Financial Instruments 2014-2020 Doing more with less NFOŚiGW Luxembourg-Warsaw, 17 April 2012

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 (technical assistance, performance based rebates, …) 2 2 2

EU Financial Instruments: Why? An appropriate tool in times of budget constrains 3 types of benefits Multiplier effect – multiplication of scarce budgetary resources by attracting additional finance Policy impact – financial intermediaries pursue EU policies Institutional know-how – EU can use the resources and expertise of financial intermediaries A political priority (Europe 2020 strategy, Communication on a Budget for Europe 2020) Effective and efficient way to support Europe 2020 objectives of smart, sustainable and inclusive growth 3 3 3

EU Financial Instruments: When? Guiding principles include: Addressing sub-optimal investment situations Funding gaps e.g. due to general economic uncertainty, high business/innovation risk, high transaction costs, asymmetric information Ensuring EU value added Effective targeting of policy goals Catalytic effect on existing similar MS schemes or private investment, no crowding out Multiplier effect Attracting private investment greater than EU contribution 4

Financial Instruments 2007-2013: SMEs & Innovation SME Guarantees (SMEG) 2007-2011: approx. EUR 300m of EU budget generated 9.4bn of lending 155.000 SMEs reached, volumes are increasing fast Target of 315.000 SMEs is attainable Equity: High Growth and Innovation (GIF) 2007-2011: so far, EUR 344m of EU resources generated EUR 1.9bn of total investment volume, amounts growing fast. 190 SMEs covered so far Risk-Sharing Finance Facility (RSFF): EUR 2bn of EU and EIB resources expected to generate over EUR 10bn of lending to RDI projects. By end 2011 approximately EUR 5bn of lending already disbursed to final beneficiaries. Dedicated RSI facility for SMEs. European Progress Microfinance Facility (EPMF, est. 2010) by 2020, the EU contribution of EUR 100m is expected to have generated EUR 500m of micro-loans.

Financial Instruments 2007-2013: Transport & Energy Loan Guarantee Facility for TEN-Transport (LGTT, est. 2008) Conceived to absorb traffic risk during the ramp-up phase EU and EIB share loan loss provisioning EUR 500m of EU budget has generated EUR 12bn of project financing Marguerite (est. 2010) Equity fund for TEN-T, TEN-E and renewables EUR 710m, of which EU EUR 80m stake EU co-invests with BGK, Caisse des Depots, Cassa Depositi, ICO, EIB and KfW European Energy Efficiency Fund (EEEF, est. 2011) Mixed fund for debt and equity to energy efficiency investments in municipalities EU invests EUR 125m in first loss piece Co-investors EIB, Cassa Depositi and Deutsche Bank Target size EUR 600-700m 6

Lessons learned Need for simplified implementation modalities with streamlined rules. Need for a clear and dedicated legal framework. Increased coherence and consistency between instruments is necessary. Close coordination with Structural Funds. More can be done to raise visibility and transparency of instruments. New risk-sharing arrangements could achieve higher finance volumes. Audits and evaluations carried out of existing innovative financial instruments are positive regarding their output. 7

Next MFF: Simplification and Transparency Fewer financial instruments (from 13 to 6) Larger financial instruments ensuring critical mass Minimisation of overlap between instruments Standardised contractual arrangements including management structures, reporting, fees… More transparent to stakeholders Budget: No contingent liabilities Dedicated regulatory framework (Title VIII of the Financial Regulation) 8

Financial Instruments included in proposals for 2014-2020 MFF Centrally managed by COM Shared Management Research, Development Innovation Horizon 2020 Equity and Risk Sharing Instruments EUR 3.5bn Instruments under Structural and Cohesion Funds EU level Off-the shelf instruments Tailor made instruments Significant higher amounts than currently Growth, Jobs and Social Cohesion Competitiveness & SME (COSME) Equity & guarantees EUR 1.4bn Creative Europe Guarantee Facility EUR 210m Social Change & Innovation Micro-finance EUR 192m Erasmus for all Guarantee Facility EUR 881m Infrastructure Connecting Europe Facility (CEF) Risk sharing (e.g. project bonds) and equity instruments Budget not yet decided 9

Current status and next steps 2011: Commission proposals were adopted 2012: Discussions in Council and Parliament on the legal framework (Financial Regulation, delegated act) as well as on the basic acts for the specific instruments 2013: Expected adoption of legal bases by European Parliament and Council, negotiations with IFIs, preparations for the roll-out 2014: Roll-out, instruments are operational 10

Conclusions Financial instruments Well-tested, efficient and effective way of supporting growth, jobs and innovation. Can attract private funding for public policy objectives. Needed in times of limited public resources. Will play an important role in achieving the Europe 2020 objectives. Promote best practices. 11 11

Mechanisms of financial Instruments 12

Risk Sharing Financial Facility RSFF provides debt finance to research and development projects through directly to companies indirectly through banks EIB/EU fund in average 20% of the projects, remaining 80% come from banks This multiplication / leverage is reached through Risk sharing Own Resources EUR 1bn EUR 1bn EIB (RSFF) 2007 - 2013 Approx. EUR 10bn Debt Financing Banks Investors Final Beneficiaries Low/Sub Investment Grade 13

Rating enhancement in RSFF RSFF finances sub-investment grade projects moving them to investment grade It makes the project therefore bankable RSFF loan is subordinated / junior to the bank's loans, means in case of default it is served after the senior bank loan Sub invstment grade company Senior loan Company's equity Mezzanine finance 14

What is a bond? Bonds are debt securities paying a fixed interest (coupon) In comparison to other debt they are tradable rated large ticket size interesting for institutional investors Bonds are issued by: public bodies (sovereign, municipal bonds) Companies Special purpose vehicles 15

Europe 2020 Project Bond Initiative Objectives Increase financing available for large infrastructure projects Establish debt capital markets as a complementary source of financing Target areas Transport Energy Broadband How? EU/EIB joint support to project companies issuing bonds to finance infrastructure projects Form of support Debt service guarantee or subordinated loan by EIB to ensure sufficient rating of the bonds Result More private sector financing attracted from the capital markets to finance key infrastructure projects Potential investors Long-term institutional investors – pension funds, insurance companies 16

Functioning of the Initiative Designed to improve (or “enhance”) the rating of the senior debt of the project Subordinated tranche of debt underwritten by EU and EIB share risk Subordinated debt maximum 20% of total investment Provides cushion for senior debt service if project risks materialises Raises rating of the debt to a quality where it will be attractive to bond investors Longer maturities more appropriate for project lifetime 17

Functioning of the Initiative SPV Project Costs Bond Issue and underwriting Project bond Target rating > A- Project Bond Investor up to 20% of total Bond issue Sub debt 10-20% Equity e.g. 15% Sponsors or investors 18

European Energy Efficiency Fund Fund (EEE F) Objective: financing of projects in a local & public context Scope: Energy efficiency, renewable energy and clean transport Commercially managed fund, operating under market conditions Debt and equity products, normally not offered by banks senior loans with long duration ( 15 years) and grace periods Junior/subordinated loans Leasing Forfeiting of receivables (quasi-)equity participation in special purpose vehicles 20

Leasing and Forfaiting in EE Examples of off-balance sheet financing for public bodies under constrains of borrowing Leasing Leasing of resellable installations like CHP installations, PV modules Organised similar 'to sale and lease back' Forfaiting for ESCOs ESCO face high up-front capital demand and long pay-back period ESCO can sell major share of future receivables at discounted rate after agreed milestones of investment Energy performance contract as colateral for forfaiting loan 21

Structured Fund The eeef is a dedicated investment vehicle founded as an Investment Fund with variable capital (SICAV) In the eeef the EU takes the first loss piece to attract other public and private investors. Target Up to € 700m Size at first closing € 265m Notes (debt) Senior – A Shares Institutional investors Public banks & institutional investors EIB, CDP Mezzanine - B Shares € 117m EIB, CDP, Deutsche Bank Public financial institutions Junior/FLP - C Shares € € 23m EU EU € 125m 22

European Energy Efficiency Fund Technical Assistance Volume € 20m provided by EU grants for project development cost – exclusively for projects financed by the Fund Managed by fund manager Deutsche Bank at 'arm's length' to eeef 23

Thank you General information on innovative financial instruments: http://ec.europa.eu/economy_finance/financial_operations/investment/innovative_financial_instruments/index_en.htm

Annex

EU financial instruments old and new EQUITY INSTRUMENT FOR SMEs 2007-2013 High Growth and Innovative SME Facility (GIF) under the Competitiveness and Innovation Framework Programme (CIP) – approx. EUR 600m GIF 1 – invests in seed, start-up and early-stage SMEs GIF 2 – invests in expansion-stage SMEs EQUITY INSTRUMENT FOR SMEs 2014-2020 EU Equity Financial Instrument for EU enterprises’ growth and RDI Equity Instruments for Research and Innovation - Investments in early stage funds or funds-of-funds that invest in intellectual property, technology transfer or venture capital - No exact allocation yet, up to 1/3 of EUR 3.5bn to be allocated to this facility and the RSI II facility for SMEs Horizon 2020 Equity Facility for Growth Investments in expansion stage funds or funds-of-funds that invest in venture capital indicatively EUR 690m COSME 26 26

DEBT INSTRUMENT FOR SMEs 2007-2013 DEBT INSTRUMENT FOR SMEs 2014-2020 EU financial instruments old and new DEBT INSTRUMENT FOR SMEs 2007-2013 SME Guarantee Facility (SMEG) under the Competitiveness and Innovation Framework Programme (CIP) – approx. EUR 500m Risk Sharing Instrument (RSI): A dedicated compartment for SMEs under the Risk Sharing Finance Facility, created in 2011 – EUR 120m DEBT INSTRUMENT FOR SMEs 2014-2020 Debt Instrument for EU Enterprises’ Growth and RDI Loan Guarantee Facility Guarantees and securitisation on loans up to EUR 150,000 Indicatively EUR 746m COSME RSI-II Facility Guarantees for R&I SMEs on loans above EUR 150,000 No exact allocation yet, up to 1/3 of EUR 3.5bn to be allocated to this facility and equity instrument for R&I Horizon 2020 Cultural and Creative Sectors Facility (new) Guarantees for loans to creative and cultural entities EUR 210m Creative Europe 27

EU financial instruments old and new DEBT INSTRUMENT FOR LARGE R&D PROJECTS 2007-2013 Risk Sharing Finance Facility (RSFF) under FP7 provides loans and guarantees to R&D projects EU budgetary allocation to large projects and research infrastructures (excluding the SME compartment) approx. EUR 900m DEBT INSTRUMENT FOR LARGE R&I PROJECTS 2014-2020 Loan & Guarantee Service for Research and Innovation Loans and guarantees to R&I (non-SMEs) No exact allocation yet (possibly approx. 2/3 of EUR 3.5bn) Horizon 2020 28 28

EU financial instruments old and new EQUITY AND DEBT INSTRUMENT FOR THE SOCIAL ECONOMY 2007-2013 European Progress Microfinance Facility (EPMF, est. 2010) Guarantees and counter-guarantees for microcredit lending Loans or Equity to microcredit institutions EU Budgetary contribution EUR 100m EQUITY AND DEBT INSTRUMENT FOR THE SOCIAL ECONOMY 2014-2020 Micro-finance and social entrepreneurship instrument Guarantees, micro-credit, equity and quasi-equity to financial institutions that invest or lend to entrepreneurs, especially those furthest from the labour market, and social enterprises. Proposed EU budgetary contribution Access to microfinance EUR 87m Social enterprise development EUR 96m Capacity building EUR 9m Social Change and Innovation 29 29

DEBT INSTRUMENT FOR STUDENTS EU financial instruments old and new DEBT INSTRUMENT FOR STUDENTS Student Loan Guarantee Facility Guarantees for student loans EUR 881m Erasmus for All 30

EU financial instruments old and new INSTRUMENTS FOR INFRASTRUCTURE 2007-2013 Loan Guarantee Facility for TEN-Transport (LGTT, est. 2008) EUR 500m of EU budget has generated EUR 12bn of project financing Pilot phase for project bonds EUR 230m budget for 2012-13, currently being examined by Financial Counsellors and EP Budget Committee EQUITY AND DEBT INSTRUMENT FOR INFRASTRUCTURE Infrastructure financial instruments (incl. Project Bonds initiative) Equity instruments, such as investment funds with a focus on providing risk capital for actions contributing to projects of common interest; Loans and/or guarantees facilitated by risk-sharing instruments, including enhancement mechanism to project bonds, issued by a financial institution on its own resources; Thematic coverage: TEN-T, TEN-E and broadband Any other financial instruments. Exact budget not yet specified Connecting Europe Facility 31

EU financial instruments old and new COHESION POLICY 2007-2013 Currently approx. 5% of ERDF delivered through financial instruments COHESION POLICY 2014-2020 In 20014-2020 use of financial instruments in cohesion policy will expand to all thematic objectives and priorities foreseen by operational programmes, provided that economic viability of final recipients / repayment capacity of projects is demonstrated Combination of financial instruments and support, e.g. grants, will be strengthened. CSF funds may contribute to support financial instruments set up at Union level managed directly/indirectly by COM in line with FR. OP contribution to be ring-fenced for investments in regions and actions covered by OP Cohesion Fund will for the first time be open to financial instruments Volume of ERDF resources that could potentially be delivered through financial instruments could increase up to three times

Horizontal legal framework Legal Architecture Horizontal legal framework Sector rules Norm Content Basic act FR Title VIII (EP/Council Regulation) Definitions, management modes, principles and conditions, limitation of liability, reflows, control, reporting, etc. Contains a general authorisation the use of a financial instrument. May define type, duration, specific features or targets of the instrument envisaged.   The basic act may identify a specific entity entrusted with the implementation of the instrument Rules of Application (delegated act) The delegated act is expected to supplement the FR in the following areas: combination of support, rules for direct/ indirect management, rules for fiduciary accounts, ex ante evaluation, management fees, etc. Operational requirements (equity and debt platforms): A standard set of rules, provisions and templates, including homogeneous detailed provisions on governance, monitoring, , financial parameters, delivery modes, rules for dedicated investment vehicles (DIV), etc. Agreements with entrusted entities Contractual conditions under which the Commission entrusts the implementation of a financial instrument to a financial institution in line with the above rules 33