EFSI must deliver a sustained and sustainable economic recovery in Europe

DISCLAIMER: All opinions in this column reflect the views of the author(s), not of EURACTIV.COM Ltd.

Around 22% of the money mobilised by EFSI goes to energy-related projects. [Shutterstock]

The Juncker Plan is a golden opportunity to deliver investment and prosperity to the areas that need them most, argues Ingrid Holmes.

Ingrid Holmes is Associate Director of E3G, Third Generation Environmentalism.

The EU is facing a growth and investment crisis. In 2014, total investment was 15% (€430 billion) below 2007 levels; in the hardest-hit member states, the decline in investment has been even more dramatic, with the shortfall ranging from 25% to over 60%. Europe also needs to invest around €2.3 trillion to deliver an Energy Union that is in line with the EU’s 2030 climate and energy goals. In a separate initiative, the Investment Plan is focused on kick-starting investment and job creation. It has as its centrepiece the European Fund for Strategic Investments (EFSI), essentially a risk-sharing facility that seeks to promote at least €315billion of new private sector investment in the EU economy. But in working to deliver a return to prosperity in Europe (quite the right aim), there is a risk that a strategy of ‘growth at any cost’ is pursued. This would be a mistake. Particularly given the pressing challenges with securing sufficient investment to deliver a secure and low carbon Energy Union.

As such, if President Juncker is to deliver on his aims through his Investment Plan, there needs to be a focus on the quality as well as quantity of investment. In particular it is critically important that the EFSI is used to leverage private sector financing that helps, not hinders the delivery of a secure and low carbon Energy Union.

Selection criteria are therefore essential to ensure that aims turn into reality. This makes good sense in economic and security terms, as Europe’s future hinges on its ability to deliver long term productivity and competitiveness. Smart selection criteria need to ensure that projects with high growth, low risk potential are prioritised, while low growth, high risk projects are excluded. Forward-looking selection criteria will also help long-term investors effectively risk-manage their exposure to a range of uncertainties around technological and consumption changes, as well as wider infrastructure choices. Whether and how these uncertainties are managed will make or break the ability of the EFSI to leverage private sector investment into the EU, avoid stranded assets and deliver a sustained long-term economic recovery.

So what are the risks faced by investors in relation to this agenda? As well as the policy-driven impact of the EU’s climate and energy targets both in 2030 and 2050, shifts in conventional fuel consumption driven by declining energy use, the adoption of new technologies driven by innovation, new business model and behavioural changes, modal shifts in transport use, highly volatile commodity prices and the physical risks to growth posed by the effects of a changing climate in Europe, will all have a significant impact on the performance of infrastructure assets.

Applying effective screening criteria to the EFSI to start to address these uncertainties will not only enable investors to better assess risk and engage in financing a secure and low carbon Energy Union, it will also incentivise governments – through the promise of access to financing – to ensure the investment frameworks are there to support a pipeline of such high value projects. In doing this, the European Commission, European Investment Bank, national public banks and member state governments can ensure that the public funding and the reforms that make up the Investment Plan have the interests of European citizens at their heart – be they taxpayers, investors or savers –through a focus on long-term value creation.

So what do European Economic Ministers have to say about this? They agree the aim of the EFSI will be to support projects that are consistent with EU policies but also economically and technically viable, provide added value and maximise where possible the mobilisation of private sector capital. This is a good start. But given the growth and jobs crisis facing Europe the priority should also be a focus on projects that will have the highest impact in terms of creating jobs and growth, decreasing the exposure of Europe’s competitiveness to global risks, while also ensuring investments are compatible with climate and energy goals.

How can these be achieved? The suggested selection criteria are:

  1. Exclude high carbon projects that risk early retirement as greenhouse gas targets tighten. This indicates the need for an Emissions Performance Standard of 350g CO2/kWh (tighter the EIB’s current 550 gCO2/kWh limit). In addition, a social – not market – cost of carbon needs to be applied. The EIB uses €30/tCO2 in 2015, rising by €1 per year to €45/tCO2 in 2030.
  2. Prioritise projects that add most value, including to Europe’s Energy Union. Specific weighting should be applied to prioritise the projects that contribute to Europe’s energy aims, with particular priority given to projects that contribute to both energy and climate objectives, such as the efficient renovation of Europe’s building stock and electricity interconnections.
  3. Fully assess needs by ensuring projects are consistent with changing demand and consumption patterns, as developed and developing countries decarbonise their economies, mitigate the risk of early retirement and ensure economic viablility in the face of energy price and resource shocks.
  4. Take into account additionality – but meaning that the EFSI should prioritise investment in areas where underinvestment has occurred due to market failures. However, this will not happen without substantial interventions to overcome those market failures and will require a range of public-private risk sharing mechanisms. Some will require relatively low levels of risk-sharing, while others – such as investment in countries experiencing exceptionally low levels of growth or in high social value projects such as energy efficiency retrofits – will require higher levels of risk sharing and more technical assistance support. As such, a mixed portfolio of investments will be desirable.

The task of returning Europe to prosperity should not be underestimated. Without a systematic approach to prioritising long-term value investment that helps, not hinders, the delivery of the EU’s 2030 and 2050 climate and energy targets, we risk an Investment Plan that delivers benefits to the few, while overlooking the needs of the many, both in the short and the long-term.

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