1. 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

2. Challenges for long-term financing

3. 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

4. Europe's research challenge
Debt:
to 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

5. Europe' SME Challenge (I)
28 million SMEs in the EU:
account for more than 99% of all companies
employ 66.5% of all private-sector workforce
Micro-businesses dominate employment in some countries: Italy (48%) and Greece (57%)
Very flexible
Stable employer, source of organic growth and innovation
Share of total number of companies
Source: Eurostat, Commission Communication on Modern SME policy for Growth and Employment

6. 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

7. 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

8. The role of the Union budget

9. Europe 2020 - The basis for the MFF 2014-20
A strategy to come out stronger from the crisis
A strategy to turn the EU into
a smart
sustainable
inclusive economy
A vision of Europe's social market economy for the 21st century
Three reinforcing priorities.
Smart growth
Sustainable growth
Inclusive growth
Two pillars:
combining priorities
helping Member States to develop their strategies to return to sustainable growth.

10. 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)
Contribute to achieving the objectives of Europe 2020 and implementing the Lisbon Treaty by means of
a modernised budget:
targeted at specific objectives aimed at the Europe 2020 strategy,
made conditional upon structural reforms and other criteria ensuring effectiveness and efficiency,
with a simplified delivery system
and increased leverage for investments
a redesigned budget:
savings in some areas to the advantage of key areas (new challenges); priority to EU added value
an integrated approach enabling multi-purpose expenditure
new legitimacy of traditional policies
budgetary rigour, savings in administrative expenditure
a budget financed in a more balanced way:
new own resources
Revisited financial corrections

11. Comparison of ceilings 2000-2020 (EUR bn)
100,0
110,0
120,0
130,0
140,0
150,0
160,0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
EUR bn (2011 prices)
'07 -
'13 average
EUR bn
COM '14
'20*: EUR bn
MFF '07
'13: EUR bn
Committment ceiling of
MFF 2000
2006 for EU
15/25
MFF 2007
2013 for EU 27
updated COM proposal for MFF
2020 for EU
28 (June 2012)*
MFF '00
'06: EUR bn
'00
'06 average
EUR bn
EUR 5.6 bn
EUR 1.0 bn
'14
'20 average
EUR bn
MFF : EUR bn
Commitment ceiling of MFF
* ITER and GMES outside the MFF
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 bn and the difference with the MFF would be 85 instead of the 73 bn shown above.

12. Comparison of ceilings 2000-2020 (% GNI)

13. The EU intervention model – new MFF half of the budget and EIB are growth related (together 1.0% of GDP)
EU Budget
(size ~ 1% GDP EU p.a.)
EIB
(lending volume ~0.55% GDP p.a.)
EU budget 2014 – 2020: € 960 bn (MFF - Multiannual Financial Framework)
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)
Total EIB lending reached EUR 61 bn. In 2011
Will be likely below 50 bn. In 2012
Plans for 2013 are in the order of magnitude of 70 bn. Due to the capital increase 13 13

14. Competitiveness (Heading 1a)
+ EUR 34 billion
Youth Employment Initiative, EUR 6 billion.
+ EUR 34 billion for competitiveness (Heading 1a)
Equivalent to 37,3% compared to ,
Notably research and development, education and mobility (Erasmus) and the Connecting Europe Facility
Indicative increase by programme for :
Youth Employment Initiative, EUR 6 billion.
New

15. 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

16. Financial instruments

17. 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) 17 17

18. 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 MFF) 18 18 18

19. 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 19 19

20. 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. 20 20

21. 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. 21 21

22. The New Regulatory Environment
EU financial instruments : State of Play
The New Regulatory Environment 3

23. Internal Instruments/1: Overview
EU financial instruments : State of Play
Internal Instruments/1: Overview
Funding Programme
Responsible DG
Indicative Amount
COSME
ENTR
EUR 1.38 billion (662 mio EFG/717 mio LGF)
Horizon 2020
RTD
EUR 2.55 billion
Erasmus + (Student Loan Guarantee facility)
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
All these instruments are managed by the EIB – EIF 11

24. Internal Instruments/2: types of instruments
EU financial instruments : State of Play
Internal Instruments/2: types of instruments 12

25. 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)

26. Project Bonds: Funded vs. Unfunded Solution
Funded credit enhancement - Mezzanine loan
Unfunded credit enhancement - Guarantee
SPV
Project
Costs
Project
Bonds
Target rating
Public bond issue or private placement
SPV
Project
Costs
Project
Bonds
Target rating
Public bond issue or private placement
Project Bond Investor
Project Bond Investor
EIB
Guarantee
20% max
EIB Sub-debt
20% of bond issue max
Equity
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.

27. COSME Loan Guarantee Facility
financial intermediaries can create products suitable for their particular markets
Provides a frame
free of charge
Capped portfolio guarantees
guarantees focus on transactions with a higher risk profile
Strict focus on additionality
Working capital, investment loans, subordinated loans, bank guarantees, leasing
Wide range of interventions
min. 12 months (transaction) – max. 10 years (guarantee)
Duration
≤ € 150,000: for any type of SME
> € 150,000: under conditions
Amount

28. € Financing Member States
Application to call for expression of interest; demand driven
Entrusted entity
Joint EC/ EIB SME initiative €
Financing

29. 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 29

30. 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 30