The EU is throwing open its doors for foreign and domestic investors – and laying down a welcome mat of powerful financial incentives to attract them. This is all part of the Investment Plan for Europe, an effort to jumpstart Europe’s flagging economy by mobilising private investment. Launched in July 2015, the strategy has proved so popular that the EU recently committed to expanding it.
The plan has three elements: a new European Fund for Strategic Investment (EFSI), an online investment portal and advisory service to assist project promoters, and regulatory reform.
EFSI was launched with a €16bn guarantee fund from the EU and a €5bn capital contribution to the fund from the European Investment Bank (EIB) to make loans in desired sectors. “Each loan will in turn generate investment worth several times the loan itself by attracting third-party co-investment,” the EIB explains, aiming at a total €315bn over three years – multiplying the original joint investment of €21bn by a factor of 15.
“The EIB is normally rather conservative, but with the EFSI backing a project, the EIB can take more risk,” says Jyrki Katainen, the European Commission’s vice-president for jobs, growth, investment and competitiveness. “One of the main values of the EFSI is that it cannot crowd out private money; it addresses market failures and mobilises private investment and does things the market cannot provide.” This is the principle of 'additionality'.
Loan or guarantee recipients can be private companies, public-private partnerships, special purpose vehicles or public agencies. Foreign investors from outside the EU are eligible for funding – provided the project being financed is in an EU country, or is a crossborder project involving an EU member state.
Going to plan
The plan appears to be working. One year after its July 2015 launch, a total of €20bn in loans to large and small companies had been made, in the expectation of triggering €115.7bn in additional investment. The focus is on key sectors, especially strategic infrastructure such as digital, transport and energy, as well as R&D to promote innovation.
The EFSI reported 97 large infrastructure and innovation projects had been approved for €13.6bn in funding in its first year. They included wind farms, hospitals, ports and airports, early-stage life sciences companies, dairy production facilities and financial intermediaries seeking funds to support local start-ups.
SMEs are an integral part of the EFSI strategy. Funds for such companies are funnelled through local bank or financial intermediaries. The appetite of smaller business for EFSI loans was “well beyond expectations”, the EIB has reported. By July 2016, 192 SME financing agreements worth €6.8bn had been approved, benefiting more than 200,000 smaller companies.
And to help promoters in preparing their offering for investors, a European Investment Advisory Hub has been set up as a single access point for advisory and technical assistance as well as financial advice.
One beneficiary of EFSI funding is Grifols, a global plasma product manufacturer headquartered in Barcelona, Spain. In October 2015 the company was awarded a €100m, 10-year loan at a fixed interest rate of 12.5% to research new indications for plasma proteins. Financial sources from Grifols say one reason the company sought an EFSI loan was the flexibility the 10-year loan period offered.
The sources add that a key benefit of the loan was the boost to Grifols’ reputation from winning EIB funding. “It opened doors to other opportunities to obtain financing,” they said.
The Investment Plan for Europe also includes what Mr Katainen calls an “online dating service” – the EU Investment Project Portal. The portal is an online platform that allows public authorities and private entities – but not individuals – in member states to trawl for foreign investors by posting projects in desired sectors for which they are seeking at least €10m in financing. Among the largest is the €5bn Rail Baltica project, which spans five countries, and, officials say, has received significant interest.
“The portal is getting good feedback because we designed it with the private sector,” says Mr Katainen. “Investors outside the EU have found it, including some from Japan, Hong Kong and Singapore. Sovereign wealth funds and investment banks like it because they can easily find projects they would not otherwise know about. We do a quick check that the project is legal, and then put it on the portal.”
The portal launched in June 2016 and by October more than 220 projects had been submitted, of which 120 have been published. Officials say it is too early to judge how many successful matches have been made.
In September 2016, the European Commission announced that the EFSI would be extended beyond 2018 to 2020. It set a new goal of generating at least €500bn in investment, this time with hoped-for contributions from member states. Crossborder and sustainable projects are slated to receive more focus to meet the ambitious goals set at the UN Climate Conference in Paris.
“We are proposing that some 40% of financing should go to investment that addresses climate change,” says Mr Katainen.
Mark Richards, a partner with the Berwin Leighton Paisner law firm in London, thinks the EFSI programme is especially useful for countries such as Greece, Spain and Portugal, which lack strong financial institutions such as those in the UK, and therefore find it difficult to attract financing.
Nevertheless, UK promoters have hastened to seek EFSI loans, including RockRail East Anglia and Midland Metropolitan Hospital – access that Mr Richards fears could be threatened after Brexit, since EU membership is a condition for automatic eligibility for EIB funding.
“If the project is energy, transport, infrastructure or R&D, I would encourage a client very keenly to seek discussions with the EIB, because ultimately the whole structure of the transaction will be cheaper than getting commercial debt,” says Mr Richards.
But is it needed?
There is one dark cloud hovering over the EFSI, however. The chairman of the EU’s European Court of Auditors, which monitors the use of EU funds, recently suggested some projects the EFSI is funding might have attracted private investment even without EFSI support, while cautioning against the EU’s increasing use of financial instruments. European Commission sources have responded by claiming that it has already proposed reinforced requirements on additionality “to ensure an even higher added-value from EFSI investment” and “foresees an even more transparent decision-making process”.
Meanwhile, the EU has also proposed a new European External Investment Plan that would direct €3.35bn from the EU budget and the European Development Fund to support a somewhat similar loan guarantee to mobilise €44bn in private investment in Africa and the EU neighbourhood, which includes countries such as Georgia, Armenia, Ukraine and Jordan.