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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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