EN Official Journal of the European Union C 139/4

Opinion of the Committee of the Regions on ‘Synergies between private investment and public funding at local and regional levels’

2013/C 139/02

THE COMMITTEE OF THE REGIONS

— agrees that combining grants with Innovative Financial Instruments potentially provides an innovative approach through which overall costs and risks of projects/investments can be reduced, and calls on local and regional authorities to think imaginatively as to how these different ‘tools’ can be used to optimise the support to key investments on the ground;

— underlines the key role played by the EIB as the EU's long-term financing institution in supporting PPPs within the EU, and in providing expertise and knowledge to the development and implementation of a range of InFIs at EU level, in co-operation with the European Commission;

— welcomes the EUR 10 billion capital increase decided in 2012 which will allow the EIB to provide up to EUR 60 billion in additional lending;

— welcomes the new ‘framework loans’ and ‘structural programme loans’ instruments introduced by the EIB. These instruments could prove critical for financing LRAs by allowing the funding of a portfolio of investments and thereby overcoming the barrier of the project size;

— recognises there have been teething problems in the uptake of the InFIs in the Structural Funds programmes and identifies a number of factors that explain this low take up, including lack of awareness and understanding of the opportunities, need for a ‘cultural shift’ for management authorities away from grants towards financial instruments, and concerns around the complexity of the regulatory framework, including state aid legislation;

— welcomes expansion of the scope of InFIs for 2014-2020 to all types of projects, to all thematic objectives and investment priorities covered by Partnership Agreements and Operational Programmes, and to all CSF funds;

— highlights the growing interest of LRAs in developing multi-regional funds in the context of macro-regional strategies with EIB;

— requests the extension of the project bonds initiative (PBI) until 2020 and expansion of its scope to include other sectors than just trans-European networks, once an evaluation has been undertaken of the pilot phase;

— recommends the European Commission to clarify the applicability of State Aid rules to InFIs;

Rapporteur Rhodri Glyn THOMAS (UK/AE), member of the National Assembly for Wales Reference document

I. POLICY RECOMMENDATIONS

THE COMMITTEE OF THE REGIONS

Introduction

1. asserts that despite growing optimism that the worst of the Eurozone crisis is behind us, there remain major challenges and obstacles to stimulating economic recovery across the EU, particularly in terms of availability of public and private finance to support key investments;

2. argues that the EU has a key role to play in helping to restore confidence in the economy, by creating framework conditions to help mobilise the limited public and private resources available to stimulate key investments at the local and regional level, and address the ongoing shortfall in availability of finance and credit to SMEs, without which the aspirations to achieve Europe 2020 and the Pact for Jobs and Growth will fail;

3. reiterates, as was set out in the opinion of the Committee of the Regions on Creating greater synergies between EU, national, and subnational budgets adopted on 31 January 2013 (1), the central role and responsibilities of local and regional authorities (LRAs) in the European recovery effort, given LRAs are responsible for a substantial share of public expenditure in Europe (16.7 % of GDP and 34 % of all public spending in 2011, and accounting for two thirds of direct investments during 2011 (2)), much of which is concentrated in key priority areas at the heart of the Europe 2020 strategy (such as economic affairs, education, environment, housing and community amenities);

4. highlights the growing importance of and interest in public private partnerships in financing projects (PPPs) (3) and innovative financial instruments (InFIs) (4) as a potential mechanism through which to help unlock key investments;

5. welcomes, therefore, the role that the European Commission is playing to stimulate the use of PPPs and InFIs, by providing a policy framework that supports and encourages use of such instruments, and mobilising the EU budget to increase the available ‘public’ finance at LRA level;

6. underlines central role of the European Investment Bank (EIB) and the growing public bank sector across the EU in supporting a coherent and comprehensive ‘policy driven’ investment environment;

7. notes that despite its relatively small scale, the EU Budget and the EIB have a key leverage role in stimulating investments across the EU territory, in particular (though not exclusively) through the ‘Common Strategic Framework’ (CSF) Funds that are delivered and implemented at the territorial level (in many cases by LRAs), and which generate an important ‘multiplier’ effect on the economy;

8. notes the ambition of the European Commission to potentially double the leverage effect of Structural Funds investments over the 2014-2020 to EUR 4.2 per EUR 1 invested by the EU, with initial indications that the share of ERDF taken by InFIs could increase from 5 % to 15 %;

9. welcomes the continuation of the ‘revolving’ fund approach for CSF funds, which has the potential to create a ‘legacy’ fund at the territorial level; calls for consideration to be given to how a ‘revolving’ fund approach could be developed effectively for InFIs run through centrally managed programmes supported by the EU Budget (e.g. in COSME and Horizon 2020);

10. welcomes the stronger political priority given to InFIs in the 2014-2020 Multi-annual Financial Framework and accompanying proposals; encourages LRAs (and Member States) to optimise this supportive regulatory framework – in particular through the strengthened and clarified rules for the CSF Funds delivered through shared management at the territorial level;

11. agrees with the Special Report prepared by CEPS at the request of the European Parliament (5) that InFIs should not be seen as a panacea for all types of interventions at the local and regional level, underlining they are only suitable for projects with potentially profitable financial returns and that they should not be seen as substitutes for grants, but rather as means of enhancing the scope of the EU budget;

12. agrees, furthermore, that combining (or ‘blending’) grants with InFIs potentially provides an innovative approach through which overall costs and risks of projects/investments can be reduced, and calls on LRAs to think imaginatively as to how these different ‘tools’ can be used to optimise the support to key investments on the ground;

Rationale, justification for, and benefits of PPPs/InFIs

13. asserts that the rationale for PPPs and InFIs is motivated by a number of factors, beyond the potential key role such approaches may have in supporting the EU economic recovery. The core logic behind PPPs is potential to achieve shared benefits, common goals and objectives, in a way that would not be possible or desirable without the pooling of public and private interests. The logic behind InFIs is to provide a more structured support, establishing schemes with set rules and objectives, that can be used to target particular beneficiaries/groups (e.g. SMEs through micro-finance; R&D projects; urban development schemes);

14. asserts that market failure provides an important rationale behind the public intervention logic, as a means to alleviate risk, incentivising private sector engagement, and enabling investments to take place that otherwise would not happen. This rationale is evident in InFIs aimed at providing SMEs with access to microfinance, for example;

15. argues strongly, however, that market failure is not the sole or necessarily underlying driver for such actions, and that there may also be a wider public policy objective as the core rationale for interventions, such as focusing on long-term goals rather than short-term gain, focusing on environmental (e.g. clean energy) or social objectives (alleviate poverty, tackle social exclusion), albeit such investments may in turn lead to new markets and economic activity (such as development of renewable energy sector, urban regeneration etc.);

16. calls on the European Commission to give greater clarity in the legislative and regulatory framework behind PPPs/InFIs to this public policy rationale, and to give greater clarity about the application of State Aids rules and public procurement legislation, which can act as barriers to participation by LRAs in such initiatives. Where there a clear public policy rationale is present, EU competition rules should not impede or act as a disincentive to such interventions being taken forward;

17. underlines that the public sector is democratically accountable: in principle it takes a long-term view on viability of investments, focusing on ensuring core public objectives and values are respected, and lowering risk by providing a relatively safe-environment for private sector to invest; whilst private sector partners bring new finance, commercial awareness and expertise, innovative and entrepreneurial skills;

18. notes that for private investors, including Pension Funds, one of the potential attractions of investing in PPPs/InFIs, particularly in the current economic climate, given the high uncertainty in financial markets, is that the public sector engagement can lower the perceived risk of the investment. Furthermore the involvement of the EIB/EU funding has the potential to lower perceived risk further, through ‘external’ verification of the quality of the planned investments;

19. calls on the European Commission to explore further the potential for EU level action aimed at mobilising pension fund investments behind the EU recovery plan;

20. asserts that as a consequence of the irresponsible financial investments that led to the financial crisis in 2008, and the drive over the past 3-4 years to reform the financial services sector in Europe, there is a clear recognition of the need to focus on long-term and sustainable investments, and avoid the abuses and excesses of the past;

21. underlines, therefore, the core need to defend and respect public objectives and interest in public private partnerships; notes, however, that without private investors there cannot be a public private partnership, and that rules governing PPPs and InFIs must be developed in a way that incentivises participation by private partners;

22. asserts that there is a strong move towards new models of ownership, aimed at delivering policy-driven investments to the benefit of citizens at the local and regional level, whilst respecting the need to achieve cost-based returns and long-term viability and sustainability rather than maximise short-term profit at all costs, building on a strong tradition of public banks in the EU which represents over 20 % of the EU banking sector (for example KFW and the network of regional banks in Germany; Caisse des Dépôts in France; and Cassa Depositi e Prestiti in Italy) (6);

23. notes in this context the emerging Scandinavian model of agencies for financing LRAs: BNV (Netherlands), KommuneKredit (Denmark), Kommunalbank (Norway), Kommuninvest (Sweden), Municipality Finance (Finland). Though they very much differ in terms of the level of involvement of the respective central government and thus the level of control exercised by that government and the level of risk it assumes (7), they provide an interesting alternative route for the financing of LRAs' investments, including in partnership with the private sector: in the case of Finland for instance, Municipal Finance is 16 % owned by the State, 31 % by Finnish public pension funds and 52 % by the municipalities. Within Wales there is an emerging debate about the potential to create a publicly owned Wales Investment Bank;

Role of the European Investment Bank

24. underlines the key role played by the EIB as the EU's long-term financing institution (and the world's largest multilateral borrower and lender – working with over 150 non-EU states) in supporting PPPs within the EU, and in providing expertise and knowledge to the development and implementation of a range of InFIs at EU level, in co-operation with the European Commission (including JEREMIE, JESSICA, ELENA and the RSFF facility; as well as technical support facilities such as JASPERS and JASMINE);

25. underlines the value the EIB brings in terms of an investment based approach, the flexibility to tailor support and lending around individual packages, the ability to offer professional advisory support and technical expertise to public authorities, and to offer good terms to clients due its AAA rating on international financial markets;

26. highlights the broad portfolio of EIB support available and range of different types of interventions including direct loans to projects (where in excess of EUR 25 m), intermediated loans through local banks, venture capital, microfinance schemes etc. and its policy-driven approach to investments, focusing on overarching EU priorities to develop SMEs, address economic/social imbalances, invest in the natural/urban environment, the knowledge economy, support to Trans-European Networks, and sustainable energy supply in the EU;

27. notes that more than 90 % of EIB activity is focused on Europe but that it plays an important role in implementing the financial aspects of the EU's external and development policies, which is welcomed by the Committee of the Regions;

28. highlights the growing importance of the EIB-funding since the late 1990s evidenced in the increased lending over the past decade, and in particular witnessed during the financial crisis of the past 4-5 years;

29. notes that by mid-2000 EIB's annual lending had increased from ECU10 bn in 1998 to EUR 45 bn, jumping to EUR 79 bn in 2011 (peak year) to offset falling private investment during the crisis. By the end of 2011 the total value of ongoing, outstanding loans had increased by over one-third to EUR 395 billion; the EIB played a pivotal role in making capital available across the EU, and supporting investments in a number of struggling Eurozone countries, including Greece, Portugal and Spain;

30. welcomes the EUR 10 billion capital increase decided in 2012 which will allow the EIB to provide up to EUR 60 billion in additional lending;

31. underlines the value of having such an asset at the EU's disposal, able to respond flexibly and quickly to changing circumstances, to adapt and develop new support programmes accordingly; reiterates the importance in the current economic climate of having an EU Institution that undertakes policy-based investments, aimed at meeting core EU objectives, on the basis of ‘not-for-loss’ rather than ‘maximise profit’ approach;

32. congratulates the European Commission and the EIB for developing a suite of InFIs during the 2007-2013 and firmly embedding the principle that EU funding has a clear role and added value to play through these InFIs, complementing and going beyond the traditional grant based; notes that by the end of 2011 a total of 592 InFIs had been developed in all Member States with the exception of Ireland and Luxembourg;

33. welcomes the new ‘framework loans’ and ‘structural programme loans’ instruments introduced by the EIB. These instruments could prove critical for financing LRAs by allowing the funding of a portfolio of investments and thereby overcoming the barrier of the project size (normally the minimum loan amount is EUR 25 million);

34. calls on the European Commission to explore extending this approach to the EU budget with financial instruments allowing a bundle of small projects to be ‘securitised’ (inter alia to issue project bonds, which the European Council agreed in its conclusions in June 2012, including a pilot phase project for the current financial framework as well as reference to the ‘Connecting Europe Facility’ as an example of where this could potentially happen during 2014-2020);

35. welcomes the steps being taken to ensure a strong and close relationship between the EIB and Committee of the Regions, given the EIB's increasingly important role in supporting economic investments at LRA level;

Bottlenecks to use of public private partnerships and innovative financial instruments

36. recognises there have been teething problems in the uptake of the InFIs in the Structural Funds programmes during the 2007-2013 period evidenced in the external evaluation report for the European Commission on the progress made in financing and implementing financial engineering instruments co-financed by Structural Funds;

37. identifies a number of factors that explain this low take up, including lack of awareness and understanding of the opportunities, need for a ‘cultural shift’ for management authorities away from grants towards financial instruments, including approaches to risk, perceived complexity of instruments and methods of participation, and concerns around the complexity of the regulatory framework, including state aid legislation;

38. notes specific concerns from cities and urban authorities with regard to development of JESSICA instruments during 2007-2013 programming period, centring on tensions between the management authorities for the programmes and the city authorities; welcomes, therefore, the greater clarity and scope within the draft regulations for 2014-2020 for sub-regional programming and ‘integrated territorial investments’, which should means cities/urban areas are better able to develop JESSICA schemes in the future;

39. notes some views expressed in the evidence gathering phase that the EIB should take a stronger role, within its portfolio of investments, in supporting ‘riskier’ projects/initiatives;

40. underlines the importance of supporting new and emerging technologies, including policy priorities such as the development of key enabling technologies in the EU (including the photonics sector for example); calls on the European Commission and EIB to ensure that PPPs and InFIs during 2014-2020 will give sufficient prioritisation to new and emerging technologies, as part of a longer-term investment perspective for Europe;

Simplifying, streamlining and enhancing instruments at EU level (including CSF Funds)

41. notes that in the context of the 2007-2013 period a wide range of different thematic instruments have developed, in a confusing and ad hoc way, as different Directorates-General have sought to introduce new methods of finance;

42. welcomes the efforts by the European Commission to streamline and simplify the range of InFIs available for the 2014-2020 period;

43. welcomes expansion (8) of the scope of InFIs for 2014-2020 (as set out in Articles 32-40 of the draft Common Provisions Regulation) to all types of projects, to all thematic objectives and investment priorities covered by Partnership Agreements and Operational Programmes, and to all CSF funds; looks forward to seeing strong widespread take up of these provisions, including in rural development and maritime programmes;

44. welcomes in particular the removal of the prohibition of financing a project from more than one source and the possibility to combine several financial instruments, which should help facilitate financing of local and regional projects;

45. welcomes the proposal to merge support for innovative SMEs in COSME (9) with the RSFF programme for SMEs under the Horizon 2020 programme, with an estimated potential leverage for investments in R&D of over €100 billion during 2014-2020, representing around 10 % of the gap towards achieving the 3 % GDP target set by the Europe 2020 Strategy;

46. identifies a need for greater awareness at the local and regional level about the potential opportunities for support from the EIB, and calls on LRAs (including management authorities for CSF programmes) to take a more pro-active role in approaching the EIB, whilst also calling on the European Commission and EIB to undertake further awareness-raising activities to promote the existing and new opportunities available;

47. suggests a series of joint conferences organised with the Committee of the Regions during 2013 and 2014, potentially within the context of the Open Days Week of the Regions, as one way of doing this; reiterates the importance of involving organisations like the European Association of Public Banks, KFW, and commercial banking sector, as well as business network organisations in such events;

48. notes that a common concern for beneficiaries, in particular from the perspective of SMEs (notably micro-enterprises), is navigating their way around complex range of instruments to support investments;

49. notes that for most SMEs their local bank is the port of call for advice and for funding, which means loan finance instruments (including those supported by the EIB and EU budget) must find an effective gateway to reach the businesses; calls for the Think Small principle to be applied more rigorously in the development of InFIs;

50. notes that in those countries (e.g. Germany) where there is a strong public bank infrastructure, and policy-driven investment ethos, the linkages between EU policy developments, new instruments and integration into the existing portfolio of services provided to SMEs at the LRA level, are more clearly evidenced;

51. calls, therefore, on Member States and LRAs, in particular in the context of the ongoing reforms of the EU economic governance structures, to undertake a more systematic review of how EU, national and sub-national financial/banking structures, can work more effectively together to focus support on SMEs and the creative/innovative value adding actors within the EU economy;

52. highlights the growing interest of LRAs in developing multi-regional funds in the context of macro-regional strategies with EIB (e.g. in the Nordic countries). Such pooling of funds rather than separate regional isolated funds could increase risk spread and the leverage and multiplier effect of the funds involved;

Projects bond initiative

53. welcomes involvement role of the EIB in the Project Bonds Initiative, aimed at helping private project promoters issue bonds to finance in infrastructure projects and attract capital market finance from institutional investors, including pension funds;

54. requests the extension of the project bonds initiative (PBI) until 2020 and expansion of its scope to include other sectors than just trans-European networks, once an evaluation has been undertaken of the pilot phase (as requested by the European Parliament);

55. calls for sharing of best practice at EU level to highlight the potential for LRAs to undergo rating agency evaluations, with the aim of reducing their risk status when seeking to attract private finance;

56. reaffirms the request from previous Committee of the Regions opinions, for the European Commission to explore the possibility of facilitating the development of ‘citizen bonds’ and ‘social impact bonds’ (already used in the UK and USA) as further innovative financial instruments to support of EU objectives;

57. welcomes the mainstreaming of ex ante assessments aimed at justifying the public intervention logic for projects using such financial instruments;

58. recommends the European Commission to clarify the applicability of State Aid rules to InFIs, for example by developing standardised ready-to-use templates addressing such issues, whilst the European Commission and EIB could also enhance their technical assistance to LRAs on these matters;

Subsidiarity and proportionality

59. notes that subsidiarity and proportionality considerations are not very relevant to this opinion, given it is not a response to a European Commission legislative or policy proposal;

60. underlines however the importance of ensuring EU level interventions are undertaken on the basis of additionality/added-value principles, and welcomes the fact that this principle is enshrined in the new EU Financial Regulation with regard to rules applicable to financial instruments.

Brussels, 11 April 2013. The President of the Committee of the Regions Ramón Luis VALCÁRCEL SISO

(1) CdR 1778/2012 final.

(2) DEXIA Crédit local and CEMR (2012), Subnational public finance in the European Union, July 2012.

(3) The term PPPs is used throughout this report to refer to joint investment projects involving public/private partners and finance, and is understood in the context of a ‘project’ based approach, ‘one off’ investments between a public/private consortium.

(4) InFIs is used throughout this opinion to refer to schemes or instruments set up to support a range of individual projects/actions, delivered through a ‘holding fund’ rather than a one-off project, e.g. JEREMIE or JESSICA. The term InFI is used in preference to the phrase Financial Engineering Instruments (FEIs) that is also widely prevalent in EU and academic literature in this field.

(5) CEPS Special Report No 68 October 2012, page 1.

(6) Public Financial Institutions in Europe, March 2011, European Association of Public Banks (EAPB).

(7) The Kommunalbank in Norway is 100 % supervised and owned by the central government. BNV bank in the Netherlands is 50 % owned by the State and 50 % owned by local and regional authorities.

(8) See articles 32-40 of the proposal for a Common Provisions Regulation (CPR) for the 5 funds covered by the Common Strategic Framework, i.e. the ERDF, ESF, CF, EAFRD and EMFF funds.

(9) Previously falling under the Competitiveness and Innovation Programme (CIP) with two InFIs: the High Growth and Innovative SME Facility (GIF) and the SME Guarantee Facility (SMEG).