Impact of structural funds
and new financial instruments
on long-term investment in Europe
CIPFA Europe Annual Seminar
15 October 2014
Leopold Mantl, European Commission
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Challenges for long-term financing
2
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
3
Europe's research challenge

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
4
Europe' SME Challenge (I)

28 million SMEs in the EU:
Share of total number of companies
 account for more than 99% of
all companies
 employ 66.5% of all privatesector workforce

Micro-businesses dominate
employment in some countries: Italy
(48%) and Greece (57%)

Very flexible

Stable employer, source of organic
growth and innovation
Source: Eurostat, Commission Communication on
Modern SME policy for Growth and Employment
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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
6
Europe'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
The role of the Union budget
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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)
EUR bn (2011 prices)
160,0
MFF '00-'06: EUR 878.5 bn
MFF '07-'13: EUR 993.6 bn
COM '14-'20*: EUR 1033.2 bn
150,0
EUR 1.0 bn
MFF 2014-2020 : EUR 959.9 bn
140,0
EUR 5.6 bn
'07-'13 average
EUR 141.9 bn
'14-'20 average
EUR 137.1 bn
130,0
Committment ceiling of
MFF 2000 -2006 for EU -15/25
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.
Committment ceiling of
MFF 2007 -2013 for EU -27
120,0
Committment ceiling of
updated COM proposal for MFF
2014 -2020 for EU -28 (June 2012)*
'00-'06 average
EUR 125.5 bn
110,0
Commitment ceiling of MFF 2014-2020
100,0
2000
2001
2002
* ITER and GMES outside the MFF
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
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2020
Comparison of ceilings 2000-2020 (% GNI)
% of EU GNI
1,30%
'93-'99 average 1.25%
1,25%
1,20%
1,15%
1.27% of GNP ≡ 1.24% of GNI excl.
1.23% of GNI incl. FISIM
f GNP
1.27% o
to
%
0
from 1.2
Own
OwnResources
Resourcesceiling
ceiling
Commitment
ceiling
Payment ceiling
of of
Financial
FinancialFramework
Framework
'93-'99 average 1.19%
'07-'13 average 1.12%
'00-'06 average 1.09%
1,10%
1,05%
'93-'99 average
1.06%
'00-'06 average 1.06%
Payment ceiling of
Financial Framework
Payments actually
executed/appropriations*
Payments actually
executed/appropriations*
'07-'13 average 1.06%
'14-'20 average 1.00%
1,00%
0,95%
'00-'06 average
0.94%
'14-'20 average 0.95%
0,90%
0,85%
* excluding expenditure financed by assigned revenue
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The EU intervention model – new MFF
half of the budget and EIB are growth related (together 1.0% of
GDP)
EU Budget
EIB
(size ~ 1% GDP EU p.a.)
(lending volume ~0.55% GDP p.a.)
EU budget 2014 – 2020: € 960 bn (MFF Multiannual Financial Framework)
Administration
Foreign
6%
Policy
6%
Agriculture &
Rural
Development
41%
Other
2%
Competitiv
eness
13%
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)
Cohesion
34%
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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
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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?
 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?
Guiding principles:
Financial instruments and grants are complementary financing tools.
Financial Instruments:
 Address market gaps or sub-optimal investment situations
in economically viable projects
 Funding gaps e.g. due to general economic uncertainty, high
business/innovation risk, high transaction costs, asymmetric
information
 Ensure EU value added
 Effective targeting of policy goals
 Catalytic effect on existing similar MS schemes or private
investment, no crowding out
 Provide leverage
 Attract private investment greater than EU contribution
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Lessons 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 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
Horizon 2020
RTD
EUR 2.55 billion
Erasmus + (Student Loan
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
Guarantee facility)
1.38
billion
EFG/717 mio LGF)
All these instruments are managed by the EIB – EIF
11
(662
mio
EU financial instruments
2014-2020: State of Play
Internal Instruments/2: types of instruments
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Infrastructure: two level approach
 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)25
Project Bonds: Funded vs. Unfunded Solution
Funded credit enhancement - Mezzanine loan
Project
Bonds
Target
rating
SPV
Project
Costs
EIB
Sub-debt
Equity
Public bond issue
or
private
placement
Project
Bond
Investor
20% of bond
issue max
Unfunded credit enhancement - Guarantee
Project
Bonds
Public bond issue
or
private
placement
Project
Bond
Investor
Target
rating
SPV
Project
Costs
EIB
Guarantee
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.
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20%
max
COSME Loan Guarantee Facility
Provides a frame
financial intermediaries can create products suitable
for their particular markets
Capped portfolio guarantees
free of charge
Strict focus on additionality
guarantees focus on transactions with a higher risk
profile
Wide range of interventions
Working capital, investment loans, subordinated
loans, bank guarantees, leasing
Duration
min. 12 months (transaction) – max. 10 years
(guarantee)
Amount
≤ € 150,000: for any type of SME
> € 150,000: under conditions
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Member
States
Entrusted entity
Joint EC/ EIB SME initiative
Application to call for expression of interest; demand
driven
€
€
€
Financing
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Accounting 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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Conclusions
 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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