One chance to get EU infrastructure investment plan right: IIGCC

Investors propose measures to tackle the structural barriers to greater infra allocations.

In January the EU President Jean-Claude Juncker announced an initiative to significantly increase investment in European infrastructure. The Investment Plan for Europe will use €21bn of EU money to unlock institutional investment to the tune of €315bn over the next three years.
The plan is much-needed: the IEA says $2.2 trillion of investment in energy infrastructure in Europe is needed to 2035 to replace ageing power plants and meet decarbonisation goals. Three-quarters of this investment need is in new renewable energy.
And the plan also comes at a good time for European institutional investors, many of whom have in recent years fallen short of their aim to allocate 8% of total assets to infrastructure. This plan could therefore help to provide the conditions for investors to move towards their allocation targets.
However investors have fallen short of their targets for good reasons. From retroactive changes to renewable policies in member states, uncertain low carbon signals at an EU level and a lack of bankable projects across Europe, energy infrastructure investment has been stymied by a confluence of factors. And this plan, welcome as it is, has not made these factors disappear.
Investors are therefore proposing that the plan is accompanied by a series of measures which will both tackle the underlying structuralbarriers and put new processes in place to get capital flowing. In a paper launched today by the IIGCC called Achieving the Investment Plan for Europe’s €315bn ambition, investors set out 12 fixes which if implemented could significantly increase low carbon infrastructure investment across Europe.
Firstly, we make clear in the paper that the plan has to be consistent with the EU’s 2030 framework, the emissions reduction goals it is targeting and the signals policymakers want the framework to send. This means it must exclude high-carbon projects from funding consideration. It would hurt the credibility of the plan and undermine the EU’s stated goals on emissions and low carbon energy for it to do otherwise. Ruling out such investment would be a clear signal to investors and really provide confidence about the direction of travel.
Related to this is the issue of retroactive changes to renewable energy policies. In a number of countries policies that investors had reasonably assumed were fixed in law for the long-term have changed. These shifts have caused billions in losses for investors and been disastrous for clean energy investment. Latest figures bear this out very clearly. As long as there is no protection from this risk investors will remain cautious. We are therefore urging policymakers to consider an EU-level mechanism to mitigate the risk from retroactive policy changes in member states.

It’s also going to be very important that projects put forward for funding are assessed using a transparent set of rules which ensure they fit the parameters of a low carbon economy. We would therefore like to see the European Fund for Strategic Investment (EFSI), which has been established by the plan to mobilise the €315bn, create and publish a set of robust sustainability criteria that will be integral when evaluating prospective projects. If all projects must pass a rigorous sustainability evaluation the EFSI can become a real marque for high quality assets.
Scale, or lack of it, has also held back infrastructure investment. Many projects are too small individually and consequently not suitable for a large institutional investor to finance. In the paper we suggest that by aggregating infrastructure assets, the investment plan could diversify risk across projects with different risk profiles and help to attract more potential investors.
Finally, a primary obstacle to increased infrastructure investment is the shortage of operational and bankable projects that have a suitable risk-return proposition. Institutional investors’ appetite for pre-construction projects will usually be limited, even with guarantees, given their risk profiles.The EFSI should therefore focus on project pipeline expansion, with greater attention given to project development and construction-phase projects.
To achieve all of the above and scale the sort of capital the EU is aiming for, projects must be structured to match the long-term considerations which drive the decision making of investors who manage the savings, pensions and investments of millions of EU citizens. The EFSI will need to have an independent and commercially astute investment committee, and the EU should consider appointing representatives of the institutional investment community to the EFSI board.
The EU’s plans have the potential to usher in a new era of low carbon infrastructure investment across Europe, but as our paper today indicates, to do this the structure of the investment plan and its related parts have to be correct from the start. Investors want to work with the EU to get this right first time and set the course for a clean energy future backed by significant institutional investment.

Stephanie Pfeifer is Chief Executive, Institutional Investors Group on Climate Change