EFSI boss: The next EU budget will be different

Wilhelm Molterer. Krakow, September 2016. [European Commission]

The concept of the EFSI – to use taxpayer’s money from the EU budget in combination with financial instruments to achieve leverage with a higher economic impact – is now waterproof, Wilhelm Molterer, managing director of EFSI, told EURACTIV Slovakia in an exclusive interview.

Molterer was interviewed by EURACTIV.sk’s Andrej Furik

The European fund for strategic investment (EFSI, also called “Juncker Plan”) has been functioning for more than a year. What are the main accomplishments of the initiative and what challenges is it still facing?

Since the EFSI regulation came into effect in July 2015, the EIB Group has already approved projects that are expected to support 44% of the overall investment target. This means that by the end of this year, i.e. halfway through the EFSI period, we will achieve half of the €315 billion goal. We are on track.

However, there is room for improvement. This goes for the project development and the advisory capacity as well as for the quality and speed of project preparation, particularly in the infrastructure area.

The second thing that can be improved is the crowding in of private capital. We have to move in the direction of structural public-private partnerships (PPP) to achieve more infrastructure investment without increasing public debt.

Finally, we can do more to combine the financial instruments deployed by EFSI with grant money from European Structural and Investment Funds (ESIF). The potential is huge, mainly for achieving the cohesion target. The challenge is to work around the different EFSI and ESIF legal environment.

There is currently no cross-border project under EFSI. Why is that and how can it be changed?

Cross-border projects are difficult mainly because of different regulatory and legal frameworks between states.

But there are some interesting macro-regional concepts established by the EU, e.g. the river Danube strategy. Here, the countries alongside the river work on joint investment topics.

I also believe that we should reserve a portion of our structural funds purely for cross-border investments, rather than having all of it dedicated to regions and countries.

Is the European investment advisory hub (EIAH) not sufficient?

First of all, I was surprised, because we expected that the vast majority of the requests will come from the public side. This has not been the case so far. The largest portion of requests is coming from the private sector, which is good, and we also want to see more projects from the public side.

There are three advisory elements. One is the technical advice – on how to design a project and how to implement it. The second is the support of proper governance, specifically when it comes to the regulatory environment. The third, which is becoming more and more important, is the support of various financing structures.

All three elements are relevant and I think the next necessary step is to have advisory bodies on the ground to make use of the regional capacity.  We need state-backed national promotional banks to create a sort of European advisory network.

The EIAH is important but it cannot do the job alone. We need to ensure that we are working together.

The Commission proposed an extension of EFSI until 2020. The initiative is however often criticised for not providing additional funding. It was also pointed out that the financial support is unevenly spread among member states. How are these issues going to be addressed?

I think it is good that we talk about prolonging EFSI for two more years, and I am pretty sure we will get the extension. The logic is that we would like to have EFSI in place not only for part but for the whole current budget period.

Of course, there is an urgent need to get all 28 EU countries involved, to date one is missing. For this, we need better advisory, the combination of EFSI with structural funds, and capital market instruments, like PPP. We also need to broaden the scope of sectors eligible for EFSI: I think of rural development, agriculture, but also cohesion.

On the added value:  It is indisputable that EFSI delivers on what the regulation describes as “additionality”: Three of four private sector clients backed by the initiative are new. They have never been in touch with EIB before – which proves that the transactions we do with EFSI are additional.

On top of this, all EFSI projects until now are in the risk profile category provided by the EFSI regulation – we call this category ‘special activity’. True, the EIB has done special activities before EFSI came into being but to a much lesser extent. The Investment Plan for Europe allows us to step up our risky activities considerably. Still, there is room for improvement -no doubt about that.

You say that EFSI and structural funds need to work together. Can EFSI be additional when it supports a project that is also receiving money from ESIF?

It can. Let me give you an example: There is a big social housing project in France, which receives a contribution from the EIB via EFSI, a contribution from a national promotional bank, a contribution from the private sector and also a contribution via grants from ESIF. The contribution from EFSI is comparatively small as the project is supported by other instruments as well. But it is this combination that made the investment possible. The project would not have taken place without the support from EFSI.

Combining structural funds with EFSI is not about double financing. It is simply about making the best use of the various pieces we can offer.

If EFSI is designed as a demand, market driven instrument, what role do national contributions play? Are member states that have contributed not expecting a return in their regions?

Importantly, EFSI does not receive national contributions. Legally, EFSI is not a fund, it is a guarantee facility supported by EIB reserves and the EU budget. Hence, national contributions go directly to EFSI projects. Take the D4 ring road around Bratislava – this is a perfect example of how various contributions can be combined. The project is a PPP structure supported by EIB contribution via EFSI, by a grant support from the Slovak government and by private capital.

Still, it is of utmost importance that EFSI has strong political ownership in EU countries. Where they exist, national promotional banks or other state-backed financial institutions play a crucial role. Several EU countries consider or are in the midst of creating such promotional institutions. They are a helpful tool and they do not compete with commercial banks. Instead, they are complementary; they increase the economic impact certain investment vehicles have.

We can do a lot out of Luxembourg but we also need professional and strong counterparts on the ground.

What about contributions from third countries like China, which pledged to contribute nearly €10 billion?

China has realised the potential of EFSI. Together with the European Commission, it is considering  investing in European projects supported by EFSI.

Right now we are discussing EFSI support for a venture capital fund which would create a possibility for investors from abroad to invest in Europe.

An infrastructure fund supported by EFSI could soon provide another opportunity for non-EU countries to invest.

Will EFSI receive more money from the EU budget or is the proposed extension mainly relying on new national contributions?

The current input of €16 billion from the EU budget and €5 billion from the EIB reserves will certainly be increased. If we are to incentivise more than €315 billion and reach the goal of €500 billion in 2020 we certainly need more than €21 billion. However, no additional investment is expected from other sources than the EU budget or EIB.

By how much will this amount be increased?

The details are still under discussion but the target is clear. We need more than €21 billion to incentivise more than €315 billion. It is as simple as that.

If the extension of EFSI is approved, it will be operating until 2020. That is also when the current multiannual financial framework (MFF) ends. What role will EFSI play in the next EU budget?

First of all, the concept of EFSI – to use taxpayer’s money from the EU budget in combination with financial instruments to achieve leverage with a higher economic impact – is now waterproof. It has been tested and it is very convincing.

Therefore, I believe that the next EU budget will be altered. Financial instruments will become even more important, they will compliment grants and structural funds.

It is not yet clear how this will work: Currently EFSI only uses centralised money, i.e. money that is under the administrative responsibility of the Commission. Structural funds work with decentralised money, money under the responsibility of EU countries and managing authorities. One of the key issues is: How do we make this concept work for the centralised as well as decentralised budget?

The second issue is that the centralised and decentralised money requires different regulatory frameworks. This cannot work in the long run. Investors are simply not prepared to deal with two sets of regulations at the same time.

I am sure that EFSI will play a crucial role in the next Financial Framework, it will be a relevant instrument on all levels.

The obvious question then is, if it is going to play a more crucial role, will there be less money available for cohesion policy grants?

It is a total misunderstanding to think that financial instruments replace grants. We do need grants in various sectors like in research and social infrastructure.

The point is: If we want to have a higher economic and social impact, we need financial instruments to achieve the higher leverage.

The combination of the two tools is in the main challenge. I know some people consider financial instruments as competitors to the grants but this is not my point of view. They are complimentary to each other.

It will certainly take some time to develop this joint understanding. Structural funds have been around for decades. EFSI is ‘the new kid on the block’.

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