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Report on the Workshop

The EFSI -

European

Investments

for Growth and Employment

Tuesday, 7 June 2016

European House

Unter den Linden 78, Berlin

The EU currently faces a series of complex challenges. Economic growth falls short of expectations, negatively affecting the lives of Europe's citizens. The unemployment of today is at the same time also the missed opportunity of tomorrow. In order to strengthen the European economy and secure its competitiveness, the Juncker Commission introduced the Investment Plan. In this regard, the European Fund for Strategic Investments (EFSI) is a key component.

#investEU

The workshop served as platform for a fruitful exchange of experiences and opinions. Among the topics covered were the recent development of the investment plan as well as discussions about the benefits, risks and potential of the EFSI. Which investment opportunities exist in Germany? Are there specific opportunities for complementarities and particularities regarding the investment structure? Which are the biggest obstacles when it comes to implementation? How can we make best use of the funds? In addition, three funded projects were presented.

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Report on the Workshop

100 Billion euros already activated on its first anniversary, EFSI is making swift progress and initiates new investment all over the European Union

315 billion euros of additional investment in Europe over three years the European Fund for Strategic Investments (EFSI) to date is the European Commissions most ambitious project under President Jean-Claude Juncker. The idea: Infrastructure projects, research and development and small and medium enterprises (SMEs) receive additional financial support by reducing the risk of private investors through public funding. Nearly one year after the official launch of EFSI, representatives of EU institutions, national financial institutions and scientists discussed the interim results on 7 June 2016. The setting: A Workshop of the European Commissions representation in Germany in co-operation with the European Investment Bank (EIB). The EFSI was subject to an intense debate, with a particular focus on the question to what extent it actually triggers additional investments and how to optimize the interaction with private investors.

European Investment Bank sees no crowding out but additional benefits

What is the current state of the EFSI? Werner Hoyer, President of the European Investment Bank (EIB), which monitors the quality of EFSI investments and manages the guarantee facility, gave an overview about the developments.

Hoyer stressed that the basic idea of the EU investment program was to use parts of the EU budget and reserves of the bank efficiently to strengthen growth and raise the competitiveness of the EUs economy. In order to achieve this, the EIB group, comprising the EIB and the European Investment Fund (EIF), would shoulder some of the higher risk in promising transactions to prepare the ground for the investment of third parties in these projects. Hoyer said he was "extremely happy" about the progress so far. The projects initiated after just a year had the potential to trigger additional investments of about 100 billion euros, a third of the overall target.

EIB President Hoyer and Vice President Ambroise Fayolle reported that contrary to concerns that were being voiced occasionally about the crowding-out of private investors, this did not occur. Instead, additional private investors were attracted ("crowding-in"), because projects carried the seal of approval of the EIB. This would encourage private investors to invest, for example, in large projects financing strategic infrastructure in the EU. A crucial advantage of the EFSI approval process, they pointed out, would be the assistance by the experts of the EIB. "Our due diligence, the financial auditing of projects, has reached a quality level second to none among public lending institutions.

The EIF, which is responsible for the financing of small and medium-sized enterprises (SMEs), argued the EFSI has enabled longer support by cheap lending for longer than before five rather

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than three years. "We see additionality in every respect", said Christa Karis, Head of Corporate Relations at EIF.

National promotional banks such as KfW play an important role

The loans are implemented with the support of national (or regional) promotional banks, which also provide 40 billion euros of capital to the EFSI. Eight billion euros are contributed by the German KfW. The EFSI funds are spread over a number of KfW programs. For example, StartGeld" has been extended, which in turn profits from additional funds for the EUs COSME program for SMEs. Unternehmerkredit Plus is supported by the InnovFin credit guarantee facility for SMEs (InnovFin SME Guarantee) of the EIF. By 2018, according to KfW, 1.5 billion euros of additional credit will have flown to 15 000 start-ups and young enterprises.

Christian Krmer, Head of Office for Management Affairs at KfW, said the program initiated additional investments because KfW could support a diverse range of small companies such as bakeries, the founders of ice cream shops and the manufacturer of special sunglasses.

Heidelberger Druckmaschinen able to invest in promising new technology

But there are also numerous larger borrowers who benefit from EFSI support. During the workshop, Heidelberger Druckmaschinen AG, a German manufacturer of printing machinery, gave an account of how an EFSI loan supported the company at a crossroads. With a 100 million euros loan, it can finance the development of an innovative inkjet printing machine, which premiered recently at a trade fair. The newly developed machine can print individually at high speed and relatively low cost. The new technology could eventually capture a world market share of up to 40 percent, said Heidelberger Druckmaschinens CFO, Dirk Kaliebe. Due to financial calamities in the past, he said, it had been difficult to obtain long-term financial support by other lenders hence, the EFSI played a crucial role. Heidelberger Druckmaschinen had suffered a sales decline of 50 percent, had to restructure financially and was forced to make half of its employees redundant.

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Kaliebe highlighted that the EIB had provided not only financial due diligence and support, but also technical assistance. "The support we received during this project has been truly first class" he said. "Businesses need excellent support schemes, but they also need people who care, people who carry the project over the finish line," he said, referring to the co-operation with the European institutions after applying for the EFSI loan. By October, the financial audit had taken place and the green line had been given quickly. "This happened faster than the German government guarantees are being approved."

A bank abandoned the project and the EFSI jumped in to help green energy investor

Michael Hannesschlger, managing director of the Austrian Energiepark Bruck/Leitha GmbH, provided an example of how the EFSI supports investment in renewable energy. Energiepark was founded by energy transition enthusiasts in 1995 and focuses on regional green energy projects. At short notice, he said, a bank had backed out of financing two wind parks of the company, totalling 12 wind turbines. Banks are reluctant to finance large scale projects, Hannesschlger said. After establishing a first contact in late 2015, the EIB, based on EFSI funds, had supported the investment swiftly and had made possible that the wind parks were built without delay. Financial and technical audits, he said, had been finished astoundingly fast. The engineers at EIB have a high level of expertise.

German Finance Ministry praises the program but is not yet willing to support an extension

Jens Spahn (SPD), Parliamentary Secretary, Ministry of Finance, emphasized that the focus of EFSI on small and medium enterprises was right and important". The concept of the EFSI to leverage 20 billion euros of additional capital for the EIB to more than 300 billion euros of investment was a "good effect," said Spahn. Since many European banks still had non-performing loans on their balance sheets, they would have difficulties to expand their credit volume. " The EFSI is about resolving market failure," he said.

However, he argued that it would be important to scrutinize whether the fund really triggered additional investments or if those would have taken place anyway, financed by other sources. This additionality, according to Spahn, "is very important for the German federal government. We need to make sure that we do not replace other institutions, we must instead unleash investment that would otherwise not have happened. Should the economy in Europe regain momentum, he said, the question should be asked if the instrument was still the right regulatory policy. Should EFSI continue after 2018 and after initiating 315 billion euros of investment? Spahn said that European and national institutions should evaluate the investment plan thoroughly and then make a decision. "The mandate to continue has not yet been given," said Spahn.

The discussion at the workshop echoed some earlier criticism. Claus Fintzen, Director Infrastructure Debt of Allianz Global Investors, the subsidiary of the German insurance giant, said he thought the investment was an excellent idea.

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However, it would be difficult to judge to what extent the EFSI would displace private investors and result in crowding out. When an EFSI product competed for a loan with a private investor, the yield would fall accordingly, Fintzen said.

Public financing, he argued, should therefore focus mainly on areas of the economy that would be more difficult to handle for large investors. For this reason, the EFSIs approach to support SMEs was justified, he said.

DIW chief Fratzscher sees huge public investment gap

Marcel Fratzscher, President of the German Institute for Economic Research (DIW), said the decisive factor was not who gave the capital. A "crowding out" of private investors could, on the one hand, even be politically desirable. He said that on the other hand, it was reasonable that private investors needed to earn returns on their investment, whilst in the public at large, there still was aversion against private investors. But resentments should be scaled back, because the higher finance costs of private investors would include credit risk. We need both anyway, private and public investment, Fratzscher concluded.

Fratzscher added that the crucial issue would be whether lending took place efficiently. Fintzen of Allianz Global Investors agreed. In his view, for example, the bundling of small, non-homogeneous loans was the right task for development banks. Insurers and other institutional investors would be in a better position to cover large transactions. He raised worries, however, that new regulatory barriers in finance could massively reduce the willingness of private inves-

tors to provide capital. According to Fintzen, changes to taxation proposed by the German government could stifle investment.

Clearing the investment backlog in Europe is one of the central tasks of the EFSI. But Fratzscher stressed that more needed to be done. "Public investment as a whole needs to rise", he urged. In Germany in particular, there was a huge pent-up demand, Fratzscher said. Due to the financial crisis, the mistake had been made to cut spending "where it hurt: in innovation and education". Instead, consumptive spending had been growing. At a minimum, the German state should spend enough to compensate for depreciations. The EFSI could help at least to incentivise some of the much-needed investment.

EFSI takes over some of the risk of projects activating more private investors

Wilhelm Molterer, Managing Director of EFSI, said that the responsible institutions were well aware of the controversy surrounding additionality. Therefore, the main task was to ensure additionality. "That is at centre stage" Molterer said. He stressed how the basic mechanism of the EFSI worked: The additional capital of EFSI of about 20 billion euros served as a starting point to allow the EIB and the development banks to raise additional capital. This in turn would be used to take over some of the risk of public and private projects which would otherwise not be realised. "Part of the risk is transferred to the EFSI, which makes the risky credit more manageable for the EIB, which in turn allows private investors to proceed," he said.

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EIB President Hoyer had already made clear in his opening statement that the European Bank would go to great lengths to avoid crowding-out. "We are a crowding-in bank. We operate exclusively on the private credit market. And almost half of our funds come from non-European sources, he stressed.

In addition to the direct effects of the EFSI on the European economy, Molterer described it as an opportunity to modernise the EIB. "This is a massive game changer, the EIB needs to change, it has to become more market-based," he stressed. Critics often call the EFSI a "bureaucratic monster", said Molterer. According to him, however, this criticism was unjustified because the EFSI made use of established mechanisms and institutions, therefore not causing any additional delays. "The Investment Committee of EFSI has to make the decision on a project within ten days," he said.

European Commissioner Gnther Oettinger expects boost for the digital economy

Is it sufficient to simply inject more money into the European economy to bring growth back on track? "The money is there, now it needs good projects, and we have to match them with the investors," said Irmfried Schwimmann, Deputy Director General of DG GROW.

Barriers need to be dismantled and public procurement needs more administrative capacity. Awarding must be carried out well and sustainably. At the same time, the issue of competition cannot be neglected: "There are still many barriers at the national level," she said.

Europe's economy would certainly not lack sectors in need of modernization through additional investments. Via video-message from Strasbourg,

the European Commissioner for the Digital Economy and Society, Gnther Oettinger highlighted EFSI's impetus for the digital economy: "The EFSI will contribute to investments in digital professionals, entrepreneurs and start-ups, it is an excellent driver for change," he said. Oettinger cited conversations he currently leads with the industry on the modernization of mobile networks, which would invest in the fifth technology generation (5G). Oettinger also took up the issue of efficiency. The long-term success of the EFSI will be to render public investment more efficient in comparison to issuing direct grants.

Further information:

The investment program for Europe - Questions and Answers

Press contacts:

Reinhard Hnighaus, Spokesperson of the Representation, Phone: +49 (30) 2280-2300

Christof Roche, Senior Press Officer, European Investment Bank, Phone: +32 (2) 712 41 29

The general public is encouraged to contact the team of the ERLEBNIS EUROPA centre in Berlin in case of any further questions either via email or by phone +49 (30) 2280 2900.

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Impressions

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