever there are different national disclosure regimes, or different national investor protection policies, which suggest consistent EU-wide approaches standardising disclosure and regulatory protection rules throughout the EU in order to create a level and open playing field for sales throughout the Union.
10. Adapting investors' regulations is also an important piece
The revision of the regulation of investors, particularly insurance companies, with Solvency II, is also an important piece of the EU investment plan.
Indeed, the insurance industry is disappointed that progress has been slow to provide the right regulatory incentives to encourage long-term infrastructure investment. According to the industry, the EIOPA is very cautious not to define regulatory capital charges, which are not justified. For example, with regard to equity, 39% capital charges are totally punitive, because infrastructure returns even on equity cannot be expected to be in double digits because cash flows are more stable in infrastructure. They should be near 22% and benefit from the diversification effect as their risk characteristics make them closer to strategic equity.
On the debt side, discussions are moving in the right direction and the EIOPA is apparently recognising that the better recovery rate deserves lower capital charges. However, for the time being, it is only for the credit risk and not for the spread risk. Yet the level of regulatory capital should be reduced by at least 40% for both the credit risk and the spread risk.
Another issue concerning insurance companies is securitisation. In this respect, the rules, which have been set recently for banks and could be extended to insurance companies, are very punitive. They encompass no less than 50 criteria to be checked to enable securitisation assets to be eligible or not, for reduced capital charges. In addition, if the securitisation were to be inappropriately declared as qualifying, the potential penalty can be 10% of the bank's turnover and it can also be a personal liability. Ultimately, the end result may be something that is not going to work whatever the type of asset concerned.
11. The third pillar requires bottlenecks to be addressed at both national and EU levels in a general EU strategy, which also encompasses structural economic reforms
The third pillar requires a very broad approach as the regulatory bottlenecks are at EU level and some at national level. Some are of a financial nature and some are linked to each infrastructure sector's specific rates of return and profitability.
This requires the identification of areas where a business-friendly environment needs to be created, the market's flexibility and liberalisation need to be improved, and the administration and taxation systems need to be modernised.
In addition, the challenge is very different when addressing the need to restore investment in countries getting structural funds, which have seen foreign direct investment suddenly stop as a result of the crisis, compared with those specific to Euro area member states recovering from the crisis with debt overhanging the corporate sector and high levels of non-performing loans. At EU level, the issue of investment has been examined together with the proposals regarding an Energy Union and the EU digital single market.
Bigger obstacles to more diversified cross-border financing, notably regarding insolvency laws, should also be tackled. And at European level, there are many procedural laws governing investment decisions, concerning environmental matters for instance.
Speakers also stressed that Europe is in a fortunate position as monetary policies give some breathing space to Member States, but they were of the opinion that this should be used to make the necessary structural reforms and also to enhance the investment environment. Structural reforms are not very popular with governments because they are very painful, they go to the heart of the labour market and the product market, but this needs to be done. Yet sound public finances are a key element because they give confidence to investors and make investors come to the market and invest in worthwhile projects.
In addition, a speaker stressed that no dedicated adjustment mechanism exists to address cyclical economic asymmetries among countries in the Euro monetary area. These divergences should be compensated through a budgetary policy encompassing a long-term investment horizon, which raises the question of having a specific budget for the Eurozone, in addition to technical, institutional and major political issue
1. Context and general principles of the Juncker Plan
Various participants on the panel first reminded the audience that in the wake of the financial crisis the overall investment level in Europe had significantly declined to an estimate of between €230 to 350 billion. They explained that there was a need for a European boost to be given to investment. They stated also that the situation in Europe was not homogeneous since in some countries companies have infrastructural needs, which are hampered by a lack of credit, while others do not lack funding but require credible projects.
They then explained that in such a context the Juncker Plan was expected to provide solutions for both shortcomings notably through the creation of the European Fund for Strategic Investment (EFSI), which will mobilise €350 billion additional funds to boost the level of investment in Europe. Finally, he said, these funds are intended to support key investment areas - digital, transport and energy – as well as small and medium sized enterprises.
The panellist explained that the Juncker Plan also aims to unlocking the full potential of investment in Europe by establishing a pool of credible projects and - in its final stage – contributing to the removal of investment obstacles in Europe by improving regulatory predictability, suppressing regulatory barriers, and also extending the single market.
Another panellist insisted that the whole diagnosis underlying the investment situation in the EU was not only a question of demand, neither a lack of saving in the EU nor a lack of liquidity or investment opportunity. The issue, he said, was a number of inefficiencies, which are disturbing an efficient channelling of funds towards the real economy: i.e. a combination of uncertainty, financial friction and regulatory bottlenecks of different kinds.
2. The EU parliament supports the Juncker plan as one element among others to improve the competitiveness of the EU and to re-launch growth
A public decision maker commented on the views of the European Parliament, which from the very beginning has strongly supported the idea of stimulating growth and jobs. It is very important that the general climate should recover, he said.
In particular, he explained that the Parliament fully endorses the three-pillar approach, proposed by Mr Juncker, developing a dedicated guarantee mechanism that has a maximum leverage effect, and supporting projects through innovative financial instruments - rather than classic bank financings - which allow more risky profiles. He also said that the Advisory Hub is a very important tool, as it is expected to be a catalyst of a more investment-friendly environment in a context where regulation will also be more stable and visible.
He stressed that several elements have been designed to improve the implementation of the Plan. He cited the portal for European investments, which is very important, and the Advisory Hub. Indeed he was of the opinion that in addition to the Investment Committee, these two mechanisms are essential for an appropriate selection of projects and to ensure that the projects chosen would contribute to growth and development.
He also insisted on the need for a proper co-operation between national promotional banks and investment platforms at regional and national levels, for the success of the global mechanism.
it is very important for the Parliament that there should be an effective additionality
More generally he emphasised the fact that it is very important for the Parliament that there should be an effective additionality i.e. the riskier projects and not the projects that could be financed by the market without public support, have to be targeted.
He reminded the audience in this respect that in addition to this support the Parliament has developed a proposal for a future guaranteeing mechanism financed up to €5 billion by appropriation of Horizon 2020 and Connected Europe financial resources, which could be used either for grants or for innovative financial instruments, and was concentrating on the projects ineligible for the EFSI because they were too risky.
He concluded by saying that if the Juncker Plan is a good policy answer, it cannot however be considered as the only reply, as there is still a delay in the completion of the single European market and structural reforms are also necessary.
3. Main Features of the EFSI
The investment plan is based on three pillars.
The first pillar is the EFSI which mobilises funds through a pledge of €21 billion public finance to be invested in an additional funding pool.
In addition, in order to effectively unlock the full potential of investment in Europe, one key feature of the EFSI is the principle of no pre-allocation of funding to any specific sectors or countries. This is very new for EU interventions, he said.
one key feature of the EFSI is the principle of no pre-allocation of funding to any specific sectors or countries
The panellist from the public sector explained that the second pillar targets the creation of a pipeline of projects, which has been proving fairly difficult. Two instruments have been made available to facilitate this he said.
One is the Advisory Hub, which is a point of single contact for technical assistance to help investment promoters at the different stages of a project. The Hub will help them by providing advice, guidance and concrete assistance in shaping projects.
The second is a Project Portal - an online database of investment projects that any public or private entity can feed with existing or potential projects. He explained that this is an effective way for informing on investment plans into the real economy, and it is expected to favour the channelling of financing into the real economy.
The third element, he said, is the regulatory pillar, which will address all the financial and non-financial, regulatory obstacles at the national and EU levels, that cause lack of legal certainty or impede operators when making investment decisions.
4. Actual achievements in the implementation of the Plan
The first six months of the year 2015 have been used for laying down its legal basis: in July the EU passed the legislation related to three key instruments: the EFSI, the Hub and the Project Portal. In June the European Parliament and the Council passed the legislation, and in July the President of the European Commission and the President of EIB signed an agreement.
The EIB has been pre-financing some of the projects pending the full operationalisation of EFSI and in September 2015, the governance structures are being put in place. The steering board of EFSI that is going to decide on the broad guidelines has already met. The Investment Committee, an entity composed of experts who will have the responsibility to approve projects deserving support from the European Union, is going to be in place in the next few weeks.
The Hub is starting to recruit technical assistance through a joint EIB/Commission initiative. The Hub is also liaising with the Joint Assistance to Support Projects in European Regions (JASPERS, a technical assistance partnership managed by the EIB and co-sponsored by the European Commission (Directorate-General Regional and Urban Policy) and the European Bank for Reconstruction and Development (EBRD)), with the European Public Private Partnership Expertise Centre (EPEC) and with the national promotional banks. The portal for its part will be up and running and should be fed by a number of operators in early 2016.
5. Important differences between projects falling under the EFSI and those belonging to the EIB.
Since April the EIB is warehousing projects of the requisite quality and characteristics that would be supported by EFSI. These projects remain on the EIB balance sheet, waiting for the EU guarantee to be applied if the governance of EFSI accepts them. There have been 15 projects in 11 countries in the transport, energy, energy efficiency, education, health, research and development in industry, and the health sectors, for an amount just below €2 billion and that is generating about €9 billion investment.
Similarly the European Investment Fund (EIF) - the entity within the EIB that is in charge of SMEs - has approved 30 investments regarding SMEs in 10 countries
the level of risk for the EFSI project is expected to be higher
The main specificity of a project that part of the European investment plan and supported by the EFSI but not by the EIB, is that completing it financing requires a guarantee from the EU budget. Otherwise a project that is under EFSI follows the same kind of due diligence and appraisal work as a non-EFSI project at the EIB.
Indeed there are two features that are quite important. The first is that the level of risk for the EFSI project is expected to be higher as one of the objectives of the Juncker Plan is to encourage investment in projects with a higher risk profile than those that are supported by EIB normal operations. It is worth noting in this respect that the riskier operations are currently on a smaller scale: around €4 to €5 billion per year out of between €70 and €80 billion total projects. This amount will increase up to €20 billion next year thanks to the Juncker Plan. The second specificity is that because of the guarantee provided by the EU budget, each of these EFSI projects will require approbation from the Investment Committee that checks that these projects effectively deserve a guarantee from the EU budget.
6. Key success factors in the hands of the EIB for the Juncker Plan
In addition to putting in place the appropriate environment for investment that is obviously key, making the Juncker Plan efficient requires combining two things.
One is a swift implementation of the policy recommendations, the critical work by the Steering Board of EFSI, to make sure that criteria for an appropriate selection of projects are set, and also to try to avoid misunderstandings about EFSI policy, processes and criteria.
Even more important is to have the right pipeline of projects. For this to be effective there must be a mobilisation of everybody i.e. the stakeholders in the field, in the financial sector, in national promotional banks, in the private sector, and in governments, to make sure that there are the best possible projects to finance through EFSI.
This is also a challenge for the EIB, because it is used to finance big projects with quite low levels of risk and EFSI often addresses smaller projects with higher levels of risk. It will need to adjust to that, including more staff, because these new projects will probably take more time to be structured as they are often more complex.
The EIB will continue to help member countries finance their projects that are also important but do not need the EU guarantee
The EIB must make sure that the outside world does not see the EIB only as the EFSI. Even if EFSI is very visible and increases its share of business within the EIB it will still only deal with a maximum of 25% of EIB’s activities. The EIB will continue to help member countries finance their projects that are also important but do not need the EU guarantee.
7. The leverage ratio of the Juncker plan is credible
A €5 billion contribution by the EIB, with a €16 billion guarantee from the EU budget expected to raise in total €350 billion cast doubts regarding the credibility of the Juncker Plan. However though the ratio of leverage is rather high, past experience has shown that it is quite a realistic business model, concluded a representative of the public sector.
A representative of the public banking sector exposed some general ideas on how the Juncker Plan, together with communications on the flexibility and the modernisation of state aids have made a big change in the investment and economic policies of the EU.
Indeed he was of the opinion that all these policy actions are introducing new principles and building a new investment framework. Though they have not changed the economic constitution of the Union, they act as seeds for future transformations.
In this respect the speaker quoted in particular the Golden Rule that has been introduced with an appropriate flexibility, i.e. while the rule is quite strict some of the investments, which are under the Juncker Plan can be excluded from the reporting of the state indebtedness.
this is a concept of general interest for compensating for market failure
Additionality is another important concept he said. Especially after the crisis, as there was more economic divergence than convergence. The provision of strict and compact state aid rules aiming at achieving an effective additionality of EFSI interventions is intended to re-level the playing field of the various projects in the EU. Therefore, this is a concept of general interest for compensating for market failure, which will impact also national (financing) platforms.
National promotional banks play also a central role in the architecture of the new investment policy in the EU. They are expected to be complementary to the market so as to crowd in private investors and not crowd them out. This is quite a challenge, as promotional banks have to get bigger when the market is in need for help and then shrink again when the market is not. They must learn how to be flexible in this sense.
8. Reinsuring private investors on the fact they will not be crowded out
Whilst progress needs to be made on communication, the EFSI can be accessed via the Portal, or through offices in Luxembourg, or in various countries, and also through partners, such as the national commercial banks.
A representative of the industry agreed on the fact that achieving the ultimate goal of €350 billion needs the support of the private sector, including investors such as insurers, who have been investing for a long time in infrastructure and equity.
Additional clarity regarding the actual governance of the Juncker Plan is welcomed, as it represents a complex machine for putting together national promotional banks, the European Commission, the Parliament plus the particularities of each separate country.
It is not known if one of the principles, which were imposed at the beginning, namely the creation of a clear pipeline to avoid private investors being crowded out, will be respected. This is an element that will become more apparent to private investors in the near future. However it is to be observed that today some of the projects are still financed through public funds. This is not what is going to create a pipeline as getting public money through funds does not initiate an adequate systematic funding process enabling private investors to obtain the money through the Juncker plan (i.e. the Commission and the EIB). It is also doubtful that this will achieve additionality, he concluded.
The contact between private investors and the different parties, at the local, national and European levels, is going to be key
Moreover, there have been many announcements regarding Juncker projects, providing slogans for politicians. But some of these projects were doubtful, as they eventually appeared not to conform to certain of the Juncker Plan principles. Consequently any clarity on what will enable or not a project to qualify as a Juncker project is welcome.
In this respect the key for investors in the next few months when the entire framework is completed, will be to see how the list of projects will be managed and how they will be dealt with. The Portal is not some magic way for business. It facilitates transparency but it will not as such encourage institutional investors to participate. The contact between private investors and the different parties, at the local, national and European levels, is going to be key.
At present it is somewhat disorganised. It started with different countries trying to benefit from the momentum of the Juncker Plan and trying to influence the Juncker principles regarding the pipeline. Currently there is diversity regarding the type of projects put on the table, some of which do not qualify. Rigorous discipline must be enforced to select appropriately qualifying Juncker projects. Investors should be reassured that they are not going to be crowded out, by explaining how money needs to be deployed where it makes sense, and g projects proposed just to titillate public opinion must be avoided.
9. Attracting private investors
In response to the Chair’s question of what is needed to attract high quality projects and how to ensure that the projects which are finally selected are the right ones, those that are needed to build up growth and to enhance the competitiveness of Europe, a private investor representative started stressing priority questions which are: what is needed to attract high quality investors? What must the projects have that can attract sufficient investors to ensure the success of the Juncker Plan?
Then he pointed out that the most important thing is that the risks and rewards are clear and supported by strong, independent analysis. Consequently he said that a little more is required than just having the EIB looking at whether the projects reach one level of risk or another.
In addition he stressed that high quality projects will certainly be those in which investors can invest, e.g. be meaningful in respect of their size and feasibility, and those with great potential will be those that can be seen to be of widespread benefit to the communities of the EU and, as such, able to attract investors from a number of different Member States.
what appears to be challenging nowadays is to find business opportunities at reasonable rates of return
Finally he concluded by declaring that what appears to be challenging nowadays is to find business opportunities at reasonable rates of return, fulfilling the long term earning requirements of aging populations. Then he explained that indeed while there must be projects that help the long-term economic health of Europe, much of the money will come from those who will not see the benefits of this, so the projects must give them good returns.
10. A project-selection process involving investors and EU level representatives should avoid any national bias and favour national policies effectively fostering sustainable investment.
In the selection process of projects one risk is a possible geographical bias, which makes the money go back to the countries that have contributed to the EFSI notably through their national promotional banks, instead of, for example, financing European cross-border projects. This inappropriate situation should be avoided. Indeed it is in the best interest of all that the funds should go to the best-qualified projects. In this respect according to a national public sector representative two things are extremely important. Firstly, that there are no national quotas and secondly, that there is a single European governance and no Member State representative decides on the projects. This was one of the key issues when drafting and working on the EFSI regulation. A purely European governance structure only involving the Commission and the EIB, must the safeguard.
A representative from a national promotional bank further clarified this issue by explaining that there are two big safeguards against a possible national bias.
The first he said is the fact that – and the EIB has never worked in this way - the logic is not of return, each country must not calculate the rate of return on its share of capital.
Second, he said national promotion banks have not contributed to the EFSI. Actually they are committed to financing alongside it national or European projects involving several countries. In this case the money will be provided by national promotional banks, together with the EIB down stream, in addition to the EFSI framework intervention.
not every project financed by the EFSI has to be cross-border
The EU public sector representative for his part insisted on the fact that not every project financed by the EFSI has to be cross-border there can also be national projects. And he concluded by saying that every project will be assessed on its individual merits. It is extremely important especially at the beginning that the right discipline should be applied and only those projects that are viable and meet the commonly agreed principles should be financed.
In addition it is essential to ensure that there are no showcase projects but real, economically viable ones. The appropriateness of the projects has to be assessed both by private investors and those distributing public money.
If this is followed there is much to be gained beyond the mere financial benefit. That will give an appropriate feedback both to national and European policymakers on the conditions and policies, which are necessary to foster this investment. This will help in particular to articulate the Juncker Plan with national policies.
11. Financing Greenfield projects justifies per se the Juncker Plan
A representative from a national promotional bank considered the question of whether there is a lack of money or a lack of projects. He explained quoting France as an example, that from practical experience it appears that there is a great deal of money willing to be invested in infrastructure but with a low risk level. In the infrastructure field, there is a lot of money available for brown field investment, but the situation is much more difficult with Greenfield projects, which feature a higher level of risk and uncertainty e.g. traffic risk, and so forth. That is why the approach of the Juncker Plan with its idea of covering one part of the risk can be justified.
12. Finding ways to bundle smaller projects is necessary in order to enhance the reach of the Juncker plan
The second issue is that there is money for big projects but it is much more difficult for smaller projects whereas many investments are coming from the sum of smaller projects. He acknowledged that however it might depend on countries, their level of development, and the infrastructure situation. He illustrated the point by alluding to France, where the infrastructure of transportation, motorways, and trains is already in place. He also indicated that on broadband infrastructure, there is a very local approach not a national one, and this is also the case for energy transition, climate change investment, etc. it very often concerns smaller projects coming from smaller entities. This is key in order to allow this kind of investment to take place and not to focus only on major investment.
Consequently he insisted on the fact that the issue is how to aggregate them in order to make them interesting for investors, and for the EIB. This should be one of the main areas of discussion between the EIB and national development banks that should work together in order to make sure that smaller and local level projects are addressed. Actually he said, in broadband the national banks are working with many regions, departments or local authorities, which are developing projects, and trying to put them together to make them financeable by bigger players like the EIB or institutional investors.
13. Defining the criteria of eligibility
While in terms of consistency, the EIB and the Commission have defined quite clearly the areas of priorities for investment the speaker explained that many has still to be done to define the criteria of eligibility, set the level of risk, etc. However he considered that though it is still a learning process regarding what kind of financial scheme is feasible, what is the appropriate level of risk, etc. the framework is set up and projects are starting.
14. The need for more predictable public policies
Obstacles to promoting investment: the role for the predictability of public policies
A representative of the private sector considered that the main obstacle to promoting a project is lack of vision as this prevents the economic agents from correctly anticipating policymakers’ targets notably in the Eurozone; this obstacle exist in the short and medium terms.
In the medium term, the companies - firms and economic agents in general - need to be sure that the policy of the Eurozone is consistent with national economic policies at national levels. This raises another problem for the EFSI and the European authorities. It is a necessity to have a detailed discussion not only involving the European Parliament but also involving the national Parliaments. This also raises a question of political will.
Another speaker insisted on the fact that improving the investment environment and increasing investor confidence to better attract private sector money is at the heart of the success of the Juncker Plan.
As most investors just do not have the adequate depth of knowledge for evaluating available investment opportunities, most are likely to use the services of professional advisors and specialists. In this respect asset managers owe their clients the best advice i.e. full analysis and research that are essential before the money can be risked in the market place.
It was stressed that this difficulty is compounded by the fact that investors have a wide range of investment needs, from very short-term cash investment to medium term and even to longer-term arrangements.
This is the case especially for the investments and projects that are more complicated, more risky or longer term such as those of SMEs that are more likely to fail than their larger and more established counterparts, while their investment needs usually represent an answer to a significant part of investor borrowing needs.
Consistent EU-wide approaches by which risks can be well known and understood is absolutely vital
This difficulty is exacerbated whenever there are different national disclosure regimes, or different national investor protection policies. Consistent EU-wide approaches by which risks can be well known and understood is absolutely vital. Currently though, passports into individual countries are expensive and seem to go against the whole premise of a single market, and local selling rules even necessitate additional perspectives in different languages to sell the same product. Asset managers cannot and will not do business where they cannot cover their costs and if they cannot trade, the flow of investor cash into projects will be severely reduced.
More generally, in the EU, member states regularly act differently from others. Their currencies move or can move against one another. Similarly domestic borrowing costs can be different for similar businesses in different Member States, especially where their sovereign credit ratings diverge, even when they share a common currency.
The aggregation of smaller projects could certainly help
The aggregation of smaller projects could certainly help, and there must also be access to standardised credit analysis to supplement what analysts from asset management firms, produce. But some regulatory issues need to be changed by standardising disclosure and regulatory protection rules throughout the EU in order to create a level and open playing field for sales throughout the Union.
Finally, it should be recognised that although 19 out of 28 Member States share a common currency, one third of the Member States do not. Rules and regulations cannot be imposed that only act in the interests of one of these currencies (i.e. the euro).
15. The revision of investors’ regulation is an important piece of the investment plan.
A public decision maker insisted on the fact that while the Juncker Plan plays a vital role, the revision of the regulation of investors, notably that of insurance companies, is also an important piece of the EU investment plan. In this perspective he said in the EFSI regulation the Parliament introduced a very important amendment calling for the revision of Solvency II.
In response to the question of whether the EU legislation is correct – notably Solvency II delegated acts and securitisation regulation - and whether the right regulatory incentives exist to encourage long-term infrastructure investment, an insurance industry representative expressed disappointment that progress had been slow, though he considered current regulatory proposals weree going in the right direction.
EIOPA is very cautious about creating a situation where people are receiving incentives to invest
He stressed that EIOPA is very cautious about creating a situation where people are receiving incentives to invest by defining regulatory capital charges, which are not justified. He illustrated this attitude by alluding to the definition of what are good infrastructure projects, which is clearly too restrictive, as it excludes projects, which have sound cash flows.
He also quoted the EIOPA that, with regard to equity, refuses to distinguish between listed and unlisted equities and the consequent application of capital charges, which will be at 39%, which is totally punitive according to industry experts on related risks. 39% as a minimum makes no sense he said, because infrastructure returns even on equity cannot be expected to be in double digits because cash flows are more stable. Yet infrastructure equity deserves a lower capital charge - near 22% and should benefit from the diversification effect - because its risk characteristics make it closer to strategic equity.
However on the debt side, he stressed that the discussion is going in the right direction, as it seems to recognise that the better recovery rate deserves lower capital charges.
Nevertheless, for the time being it is only for the credit risk and not for the spread risk, he said. In addition the calibration of the level of the regulatory capital should be reduced at least by 40% both for the credit risk and for the spread risk.
Another topic concerning insurance companies is securitisation. To the surprise of many people, the rules, which have been set recently for banks are very punitive and will make it very difficult to have a revival of the securitisation market.
Giving a simple example, the proposed regulation for banks encompasses no less than 50 criteria to be checked by the banks, some of them being totally subjective, to enable securitisation assets to be eligible or not, for reduced capital charges. Furthermore, if the securitisation were to be inappropriately declared as qualifying, the potential penalty can be 10% of the turnover of the bank. Finally, there can also be a personal liability by which bankers are going to be fined on their personal wealth, and possibly sent to jail. But this is only the first layer of control, which has to be met. The investor will also have to check those 50 criteria.
the European Commission wants to closely involve both banks and investors in the assessment of the quality of securitised assets
On this basis the speaker concluded by stating that it is obvious that the European Commission does not want to endorse the principle of external certification and wants on the contrary to closely involve both banks and investors in the assessment of the quality of securitised assets, but it has not however succeeded in creating a harmonised, simple, clear and balanced approach which notably makes it possible to exonerate the bank from part of the responsibility.
He concluded consequently by wondering if, although the regulatory steps are in the right direction, they are also too limited, so that the end result may be something that whatever the type of asset concerned, it is not going to work.
16. The third pillar requires addressing bottlenecks at both national and EU levels
A public decision maker commented that it was very clear that the third pillar needs a very broad approach, because some of the regulatory bottlenecks are at the EU level and some at the national level. Some are of a financial nature and some are linked to the rate of return and profitability specific to each infrastructure sector.
In this respect at the national level the scope of surveillance has been enhanced and become much more intrusive with regard to structural aspects. Notably by targeting cutting red tape the approach seeks the identification of areas requiring the creation of a business-friendly environment, the improvement of the liberalisation and the flexibility of the market, the modernisation of big administration and taxation systems.
It is very different addressing the need to restore investment in countries getting structural funds compared with those specific to Euro area member states recovering from the crisis with debt overhanging the corporate sector
The challenge is therefore to prioritise, and to define macro settings. It is very different addressing the need to restore investment in countries getting structural funds, which have gone through a sudden stop of foreign direct investments through the crisis, compared with those specific to Euro area member states recovering from the crisis with debt overhanging the corporate sector and a high level of non-performing loans. The way that reform is prioritised is thus quite different.
In 2015, the Commission began highlighting some specific elements for different countries.
At the EU level, however, the issue of investment in the energy sector has been examined together with the proposal of an energy union. Similarly the EU digital single market elements regarding the electronic communication sector highlighted the needs regarding Internet platforms and the drivers for a single market. In parallel informal discussions with the Ministers of Finance have been launched, to follow that up in a more systematic way.
17. Critical obstacles to EU investment: going beyond financial ones
Bigger obstacles or barriers to more diversified cross-border financing for companies are probably not all in the area of financial regulations but in other areas. Obviously there has to be work on infrastructure treatment in Solvency II.
But the Capital Market Union (CMU) should go beyond financial regulation; it would be a good thing to be ambitious and tackle at least part of insolvency law. Bank financing should be examined once more, because for SMEs, bank financing will be the predominant channel to obtain finance. More important is to look at the non-financial regulations and the barriers to investment, at both levels – European and national. At the European level there is much procedural law governing decisions on investments, for instance the environmental laws are at least partly based on European regulation on procurement.
18. The Juncker Plan together with the CMU, are part of a general EU strategy, which also encompasses economic structural reforms
A national public decision maker provided a broad perspective regarding the general EU strategy.
He explained that the Juncker Plan is together with CMU and with all the Commission’s efforts to expand the single market, with the new energy agenda and the digital agenda as part of a comprehensive strategy.
There must not be over-reliance on monetary policy; it is only one of the instruments in the toolbox
The public decision maker also stressed that we are in a context where the economy in the European Union is moderately recovering, due to an accommodative monetary policy and low oil and commodity prices. This is a fortunate position he said as it gives some breathing space to Member States and it should be used to make the necessary structural reforms and also to enhance the investment environment.
However he insisted on the fact that these efforts rely not only on the European Commission but they are also a responsibility of Member States. Structural reforms are not very popular with governments because they are very painful, they go to the heart of the labour market and the product market, but it needs to be done. There must not be over-reliance on monetary policy; it is only one of the instruments in the toolbox. Sound public finances are another key element because they give confidence to investors and make investors come to the market and invest in worthwhile projects. Structural reforms and investments are also key elements. It is all about having the right policy mix.
19. Addressing cyclical economic asymmetries emerging within the Monetary Union
In the short term, cyclical economic asymmetries among the countries of the Euro monetary zone are emerging. No dedicated adjustment mechanisms exist to address them. These asymmetries are aggravated by the present high volatility of the markets. Indeed, despite the positive impacts of the central bank policy, the enormous amounts of liquidity, which are travelling across the world, are reducing the will of industrial companies to go to the financial market. In addition such a monetary policy, which has reached its limit i.e. the zero lower bound, has limited economic impacts. This increasing divergence should be compensated by a budgetary policy encompassing a long-term investment horizon, asking the question of having a budget specific to the Eurozone, which raises technical, institutional and strong political issues.
20. A strong and close cooperation between National Promotional Banks and the EIB can progressively reap all the potential benefits of the Juncker Plan
The Juncker Plan is potentially a very strong catalyser of those structural reforms, which are needed to have a single European Investment Market environment that supports corporates and SMEs.
It is in such a context, that National Promotional Banks work strongly and closely with the EIB and that they may act as national EIBs because they know their own countries and their own specificities best. Indeed there is no doubt that there exists a very strong need for technical assistance, that creating the right environment for investment and creating appropriate investment pipelines are priorities.
However the process will take some time, but, he concluded it is the only way to harvest part of the long term savings around the world, notably from insurance companies and pension funds.
21. Creating a sound market place financing for SMEs: various experiments
A representative of a national promotional bank explained that though it is unlikely that Europe will fully adopt a US type financing-model, the big challenge being faced regarding SMEs, is completing the shift from a classic bank financing towards a more market based financing. This shift stems from changes in bank regulation and is being done progressively.
The speaker illustrated the effort engaged describing some experiments launched in France. There he said, in order to facilitate access to non-bank financings, some market-based instruments have been created, in which investors are gathered in common funds in order to finance SMEs. These funds, called Novo, Novi, Nova, which provide equity or debt financing for SMEs, do not provide SMEs with direct access to capital markets. They are not securitisation vehicles either but rather a kind of delegated-investment vehicle. The speaker stressed that this kind of instrument is a well-developed way forward as institutional investors have to get used to this kind of financing. He also explained that to enable investors to invest in this type of risk, additional tools such as guarantee mechanisms might be required to mitigate the risk in SME financing.
22. Small and medium enterprises and local authorities should issue standardised sound information to markets and be encouraged to diversify appropriately their financing sources
A representative of the private sector discussed the appropriate incentives to unleash the potential for long term infrastructure financing. He commented that in addition to the very sound products, which are strengthened by the strong impulse from the EIB, regarding medium sized companies and medium sized local authorities, what is very important is providing investors and markets at large with sound standardised information. Second, these agents must get advice, because in the permanently changing environment specific to them, they need to set up sufficiently diversified financing scenarios. Given that this will not be easily available at a regional level, they may need to find this advice within the EIB, and probably national public banks and other providers of products.
23. Developing cross border projects remains a challenge
A EU public decision maker considered that the best way forward to promote cross-border lending and to facilitate such lending for SMEs is to expand the single market. He suggested in this respect putting the emphasis on projects that are cross-border by nature, notably in infrastructure. He quoted the energy network, which is easily cross-border. He also alluded to the many promoters that right now should work together in order to achieve economies of scale regarding human and financial resources, for example, in research and development. The decision maker also suggested similar approaches at national and regional levels. He concluded by saying that developing thematic platforms amongst several countries is important and that in this respect the role of National Development Banks is crucial.
€75 billion are made accessible for SMEs
Access to funding for small and medium enterprises is technically and financially very difficult. In addition the feasibility of cross-border lending is very different in the more developed countries from that in less-developed countries.
In this context the dedicated funding reserve in the EFSI for SMEs is critical. At the beginning based on €5 billion public funds or guarantee, €75 billion are made accessible for SMEs. Promotional banks are now probably at national and regional local levels the right tools for the SMEs to bridge the EFSI and small enterprises.
An additional solution is grouping such companies to establish common project platforms that can go directly to the EFSI and also the Advisory Hub.
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