Analysis: new mega European strategic investment fund takes major step forward

The momentum continues for ambitious European Fund for Strategic Investment

A planned new giant investment fund aimed at jumpstarting the becalmed European economy and backing, in part, renewables, energy efficiency and environmental infrastructure, took a major step forward yesterday.

The ‘European Fund for Strategic Investment’ (EFSI), which will start out at €21bn, has now been formally put forward as a legislative proposal by the European Commission – just 50 days (including the holiday period) since the idea was first floated by new Commission President Jean-Claude Juncker.

At a stroke, EFSI, a key plank of Juncker’s €315bn “Investment Offensive”, will be one of the world’s foremost investors, and co-investors, in renewables. It will be able to finance projects directly or, crucially, “participate in funds that finance various projects”.

Assuming it goes through the EU law-making apparatus as is hoped, the fund should be operational in the middle of this year. This is remarkable speed by any standards which attests to the political momentum behind the ambitious project. By operational, the Commission is clear: “so that new investments can start flowing from mid-2015”.

It is difficult to overstate how bold these plans are, given that as yet the fund has no board, operational executives or investment criteria in place. Whoever takes the reins of the fund will likely become, if they aren’t already, a pivotal investment figure.

The fund will focus on infrastructure (including in the environmental and natural resources areas), education, research, innovation, renewable energy and energy efficiency. The EU’s top brass is saying that projects will be selected for “viability, reliability and credibility” and that “commercial return is not the only benchmark”.

A fascinating feature of the proposal is what’s being termed the ‘European Investment Advisory Hub’ (EIAH) to provide advisory support to project identification, preparation and development across the EU. There will also be a ‘European Investment Project Pipeline’ (EIPP) to “improve investors’ knowledge of existing and potential future projects”.

How these will work in practice will be interesting to see, but it is clear that the Commission is doing all it can to be a facilitator. The new fund won’t have any liabilities and will have the freedom to roam the continent looking for investment opportunities where it can bear “first-loss” risk and – it is hoped – “crowd-in private sector investments”.

What are the next steps? Negotiations at the member state level-Council are due to start on January 19 in a hastily convened Working Group.And work is also expected to start in the European Parliament shortly. The Commission expects a final text to be agreed by June.

Investments will be overseen by a Steering Board which will decide on overall direction, investment guidelines, risk profile, strategic policies and asset allocation. Then there will be an Investment Committee that will be accountable to the Steering Board. This body will vet specific projects; it will consist of six paid, independent market experts and a Managing Director who will be in charge of the day-to-day management of the EFSI and chair the Investment Committee.

“Commercial return is not the only benchmark”

The fund will operate as a separate account managed by the European Investment Bank and be accountable to the Commission and the Parliament – and be open to contributions from Member States.

A report on December 9 from the EU’s Task Force on Investment identified more than 2,000 projects worth over €1.3trn, though the Commission is stressing this was just to create a “critical mass of projects” for the EFSI, with no guarantee they will all be financed: “There will be no such thing as a definitive list of projects that will be guaranteed financing by the EFSI.”

The Commission is saying the fund will have the flexibility to work with a range of financial instruments like debt financing (subordinated or senior), guarantees, equity, quasi-equity and venture capital. It will not give grants and subsidies. Indeed, the plan envisages an overall doubling of the use of what are called “innovative financial instruments” up to 2020.

Initial financing will come from a €16bn guarantee created under the EU budget, which will be combined with €5bn from the EIB, meaning it starts with “significant firepower while being able to expand its activities further over time”. It will also draw on another €8bn identified from various initiatives on “the existing margins of the EU budget”. The Commission and the EIB have identified a “conservative” leverage ratio of 15 to 1 as feasible.

There is no mention in the documents of borrowing powers for the fund, though the EIB “will adjust its borrowing activities for 2015-2017 once the EFSI has been set up”. Juncker said: “This Commission means business. With today’s proposal for the European Fund for Strategic Investments, we are delivering, together with our partner the EIB, on the pledge made in November in the plenary of the European Parliament.” The fund’s website is here.