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Financial Instruments in the next Multiannual Financial Framework : principles, policy areas and volume / From co-financing to co-investment

14 Février 2011, 14:45pm

Publié par Patrice Cardot

1. The EU budget as a catalyst for strategic investments

One of the most important challenges that the next Multiannual Financial Framework (post-2013 MFF) will face is the tension between the significant amount of investments needed to reach the Europe 2020 policy objectives and get the EU out of the economic crisis stronger and more competitive than before and the heavy constraints on public finances, as well as reduced lending capacity of the private financial sector due to higher capital requirements under Basel III. The next MFF should therefore act as an effective catalyst to bring together the public and private actors that will make strategic investments to raise the EU growth potential and to deliver a knowledge based and low carbon economy.

At the same time, the EU policy priorities for 2020 cover a range of areas where the private sector is the targeted beneficiary and/or plays a key role to meet the objectives. Hence, the projects to be funded present a potential economic viability that the public support may turn into profitable medium and long term investments.

In this context, co-investment through financial instruments , where one euro invested in a field affected by a market failure has a multiplying effect on the total investments mobilised and where the budget may get back a portion of its initial investment, should clearly play a significant role in the next MFF.

2. Existing financial instruments

Since more than ten years, the EU budget has been using financial instruments such as guarantees and equity investment for SMEs (currently the SME Guarantee Facility and the High Growth and Innovative SME Facility under the Competitiveness and Innovation Framework Programme, both are implemented by the European Investment Fund). In the 2007-2013 financial framework, a new generation of financial instruments have been put in place in cooperation with the EIB, such as the Risk-Sharing Finance Facility (RSFF) under the 7th R&D Framework Programme, or the Loan Guarantee Instrument for TEN-T projects (LGTT). In the area of structural funds, financial instruments have been set up to support enterprises, mainly SMEs, urban development and energy efficiency through revolving funds.

Other smaller instruments have been implemented to invest in infrastructure equity funds (e.g. Marguerite Fund) or to provide micro-credit (e.g. European Microfinance Facility for Employment and Social Inclusion), via fund structures allowing for the pooling of resources with other public or private bodies, including International Financial Institutions (IFIs) or Member States’ bilateral financing institutions. Also the structural funds allow financial engineering to support SMEs or to invest in energy efficiency projects in urban areas.

Although fragmented, experience until now with financial instruments has been positive. The mid-term evaluation of the RSFF, for instance, proposes that an appropriate size for risk-sharing instruments supporting research and innovation in the next MFF could be five times the size of the current RSFF. Court of Auditors' reports have generally praised the effectiveness of these instruments, excepting in certain cases where it detected a lack of an integrated vision from the Commission side on their operations and of the rationale for distinguishing between EU level instruments and value added versus similar instruments deployed at national/ regional level (often co-financed by the structural funds).

3. Principles for a wider use of financial instruments

If the next MFF is to be a fresh start for an increased role of financial instruments in the EU budget, their regulatory, budgetary and operational framework should be strengthened in order to ensure that EU resources are being used for the purposes intended, that they effectively leverage investment and that they are adequately monitored, reported and accounted. Therefore, in line with general principles endorsed by the Group of Commissioners on Innovative Financial Instruments, any future proposal for a financial instrument should fully respect the following principles:

Addressing sub-optimal investment situations. The rationale for intervention must be solidly established on an analysis showing a sub-optimal investment situation (e.g. market failure, high innovation risk).

Ensuring EU value added. The intervention through EU level financial instruments, whether through sectoral or structural finds, should be clearly motivated as opposed to an intervention at national/regional level.

Multiplying effect. The intervention of an EU financial instrument should be an instrument to mobilise a global investment (equity and/or debt) several times the size of the EU commitment.

Capital accumulation. Revenues and repayments generated by the instrument are reused by this one during the programming period.

Transparency. The procedures for budgeting, delegating management, awarding funds, monitoring implementation, leverage and risk exposure, reporting and accounting shall guarantee in a simple manner full transparency of the financial instrument operations.

Capped risk exposure. Liabilities generated by the financial instrument will remain under the limit of the budget contribution to the instrument.

Harmonization and simplification. All financial instruments shall respect a common set of rules, procedures and standards enshrined in a legislative or delegated act.

Integration. Financial instruments targeting the same policy area and/or providing similar products should as much as possible be integrated.

Flexibility. Financial instruments should be designed with sufficient flexibility built in to allow them to adjust to market conditions.

Delegation. The management and implementation of financial instruments will in general be delegated to the EIB Group , other international financial institutions (IFIs) or public financial institutions where at least one Member State is a shareholder. It could also be delivered through an investment vehicle structure set up under national law and pooling resources from different public and private sector sources. Further cascade delegation to private financial actors would be possible.

These principles are being defined and complemented by concrete rules and guidelines under the EU Equity and Debt Platforms through appropriate regulation (see section 7). When appropriate, new provisions may be added in the proposal for the revision of the Financial Regulation and its Implementing Rules, currently under negotiation and which already foresees a specific title for financial instruments.

Any future proposal to set up a financial instrument will be scrutinized against these principles, making due allowance for specific circumstances in case of shared management.

4. Policy areas where co-investment should play a central role

In line with the approach and principles described above, financial instruments should be part of the EU budget interventions in internal policies pursuing the following objectives :

 1. To foster the capacity of the private sector to deliver growth, job creation and/or innovation: support to start-ups, SMEs, mid-caps, knowledge transfer, investment in intellectual property.

 2. To build infrastructures with an earmarked revenue stream (user or availability payment schemes) that reinforce EU competitiveness and sustainability: transport, energy and ICT infrastructures.

 3. To support mechanisms that mobilise private investments to deliver a public good: knowledge (research and development), energy efficiency, promotion of technologies tackling climate change, social cohesion.

In each of these areas the respective share of grants and financial instruments will be determined by the financing and risk profile of the projects targeted.

In the first case, where the private sector is the direct beneficiary, the EU intervention should be increasingly delivered through financial instruments.

For infrastructures with an economic model based primarily on user payment schemes (most energy infrastructures, ICT infrastructures in urban areas, transport infrastructures with a toll on traffic), financial instruments should represent a large majority of the EU intervention.

For infrastructures to be funded mainly by public finance (direct grants or availability payment schemes), as it is the case for a large share of transport and energy infrastructures as well as for ICT infrastructures in rural areas, financial instruments may represent 10-30% of the EU spending with the aim of allowing public authorities to have the choice between direct financing or through public-private partnerships. A combination of grant financing and financial instruments in the same project should be possible provided that there is private sector investment, for example through PPPs.

Internal policies, because of their direct impact on the Internal Market, on EU growth potential and on the achievement of the EU 2020 sustainability objectives, are the priority sector for gearing up the share of financial instruments in the budget.

In the structural funds area (regional development, cohesion fund, social fund, rural development), the EU budget is shared managed with Member States who have a large autonomy for allocating resources and choosing instruments. The approach here would be to make the environment as friendly as possible towards financial instruments, removing EU or national regulatory obstacles and where possible offering standardised instruments at EU level and by providing certain incentives (see below).

In the external action sector, the more complex environment and the nature of objectives necessitate further work to determine to which extent the use of financial instruments could be favoured in interventions in partner countries, particularly in the immediate neighbourhood and pre-accession countries, as some external programmes support projects similar to those funded by internal policies (e.g. SMEs and innovation, infrastructures, renewable energy, etc.), or for big projects of EU strategic interest. The discussion on the EU platform for cooperation and development proposed in the framework of the review of the EIB external mandate could provide a forum for such complementary work.

5. Financial volume of a set of innovative, integrated and flexible financial instruments

In the 2007-2013 financial programming period, financial instruments in internal policies amount to € 2,855 million and in cohesion policy € 10,800 million (1.3% of the 2007-2013 programmed budget).

A preliminary estimation, carried out by the concerned Commission DGs, of the volume of EU budget resources required by financial instruments to address properly the EU 2020 objectives set for the policy areas discussed in §4, provides a figure several times the volume allocated under the current financial programming period.

There is currently a certain fragmentation of instruments with considerable overlaps in terms of the projects and beneficiary groups targeted. Just to mention a few examples, supply of equity to various types of SMEs, investment in infrastructure and energy efficiency, in particular in local settings, are targeted by several policies. There is thus significant scope for streamlining the number of instruments to avoid extending this situation of fragmentation and overlapping into the next MFF. As a very first priority, before entering into discussion on individual volumes of financing, it is therefore crucial to establish the premises for this discussion, notably to arrive at a consensus and clear decision on the clustering of policies around a limited number of cross-flagship instruments.

For structural funds (regional development, cohesion fund, social fund, fisheries and rural development), an increase in the use of financial instruments should be promoted through strong incentives. The following options could be explored to encourage the use of financial instruments by the structural funds :

  consider mandatory or indicative national envelopes breakdowns by objectives that mirror as much as possible the EU 2020 objectives, in particular concerning the support to innovative SMEs, strategic cross-border infrastructures, energy efficiency, renewable energy and climate mitigation and adaptation;

  reduce the co-financing requirement for investment in strategic infrastructures funded by financial instruments;

  allow the pooling of structural funds from several Member States into a common financial instrument, possibly with national windows to favor investment in contributing Member States;

  develop at EU level standard instruments and mechanisms that are attractive to use by regions and Member States.

Further work on internal policies and structural funds in the areas where the financial instruments can play an important role (research, innovation, infrastructures, energy efficiency, climate change, and social cohesion) should be carried out in a coordinated way in order to set up clear guidelines on what level, EU or national/regional, is the most adequate for the EU budget intervention.

In order to quantify the weight of financial instruments in the next MFF, further work is needed on the analysis of estimates, on the absorption capacity by sectors, including the financial sector, on the integration of instruments, on synergies with the structural funds and on the critical masses below which the EU added value and cost-effectiveness would not be proven.

6. An effective and transparent budgetary and operational management of financial instruments

The current budgetary management of financial instruments provides only a partial picture of the main parameters that define the financial position of the instrument. In the main documents submitted to the Commission and/or the budgetary authority in the context of the budgetary and discharges procedures (activity statements, the budget, financing decisions and annual accounts), there is little information about leverage, other financial investors, investment conditions, time horizon, revenue generated, repayments, risk exposure, etc.

As stated in the principles listed above, full transparency should prevail concerning the planning and implementation of financial instruments. A detailed work will be carried out in order to define concrete rules and guidelines that will ensure the respect of this principle.

Similarly, the procedure to choose the financial institution(s) to which the management of the financial instrument will be delegated should follow a transparent process based on objective criteria.

Without prejudice to the central role that the EIB/EIF already plays and will continue to play in the design and management of financial instruments, it is in the EU budget interest to pool resources and financial expertise from all financial institutions (EIB Group, IFIs and public national financial institutions) in the implementation of EU and national/regional financial instruments. This could be achieved either by involving various institutions in the implementation and management of an EU instrument or by using investment vehicle structures involving investment from several such institutions.

7. The EU Equity and Debt Platforms

The principles of integration, which implies a limited number of cross-policy instruments, and delegation, which externalizes to financial institutions a large part of the implementation, require that new equity or debt instruments are appropriately designed and have appropriate governance structures to ensure that the EU has an effective oversight of the financial operations and investments.

The EU Equity and Debt Platforms will be a new set of standardized common rules and principles for equity and debt instruments, within the respect of the Financial Regulation. They will not have a specific envelope in the budget for financing such instruments; instead, the financial instruments will be financed through different budget lines from the specific policy areas, combined in appropriate cross-flagship instruments providing equity or debt. The aim is to avoid multiplication of financial instruments of a similar nature or with a similar target population.

The Platforms will establish EU models for financial instruments at highest level through a horizontal legal basis, either in the form of a separate Regulation or enshrined in the Financial Regulation and its Implementing Rules, to ensure the buy-in of all actors in the set-up of financial instruments to the vision of streamlining and standardisation. The Platforms also support simplification through fewer instruments, larger-scale interventions and unified management rules.

They would be mandatory for the internal policies and apply horizontally to equity and debt instruments across these policy areas. In the case of structural funds, as mentioned above the principle of shared management with Member States must be respected and therefore the EU models will be offered as optional best practice models coupled with strong incentives for Member States to follow the EU level approach, the aim being to ensure increased complementarity between EU level and national/regional level instruments.

The task of designing new instruments for the different policy areas will be simplified by the Platforms, as the standard issues which are not policy-specific but apply to all policy areas would already be settled in the Platforms. This also ensures a stronger negotiating position for the EU vis-à-vis its financing partners and equality in the treatment of those partners.

The common rules and standards for financial instruments would harmonise delivery mechanisms, offering a limited number of options. They would aim at ensuring appropriate oversight and policy control, e.g. by Commission participation in steering committees for individual instruments or investors' committees for investment funds. Key financial parameters would also be harmonised, such as sharing of risk and revenue with other investors, risk diversification, fee structures and other measures to align interest with financing partners and ensure instruments are in line with market practice to be attractive also to private investors.

As regards monitoring and reporting, the focus would be on providing reasonable assurance that EU funds are being used for the purposes intended, based on ex ante identification of risks and relying on controls carried out by financing partners and independent auditors. Appropriate risk management (incl. reputational risk) would be an overriding concern of the Platforms not only in respect of monitoring but also in the design of instruments. The Platforms would thus provide standard "templates" to be used for equity and debt instruments.  

Source : European Commission

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