What is today's Communication about?
The Communication takes stock of the three evaluations - foreseen in the original Regulation - on the EFSI and the European Investment Advisory Hub:
- the Commission published its evaluation on the EU guarantee and the EFSI Guarantee Fund on 14 September 2016 in the context of President Juncker's State of the Union address
- the European Investment Bank (EIB) published its evaluation on 5 October 2016 and
- EY published its independent evaluation on 14 November..
In line with the requirements of the EFSI Regulation, the European Court of Auditors also issued an opinion on the Commission's evaluation on 11 November 2016.
These three evaluations allow stakeholders to gain a comprehensive overview of the functioning of the EFSI so far and are already feeding into the ongoing legislative discussions on EFSI 2.0.
The Communication concludes that the three evaluations strengthen the case for extending and reinforcing the EFSI. This is in line with the Commission's proposal for EFSI 2.0, which was presented alongside President Juncker's State of the Union speech of 14 September and addresses the evaluation's main recommendations whilst ensuring continuity.
Has the EFSI helped to address investment gaps in Europe? What has been its macro-economic impact?
Following the collapse of investment during the economic and financial crisis, investment continues to be held back by expectations of sluggish demand. It is forecast to grow by 3.3% this year, 3.1% in 2017 and 3.5% in 2018 in the EU, according to the Commission's 2016 Autumn Forecast, but still needs further support in order to return to a sustainable path. It is therefore one of three main areas of focus for the Commission's economic policy, alongside sustainable fiscal policies and structural reforms. Together they build the so-called virtuous triangle. Projects financed under the Investment Plan for Europe, as well as - in some Member States - projects co-financed with EU funds from the 2014-2020 programming period, should increasingly support private and public investment as they enter their implementation phase.
As of mid-November, the operations approved under the European Fund for Strategic Investments now represent a financing volume of EUR 27.5 billion. They are located in 27 Member States and are expected to trigger total investments of around EUR 154 billion.
The European Investment Bank (EIB) has approved 151 infrastructure projects for financing under the European Fund for Strategic Investments (EFSI). These projects represent a financing volume of EUR 19.8 billion and are expected to trigger total investments of around EUR 87 billion.
The European Investment Fund (EIF) has approved 234 SME financing agreements, with total financing under the EFSI of EUR 7.7 billion. They are expected to trigger total investments of around EUR 67 billion. Close to 377,000 SMEs and Midcaps are expected to benefit.
In spite of encouraging signals that the EFSI can sustainably increase investment levels, it is too early to accurately assess the Investment Plan's macro-economic impact. Projects, particularly infrastructure projects, generally take a long time to prepare and structure, with financing often disbursed progressively over a period of years. However, the Commission expects that the Investment Plan will prove to have a significant positive impact on growth rates.
Has the EFSI been effective in increasing access to finance and mobilising private capital?
Around 60% of the overall investments mobilised by the EFSI comes from private investors outside of the EIB Group. Signals from the market indicate that this positive momentum will be maintained. Mobilising private investment in order to boost jobs and growth is one of the key aims of the Plan.
The EFSI - as a rule - provides the riskier tranche of the investment in order to maximise the contribution from private sources of financing by reducing the risk ("first loss protection"). The EFSI plays the role of absorbing some of the risk of an investment so that the bank can lend to additional projects with higher risk profiles.
Projects will only be selected if - with EFSI's involvement – an appropriate multiplier effect can be achieved in terms of attracting private investors and if the projects are viable. Obviously, some projects will generate higher returns than others.
The EFSI works with a wide range of financial instruments and uses the most appropriate one for each project to ensure the best financing solution possible. The EFSI can for example use debt instruments, guarantees, equity, quasi-equity instruments, credit enhancement tools and venture capital. It can finance projects directly or participate in funds that finance several projects.
What are you doing to address geographical balance of EFSI financing?
The EFSI is demand driven. This means that there are no country-specific or sector-specific quotas. However, the Commission agrees that the geographical coverage of the EFSI could be further improved. That is why a central objective of EFSI 2.0 is the enhancement of the geographical coverage of the EFSI, particularly in less developed regions.
To achieve this, the Commission has proposed placing a stronger emphasis on leveraging local knowledge through the European Investment Advisory Hub (EIAH). The Hub will provide more targeted local technical assistance across the EU.
The EIB is also working to extend its local outreach in Member States through opening local offices. Since the Investment Plan was launched in November 2014, the EIB has opened offices in Bratislava, Budapest, Copenhagen, Ljubljana, Prague, Stockholm and Zagreb. Together with the EIB, the Commission is also working closely with National and Regional Promotional Banks to benefit from their expertise of local financing conditions and needs. According to the EIB evaluation published on 6 October, two thirds of the EFSI transactions approved so far have co-investment from National Promotional Banks (NPBs).
The Commission's proposal will also make it easier to combine EFSI financing with other EU funding sources, including European Structural and Investment (ESI) Funds. The Commission also proposed on 14 September a simplification of the Common Provisions Regulation to facilitate such combination. This should further improve the geographic balance of the EFSI.
Does the EFSI complement or compete with other EU funding?
There is great potential for further complementarities and synergies between the EFSI and other EU funding sources, including European Structural and Investment (ESI) Funds. Further developing such complementarities will help to get more projects off the ground and maximise private sector contributions. The Commission has therefore proposed a simplification of the Common Provisions Regulation and the Financial Regulation to facilitate combining the EFSI with ESI Funds, both at the level of the EFSI risk-bearing capacity as well as at the level of Investment Platforms and individual projects.
The Commission, EIB and national authorities are currently developing a first set of projects to illustrate the beneficial outcomes which stem from combining the EFSI with ESI Funds. The TRI – Nord-Pas-de-Calais project, a new company which invests in low-carbon economy projects in the Nord-Pas de Calais region to support the region's zero emissions plan, is an example of one such project.
Further combinations are also possible. In Latvia, for instance, an EFSI loan is being combined with grant funding from the Connecting Europe Facility to allow a Riga transport company to upgrade its fleet with hydrogen fuel cell buses. The "Green shipping" guarantee programme was launched on 8 November and makes use of the Connecting Europe Facility (CEF) Debt Instrument and EFSI resources.
The Commission will shortly adopt an energy package to boost clean energy transition and energy efficiency, to support EU global leadership in renewable energies and to provide a fair deal for energy consumers. The package will aim to provide predictability for businesses, investors and society and to facilitate investment at national level, notably through National Energy and Climate Plans.
How will you further improve cooperation with National Promotional Banks (NPBs)?
NPBs play a crucial role in the implementation of the Investment Plan and the success of the EFSI. The Commission's proposal for EFSI 2.0 recognises the importance of using their local knowledge and geographical reach as well as their potential to co-finance projects. In fact, according to the EIB's evaluation, two thirds of the EFSI transactions approved so far have co-investment from NPBs.
The involvement of NPBs will be central to the success of the enhanced European Investment Advisory Hub (EIAH). So far, 18 NPBs (as well as the International Union of Railways) have agreed to build partner networks with the Hub to exchange best practices and facilitate the Hub contacting project promoters.
Do the EFSI governance structures function well?
The evaluations have found that the governance structure of the EFSI is functioning well.
However, the Commission has proposed to further enhance transparency in investment decisions and governance procedures. Under the EFSI 2.0 proposal, the Investment Committee will be required to make its decisions public, outlining the reasons why it deems any given operation should be approved under the EFSI. In addition to this, a scoreboard of indicators will have to be published once an operation is signed, unless it includes commercially sensitive information.
Moreover, the EFSI 2.0 proposal also includes an obligation for the EIB and the EIF to inform the final beneficiaries, including SMEs, that they have received support from the EFSI. Many beneficiaries are still unaware that they the loan they have received is backed by the EFSI.
Has the EU guarantee proven appropriate? Why are you lowering the provisioning?
The Commission evaluation assessed the risks of the different products supported by the EU Guarantee and concluded that the EU budget would still be adequately shielded from potential calls under the EU Guarantee with an adjusted target rate for provisioning the Guarantee Fund of 35%, taking into consideration recoveries, revenues and reflows from EIB operations. So far, the provisioning has been a very conservative 50%. The recent report by the European Court of Auditors confirmed the Commission's evaluation that the proposed adjustment of the provisioning of the EFSI Guarantee Fund from 50% to 35% is in line with the updated estimate of expected losses.
The increase of the EU guarantee to EUR 26 billion will further expand the large and diversified EFSI portfolio with the aim of triggering EUR 500 billion of investment by the end of 2020. This diversified portfolio is expected to generate revenues and reflows which, together with the yield stemming from the investments by the Guarantee Fund, will feed into the Guarantee Fund.
Has the Investment Plan been communicated effectively?
One of the areas for improvement identified by the independent evaluation by EY relates to the Investment Plan's communication efforts. Much has already been done. The Commission carried out a specific communication campaign focused on stakeholders in Member States in 2015-2016. A corporate communication campaign targeting citizens in Member States is currently ongoing. The Commission is also cooperating closely with the European Parliament, the EIB Group, NPBs and key stakeholders at European and local level to make the opportunities under the Investment Plan known to all potential beneficiaries.
The Commission will, in close cooperation with the EIB Group, further strengthen the communication on the EFSI and the Hub in order to raise awareness of the availability of funding and technical assistance across the EU.
Has the European Investment Advisory Hub (EIAH) been effective in providing the necessary technical assistance? What can be improved?
Through its network of partner institutions the Hub provides access to a number of advisory and technical assistance programmes and initiatives. Project promoters, public authorities and private companies can receive technical support to help get their projects off the ground, make them investment-ready, gain advice on suitable funding sources, and access a unique range of technical and financial expertise. The Hub has already dealt with almost 300 requests from all Member States.
The Advisory Hub looks at projects which are not yet ready for financing. This means that the projects supported by the Hub will be implemented at a later stage. In other words, the effects of the Hub's action are not yet visible on the pipeline of projects that can be financed. Of the EFSI projects, 26 have benefitted from an advisory support of some kind during their development.
Concerning recommendations that the Hub should be more local and targeted, the EIAH and the Commission are working on several fronts to make this possible. The Commission proposal for EFSI 2.0 places a stronger emphasis on leveraging local knowledge to facilitate EFSI support across the EU through the Hub. The Hub will provide more targeted technical assistance locally across the EU, and the EIB is working to extend its local outreach in the Member States.
The Hub is also seeking cooperation with other international partners such as the European Bank for Reconstruction and Development (EBRD) to cover advisory areas currently not served by the EIB, for example to provide advice for small businesses in cohesion countries (e.g. Romania and Bulgaria).
Moreover, the Hub has allocated specific resources to Greece and they are already currently supporting the development of investment projects in the country. There are similar discussions for local support with Bulgaria and Romania.
In addition, with the support of an external contractor, the Hub is assessing where else and in which areas more needs to be done. This assessment is about to be finalised. This study supports the EIB and the Commission in setting out the strategy for the Hub by helping to define the Member States and investment sectors where improving the uptake of advisory services could have the greatest impact on investment outcomes.
Does the Communication address the issues raised in the opinion issued by the European Court of Auditors (ECA)?
The Commission welcomes all of the reports and evaluations on the EFSI. They are already feeding into the legislative process on the proposal to extend the EFSI. The majority of the issues raised in the reports are already addressed in our proposal.
In line with the requirements of the EFSI Regulation, the Court of Auditors issued an opinion on the Commission evaluation on the use of the EU guarantee and the functioning of the EFSI Guarantee Fund. The Commission welcomes the ECA's opinion that the proposed adjustment of the provisioning of the EFSI Guarantee Fund from 50% to 35% is in line with the updated estimate of expected losses.
In addition to the EFSI Regulation requirement, the Court of Auditors also assessed other elements of the EFSI 2.0 proposal and made recommendations on: (i) the timing of the proposal; (ii) additionality; and (iii) governance and transparency.
The Communication explains the Commission's stance on each of these issues:
- Concerning the timing of the EFSI 2.0 proposal, bearing in mind that the legislative process takes some time, an undue delay may have created a financing gap for EFSI financed projects by mid-2018. It was necessary to present the proposal for EFSI 2.0 in September 2016 to guarantee certainty for investors and project promoters.
- Regarding additionality, the EFSI has allowed the European Investment Bank to take on more risk. The EIB evaluation concludes that the EFSI has changed how the EIB operates: it is no longer business as usual. The EIB is financing riskier and more innovative projects. Nonetheless, the Commission proposes to further enhance the criteria of additionality, by proposing that projects under the EFSI must address market failures or sub-optimal investment situations as part of the eligibility criteria for EFSI support. In addition, the EFSI 2.0 proposal includes a more detailed definition of additionality, the concept that a project would not have happened at the same time, or to the same extent, without the EFSI. The Commission also addresses a concrete bottleneck to investments of high EU added value, by considering cross-border infrastructure projects (and related services) as additional by definition.
- On governance and transparency, the Commission welcomes the ECA's positive opinion on the proposals reinforcements. The proposal on EFSI 2.0 aims at increasing transparency, by (i) asking the Investment Committee's decisions to include the rationale for the decisions on the use of the EU guarantee; (ii) the publication of the EFSI scoreboard of indicators, with the exception of commercially sensitive information.
As regards the respective roles of the Commission and the EIB in the governance structure of EFSI, the Commission does not share the view of the ECA that responsibilities are unclear. The proposal for EFSI 2.0 does not propose to modify the current, well-functioning arrangements.
Why are there three separate evaluations of the Investment Plan?
The three evaluations have been prepared in line with the requirements of the EFSI Regulation.
Those evaluations allow stakeholders to gain a comprehensive view of the functioning of the EFSI so far, and are already feeding into the ongoing legislative discussions on EFSI 2.0. The Bratislava Declaration committed the European Council to taking a decision on the extension of the EFSI in December 2016, in light of the independent evaluation.
Why has the independent evaluation been published already when the EFSI Regulation only asks for it by June 2018?
The Commission decided to ask for the external, independent evaluation to be concluded earlier than initially envisaged so that it could feed into and inform the debate on the legislative proposal on EFSI 2.0. This independent evaluation does not replace the 2018 evaluation. In fact, the proposal for EFSI 2.0 now foresees two independent evaluations. The first should be completed by 30 June 2018, and the second by 30 June 2020.