Deutsche Bank
Research
Europe
Economics
Date
5 June 2015
Barbara Boettcher
EU Investment Plan set on course
Economist
(+49) 69 910-31787
barbara.boettcher@db.com
Dieter Braeuninger
The long-awaited European Fund for Strategic Investments, Mr. Juncker´s key
economic priority, has successfully passed the final stage of negotiations in the
ordinary legislative procedure and is expected to be approved in the ECOFIN
on 19 June and in the EP on 24 June. In response to a still cumbersome
economic recovery the Juncker Commission proposed the EFSI as a
cornerstone of its investment plan to stimulate underperforming investment in
Europe. The EFSI sets out to mobilise EUR 315bn in public and private
investment via leveraging an initial endowment of EUR 21bn with a multiplier
of up to 1:15. The initial funds will be provided in the form of a EUR 16bn
guarantee from the EU, of which 50% or EUR 8bn will be backed up with a
standing EU guarantee fund, and EUR 5bn from the European Investment Bank.
Economist
(+49) 69 910-31708
dieter.braeuninger@db.com
In the course of negotiations, the EU legislators have overcome substantial
disagreement, in particular on the question of how the initial EU guarantee
fund of EUR 8bn will be financed from the budget. The EP wanted to minimise
the re-appropriation of funds from Horizon 2020 and the Connecting Europe
Facility that had been proposed by the Commission and the Council. The
compromise that has been reached in the trilogue will meet some of the
demands by the EP but maintain the overall direction. Instead of the initially
proposed EUR 6bn, only EUR 5bn will be re-appropriated from the two projects
and an additional EUR 1bn will be taken from the global margin for
commitments in the budget. In another substantial concession, the Council
grants the EP the right to approve the Managing Director of the EFSI. In turn,
the EP will have no decision power in the appointment of the investment
committee, the body that will be responsible for examining and deciding on
the projects to be financed by the EFSI. In resolving their disagreements, EU
legislators stick to an ambitious timeline that aims to make the fund
operational by mid-2015.
Six member states have so far announced contributions worth a total of EUR
33,58bn to foster the investment initiative, though only indirectly through their
national promotional banks. For the desired 1:15 multiplier to fully materialise,
it will be vital that both EU member states and the private sector participate.
The exact form of the national promotional banks’ contributions is still to be
determined, but certain guiding principles for project-based financing and the
participation in investment platforms have been made public. The EFSI
regulation provides that one-off sovereign contributions, including through
national promotional banks, will be treated favourably in the context of the
assessment of public finances under the Stability and Growth Pact.
The EIB and EIF have already started approving funding for projects that are to
be covered by the EFSI guarantee and a first financial transaction has been
conducted on 12 May. These actions have been mandated by a clause in the
forthcoming regulation with regard to the ambitious timeline and the urgent
need for action on investment. If they are found to fall into the profile of the
EFSI, those projects will be included into the EFSI portfolio and will be given
coverage under the guarantee fund retrospectively.
We thank Maximilian Kremer for contributing with valuable research to this paper..
________________________________________________________________________________________________________________
Deutsche Bank AG/London
DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 124/04/2015.
5 June 2015
Focus Europe: EU Investment Plan set on course
The Idea behind the EFSI
There has been widespread concern among policy makers about the apparent
investment gap in Europe that is holding back growth and innovation. EU
investment is currently hovering well below its sustainable trend 1 and in 2013
was 16% below its pre-crisis peek in real terms. Public investment in the euro
zone last year even amounted to only 2% of GDP, half of what other developed
economies such as the U.S. are spending in proportion.
For this reason, EU Commission President Juncker in November 2014
presented an investment plan for Europe, a cornerstone of which was the
European Fund for Strategic Investments (EFSI). A legislative proposal for the
fund was presented by the Commission in January 2015. 2
The EFSI is expected to generate up to EUR 315bn in new investments over
the next three years. This is to be reached by a public guarantee of EUR 21bn
which is expected to trigger an overall multiplier effect of 1:15. Via taking on
some of the risks that are associated with its investment and financing activity,
the EFSI will allow the European Investment Bank (EIB) to invest in projects
with higher risk profiles and aims to mobilize private investment for the
projects. To inform investors about current and future projects, a European
investment project portal will be set up and a European investment advisory
hub will provide guidance in the identification, preparation and development of
projects.
Figure 1: Investment: EMU countries
underperforming compared to US
Investment as % of GDP
35,0
30,0
25,0
20,0
15,0
10,0
90
94
98
02
06
10
EMU
FR
DE
GR
ES
US
14
Source: Deutsche Bank Research, AMECO
There will be no geographical or sectoral quotas for the eligible projects, but
rather certain prioritised areas for investment. These include areas such as the
development of infrastructure, research and innovation, education, and the
development of communications technology and the energy sector. One
quarter of the money will be channelled to support small and medium-sized
enterprises as well as mid-cap companies with less than 3000 employees.
Figure 2: The public funds contributed by the EIB and EU
Figure 3: Enhanced risk-bearing capacity and private
will be leveraged x15
investors will help realise the EFSI’s x15 leverage
Source: Deutsche Bank Research
1
Source: Deutsche Bank Research
The Commission has defined the sustainable trend as an investment share of 21-22% of GDP.
2
The idea behind the EFSI and its leverage has been discussed in depth in Deutsche Bank Research,
Focus Europe edition of 28 Nov. 2014.
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Deutsche Bank AG/London
5 June 2015
Focus Europe: EU Investment Plan set on course
The funds on the European level will come in the form of a EUR 16bn
guarantee from the EU budget, EUR 8bn of which will be backed up with a
standing EU guarantee fund, and EUR 5bn from the EIB. The total of EUR 21bn
of risk-bearing capital will allow the EIB to borrow three times as much around EUR 63bn – for investment and financing activity. The 63bn from the
EIB are in turn expected to attract private investors, which should be worth a
total of EUR 315bn The Commission and EIB state that the estimates for the
multiplier effects are based on experience from past projects.
The EFSI will be governed by a steering board, which presides over the
strategy and investment policies. An investment committee will be responsible
for approving the support of the EU guarantee for individual projects. The
investment committee will consist of a number of independent market experts.
EU member states have been encouraged to also contribute money to the EFSI,
either directly or indirectly, via their respective national promotional banks. Six
member states have already announced that they will participate with a total
amount of EUR 33,58bn in the investment plan. All of these contributions will
be made through national promotional banks (NPBs). In that context, the
Commission stuck to its promise inasmuch as one-off contributions from
member states, either directly or via a NPB, will not be counted towards a
budget deficit in the assessment of public finances under the Stability and
Growth Pact.
Legislative disagreements have finally been resolved
On 28 May, after a night of prolonged negotiations in the final trilogue,
representatives of the Council, European Parliament, and Commission agreed
on a substantially amended regulation for the EFSI. This regulation still needs
to be approved by a vote in the Parliament and ECOFIN. As all parties have
acknowledged the urgency of action, the proposed regulation includes a
provision that legitimises the EIB and EIF to already start approving financing
for additional projects that fall into the profile covered by the EFSI. As long as
they fulfil the criteria of the guarantee, these projects will be guaranteed under
the EFSI retrospectively. In consequence, the EIB has already earmarked
several projects to be covered by the guarantee fund and a first financial
transaction under the plan was completed by the EIF on May 13.
In the course of the negotiations, substantial disagreements with regards to
the financing of the fund and its governance structure have been resolved.
Especially from the parliamentary side, there had been considerable objections
to the proposal that had been brought forward by the Commission and agreed
to by the Council. At the centre of the disagreement were the questions of how
the EU guarantee fund, an essential part of the EFSI, would be financed from
the EU budget, and what would be the parliamentary rights in the oversight of
the fund’s operations and personnel decisions.
By far the biggest argument had evolved around the question of how the EU
guarantee of initially EUR 8bn was to be financed. The Commission´s initial
proposal, in order to stick to the enacted budget and to accommodate more
fiscally conservative member states, planned to re-appropriate considerable
amounts of funds from the general EU budget to finance the guarantee fund.
The proposal included a total of EUR 6bn of re-appropriation, 3.3bn from the
Connecting Europe Facility (CEF) and 2.7bn from Horizon 2020, and EUR 2.0bn
from the EU’s unused budget margin. The total transfers would be enacted
over the coming 4 years within the EU’s 2014-2020 financial framework.
According to this proposal, Horizon 2020, the EU’s funding program for
research and development, would have been set to lose about 3.5% of its
Deutsche Bank AG/London
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5 June 2015
Focus Europe: EU Investment Plan set on course
funds. The CEF, an EU fund for transport, energy and digital infrastructure
investments, would have lost about 6.6% of its EUR 50bn initial endowment.
The Council, in its negotiating stance, backed the Commission’s reappropriations and their amount. It was imperative, they argued, that the
budget margin would not be overstretched. Furthermore, the funds would
need to come from Horizon 2020 and the CEF, as the positions in the budget
are earmarked and can only be re-appropriated within the specific policy area.
The Parliament, on the other hand, demanded that cuts to the Horizon 2020
and the CEF budget posts be minimised and alternative ways of financing be
found. As MEP Jean Arthuis puts it, the new investment plan must not go at
the costs of other “genuinely European, transnational projects.” 3 Alternatively,
the EP wanted to take more money out of the budget margin and explore
alternative ways of financing, such as filling the guarantee via the annual
budgetary procedure until it reaches EUR 8bn over an extended time horizon.
This, however, would have lead to significant additional expenditure for the EU.
The compromise, which has now been struck between the legislators, gives in
to some of the demands from the EP while maintaining the fundamental
direction. Horizon 2020 and the CEF will remain the main source of reappropriations. However, those will be lowered by EUR 500m for each
program and enacted over an extended time horizon:
a)
b)
c)
2.2bn from Horizon 2020
2.8bn from the Connecting Europe Facility
3.0bn from the budget margin
The consented cuts to both programs will be extended until 2023, thus
lowering the annual contributions in the coming years. To accommodate the
Council, on the other hand, the EUR 1bn that will additionally be taken from
the margin will come in the form of EUR 543m and EUR 457m specifically
earmarked from the global margin for commitments for the 2014 and 2015
budgets respectively. Thus, no really new money will be spent - a fact that will
accommodate the more fiscally conservative governments in Europe. At the
same time, the compromise will lower the percental cuts to under 3% for
Horizon 2020 and about 5.6% for the CEF. This also includes the complete
absence of cuts from projects in fundamental research, according to
Commissioner Carlos Moedas. While the Commission acknowledges that the
reductions will still lower the impact of those programs somewhat, it expects
that the leverage effect of the EFSI will result in both areas actually receiving a
positive net-flow of funds through the projects financed by the new scheme.
A further topic of vehement argument in the trilogue had been the degree of
control that the EP would be granted over the newly created governing bodies
of the EFSI, especially with regards to the Investment Committee and the
Managing Director. The Commission’s legislative proposal made it clear that
the impartiality of the Investment Committee is vital to the successful
functioning of the EFSI. Thus, the members of the Investment Committee
should be selected by the Steering Board based on their experience and merit
and should be accountable to the Board alone. The Managing Director, in turn,
would be appointed by the President of the EIB.
The European Parliament, on its part, had called for more control over the
leadership and operations of the EFSI. Particularly, the idea was floated that
the Parliament would have a stance in the appointment procedure, by
3
http://www.ipe.com/news/regulation/european-parliament-oks-juncker-plan-aftermaking-amendments/10007617.article
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Deutsche Bank AG/London
5 June 2015
Focus Europe: EU Investment Plan set on course
approving both the Investment Committee and the Managing Director on
suggestion of the Steering Board and EIB President, respectively. Additionally,
the EFSI’s operations should be audited by the European Court of Auditors and
be subject to annual vetting by the Parliament.
Despite initial reluctance from the side of the Council, the compromise indeed
does grant the Parliament a say in the appointment of the Managing Director.
After an initial selection process by the Steering Board in which both Council
and Parliament will be kept informed, the EP will organise a hearing with the
selected candidate and approve him. However, the EP will not be involved in
appointing the investment committee. As this is the body that will be
responsible for examining and approving potential projects, the impartiality of
the investment decisions - the essential concern of the Council and
Commission - will be preserved.
Some additional, although minor, disagreements have been resolved in the
course of the negotiations. One such area is the lifetime of the EFSI. Here, colegislators have agreed that the Commission will submit an independent
evaluation before the end of the initial investment period. Based on the results
of the evaluation, a prolonging of the EFSI as a permanent investment vehicle
will be established. Furthermore, the principle of additionality – the value that
the EFSI will add to the projects financed – has been clarified by co-legislators,
according to a report by Europolitics. As the EIB has made it clear that it will be
able to finance almost all potential projects through its equity, the additionality
principle will refer to the volume of investment allocated to projects with a
higher risk profile. In that, the EFSI will improve the attractiveness of such
projects and attract private investors’ funds.
At least six national promotional banks will participate
Member states have so far been reluctant to make direct contributions to the
EFSI. Instead, a number of states have pledged to contribute indirectly,
through their national promotional banks (NPBs). This is to be understood as a
response to the Commission’s early on decision not to grant the Steering
Board the right to set sectoral or geographic targets for the selection of
projects, as it had been desired by member states. It is now clear that the final
legislation will even go one step further and not give sovereign contributors
any influence over the governance of the fund. The seats in the Steering Board
will be allocated between the EIB and Commission only. This decision can be
seen as consequent in ensuring the fund’s impartiality, but make large
contributions to the risk-bearing capital of the EFSI less attractive for member
states.
When contributing through a NPB, however, the respective entity has more
say in deciding how to allocate its capital: It can either go the aforementioned
way and contribute money directly to the risk-bearing capacity - and thus
enhance the leveraging capabilities of the fund. Or the money can go into a coinvestment platform, or collaborate with the EFSI on a project-based level.
With the latter two forms, member states secure the option to channel their
promotional bank support to projects in their own countries. Despite that, all
contributions must be regarded positive as they help to boost the impact of the
overall investment plan and reduce the risks for private investors when they
participate in a project.
Figure 4: Six member states will
participate in the investment plan
The following six member states will
participate via their NPBs:
Germany: EUR 8bn via the Kreditanstalt
für Wiederaufbau (KFW)
Poland: EUR 8bn via Bank Gospodarstwa
Krajowego
Italy: EUR 8bn through the Cassa Depositi
e Prestiti
France: EUR 8bn via the Caisse des
Dépôts’ and ‘Bpifrance
Spain: EUR 1,5bn through the Instituto de
Crédito Oficial
Luxembourg: EUR 80m. via the Société
Nationale de Crédit et d’Investissement 4
Source: European Commission
The exact form in which the NPB’s contributions will complement or interplay
with the money from the EU and EIB has not yet been announced by the
4
http://europa.eu/rapid/press-release_IP-15-4745_en.htm
Deutsche Bank AG/London
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5 June 2015
Focus Europe: EU Investment Plan set on course
institutions or the respective member states. There have, however, been
outlined a number of guiding principles as to how the NPB’s plan to get
involved. On a project-based level, these include priorities such as improving
access to funding via Global Loans, guarantees, and providing technical
assistance, investing in venture capital that is linked to the EU, increasing
project-based finance or public-private partnerships for eligible infrastructure
projects in the EU. Further, capital shall be contributed to existing investment
platforms such as the Fund Marguerite, a fund that was established to make
capital-intensive infrastructure investments. The EU legislators are well aware
of the merit of the NPBs contributions and appear committed to a fruitful
working together. It has even been provisioned in the legislative proposal that
EIB and EIF may also grant a guarantee to a NPB, thus protecting their
investments.
The EFSI will be operational by mid-2015
The EU legislators have managed to deliver in accordance with their ambitious
timetable. After the final trilogue on 27 May yielded a joint proposal for a
regulation, the proposal will undergo a final vote in both co-legislative
chambers. The member states’ Finance Ministers are expected to approve the
Regulation in the ECOFIN Council on 19 June, the plenary vote in the EP is
expected to take place on 24 June. This will mark the end of the legislative
procedure and make the fund operational by mid-2015.
In the meantime, the EIB has already begun with the roll-out of the investment
plan. In his address to Parliament on 30 April, EIB President Hoyer announced
the EIB was ready to unlock investment through the new EFSI and that it has
already put on track the first projects it will propose for backing by the EU
guarantee fund.
On 12 May, the EIB announced the first financial transaction under the EFSI. It
comprises an agreement between EIF, the arm of the EIB Group specializing in
risk financing for SMEs, and Bpifrance, the French public investment bank, to
increase lending to innovative SMEs and mid-caps in France. The backing by
the guarantee fund will enable Bpifrance to increase its lending by a total
amount of EUR 420m over the next two years. In a further move on 19 May,
the EIB approved financing for an additional four projects, all of them in the
area of enhancing energy efficiency throughout Europe. According to Hoyer,
there are even more transactions that are readily earmarked to benefit under
the EFSI. These projects include investment in healthcare research in Spain,
the expansion of a key airport in Croatia, the construction of 14 new healthcare
centres across Ireland, and backing for industrial innovation in Italy. The EIB
has approved EUR 300m for the earmarked projects and expects these funds
to support overall investment of around EUR 850m for the projects. 5 Following
EIB board approval, legal and financial negotiations for the projects are
expected to be concluded in the coming months. Should the EFSI legislation
fail or the EFSI guarantee be found as non-applicable, the EIB says it is
committed to take the projects on its balance sheet, nevertheless.
The success of the EFSI will to a large degree depend on whether policy
makers will be able to deliver on the political reforms that they promised would
accompany the EFSI. Even though a major cornerstone, the EFSI is only part of
the ‘investment triangle’ that has been proposed by the EU. The second and
third pillar of the plan are targeted at ensuring that financing will indeed reach
the right projects and benefit the ‘real’ EU economy and far reaching structural
reforms will improve the overall investment environment. For this purpose, an
5
http://www.welcomeurope.com/fact-of-the-day/spotlight-on-juncker-plan-244+144.html#afficheTexte
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5 June 2015
Focus Europe: EU Investment Plan set on course
investment advisory hub shall be set up that will provide guidance on the most
appropriate advisory support for a specific investor from relevant institutions.
To improve the private sectors sentiment to invest, regulation shall be
streamlined to become simpler and more predictable and barriers to crossborder investment be broken down hampering business’s access to finance.
The Commission began consultations in January this year on its project of a
genuine European Capital Markets Union.
The ‘Juncker Plan’ with the EFSI and the planned reforms undoubtedly present
an opportunity to spur the lacklustre investment in the EU and should therefore
be welcomed. The legislative compromise presents an important victory of
common sense in a time when the EU economies urgently need stimulus.
Much of the ultimate success of the plan will depend on whether the available
projects are of such quality to attract private investors who will be needed to
realise the ambitious 1:15 multiplier. Still, the evidence that EU legislators are
capable of swift and resolute action when it is needed is reassuring.
Deutsche Bank AG/London
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5 June 2015
Focus Europe: EU Investment Plan set on course
Appendix 1
Important Disclosures
Additional information available upon request
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Analyst Certification
The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s). In addition,
the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation
or view in this report. Barbara Boettcher/Dieter Braeuninger
Regulatory Disclosures
1.Important Additional Conflict Disclosures
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"Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing.
2.Short-Term Trade Ideas
Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are
consistent or inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be found at the
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Focus Europe: EU Investment Plan set on course
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Focus Europe: EU Investment Plan set on course
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Page 10
Deutsche Bank AG/London
5 June 2015
Focus Europe: EU Investment Plan set on course
and/or services, customers should carefully read the relevant disclosures, prospectuses and other documentation.
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Page 11
David Folkerts-Landau
Group Chief Economist
Member of the Group Executive Committee
Raj Hindocha
Global Chief Operating Officer
Research
Michael Spencer
Regional Head
Asia Pacific Research
Marcel Cassard
Global Head
FICC Research & Global Macro Economics
Ralf Hoffmann
Regional Head
Deutsche Bank Research, Germany
Richard Smith and Steve Pollard
Co-Global Heads
Equity Research
Andreas Neubauer
Regional Head
Equity Research, Germany
Steve Pollard
Regional Head
Americas Research
International Locations
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Deutsche Bank AG London
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Deutsche Bank Securities Inc.
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Deutsche Bank AG
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Deutsche Securities Inc.
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Japan
Tel: (81) 3 5156 6770