The Bio-economy Investment Summit - European Commission€¦ · The Bio-economy Investment Summit...

Innovation Finance Advisory | European Investment Bank

10/11/2015

The Bio-economy Investment Summit

Preliminary results of the study

on access-to-finance for

Bio-based Industries and the Blue Economy

Innovation Finance Advisory, Christine Garburg

10th November 2015, Brussels, Belgium


10/11/2015

Contents

1

2

3

4

Executive Summary

Context and objectives

Methodology

Results of the BBI and BE projects survey

Preliminary recommendations


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Executive Summary

1. Emerging Bio-Based Industries (BBI) and Blue Economy (BE) projects face numerous challenges, including access-to-finance, primarily for BBI:

Private financial market participants have difficulties in accurately assessing the risks with BBI projects. The result is a low funding interest in BBI. Top ranking risks cited are market & demand risks, and regulatory uncertainty.

Public financial support is often too low and it is challenging to secure. Suitable alternative public financial instruments are limited.

2. Investments in BE are smaller and appear to face less challenges to secure funding.

3. BBI stakeholders expressed a strong need for public financial instruments with more favorable conditions and with higher risk absorption capacity than offered by private financial market participants.

4. A preliminary conclusion from this report identifies the necessity for:

Market support and awareness raising actions tailored for private financial market participants;

Novel public financial instruments dedicated to BBI projects, either directly managed by the EIB or via financial intermediaries.


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The EIB Study: Three-phase approach

1. Analyse the investment/lending conditions in BBI and in the BE

3. Frame the landscape of financial market participants

2. Formulate policy options to remove potential bottlenecks

Select 40 - 50 BBI or BE projects/companies Test the recommendations

with a panel of financial market participants (workshop)

1.1

Map public financial instruments

1.2

Conduct the project/ company survey

1.3

Analyse funding opportunities and barriers

2.1

Formulate recommendations for public financial instruments

2.2

3.1

Finalise recommendations 3.2

2

Launching new technologies and industrial processes are typically challenging , including:

• Regulatory uncertainty • Technological uncertainty • Significant capital requirements

The EIB study aims at assessing the existence of market failures that require policy action (e.g. financial instruments) to support BBI and BE.

Promoting these new economic dynamics requires strong and multi-faceted public policies


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Appetite for public financial

instruments with more favourable conditions and higher risk

absorption capacity

Relatively poor knowledge on financial engineering and existing

public financial instruments

Risk aversion and low return expectations restrain potential

financing

Market and regulatory uncertainty and low and volatile

earnings are key risk factors

Key preliminary

findings from the

survey

Access-to-finance: private funding is an issue

Limited or no understanding and expertise of private financial

market participants means low funding interest

Public financial support is often too low, grants are difficult to secure, there is only limited availability of other public

financial instruments

1

2

3

4 5

6

7

Key preliminary findings of the EIB study 3


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• 81% of analysed projects (secured and unsecured) have/have had issues regarding access to funding

• Around 60% of analysed projects have managed to secure funding

• In most cases, debt was not guaranteed by the industrial partners

• Unsecured projects target a more aggressive leverage ratio than secured projects

Access-to-funding is an issue for BBI projects, particularly for private financial investment

14 projects

7 projects

1 project

4 projects

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Project with secured funding Projects still looking for funding

Access-to-finance is an issue Access-to-finance is not an issue

Investment size : Total of 2.5 Bn €

Average of 149

M€ / project

Investment size : Total of 1 Bn €

Average of 92M€

/ project

3

37%

12%

4%

39%

8%

Average funding structure of stand-alone projects (funding secured)

Equity Grants Others Public loans Private loans

31%

20%

4%

42%

9%

Average targeted funding structure of stand-alone projects (funding unsecured)

Equity Grants Others Public loans Private loans


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• Financial market participants are virtually not involved in BBI project’s equity as they still face difficulties assessing the risks :

• Lack of benchmark transactions and track record;

• BBI considered as a emerging industry (high technological risks, uncertain market opportunities);

• Limited interest for investing in new technologies.

• Industrial investors appear significantly better placed to judge risks associated with BBI projects and therefore are more likely to invest.

• To secure funding, other partners are required to develop other projects around the bio-refinery to provide the input (and maybe some of the markets).

Limited understanding and expertise of private financial market participants lead to low funding interest in BBI

3

Unbalanced breakdown of equity providers for BBI projects


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Public financial support is often too low and challenging to secure – except for grants, there is limited availability of other public financial instruments

• Large size of CAPEX • Grants are too low for large commercial scale projects

• Suboptimal size due to lack of available funds

• Long times of negative cash flow ( e.g. 3-4 years), weak credit ratios (e.g. Debt/EBITDA) volatile input costs, long time to market entry leads to low or volatile profitability

• No willingness to lend to demonstration plants or very risky projects with low predictability of profitability

• No interest by private financial market participants due to a lack of public engagement

• Complicated application for public instruments (contradictory and strict rules)

• EU State aid prohibits support for BBI companies

• More support (public grants, favourable funding) outside of Europe creates a competitive advantage compared to European companies

« Shortfalls » of existing public financial instruments

Potential consequences Key issues to access funding

3


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Investments in the BE are smaller and appear to face less challenges to secure funding

• Capital expenditure for BE projects ranges from 0.25M€ to 5M€:

• The BE sectors are primarily composed of SMEs who lack substantial financial resources.

• Most projects are on-balance-sheet

• Project funding occurs step-wise in order to provide smaller amounts of funding as the market is not sufficiently mature to provide amounts higher than the range of several hundred thousands to 1-2 M€.

• CAPEX is usually not the main issue as it can be taken into account in the business model, but OPEX is. An ideal instrument would mitigate the OPEX risk.

3

51%

12%

27%

10%

Average funding structure of BE (secured and targeted)

Equity Debt Grants Others

The sample of responses is limited: 7 projects to date


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1. Support market uptake

• Create a regulatory support framework for BBI and BE projects, notably targeting:

i. Access to feedstock, including: balance between bio-energy and bio-based products policies and measures, and regulatory waste management provisions for the collection and recycling of biomass, waste, residues.

ii. Access to markets, including: targets for the use of biomass in material and chemical sectors, bio-preferred procurement programmes, mandatory use or bans of products based on their environmental footprint, tax incentives, direct financial incentives.

Support Market Framework

4

1.


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2. Raise awareness in the financial community

• Enhance the understanding and the know-how of financial market participants on BBI projects:

i. Develop an awareness campaign;

ii. Launch a contact platform to facilitate relationships between project promoters & companies and financial market participants;

iii. Promote the use of harmonised labelling and standards for reliable technologies, processes, and products;

iv. Develop methodologies and tools to facilitate and to determine economic/financial risk of innovative technology for BBI projects through RTOs (Research and Technology Organisations) and technology transfer providers.

v. Explore synergies with market-place concept for KETs (Key Enabling Technologies) companies/projects

Raise Awareness in the Financial Community

4

2.


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Preliminary recommendations:

3. Create public financial instruments

• Develop specific financial instruments, such as loans/guarantees, where the lender or guarantor covers the regulatory and market risks:

i. Coverage against an increase in the pricing of feedstock, e.g. due to regulatory changes;

ii. Coverage against a drop in BBI product revenues by securing a minimum income revenue stream (e.g. the LGTT model developed in transport to limit the traffic revenues risk).

• Develop new financial instruments featuring more favourable conditions than the ones currently offered by the financial market, i.e. loans with:

iii. longer tenor (15 years);

iv. longer grace period (2-5 years);

v. lower interest rates.

These multifaceted instruments could be managed directly by the EIB or through financial intermediaries.

Create Public Financial Instruments

4

3.

Those recommendations have yet to be presented and discussed with the financial market participants to assess to what extent the proposed measures may have the catalytic impact to attract private money to BBI projects.

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