The “Juncker plan” to boost growth has been successful, though mostly only in a few countries.
Photo: European Investment Bank
The so-called “Juncker plan”, run by a Kirchberg-based agency, mostly finances projects in EU15, according to a report by Standard & Poor’s.
However, the plan has developed well and is set to be expanded and enlarged.
The goal of the Investment Plan for Europe was threefold: boost job creation and growth, meet the long-term needs of the economy and increase competitiveness, and help strengthen productive capacity and infrastructure.
The IPE was set up in November 2014 to mobilise €315 billion in public and private investment over 2015-2017. The European Fund for Strategic Investments was launched later in 2014 to fulfill the first goal of IPE, more specifically, to channel finance for investment.
The report “Europe’s Investment Plan Surges To €500 Billion, But Is It Working?” published by the credit ratings agency on 20 March 2017, lines out some mixed results, but also gives tips for investors.
“We think that more action is needed to foster private-sector financing, which is one aim of the plan. Other challenges, like additionality and geographical coverage, are on the EFSI’s radar, for its next version,”
said S&P Global Ratings credit analyst Michael Wilkins.
As of end-January 2017, EFSI financing related to approved operations under the European Investment Bank Group was set to trigger €168.8 billion of investment or 54% of the €315 billion target amount. 190 infrastructure projects, representing over €24 billion of financing capacity, had been approved. In addition, agreements had been concluded with venture capital funds, financial intermediaries, and promotional banks, benefitting over 400,000 SMEs.
However, looking closely at the data, only 60% of the EFSI financing approved has been signed (or has achieved financial close) under the IIW. The picture in the SME window is somewhat better, with 93% of the projects signed, the S&P report noted. Furthermore, only one-third of the signed projects have been disbursed under the IIW (€4.1 billion) as of end-December 2016. The disbursement of funds would typically signify that project construction had commenced.
The EFSI portfolio one year after launch, excluding multi-country operations, is highly concentrated. 92% of projects were financed in the old member states (EU15), while only 8% in the so-called new member states (EU13), the report stated. Furthermore, three states (the UK, Italy and Spain) concentrate 63% of all infrastructure and innovation window (IIW) financing while for the SME window Italy, France and Germany received 36% of total EFSI support.
Concerns have been raised about the “additionality” of EFSI-financed projects. Because of the plan’s short time frame, the projects financed so far are mostly in more developed member states, which can rely on strong administrative capacity and, according to some, tend to be those that could have been financed without EFSI.
The EFSI defines additionality as financing that addresses market failures or suboptimal investment, or projects that could not have been carried out to same extent or in the same time frame without EFSI.
One reason for the lack of geographic distribution is competition from European Structural and Investment Funds, according to the S&P note. In addition, smaller countries have less capacity to structure and originate bankable projects. The size of the projects is smaller and markets are not as deep.
Investors are also reluctant to invest in countries with no longstanding proven regulatory framework for infrastructure contracts or in markets where they lack expertise. The main focus for lenders is cost recovery and, for long-term contracts, the capacity to adjust tariffs to inflation.
National promotional banks
To address the geographic issue, EFSI plans to create greater synergies with NPBs (national promotional banks). The role of NPBs is to provide a local entry point for project promoters seeking support for potential EFSI projects, and encourage the combination of EFSI and Structural Funds. What’s more, the current EFSI regulation also emphasises the role of NPBs as possible co-financiers for EFSI operations. According to the EFSI evaluation report, 34% of EFSI operations as of June 2016 involved NPB co-financing.
“The timing for additional investment spending is still right, but implementation needs to be speeded up before the rise in global and European interest rates pull the attention of investors away from Juncker plan,” said Wilkins.