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Impact of structural funds and new financial instruments

on long-term investment in Europe

CIPFA Europe Annual Seminar15 October 2014

Leopold Mantl, European Commission

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Challenges for long-term financing

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

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Europe's research challenge

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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

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Source: Eurostat, Commission Communication on Modern SME policy for Growth and Employment

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

Europe' Europe' SME SME Challenge (I)Challenge (I)

Share of total number of companies

Europe's SME Challenge (II)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

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Europe's response to the challengeEurope's response to the challenge Outlined in Commission Communication on long term financing

(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

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The role of the Union budget

Europe 2020 - The basis for the MFF 2014-20

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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)

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Comparison of ceilings 2000-2020 (EUR bn)

100,0

110,0

120,0

130,0

140,0

150,0

160,0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

EUR bn (2011 prices)

'07- '13 average EUR 141.9 bn

COM '14- '20*: EUR 1033.2 bnMFF '07- '13: EUR 993.6 bn

Committment ceiling ofMFF 2000- 2006 for EU- 15/25

Committment ceiling ofMFF 2007- 2013 for EU-27

Committment ceiling ofupdated COM proposal for MFF

2014- 2020 for EU- 28 (June 2012)*

MFF '00- '06: EUR 878.5 bn

'00- '06 average EUR 125.5 bn

EUR 5.6 bn

EUR 1.0 bn

'14- '20 averageEUR 137.1 bn

MFF 2014-2020 : EUR 959.9 bn

Commitment ceiling of MFF 2014-2020

* ITER and GMES outside the MFF

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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.

Comparison of ceilings 2000-2020 (% GNI)

0,85%

0,90%

0,95%

1,00%

1,05%

1,10%

1,15%

1,20%

1,25%

1,30%

from 1.20% to 1.27% of GNP

% of EU GNI

'00-'06 average 1.06% '07-'13 average 1.06%'93-'99 average1.06%

'00-'06 average0.94%

Own Resources ceiling

Payment ceiling ofFinancial Framework

Payments actuallyexecuted/appropriations*

'14-'20 average 0.95%

* excluding expenditure financed by assigned revenue

% of EU GNI

'93-'99 average 1.19%

1.27% of GNP ≡ 1.24% of GNI excl. 1.23% of GNI incl. FISIM

Own Resources ceiling

Payment ceiling ofFinancial Framework

Payments actuallyexecuted/appropriations*

* excluding expenditure financed by assigned revenue

Commitment ceiling ofFinancial Framework

'14-'20 average 1.00%

'07-'13 average 1.12%'00-'06 average 1.09%

'93-'99 average 1.25%

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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.)

EU budget 2014 – 2020: € 960 bn (MFF -Multiannual Financial Framework)

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EIB(lending volume ~0.55% GDP p.a.)

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)

Competitiveness13%

Cohesion34%

Agri-culture &

Rural Develop-

ment41%

Foreign Policy

6%

Adminis-tration

6%

Other2%

Competitiveness (Heading 1a)

+ EUR 34 billion

Youth Employment Initiative, EUR 6 billion.

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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

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Financial instruments

What are EU Financial Instruments?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 arrangements with 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)

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EU Financial Instruments: Why?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)

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EU Financial Instruments: When?EU Financial Instruments: When?

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Lessons learnedLessons 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.

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Future: Smarter DesignFuture: 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.

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EU financial instruments 2014-2020: State of Play

The New Regulatory Environment

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EU financial instruments 2014-2020: State of Play

Internal Instruments/1: Overview

Funding Programme Responsible DG Indicative Amount

COSME ENTR EUR 1.38 billion (662 mio EFG/717 mio LGF)

Horizon 2020 RTD EUR 2.55 billion

Erasmus + (Student Loan Guarantee facility)

EAC EUR 517 million

Connecting Europe Facility MOVE EUR 3.3 billion

LIFE (PF4EE + NCFF) ENV-CLIMA EUR 140 million expected

EaSI EMPL - ECFIN EUR 193 million expected

All these instruments are managed by the EIB – EIF

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EU financial instruments 2014-2020: State of Play

Internal Instruments/2: types of instruments

Infrastructure: two level approach

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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)

Project BondsTarget rating

Public bond issueor

private placement

SPV

ProjectCosts EIB

Sub-debt

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.

Project BondsTarget rating

Project Bond

Investor

EIB Guarantee

Equity

SPV

ProjectCosts

Project Bond

Investor

Project Bonds: Funded vs. Unfunded Solution

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20% of bond issue max

Public bond issueor

private placement

Funded credit enhancement - Mezzanine loan Unfunded credit enhancement - Guarantee

20%max

COSME Loan Guarantee Facility

Provides a frame financial intermediaries can create products suitable for their particular markets

financial intermediaries can create products suitable for their particular markets

Capped portfolio guarantees free of chargefree of charge

Strict focus on additionality guarantees focus on transactions with a higher risk profile

guarantees focus on transactions with a higher risk profile

Wide range of interventions Working capital, investment loans, subordinated loans, bank guarantees, leasing

Working capital, investment loans, subordinated loans, bank guarantees, leasing

Duration min. 12 months (transaction) – max. 10 years (guarantee)

min. 12 months (transaction) – max. 10 years (guarantee)

Amount ≤ € 150,000: for any type of SME> € 150,000: under conditions

≤ € 150,000: for any type of SME> € 150,000: under conditions

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Member States

Joint EC/ EIB SME initiativeEntrusted entity

€ € €

Application to call for expression of interest; demand driven

Financing

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Accounting rulesAccounting rules

Accounting officer of the Commission adopts accounting rules, based on IPSAS

Financial instruments are covered by Accounting Rule 11

Financial data to be provided by entrusted entities according to a standardised reporting format

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ConclusionsConclusions

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

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