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National promotion banks to stimulate investments into real economy

Eugene Eteris, European Studies Faculty, RSU, Latvia, 24.07.2015.Print version
In order to put Europe on the path of economic recovery collective and coordinated efforts among the EU member states are needed. The Investment Plan for Europe is at the heart of this strategy; the plan includes a European fund for strategic investments of about €64 bln driven by the national promotion banks and operated by the Commission and EIB.

The Commission set out an approach based on three pillars: structural reforms to put Europe on a new growth path; fiscal responsibility to restore the soundness of public finances and cement financial stability; and investment to kick-start growth and sustain it over time. The Investment Plan for Europe represents a cooperative effort by the Commission and the European Investment bank, which created the European Fund for Strategic Investments (EFSI) aimed at achieving abovementioned goals.

 

EFSI includes the following priorities: a) mobilising investments of at least €315 billion in three years; b) supporting investment in the real economy, and c) creating an investment friendly environment.

 

See: http://ec.europa.eu/priorities/jobs-growth-investment/plan/index_en.htm


Providing guarantees

In the present version, the Investment Plan for Europe returns to the three initial Commission’s objectives:

 

  • removing obstacles to investment by deepening the single market,
  • providing visibility and technical assistance to investment projects and
  • making smarter use of new and existing financial resources.

 

According to European Commission estimates, the Investment Plan has the potential to add €330 to €410 billion to the EU's GDP and create 1 to 1.3 million new jobs in the coming years.

The Commission sees that there is sufficient liquidity in the EU, but private investors are not investing at the levels needed due to a lack of confidence and uncertainty among other factors, so the Investment Plan for Europe aims to address this; thus “stimulating” private investors is the  EFSI’s primary aim.

 

A guarantee of €16 billion is being created by establishing EFSI. The EU’s share will be backed by a guarantee fund of €8 billion (half the amount) from the EU budget. The EIB will commit €5 billion, giving EFSI a risk absorbing capacity of €21 billion.

 

EIB and European Commission’s experience indicates that 1 euro of subordinated debt catalyses 5 euro in total investment: € 1 in subordinated debt and on top of that 4 euro in senior debt. This means that € 1 of protection by the fund generates € 15 of private investment in the real economy that would not have happened otherwise. This 1:15 multiplier effect is a prudent average, based on historical experience from EU programs and the EIB.

 

The role of the EIB in the decision making is great: as a contributor to EFSI, the EIB will have representatives in the Steering Board. Since EFSI is operating within the EIB, any project supported by EFSI will also require approval according to the EIB’s regular procedures. EFSI financing for SMEs and mid-caps through the European Investment Fund (EIF) will equally require approval according to the EIF's regular procedures.


The ways the EFSI can provide support to member states’ SMEs

EFSI will provide financing (using instruments such as equity, quasi-equity and others) for projects that are deemed high-risk, which is often missing in the current economic environment. This could be of benefit to small, innovative starting up companies, which investors tend to see as presenting higher risk than already established or larger companies. A quarter of the total investment catalysed by EFSI, or €75 billion over three years will go to SMEs and mid-caps via the European Investment Fund (EIF), which is part of the EIB group. SMEs normally receive finance via dedicated funds such as special purpose vehicles (SPVs), or intermediaries such as banks.

 

The EIF has already started co-financing SMEs: in May 2015 it signed a first agreement with a French bank to provide increased lending to innovative companies; followed by similar agreements with banks in other countries.

 

The SME Window of EFSI will support existing funding from the Competitiveness of Enterprises and Small and Medium-sized Enterprises ("COSME") program and reinforce the implementation of the COSME Loan Guarantee Facility (LGF), which have seen a strong market demand but have limited budgetary resources. Thanks to a guarantee provided under EFSI the European Investment Fund (EIF) will be able to bring forward in time the signature of transactions with financial intermediaries compared to what would have been possible under the COSME budget alone. This will create multiple positive impacts, leading to further investments, growth and faster economic recovery.


National promotion banks

The Commission has published a Communication on the role of National Promotional Banks (NPBs) in supporting the Investment Plan for Europe (22.07.2015).  

 

European Commission Vice-President Jyrki Katainen, responsible for Jobs, Growth, Investment and Competitiveness underlined the important role that National Promotional Banks would play in making the Investment Plan a success.

 

Already nine EU states have made contributions to the Investment Plan via their promotional banks, which have invaluable local expertise and knowledge; the EIB is already working closely with those NPBs.  

 

Commissioner Pierre Moscovici, responsible for Economic and Financial Affairs, Taxation and Customs, said that the synergy between European and national tools would be essential to close the investment gap in the EU economies. He underlined that a well-structured network of national promotional banks could play an important role while complementing the European Investment Bank’s efforts.

 

The Commission’s Communication explains the important role that NPBs can play in getting Europe investing again by participating in EFSI investments. It provides clarity and practical guidance on how to set up a new NPB, the statistical treatment of NPB co-investments as regards government deficit and debt under the Stability and Growth Pact, the EU state aid treatment of national project co-financing and how NPBs from different EU states can join forces and work with the EIB to set up investment platforms. This crucial guidance will help companies across Europe gain access to financing through EFSI, the cornerstone of the €315 billion Investment Plan.


Contemporary decisions

The decisions taken by the College of Commissioners (22.07.2015) include:

 

·                     Agreement on the working methods between the Commission and the EIB, as foreseen in the Regulation for a European Fund for Strategic Investments. Commission President Jean-Claude Juncker, Vice-President Jyrki Katainen and EIB President Werner Hoyer signed the EFSI agreement in Brussels on 22 July 2015.  

·                     Confirmation of the projects pre-financed by the EIB which will receive the backing of the EFSI guarantee. The European Council in December 2014 invited the EIB to "start activities by using its own funds as of January 2015". Thus several projects have been pre-financed in the context of the Investment Plan for Europe while the adoption of the EFSI Regulation was pending.

There are eight –mostly infrastructure projects - in numerous EU member states which already received the EU guarantees: Copenhagen Infrastructure II / Abengoa research, development and innovation II / Energy efficiency in residential buildings / Grifols Bioscience R&D / Äänekoski bio-product mill / Redexis Gas Transmission and Distribution /Arvedi Modernisation Programme / Primary healthcare centres PPP

·                     The appointment, together with the European Investment Bank (EIB), of the four members of EFSI’s Steering Board: Ambroise Fayolle, Vice-President responsible for Innovation, EIB; Maarten Verwey, "Structural Reform Support Service" in the Secretariat General, European Commission; Gerassimos Thomas, DG Energy, European Commission; Irmfried Schwimann, DG Competition, European Commission. The Commission alternate members are Benjamin Angel, DG Economic and Financial Affairs; Nicholas Martyn, DG Regional Policy; Robert-Jan Smits, DG Research and Innovation.

·                     Final arrangements to launch the European Investment Advisory Hub (EIAH). The EIAH will support the development and financing of investment projects in the EU by offering a single point of contact for guidance and advice, providing a platform to exchange know-how, and coordinating existing technical assistance.

·                     Decision on the management and main elements of the European Investment Project Portal (EIPP). The EIPP will be a publicly available, secure web portal where EU based project promoters seeking external financing are given the opportunity to promote their projects to potential investors.

·                     The delegated act for a Scoreboard of indicators which the independent Investment Committee will use when deciding whether a project proposal fits the criteria to receive backing of the EU guarantee (EFSI).


Nine member states’ contribution

In February, Germany announced that it would contribute €8 billion to the Investment Plan (EFSI) through KfW.

 

Also in February, Spain announced a €1.5 billion contribution through Instituto de Crédito Oficial (ICO).

 

In March, France announced a €8 billion pledge through Caisse des Dépôts (CDC) and Bpifrance (BPI) and Italy announced it will contribute €8 billion via Cassa Depositi e Prestiti (CDP).

 

In April Luxembourg announced that it will contribute €80 million via Société Nationale de Crédit et d’Investissement (SNCI), and Poland announced that it will contribute €8bn via Bank Gospodarstwa Krajowego (BGK).

 

In June, Slovakia announced a contribution of €400 million through its National Promotional Banks Slovenský Investičný Holding and Slovenská Záručná a Rozvojová Banka, and Bulgaria announced a contribution of €100 million through the Bulgarian Development Bank.

 

On 16 July, the UK announced that it will contribute £6 billion (about €8.5 billion) to projects benefiting from EFSI finance.

 

More on the issue see: http://europa.eu/rapid/press-release_IP-15-5420_en.htm?locale=en






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