DIRECTORATE GENERAL FOR INTERNAL POLICIES POLICY DEPARTMENT D: BUDGETARY AFFAIRS WORKSHOP THE EFFICIENCY OF THE USE OF FINANCIAL INSTRUMENTS

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3 DIRECTORATE GENERAL FOR INTERNAL POLICIES POLICY DEPARTMENT D: BUDGETARY AFFAIRS WORKSHOP THE EFFICIENCY OF THE USE OF FINANCIAL INSTRUMENTS Brussels, 25 April 2012 PROCEEDINGS Abstract: The Workshop was organised with a view to the report on "Innovative financial instruments in the context of the next Multiannual Financial Framework" (2012/2027 [INI]). Experts from the EC, financial institutions and the European SME umbrella organisation were invited to share their experience with financial instruments during the current Multiannual Financial Framework (MFF) and the study "Overview of the different financial instruments used during the current MFF period and of the Commission's proposals for " was presented. All experts agreed on the efficiency of the use of financial instruments and the fact that the majority of these instruments under the current MFF reached their objectives. However, they also noticed some failures and problems which need to be clearly identified and considered in the proposals for the future. Experts called for simplification and more transparency, a clearer scope of action as well as a reduction in the number of financial instruments. In addition, more flexibility in order to adapt to market needs and a rigorous regulatory framework to be applied to all financial instruments are required. " PE April 2012 EN

4 This document was requested by the European Parliament s Committee on Budgets for a Workshop on the "Efficiency of the use of Financial Instruments". CONTRIBUTING EXPERTS Co-writers of the analytical study "Overview of the different financial instruments used during the current MFF period and of the Commission's proposals for " : Mr James Spence Dr. Julie Smith Mr Philippe Dardier Mr Roger Havenith, European Commission, Head of Unit, "Financing of innovation, competitiveness and employment policies", Directorate General for Economic and Financial Affairs Mr António Gonçalves, European Commission, Head of Unit, "Financial Engineering and Major Projects", Directorate General for Regional and Urban Policy Mr Dominique de Crayencour, European Investment Bank, Director Institutional Affairs Department Mrs Mandeep Bains, European Bank for Reconstruction and Development, Representative for EU Affairs Mr Marc Schublin, European Investment Fund, Director Mandate Management, Product, Development and Incubation (MMPDI) Mr Gerhard Huemer, The European Association of Craft, Small and Medium-Sized Enterprises, Director Economic Policy Mr Christophe Bourdillon, Permanent Delegate of the Group CDC to the EU Institutions Mr Christian Krämer, KfW Bankengruppe, First Vice President Corporate Affairs RESPONSIBLE ADMINISTRATOR Mrs Judith Lackner Policy Department D: Budgetary Affairs European Parliament B-1047 Brussels poldep-budg@europarl.europa.eu LINGUISTIC VERSIONS Original: EN ABOUT THE EDITOR To contact the Policy Department or to subscribe to its newsletter please write to: poldep-budg@europarl.europa.eu Manuscript completed in May Brussels, European Union, This document is available on the Internet at: DISCLAIMER The opinions expressed in this document are the sole responsibility of the author(s) and do not necessarily represent the official position of the European Parliament. Reproduction and translation for non-commercial purposes are authorized, provided the source is acknowledged and the publisher is given prior notice and sent a copy.

5 CONTENTS CONTENTS 3 WORKSHOP PROGRAMME 5 PRESENTATION OF THE ANALYTICAL STUDY "Overview of the different financial instruments used during the current MFF period and of the Commission's proposals for " by James Spence, Julie Smith and Philippe Dardier Curriculum Vitae Presentation "LESSONS LEARNT" CONTRIBUTIONS BY THE EUROPEAN COMMISSION, FINANCIAL INSTITUTIONS AND THE EUROPEAN SME UMBRELLA ORGANISATION (UEAPME) ON THE EFFICIENCY OF THE USE OF FINANCIAL INSTRUMENTS Contribution by Roger Havenith Curriculum Vitae Presentation Contribution by António Gonçalves Curriculum Vitae Presentation Contribution by Dominique de Crayencour Curriculum Vitae Presentation Contribution by Mandeep Bains Curriculum Vitae Presentation Contribution by Marc Schublin Curriculum Vitae Presentation Contribution by Gerhard Huemer Curriculum Vitae Presentation Contribution by Christophe Bourdillon Curriculum Vitae Presentation Contribution by Christian Krämer Curriculum Vitae Presentation

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7 THE EFFICIENCY OF THE USE OF FINANCIAL INSTRUMENTS Organised by Policy Department D Wednesday, 25 April 2012, 09:15-10:45 European Parliament, Brussels Room: Jószef Antall Building (JAN) 4Q1 WORKSHOP PROGRAMME 09:15-09:25 Welcome and Introduction 09:15-09:20 Welcome by Alain Lamassoure 5 minutes Chair of Committee on Budgets 09:20-09:25 Introduction by Eider Gardiazábal Rubial 5 minutes Rapporteur 09:25-09:40 Presentation of the analytical study 15 minutes "Overview of the different financial instruments used during the current MFF period and of the Commission's proposals for " by James Spence, Julie Smith and Philippe Dardier 09:40-10:20 "Lessons Learnt" - Contributions by the European Commission, Financial Institutions and the European SME umbrella organisation (UEAPME) on the efficiency of the use of financial instruments 5

8 09:40-09:50 Contribution by Roger Havenith 10 minutes EC, Head of Unit "Financing of innovation, competitiveness and employment policies"/ DG ECFIN and Contribution by António Gonçalves EC, Head of Unit "Financial Engineering and Major Projects"/DG REGIO 09:50-09:55 Contribution by Dominique de Crayencour 5 minutes EIB, Director Institutional Affairs Department 09:55-10:00 Contribution by Mandeep Bains 5 minutes EBRD Representative for EU Affairs 10:00-10:05 Contribution by Marc Schublin 5 minutes EIF, Director Mandate Management, Product Development and Incubation (MMPDI) 10:05-10:10 Contribution by Gerhard Huemer 5 minutes UEAPME, Director Economic Policy 10:10-10:15 Contribution by Christophe Bourdillon 5 minutes Permanent Delegate of the Group CDC to the EU Institutions 10:15-10:20 Contribution by Christian Krämer 5 minutes KfW Bankengruppe, First Vice President Corporate Affairs 10:20-10:40 Questions, replies, debate 20 minutes Discussant: Jorge Núñez Ferrer, Associate Research Fellow, CEPS Co-Author of the study "The implications for the EU and national budgets of the use of innovative financial instruments for the financing of EU policies and objectives" to be delivered in May :40-10:45 Closing remarks by Rapporteur 6

9 PRESENTATION OF THE ANALYTICAL STUDY "Overview of the different financial instruments used during the current MFF period and of the Commission's proposals for " by James Spence, Julie Smith and Philippe Dardier 7

10 JAMES SPENCE Teaches EU financing at Sciences-Po in Paris on the Masters in European Affairs course. Has undertaken advisory work for the Kosovo parliament, supporting the establishment of a budgetary control committee (2008-9), and on the budgets of Ukraine ( ) and Ghana (2010) for the Gesellschaft für Internationale Zusammenarbeit (GIZ) and Swedish Development Agency. Member of Team-Europe in France. Honorary Director of the European Commission (rtd.) (2011). Worked on budget, audit and control matters in the European Commission for 9 years ( ), five of them as Deputy Head of Cabinet of the Budget Commissioner Michaele Schreyer, during the financial and staff reforms of Worked in the European Parliament for 23 years ( ) in committee and delegation posts, twelve years in interparliamentary relations, then consecutively secretariat head of the Energy and Research Committee, of the Budgets Committee, and briefly of the Environment and Consumer Affairs Committee. Social and political researcher at NOP Market Research ( ) and then at Social and Community Planning Research ( ) before taking a post through open competition in the European Parliament (1976). EC Fellow at Harvard University ( ), MA Political Behaviour Essex University (1970) and BA Economics & Politics at Bristol University (1964-7). Published on opinion research and political behaviour, European integration, financing EU enlargement. Social media: Facebook and LinkedIn. DR JULIE SMITH is a Senior Lecturer in International Relations at the Department of Politics and International Studies, Cambridge University, and a Fellow of Robinson College. She was Deputy Director of the Centre of International Studies in Cambridge for five years until the Centre s merger with Politics in Julie also served as Head of the European Programme at Chatham House from 1999 until Julie s research and publications focus on a wide range of European issues, including: elections to the European Parliament, institutional reform, EU enlargement, and the UK's relations within the EU, including bilateral and trilateral. She is responsible for the Cambridge part of the EU-funded INCOOP project on inter- and intra-institutional cooperation within the Union and part of the MERCURY network. She also directs the ESRC-funded Cambridge contribution to the OPAL project (the Observatory on Parliaments After Lisbon), focusing on foreign policy and the multi-annual financial framework. She recently led a project team Towards a more comprehensive, strategic and cost-effective EU Foreign Policy: the role of national parliaments and the European Parliament for the EP Budgets Committee. 8

11 PHILLIPE DARDIER Vice-President - Alternativa Mid and Small cap Stock Exchange. Vice-President and Strategic Committee Member at Alternativa (2007 present). Head of Institutional Sales (Equity Derivatives and Commodity Derivatives) at Natixis ( ). Global head of Equities and Commodities Flow Sales (as well as other sales related functions) at BNP Paribas ( ). Managing Director - Head of European Equity Derivatives Liquidity Sales at Merrill Lynch ( ). Head of FX Products, FX options trader and other FX trading roles at Banque de l'union Européenne (CM-CIC Group) ( ). Senior Trader at Transoptions S.A. ( ) making markets and trading options and stocks on the Paris Stock Exchange floor in the cash equity markets (Large and mid Caps), as well as the MATIF (Paris Futures Market) and MONEP (Paris Equity Options Market). For the last twenty years, has worked in the equity markets in six different countries, whether equity derivatives or cash and equity linked. Moved up through the ranks, from being a floor trader in options and a floor broker in derivatives to running global sales in Equity & Derivatives in major institutions such as BNPP and Merrill Lynch. Like most salesman and sales managers, relishes the strong egos of customers and sales staff as well as managing sales teams while growing a customer base. Stock Exchanges and 'Bourses are crucial to investors, customers, governments and issuers alike in the equity and commodity worlds. Specialties: equity derivatives, equities, ECM, SME financing & investing, alternative assets, exchanges and MTFs, sales management, UHNW sales, financial product distribution, digital marketing. Ecole Nationale d'administration Cycle des hautes études européennes, European and EU Studies (2012); IHEDN, Institut des Hautes Etudes de Défense Nationale Graduate Degree, Strategic, Defence and Foreign Policy Studies ( ); ESCP Europe Masters in Management ('Grande Ecole' Diploma), Management and Information Systems ( ); Carleton University B.A. Hons., Political Science ( ) Canadian team bobsledder - World Cup and World Championship events ; 7-a-side International vest in rugby : Hong Kong, Darwin, Singapore, Amsterdam and Kuala Lumpur 7s ; Cyberfense IHEDN/INHSJ for PM's Office - Committee President 2011 : Tallinn, Budapest, Stockholm and Paris. philippe@dardier.com 9

12 Growth enhancement through the EU budget James Spence, Dr Julie Smith, Philippe Dardier Apr-12 1 Financial instruments studied NOT simply grants Union measures of financial support provided from the EU budget in order to address one or more specific policy objectives by way of loans, guarantees, equity or quasi-equity investments or participations, or other risk-bearing instruments, possibly combined with grants Participations in equity (risk capital) funds, guarantees to local banks lending to final beneficiaries,... or risk-sharing with financial institutions to boost investment in large infrastructure projects Apr

13 Hard times Financial and debt crises have reduced access to public and private funding; the economic downturn pulls in the opposite direction, requiring greater investment for growth The crises have limited bank lending operations, through shortening maturities and increasing collateral needs, and have made more difficult repayments of loans granted before the crisis broke Businesses have suffered; measures are being sought to reverse the harmful spiral The market for project bonds, i.e. private debt issued by the project company, is quiescent and needs reviving Apr-12 3 Attracting extra funding Designed to attract funding from other public or private investors in key EU priority areas: where investors may be reticent due to the risks involved but where an EU budgetary contribution covering part of the risk can give other investors the assurance they need to invest alongside the EU Apr

14 FIs Aims To boost the real economy through increasing the access to finance for enterprises and industry producing goods and services. They: Repair market shortcomings Foster private sector development Build infrastructures Attract research and innovation investment in key sectors Provide project management competence and financial discipline, and Assist in the delivery of public goods. Apr-12 5 Main themes of internal policy FIs Apr

15 Apr-12 7 Deal making skills Teams of dealmakers exist In large commercial enterprises. They are constantly working on a deal flow pipeline. They thus keep their negotiating and deal-making skills sharp and up to date In a local authority, large and complex deals occur irregularly; experienced resources often move once the deal is over National government could sensibly create a dedicated complex deal-making team with people who combine both private and public sector experience They would negotiate and then monitor the deal for 2 years after closure to ensure it stays on track with the milestones and economic objectives They could be located in both central and local government. Deployment could depend on deal size, complexity and risk. Finance skills are a key component in the deal-making mix Source: Public Finance Apr

16 The results so far Audits and evaluations of existing instruments have been in general positive regarding their output Increased coherence and consistency between instruments is necessary More can be done to raise visibility and transparency of instruments New risk-sharing arrangements could achieve higher finance volumes Apr-12 9 We recommend More accurate and more transparent accounting for pre-payments in shared management A clear intervention logic and performance goals for FIs More consistent supervision and control within the EC A consistent FI template Identify each FI in the EU budget and in authorising act Consistent and comparable definitions of leverage and multiplier effect Sharing experiences of setting-up and managing FIs within the administration and, where appropriate, with other implementing bodies Apr

17 We would welcome Simplified implementation means with streamlined rules to create a clear and dedicated legal framework Improved coherence and consistency between instruments and increased visibility and transparency by creating a debt and equity platform Reducing the number of financial instruments to ensure a sufficient critical mass Minimising disparities overall between instruments Apr

18 "LESSONS LEARNT" Contributions by the European Commission, Financial Institutions and the European SME umbrella organisation (UEAPME) on the efficiency of the use of financial instruments 16

19 "LESSONS LEARNT" Contribution by Roger Havenith EC, Head of Unit "Financing of innovation, competitiveness and employment policies"/ DG ECFIN and Contribution by António Gonçalves EC, Head of Unit "Financial Engineering and Major Projects"/DG REGIO 17

20 ROGER HAVENITH Roger Havenith studied business administration, international law, European studies and applied linguistics in Brussels. After his studies he worked for high-tech start-up SMEs in the US and Germany and in the financial sector in Belgium. In 1990 Roger joined the European Commission as a project manager in the area of telecommunications and information society. Since 1997 he has been working for the Directorate-General Economic and Financial Affairs, first as an auditor and acting head of unit for internal audit and since 2002 as a programme manager, deputy head of unit and eventually head of unit responsible for the design and implementation of financial instruments under the EU s programmes for SMEs. Roger s unit "Financing of competitiveness, innovation and employment policies" has a broad spectrum of tasks in relation to financial instruments. Notably, the unit is responsible for - Providing advice and assistance to other Commission services regarding the design of financial instruments under new financing programmes for ; - Developing the principles, common rules and guidelines for the design and implementation of EU financial instruments in the period The Unit prepared the Communication on Innovative Financial Instruments and is entrusted with the Secretariat of the Commissioner's Group on innovative financial instruments and with the Secretariat of the Commission's Expert Group on financial instruments; - Contributing to the development of a coherent framework for EU level financial instruments and for financial instruments in the context of Structural Funds; representing the Commission in hearings and negotiations on financial instruments; reporting to Council and Parliament on all EU-level financial instruments; - The management of financial instruments under CIP, European Progress Microfinance Facility and the Technology Transfer Project and representation of the Commission in steering committees or boards of structured investment vehicles. 18

21 OUTLINE OF PRESENTATION BY ROGER HAVENITH, EUROPEAN COMMISSION, DG ECFIN, 25 APRIL 2012 With a track record of more than 15 years, EU-level innovative financial instruments have proven to be a very effective and efficient way of financing EU policies. The fact that financial instruments are an appropriate mode of delivery has been confirmed by numerous independent evaluations and also audits of EU level instruments by the European Court of Auditors. Compared to grants, support through financial instruments is better targeted, has a potential to attract private investors and to increase available resources, can generate revenues and produces smaller market distortions. This is why the Commission has proposed that financial instruments should play an increasingly important role in the EU budget spending of the Multiannual Financial Framework (MFF). Experience with implementing various EU-level financial instruments under the current multiannual financial framework suggests that further optimisation could be achieved through capitalising on best practices and more consistency in governance, supervision and control of future financial instruments. It is also extremely important to strike the right balance between the EU's legitimate reporting and supervision needs and attractiveness for market participants. The Commission s approach to improving the use of financial instruments further is twofold: Firstly, a dedicated regulatory framework for financial instruments is being set up. Discussions between the Commission, Council and European Parliament on a new title on financial instruments in the Financial Regulation are at an advanced stage. The rules in the Financial Regulation will be complemented by a delegated act, guidance to Commission services on harmonised minimum requirements for financial instruments and for agreements with entrusted entities. The aim is to streamline and harmonise all EU-level instruments and ensure the use of best practices in areas such as governance, reporting, monitoring, remuneration or selection of entrusted entities. 19

22 Secondly, Commission proposals for financing programmes for the next MFF, published at the end of 2011, already propose the creation of a limited number of integrated specific instruments with a higher volume of budgetary commitments and increased coherence with the structural funds instruments. It is in this spirit that the framework for the financial instruments for the next Multiannual Financial Framework will be developed. And it is in this spirit that the Commission is looking forward to continuing the discussions with Council and Parliament, both on the general framework to be created by the Financial Regulation and the Delegated Act and on the specific legislative proposals for the next MFF. 20

23 Financial Instruments Workshop of the European Parliament on Financial Instruments Roger Havenith European Commission DG Economic and Financial Affairs Head of Unit Financing of competitiveness, innovation and employment policies Brussels, 25 April 2012 EU Financial Instruments: Why? An appropriate tool, efficient and effective mode of delivery (confirmed by ECA audits and independent evaluations) 3 types of benefits Policy impact effective way of delivering on policy objectives, financial intermediaries pursue EU policies Multiplier effect multiplication of scarce budgetary resources by attracting private resources to financing public policy objectives Institutional know-how EU can use the resources and expertise of financial intermediaries As a result: Financial instruments are a recognised political priority (Europe 2020 Strategy, Communication on a Budget for Europe 2020, plans for the next MFF) 21

24 Lessons learned Financial instruments (FIs) are a successful and effective way to achieve EU policy. When comparing FIs to grants: Money returning from grants indicates problems i.e. in implementation while money returning in the context of FIs shows the successful implementation Market distortion connected with grants is much higher than with FIs, where preferential treatment, if any, is limited to the necessary minimum Control issues are not inherent to all FIs, but rather due to deficiencies in implementation, that need and are being be addressed. Instruments such as CIP SMEG have an appropriate control framework: ECA audit of SME Guarantee Facility (2011): "framework for the management of daily operations is considered appropriate" Importance of capitalising on best practices and more consistency in governance, supervision and control of future financial instruments. Need to strike the right balance between the EU's legitimate reporting and supervision needs and attractiveness for market participants. Awareness raising can be further improved. Result: Simplification & Transparency 1. Dedicated regulatory framework (Title VIII of the Financial Regulation, delegated act, implementing rules) 2. Simplified implementation modalities with standardised contractual arrangements including management structures, reporting, fees, etc. 3. Increased coherence and consistency: 1. Fewer instruments with larger volumes, ensuring critical mass 2. Minimisation of overlap between instruments 3. Coordination with Structural Funds (e.g. Possibility for MS to make contributions to instruments under COSME and H2020) 4. Intervention logic must be clearly demonstrated ex ante (EU added value, market gap, multiplication of EU contribution) 5. More transparent to stakeholders (e.g. Art. 49 reporting) 22

25 FR Title VIII (EP/Council Regulation) Legal Architecture Horizontal legal framework Sector rules Norm Content Status Basic act Rules of Application (delegated act) Operational requirements (equity and debt platforms): Definitions, management modes, principles and conditions, limitation of liability, reflows, control, reporting, etc. The delegated act is expected to supplement the FR in the following areas: combination of support, rules for direct / indirect management, rules for fiduciary accounts, ex ante evaluation, management fees, etc. A standard set of rules, provisions and templates, including homogeneous detailed provisions on governance, monitoring, financial parameters, delivery modes, rules for dedicated investment vehicles (DIV), etc. Text very stable following "trilogue" meetings Open issues include reflows and early termination Commission draft to be presented in May 2012 Work in the Commission ongoing Contains a general authorisation for the use of a financial instrument. May define type, duration, specific features or targets of the instrument envisaged. The basic act may identify a specific entity entrusted with the implementation of the instrument Agreements with entrusted entities Contractual conditions under which the Commission entrusts the implementation of a financial instrument to a financial institution in line with the above rules To be concluded only following negotiations in 2013 Multiplier effect Preferred term compared to leverage (specific meaning in accounting, negative connotation due to the financial crisis) Needs to be streamlined common definition of multiplier effect: volume of finance to eligible recipients divided by EU contribution Example: SME loan guarantees under MAP and Growth and Employment ( , /7) ,0 45, ,0 27,647 for each 1of EU funds committed 63of supported loan guarantee Bank loan SME 0,0 Amount of Investment Supported Loan Amout 436 EU Commitments 104 of investment investment Investment project 23

26 Conclusions Financial instruments Well-tested, efficient and effective way of supporting growth, jobs and innovation. That is why we wish to build on our experience and use them more. Can attract private funding for public policy objectives. This is particularly needed in times of limited public resources, when we need to "do more with less". Can play a major role in achieving the Europe 2020 objectives. Moreover: We are not only providing the financing we also work on the regulatory framework, both for within the Commission and for financial intermediaries. 24

27 ANTÓNIO GONÇALVES Current position: Head of Unit, Unit "Financial engineering instruments and major projects", Directorate-General for Regional Policy, European Commission. Joined the Commission in 1988 and has since then held various positions as deputy head of unit and desk officer in operational units dealing with Structural Funds assistance in Member States as well as pre-accession assistance in Candidate Countries. Before joining Regional Policy, worked as desk officer in various the Commission services responsible for managing assistance to third countries. Before joining the Commission worked as independent lawyer and as local expert for a diplomatic mission. Studied law at the Faculty of Law of the University of Lisbon, followed by post-graduate studies in European Law. Master of Arts in International Politics, Université Libre de Bruxelles. 25

28 PRESENTATION BY ANTÓNIO GONÇALVES, EUROPEAN COMMISSION, DG REGIONAL POLICY, 25 APRIL Regional Policy has significant experience in using financial instruments, as more efficient and sustainable alternatives to traditional grant-based financing, including the combination of grants with financial instruments. In the period the use of financial instruments was significantly expanded in size and scope, to include new areas of activity, such as investments in enterprises, primarily SMEs, urban regeneration and renewal, energy efficiency and renewable energy. By 31 December 2010 some EUR 10 billion had been contributed from operational programmes co-financed by the European Regional Development Fund for supporting financial instruments in these areas. We are faced with an increased scarcity of public resources at a time when there is an urgent need for more financing to stimulate growth and employment. Using cohesion policy funding also through financial instruments, rather than only through grants, has many advantages: the same 1 can be used several times in a revolving manner (loans and equity are paid back whereas grants are not); guarantees allow mobilising significant amounts of funding from financial institutions and other investors, generating multiple amounts of funding to enterprises and other beneficiaries; in addition, financial instruments can generate income (interest, dividends, capital gains) that can be used again additionally to the original EU funding; financial instruments bring together public and private funding, make use of funds and expertise of private sector for projects that would otherwise not have been realized, financial instruments are not free money, they create strong incentives to use the money more efficiently than grants. In a nutshell, one spent through financial instruments can mobilize several further for cohesion policy, which invests in growth and jobs, and provide incentives for high project quality and sustainability. An important point to take into account is that financial instruments in cohesion policy finance projects and enterprises in less developed regions - regions with economic difficulties - for purposes that do not necessarily have a short-term profitability, but have high positive socio-economic cost-benefit ratio (seed capital, early stage and start-ups, social enterprises, energy efficiency, urban development etc.). This has to be taken into consideration when looking at financial performance indicators - comparisons with best practices in highly developed areas or with financial instruments 26

29 which do not have cohesion policy objectives are not suitable. Social and economic performance should be considered the key drivers for cohesion policy support delivered through financial instruments. Also important to note is that cohesion policy is governed by the principle of shared management where national or regional authorities play a fundamental role in the design and delivery of the programmes. This means that the legislative framework needs to maintain a certain level of flexibility in order to enable a smooth implementation of financial instruments in all European regions. The Commission's proposals for include very detailed and clear rules regarding the use of financial instruments in cohesion policy, applicable also to all funds implemented under shared management. These rules build on the experience and best practices accumulated in the current programming period. In conclusion, there is great potential for financial instruments in modern cohesion policy. We can achieve "more for less" with financial instruments, which are appropriate tools to achieve public policy objectives, particularly in times of scarce public resources and financing constraints. 27

30 Financial Instruments in Cohesion Policy COBU workshop, 25 April 2012 António Gonçalves European Commission DG Regional Policy Head of Unit Financial Engineering, Major Projects Regional Policy Implementation of FIs in cohesion policy Article 44 of the GR enables support through FEIs in three thematic areas: Art 44 (a): Enterprises, including SMEs & micro enterprises Art 44 (b): Sustainable urban development Art 44 (c): EE & RES in the building sector, including existing housing Implementation of Holding Fund (HF) structures or non-hf structures with partners such as EIB Group, national or regional public banks, private banks, RDAs, business angels, FSA fund managers, etc. Overall FEI Implementation progress in EU Member States (as per ): ERDF + national contributions committed to FEIs: EUR 10.0 bn ERDF contributions committed to FEIs: EUR 7.6 bn FEIs for enterprises (year end 2010): EUR 8.1 billion of ERDF & national resources committed to 41 HFs (investing in 131 funds) and 258 specific funds across 25 Member States FEIs for sustainable urban development (30 June 2011): EUR 1.9 billion of ERDF and national resources committed to 19 HFs and 3 specific funds across 11 Member States Regional Policy 2 28

31 FEIs : Key concepts & definitions HF = Beneficiary Managing Authority HF Financial Intermediaries Financial products Final recipients Financial Intermediary Financial products Final recipients FI = Beneficiary Beneficiary Beneficiaries = FEIs having contractual relationship with MA Operation Constituted by the financial contributions from an OP to FEIs (incl HFs) and the subsequent investments made by the FEI Eligible expenditure Interim statement of expenditure: Contributions paid from OPs (ERDF & national co-financing) to FEIs eligible At closure: Amount paid out by the FEI for concrete investments to the benefit of the final recipients (or guarantees provided/committed) Management costs & fees Regional Policy 3 Advantages of using financial instruments in cohesion policy 1 can be used several times in a revolving manner (loans and equity are paid back whereas grants are not); guarantees mobilise multiple amounts of funding from financial institutions and other investors, to the benefit of enterprises and other beneficiaries; FIs generate income (interest, dividends, capital gains) that can be used again additionally to the original EU funding; FIs bring together public and private funding, as well as expertise of private sector, for projects that would otherwise not have been realized, FIs are not free money, they create strong incentives to use the money more efficiently than grants. In a nutshell: one spent through financial instruments can mobilize several further for cohesion policy objectives and provide incentives for high project quality and sustainability. Regional Policy 4 29

32 Financial instruments : key features Background: Increased importance of financial instruments in implementing EU budget resources in future (MFF ) EU central level / direct management : EU Debt and Equity Platforms to serve as standardised rules for financial instruments using EU budget resources Regional Policy / shared management : Strengthening and expansion of financial instruments in the context of Cohesion Policy Legislative COM proposal to provide a clear set of rules, building on existing guidance, capture synergies with other forms of support such as grants, and to ensure compatibility with financial instruments at EU level. Regional Policy 5 Challenges detected provisions of legal framework not detailed enough MS capacity deficit led to delays in launching and delivering the FIs to final recipients Slow start of FI related activities Lack of reporting and monitoring data on FIs Supply driven instead of demanddriven design of FIs Over dimensioning of FIs Avoidance of n+2 decommitment / parking of Structural Funds Intransparent management costs and fees structures Multiplier effect below levels achievable outside cohesion policy EC proposal: : CPR and envisaged DA / IA More detailed and clearer rules, based on existing guidance (continuity) and best practice (optimisation); stronger rules on financial management including the re use of capital resources paid back and income resources (Art 37 and 38 CPR) Ensure alignment with FR and compatibility with FIs at EU level Guidance envisaged already at programming stage Technical assistance platform for FIs in cohesion policy Flexible implementation options, including support to FIs at Union level (Art 33 CPR) Possibility to implement standardised "off the shelf" instruments which allow for swift rollout under Art 33 CPR; templates in IA; close co operation between REGIO, ECFIN and COMP Legislative package to contain minimum requirements for monitoring and annual reporting (Art 40 CPR and envisaged IA) Obligatory ex ante assessment for each FI to identify market failure and justify CSF intervention (Art 32 CPR); minimum requirements to be laid down in envisaged DA Results of ex ante assessment (please see above) to be taken into account when developing FI business plan and concluding relevant funding agreements Phased payments from programmes to FIs, based on actual investment performance and related capital requirements (Art 35 CPR) Incentive based methodology for management costs & fees will discourage parking of funds Envisaged DA will lay down a methodology for incentive based management costs and fees Art 36 CPR enables capitalised management costs and fees for defined cases and timeframes Ex ante assessment to assess possible public or private sector participation beyond CSF Clear rules on the re use of CSF Funds and their legacy beyond programme closure (Art 37 to 39 CPR) Envisaged DA to lay down specific multiplier requirements for FIs & guarantee products Regional 6 Policy 30

33 Additional information on financial instruments in cohesion policy 1. COMMISSION STAFF WORKING DOCUMENT - Financial Instruments in Cohesion Policy cial_instruments_2012_en.pdf Financial Engineering Instruments Implemented by Member States with ERDF Contributions. Synthesis Report neering_report_2012.pdf Annexes neering_annex_2012.zip Factsheet: Financial Instruments in Cohesion Policy ments_en.pdf Regional Policy 7 For more information InfoRegio: ec.europa.eu/inforegio RegioNetwork: Regional Policy 8 31

34 Financial Instruments in Cohesion Policy COHESION POLICY The European Commission adopted legislative proposals for cohesion policy for in October 2011 This factsheet is one in a series highlighting key elements of the future approach Table of contents What is the aim? What is proposed? What has changed from ? What are the practical effects? Cohesion Policy 32

35 Financial instruments represent a resource-efficient way of deploying cohesion policy resources in pursuit of the Europe 2020 Strategy objectives. Targeting projects with potential economic viability, financial instruments provide support for investments by way of loans, guarantees, equity and other risk-bearing mechanisms including policy-based guarantees for the European Social Fund (ESF), possibly combined with interest rate subsidies or guarantee fee subsidies within the same operation. Besides the obvious advantages of recycling funds over the long term, financial instruments help to mobilise additional public or private co-investments in order to address market failures in line with Europe 2020 and cohesion policy priorities. Their delivery structures entail additional expertise and know-how, which helps to increase the efficiency and effectiveness of public resource allocation. Moreover, these instruments provide a variety of incentives to better performance, including greater financial discipline at the level of supported projects. Financial instruments have been used for delivering investments for Structural Funds since the programming period. Their relative importance has increased during the current programming period and they now represent around 5 % of total European Regional Development Fund (ERDF) resources. In the light of the current economic situation and the increasing scarcity of public resources, financial instruments are expected to play an even stronger role in cohesion policy in the programming period. What is the aim? g Top Building on the implementation experiences with financial instruments in current and past cohesion policy cycles and reflecting the importance attached to them in the multiannual financial framework , the European Commission proposes to further expand and strengthen the use of financial instruments in the next programming period as a more efficient and sustainable alternative to complement traditional grant-based financing. What is proposed? g Top To encourage and increase the use of financial instruments in cohesion policy for the programming period, the Commission s proposals:»» offer greater flexibility to EU Member States and regions in terms of target sectors and implementation structures;»» provide a stable implementation framework founded on a clear and detailed set of rules, building on existing guidance and experiences on the ground;»» capture synergies between financial instruments and other forms of support, such as grants; and»» ensure compatibility with financial instruments set up and implemented at EU level under direct management rules. 33

36 To this end, the Commission proposes a separate section on financial instruments Title IV (Articles 32 to 40) in the draft regulation laying down common provisions for the five Common Strategic Framework (CSF) Funds (1), allowing for a clearer presentation of the instruments specificities and regulatory requirements. Furthermore, implementation details will be laid down in related secondary legislation (Delegated Acts and Implementing Acts). There will therefore be a single set of rules governing financial instruments for all five CSF Funds, ensuring full consistency with the provisions of the Financial Regulation. What has changed from ? g Top Widening the scope of financial instruments In contrast to the programming period, the rules proposed for financial instruments are non-prescriptive in regards to sectors, beneficiaries, types of projects and activities that are to be supported. Member States and managing authorities may use financial instruments in relation to all thematic objectives covered by Operational Programmes (Ops), and for all Funds, where it is efficient and effective to do so. The new framework also contains clear rules to enable better combination of financial instruments with other forms of support, in particular with grants, as this further stimulates the design of well-tailored assistance schemes that meet the specific needs of Member States or regions. Financial instruments are a special category of spending and their successful design and implementation hinges on a correct assessment of market gaps and needs. Therefore, in the context of an OP, there is a new provision that financial instruments should be designed on the basis of an ex ante assessment that has identified market failures or sub-optimal investment situations, respective investment needs, possible private sector participation and resulting added value of the financial instrument in question. Such an ex ante assessment will also avoid overlaps and inconsistencies between funding instruments implemented by different actors at different levels. A range of new implementation options Across Member States and regions, the operational environment for financial instruments, as well as the administrative capacity and technical expertise required for their successful implementation, vary significantly. Against this background, the Commission s proposal offers different implementation options from which Member States and managing authorities may choose the most suitable solution. Cohesion policy support can be provided to: 1 Financial instruments set up at EU level and managed by the Commission, in line with the Financial Regulation (direct management). Under this option, OP contributions to the financial instruments will be ring fenced for investments in regions and actions covered by the OP from which resources were contributed. In terms of management and control, the same rules apply as for financial instruments implemented under direct management. (1) European Regional Development Fund (ERDF), European Social Fund (ESF), Cohesion Fund, European Agricultural Fund for Rural Development (EAFRD) and European Maritime and Fisheries Fund (EMFF). 34

37 2 Financial instruments set up at national/regional level and managed in line with the draft common provisions regulation and related secondary legislation (shared management). For these instruments, managing authorities have the possibility of contributing programme resources to: a. already existing or newly created instruments, tailored to specific conditions and needs; and b. standardised instruments (off-the-shelf), for which the terms and conditions will be pre-defined and laid down in a Commission Implementing Act. These instruments should be ready-to-use for a swift roll-out. 3 Financial instruments consisting solely of loans or guarantees may be implemented directly by managing authorities themselves. In such cases, managing authorities will be reimbursed on the basis of the actual loans provided or guarantee amounts blocked for new loans, and without the possibility to charge management costs or fees to the CSF Funds. More flexible co-financing modalities and additional financial incentives 1 For contributions to an EU-level financial instrument under Commission management (option 1 above), a separate priority axis is to be foreseen in the OP. The co-financing rate for this priority axis can be up to 100 %. 2 For contributions to national or regional financial instruments under shared management (options 2 a. and b. above), managing authorities are required to make phased contributions, while also having the possibility to include in the payment declaration the anticipated national contributions that are to be mobilised at the level of the financial instrument for the corresponding twoyear period (e.g. in the form of co investments made at the level of final recipients). For the calculation of the phased contribution, payment applications should take into consideration both the capital requirements of the financial instrument over a maximum of two years (in line with its business plan) and the remaining balance of previously paid but unspent OP support available at the level of the financial instrument, including corresponding national contributions. In terms of financial incentives, the EU co-financing share will be increased by ten percentage points in cases where a priority axis is fully implemented through financial instruments. Clear financial management rules Building on the recent guidance issued to the Member States through the Coordination Committee of the Funds (COCOF), the Commission s proposal for provides for continuity and certainty regarding the financial management of EU contributions to financial instruments. The new framework contains clear rules in terms of the qualification of financial streams at the different levels of financial instruments and corresponding eligibility or legacy requirements. The following provisions are proposed:»» EU contributions to financial instruments are to be placed in interest-bearing accounts in Member States, or to be temporarily invested in accordance with the principles of sound financial management;»» Interest or other gains generated at the level of the financial instrument prior to investment in final recipients are to be used for the same purposes as the initial EU contribution;»» EU share of capital resources paid back from investments is to be re-used for further investments in the same or other financial instruments, in accordance with the objectives of the OP; 35

38 »» EU share of gains, earnings, or yields generated by investments is to be used for: - management costs/fees; - preferential remuneration of investors operating under the market economy investor principle (MEIP) and providing co-investment at the level of financial instrument or final recipient; and/or - further investment in the same or other instruments, in line with the OP.»» Capital resources and gains and other earnings or yields attributable to the EU contributions to financial instruments are to be used in line with the aims of the OP for a period of at least 10 years after its closure. Streamlined reporting on implementation progress Given the specific procedures and delivery structures for financial instruments, the availability and reporting of monitoring data on the use of budgetary resources from the CSF Funds are of key importance to all cohesion policy stakeholders as they allow for conclusions to be drawn on the actual performance of supported instruments and adjustments that may be needed to safeguard their effectiveness. Therefore, the new framework requires managing authorities to send to the Commission a specific report on operations comprising financial instruments as an annex to the annual implementation report. What are the practical effects? g Top The Commission s proposal provides greater flexibility for Member States and managing authorities when designing programmes, both to choose between delivering investments through grants and financial instruments, and to select the most suitable financial instrument. It also gives more clarity and certainty in the legal framework for financial instruments. From a budgetary perspective, the strengthening of financial instruments, as catalysts of public and private resources, will help Member States and regions to achieve the strategic investment levels needed to implement the Europe 2020 Strategy. Moreover, with financial instruments being applied more widely and being well-tailored to the specific needs of regions and their target recipients, access to finance can be significantly improved for the benefit of a wide range of socio-economic actors on the ground. They will, for example, serve enterprises investing in innovation, households wishing to improve the energy efficiency performance of their dwelling, individuals pursuing their business ideas, as well as public infrastructure or productive investment projects that meet the strategic objectives of cohesion policy and deliver the expected outputs of its programmes. 36

39 "LESSONS LEARNT" Contribution by Dominique de Crayencour EIB, Director Institutional Affairs Department 37

40 CURRICULUM VITAE Graduated as Master of Economics and bachelor of philosophy from Université Catholique de Louvain (BE) and Master of Business Administration from Cornell University (USA), Dominique de Crayencour started his career in the Research Department of the World Bank and also spent two years in Africa in that capacity. He then moved to commercial and investment banking with Morgan Guarantee Trust Company of N.Y. in Brussels. Dominique de Crayencour s entered at the EIB commenced in 1980 as Loan Officer for the Maghreb countries and Portugal within the Directorate for Lending Operations outside the Community. In 1986, following Portugal s accession to the EU, he moved to Lisbon to establish the local EIB office. Four years later, he was called back to head the Organisation and Methods Division of the General Secretariat up to 1993, when he was appointed Head of the Financial Institutions Division in the newly created Credit and Monitoring Department. In 1997, he was appointed Director of the Information Technology Department. In 2000, he returned to the Bank s General Secretariat as Director of Institutional Affairs and head of Brussels Office. He is the EIB alternate Director at the EBRD Board since D. de Crayencour Director of Institutional Affairs Brussels Office of the EIB 227 rue de la Loi 1040 Bruxelles tel. : 32 (0) fax : 32 (0) d.decrayencour@eib.org 38

41 The efficiency of the use of Financial Instruments EIB s perspective Brussels, 25 April 2012 Dominique de Crayencour Director Institutional Affairs Department European Investment Bank 25/04/2012 The role of financial instruments Project characteristics Funding instruments Acceptable Economic rate of returns High Financial Profitability, Low risk Lower Financial Profitability/ Higher risk Low or negative financial profitability Technical assistance Commercial loan, EIB loan Joint EIB-EU EU budget Instrument EU budget grant Financial instruments bring in financial discipline of a resource e that must be reimbursed (monitoring until final reimbursement) Lending Blending Advising 25/04/

42 The financial instruments triangle EU benefits Responding to Europe 2020 strategy, Improving financial discipline, Creating a multiplier effect on limited EU budget resources, Attracting private financing Growth & Jobs Smart Sustainable Inclusive EIB Group benefits Optimising the use of EIB Group capital, Reinforcing the value added of EIB Group intervention Commission benefits Reinforcing policy impact, Creating a multiplier effect, Mobilising financial capacity and expertise of financial intermediaries 25/04/ Key ingredients for optimizing FIs EIB Group bound by all EU obligations, objectives and standards (Art 19), the CoA and the Ombudsman, and political accountability to the EP Financial instrument must be flexible, simple, revolving and catalytic Financial instruments need both the ex-ante policy objectives and criteria and a transparent and efficient ex-post reporting system Independence between ex ante and ex post control in project selection and due diligence for the financial institution implementing the instruments 25/04/2012 Level playing field competition versus Catalytic cooperation organized around the EIB Group federating other financial institutions 4 40

43 "LESSONS LEARNT" Contribution by Mandeep Bains EBRD Representative for EU Affairs 41

44 MANDEEP BAINS P ROFESSIONAL E XPERIENCE EUROPEAN BANK FOR RECONSTRUCTION AND DEVELOPMENT, 2010 to present EBRD Representative for EU Affairs, 2011 to present Senior Manager, Official Cofinancing Unit, EUROPEAN COMMISSION, 2007 to 2010 Member of Cabinet, Commissioner for Economic and Monetary Affairs (Commissioners Almunia & Rehn), ( ) Economist, Macroeconomic Support Unit, EuropeAid Cooperation Office ( ) UNITED NATIONS, Millennium Development Goals (MDGs) Campaign, 2005 to 2007 Senior Policy Advisor EUROPEAN COMMISSION, Budgetary Support Programme Manager, Food Security Unit, EuropeAid Cooperation Office ( ) Economist, Labour Markets Unit, Directorate General for Economic and Financial Affairs ( ) WORLD BANK/EUROPEAN COMMISSION Office for South-East Europe ( ) Economist EUROPEAN COMMISSION, Belgium Country Economist, Candidate Countries Unit, Directorate General for Economic and Financial Affairs ( ) UNITED KINGDOM GOVERNMENT, Department for International Development (DFID) Government Economist/Member of European Fast Stream E DUCATION PRINCETON UNIVERSITY, Woodrow Wilson School of Public and International Affairs, USA Master in Public Policy, 2005 UNIVERSITY OF WARWICK, UK Master of Science in Economics, 1995 UNIVERSITY OF LONDON, King s College London, UK Bachelor of Science in Business Management,

45 1 EBRD & the use of EU budget funds European Parliament workshop 25 April The EBRD in a snapshot Unique mandate Region Private sector orientation Operational capacity Financial strength To foster the transition towards open market-oriented economies and to promote private entrepreneurial initiative. Central & Eastern Europe including: 9 EU Member States, the Western Balkans, Turkey, the Eastern Neighbourhood, Russia, Central Asia and Mongolia. In addition, the Bank is starting operations in countries of the southern and eastern Mediterranean. In line with its mandate, some 70-80% of the Bank s annual business volume is delivered through investments in the private sector. The Bank continues to deliver high levels of support to the region: in 2011, business volume reached 9 billion (some 77% above pre-crisis levels), through a record number 380 of new transactions. The triple A rating of the Bank has been recently confirmed by all three major credit rating agencies. 43

46 3 The EBRD and the EU Strong institutional relations Strongly overlapping objectives Strong partner for the delivery of EU funds Strong partner in EU financial instruments Strong relationship with the EIB The EU is a shareholder in the EBRD, along with the EIB and all 27 Member States. EU reform objectives in the EBRD s region overlap heavily with those of the EBRD, providing wide opportunities for collaboration to meet common goals, notably in integration of enlargement and EU Neighbourhood countries. The EBRD has a long history of co-financing with EU and other donor funds. It has received over 2 billion from 36 bilateral and multilateral donors since 1991, the EU being the largest donor. The EBRD is the most active IFI in the Eastern Window of the EU s Neighbourhood Investment Facility (and is now joining the Southern window) and in the Investment Facility for Central Asia, as well as a key founding IFI in the Western Balkans Investment Framework (WBIF). It also regularly cofinances with EU Structural Funds in new CEE Member States. Strong institutional relationship with the EIB under the tripartite MOU with the Commission. Over the years, cofinancing of 99 projects, representing 7.8 billion in EIB financing and 5.5 billion EBRD financing. 4 The EBRD is a valuable investment partner with a unique offering on the market Commitment Strong local presence and expertise Partnership and engagement Product design Strong focus on outcomes A strong, internationally recognised partner with a long-term investment perspective, and a clear focus on civil and social responsibilities. Unparalleled presence in the region - approximately 30% of staff based in 36 regional offices. Close proximity to local markets and foreign investor communities, and better mitigation of political and regulatory risk. Strong and demonstrable track record of working with governments, key operators, local companies, and partner IFIs,. Flexible and innovative deal structuring to meet client needs. Strong credit awareness, resulting in financial strength. Ability to leverage substantial funding from private markets. Use of grant funding for technical assistance programme. All projects must demonstrate good potential to deliver transition impact or economic reform. Projects include technical assistance programmes to deliver regulatory or policy reform and client capacity building. 44

47 5 How the EBRD does business Project-level finance on a long-term and self-supporting basis. Financing usually on commercial terms, to ensure the long-term sustainability of markets/investments supported, and to avoid undermining local financial markets. In some cases, EBRD loans are combined with investment grants to meet affordability and/or IMF concessionality requirements. Cofinances with other IFIs, notably the EIB, to leverage the complementary financial and operational capacities of such institutions. EBRD financing requires not just the investment, but often the commercialisation of business practices by partner companies and service delivery entities. This often includes tariff reform with cost recovery, collection, metering. EBRD financing requires clients to improve environmental, social and health practices. EBRD investments are combined with strong technical assistance components to promote institutional reform and commercialisation. Key donor partners: EU partners and EBRD members on both multi- and bilateral basis 6 Case studies: EBRD investments in infrastructure 45

48 7 EBRD Infrastructure Investments Infrastructure Business Volume by Region Infrastructure Project Numbers by Sub-Sector 2% 12% 14% 5% 7% 25% 8% 5% 22% 34% 1% 4% 24% 3% 2% 32% Aviation Ports & Shipping Rail Roads Central Asia Central Europe & Baltics Intermodal Transport/Other Municpal Services Eastern Europe % Caucasus Russia Solid Waste Management District Heating South-Eastern Europe Turkey Urban Transport Waste and Sewage Data as of 31 December 2011 EBRD s s Value Added to the EU in infrastructure 8 EBRD leading financier for private sector investors in infrastructure in Eastern Neighbourhood Ability to provide non-recourse long term financing to PPPs Structuring ability leading to milestone deals: RWE Zagreb, Hochtief Albania Ability to mobilise additional commercial bank debt for projects EBRD supports EU policies in Neighbourhood Areas Opportunities to build on the success of NIF Close monitoring and implementation Working with the Private EBRD value Sector -added EBRD Shareholder Added s Value Supporting LT Debt Supporting Equity Financing EU Financing EU Policies Directives EBRD works closely with the EU to advance EU directives through co-financing and hands-on project implementation EBRD emphasis on monitoring supports builds on EU objectives 46

49 Case Study 1: Working with the EU to support the Romanian Water sector (1) 9 Working with the EU since 1995 ( PHARE and EU-ISPA) to finance critical investment in line with EU Directives EBRD financing helped mobilise EUR 500 million of EU funds for 18 water operators, with a strong focus on: Raising management capacity in water utilities to ensure efficient project implementation Financial and operational improvement of utilities to promote long term sustainability Policy dialogue with the regulator to ensure that tariffs ensure cost recovery Regionalisation to maximise benefits and to address investment needs in small and medium sized towns Focus on structures that are non-recourse to the sovereign Case Study 1: Working with the EU to support the Romanian Water sector (2) 10 In 2010, EUR 200 million Framework to provide co-financing for EU Cohesion projects of regionalised water companies was approved to support over EUR 1.3 billion of EU investment To date, 10 loans signs supporting over EUR 900 million of EU investment Key features on the Framework Non-recourse financing Benchmarking to compare operational performance over time and identify underperformance relative to industry standards Ongoing support to ensure regionalised water companied absorb smaller operators to ensure commercialisation and long term sustainability 47

50 Case Study 2: EBRD in a difficult neighbourhood: Tajikistan (1) 11 Khujand, Tajikistan EUR 2.7 phased investment to ensure increased water supply and raise commercial viability of the water company along side EUR 6.4 million grant financing from SECO Prior to EBRD, investment, unpredictable water supply unpredictable with only a couple of hours per day Situation worse in high rise apartment blocks - pipe leakages - low water pressure sourcing from neighbours on lower floors Traditionally, the task of supplying families with water fell on women, children and the elderly Case Study 2: EBRD in a difficult neighbourhood (2) 12 Phase I rehabilitated 30 percent of water supply network providing 24- hour water supply with adequate pressure Phase 2 investment will complete water supply rehabilitation covering remaining parts of City Technical cooperation for public awareness campaign to improve collections and explain tariff policy Technical cooperation for project implementation and preparation of a Master Plan for the City of Khujand also being provided which includes potential for wastewater rehabilitation and long term water security Grant financing ensured affordability while maximising project benefits Structure is being replicated in other countries 48

51 13 Case Study 3: EBRD support transport links in a near neighbourhood: Croatia: Corridor Vc Completion Project In 2010, the EBRD provided a EUR 60.7 million loan to Croatian Motorways ( HAC ), the stateowned company in charge of the motorway network in Croatia The loan provides financing for the construction of km of motorway section along Corridor Vc in Croatia,connecting the northern and southern ends of the corridor at the border with Bosnia and Herzegovina (BiH) The project is parallel financed with the EIB and supports the development of one of the three major Trans-European corridors in the region Completion of the Croatian part of Corridor Vc adjacent to Bosnia and Herzegovina will allow for full regional motorway linkage The project builds upon the EBRD and EIB successful cooperation and ensures the development of efficient transport networks throughout the region. The project complements the Bank s existing funding of the Corridor Vc sections in Bosnia and Herzegovina and Hungary Examples of Recent Road Projects ( m) Project Country Total EBRD m m South West Corridor Kazakhstan 3, Regional & Local FYR Macedonia Roads K10 Serbia Local & Regional Albania Roads Pan-European Ukraine 1, Corridors Mahovljani Interchange Bosnia & Herzegovina Road Rehabilitation Moldova Case Study 4: EBRD support rail development in Georgia : Tbilisi Railway Bypass Project In 2010, the EBRD provided a senior loan of 112 million (equivalent in Swiss Francs) to Georgian Railways to co-finance the construction of a new railway route bypassing the central area of the city of Tbilisi. The project is the EBRD s first nonsovereign lending to Georgian Railways. Funds are being used to improve the efficiency and safety of rail operations within the city of Tbilisi and supports the relocation away from the city centre of hazardous cargo. German donor Technical Cooperation funds were made available to assist Georgian Railways with the Environmental and Social Impact Assessment and associated capacity building A further EUR 8 million has provided by the EU Neighbourhood facility to finance environmental mitigation measures and technical assistance to finance the preparation of an environmental cleanup study and the master plan for the land development Examples of Other Recent Rail Projects ( m) Project Country Total m EBRD m Kaztemirtrans Kazakhstan ZPCg Rolling Stock Montenegro NPK Russian Federation RZD Bond Issue Russian Federation 1, Railways Corridor X Serbia Fesco Russian Federation JSC Freight One Russian Federation

52 15 Case Study 5: Mobilising Private Investment CROATIA Zagreb wastewater BOT EUR 327 million to finance the construction of a wastewater treatment plan and associated infrastructure in Zagreb on a BOT basis under a 28 year concession First concession in Croatia Consortium led by RWE Aqua, including RWE Aqua GmbH and WTE Wassertechnik GmbH, won a competitive tender in 1999 EUR 150 million debt package including financing from EBRD, KfW and a pool of syndicate banks The project has been completed and allows the City of Zagreb to treat municipal waste water to comply with EU standards prior to discharge into the River Sava. Case Study 6: Supporting Private Investment Albania: Tirana International Airport Private Concession 16 In 2005, the EBRD provided EUR 12 million loan to Tirana International Airport (TIA) for the design, procurement, operation and maintenance of a new passenger terminal building, a new cargo centre and ancillary infrastructure TIA was set up by Hochtief AirPort GmbH, Deutsche Investitions und Entwicklungsgesellschaft (DEG) and the Albanian-American Enterprise Fund (AAEF) Part of a EUR 24.9 million senior debt facility was provided jointly with DEG of Germany, and two local banks (Alpha Bank and American Bank of Albania) EBRD also provided an additional EUR 9 million loan with a sovereign guarantee for construction of the access road to the airport and a connecting bridge The Terminal successfully opened,on time and budget, to traffic on 22 March In 2008, additional funds were provided for an expansion of the terminal and related infrastructure and equipment (completed in March 2010). Examples of Other Recent Aviation Projects ( m) Project Country Total m EBRD m Pulkovo Airport Russia 1, Sarajevo Int l Airport Bosnia & Herzegovina Armenia Int l Airport II Armenia (Concession) Chisinau Airport Moldova Modernisation Tbilisi Int l Airport Georgia (Concession) Future Air Traffic Serbia & Management System Montenegro Civil Aviation Upgrade FYR Macedonia

53 "LESSONS LEARNT" Contribution by Marc Schublin EIF, Director Mandate Management, Product Development and Incubation (MMPDI) 51

54 MARC SCHUBLIN Born 9 October 1955 French Work experience: 2008-present: Director of MMPDI (Mandate Management, Product Development and Incubation): relations with main resource providers (EIB, Commission) and implementation of new products and mandates (Guarantees, VC, Microfinance, Tech Transfer) : Director of JEREMIE (Joint European Resources for Micro to Medium Enterprises): management of Structural Funds resources devoted to financial engineering. Preparation and implementation of the initiative : Head of Coordination and Advisory Services, European Investment Fund (on secondment from EIB since EIF Reform of 2000): EIF Strategy and business development Relations with the Commission and EIB EIF Corporate Operational Plan, Institutional issues, Board Responsibility of newly created Advisory services : Senior Coordination Officer, European Investment Bank (EIB), Directorate for lending operations in the EU : Deputy Head of the EIB Brussels Office (Liaison Office with EU) : Senior Loan Officer, EIB, Directorate for lending operations outside of the EU, Mediterranean Department: in charge of operations in Tunisia, Cyprus and Morocco : EIB Secretariat General: Secretary of the Management Committee : Ministry of Finance, Paris: seconded to the Prime Minister s Office in charge of inter-ministerial coordination on EC Affairs (SGCI): responsible for Economic and EC Budget issues. Education : Institut d Etudes Politiques, master in History Languages : French (mother tongue), English and German Others : Teaching activity at Institut d études politiques (Strasbourg) 52

55 Presentation to European Parliament Brussels, 25 April 2012 Progress Microfinance Marc Schublin Progress Microfinance a targeted design for effective market intervention pooling of resources risk sharing multiplier effect 1. funding 2. instruments 3. intermediaries 4. beneficiaries EU budget 78m 25m Micro-credit Guarantees MFI MFI micro-borrowers micro-borrowers European Progress Microfinance Fund 100m EIB contribution 178m Senior Loans Subordinated Loans Risk Sharing Loans Equity Participations MFI MFI MFI MFI 550m micro-borrowers micro-borrowers micro-borrowers micro-borrowers through a limited EU budgetary contribution of EUR 103m, financial instruments are expected to generate a total of EUR 550m in lending, which should amount to nearly 46,000 microloans until ,000 microloans 53

56 Progress Microfinance: a recipe for success efficient delivery Dedicated investment platform promotes high visibility, efficient market deployment, and geographic diversification Effective delegation approach but with adequate governance and control framework addressing EU needs and concerns flexibility Targeted, but not narrow approach - wide range of tailored financial instruments for outreach across diverse EU market to ensure critical mass and EU value added Driven by market needs and adaptable to market changes through diverse product range and intermediaries real needs met Strong central value added by plugging specific market gaps which cannot otherwise be addressed Simultaneously catalyses build-up of sustainable market infrastructure and sharing of knowledge/best practice rapid roll-out 18 operations signed with 14 intermediaries in 12 countries EUR 90m mobilised only 16 months following launch of operations (nearly half target commitments) Estimated EUR 27m in micro-loan inclusion volumes (nearly 3,000 micro-loans) already achieved by Q

57 "LESSONS LEARNT" Contribution by Gerhard Huemer UEAPME, Director Economic Policy 55

58 Gerhard Huemer UEAPME, Director Economic and Fiscal Policy 1040 Brussels, Rue Jacques de Lalaing 4 CURRICULUM VITAE since February 1999 January 1995 until January 1999 January 1995 until January 1999 September 1987 until January 1999 November 1986 UEAPME (European Association of Craft, Small and Medium-sized Enterprises) Director for Economic and Fiscal Policy, responsible for: Macroeconomic Dialog and economic policy coordination State aid policy Tax policy SME finance and relation to banks R&D and Innovation policy Pressoffice and public communication UEAPME Study Unit Executive Secretary of the "Economic and Social Council" and the "Subcommittee on International Affairs", which are institutions of the Austrian Social Partners. Deputy director of Economic Policy Department of the Austrian Economic Chamber (WKO) Austrian Economic Chamber (WKO Department of Economic Policy, responsible for Economic Policy, Industrial Policy, SME-Policy and Structural Policy Graduation at the University of Linz Studies of Economic and Social Science and Policy at the University of Linz 1980 High School Final Diploma of "Technical High School", Wels August 29th, 1961 born at Wels, Upper Austria 56

59 Gerhard Huemer Workshop on the efficiency of the use of financial instruments Wednesday, 25 April 2012, European Parliament - Room JAN 4Q1 Hand-out 1. SME have very positive experiences with support by Financial Instruments this is for different reasons: FIs are less costly for European, national or regional budgets than grants or subsidises loans and therefore more efficient for tax-payers. FIs are less distortive for competition than grants or subsidised loans. 2. European Programmes supporting FIs for SMEs have been successful in the past, but not without problems: The MAP ( ) has effectively contributed to build up loan guarantee schemes in many old Member States. The CIP and JEREMIE (Structural Funds) have contributed effectively to build up guarantee schemes in the new Member States throughout the current MFF. The European Programmes together with a reasonable State aid policy have contributed significantly to overcome the economic downturn from 2008 to Problems discovered as regards the European Programmes: SMEs are on the receiving end of the product chain for FIs, which includes normally the European Commission, EIB/EIF, national intermediaries and the House Bank of the SMEs. Therefore, UEAPME does not have a large amount of experience with the technical problems within this product chain. However, our member organisations complain that: The start of CIP has been very difficult and slow; political intervention was necessary to get the contracts done and the programmes started. The use of structural funds for FIs has been very complicated, and many projects failed because of the inflexibility also caused by the current financial regulation. Some instruments have not been taken up by the market, because the conditions enforced by the European Commission or the EIB/EIF have not been attractive enough either for the banks or the SMEs. This was especially the case with micro credits in the MAP. There are too many different rules and features for FIs supported by different EU sources and the products are not transparent and coherent from the point of view of banks and SMEs. MAISON DE L'ECONOMIE EUROPEENNE - RUE 57 JACQUES DE LALAING 4 - B-1040 BRUXELLES TEL +32 (0) FAX +32 (0) info@ueapme.com

60 3. UEAPME supports the new design for FIs as proposed for the next MFF (COSME, Horizon 2020, Structural Funds), but has one important proposal for improvement: UEAPME supports the inclusion of mezzanine instruments, especially in the loan guarantee schemes supported by COSME and Horizon 2020 subordinated loans will play an increasing role for financing startups, innovation and business transfers. UEAPME welcomes very much that use structural funds for FIs will become easier and simplified. UEAPME supports the idea of debt and equity platforms to ensure more coherence, more transparency and to make it easier for the different programmes to use FIs. One important improvement is necessary: The Commission proposal for COSME and Horizon 2020 says that SME loans up to can be supported by COSME and above this threshold loans for innovative projects can be supported by Horizon Even if the average SME loan supported by CIP is well below , there are important guarantees, especially for business transfers and internationalisation, which covers loans significantly above the threshold. Therefore, we see many discussions in the EP and at Council level to increase the threshold for COSME (up to 1 Million). UEAPME also sees good reasons for a higher threshold for loans guaranteed by COSME, especially for business transfers and asks for more flexibility in the regulation to make it more adaptable to market needs nobody knows what SMEs will need up to However, increasing the threshold for COSME and keeping the kind of separation between COSME and Horizon 2020, means that the lowest amount of loans for innovative projects will also increase to the same level. This means that most of the SMEs will not have access to FIs from Horizon 2020 anymore. Therefore, UEAPME strongly demands to keep the system flexible and allow also in future loan portfolios of normal SMEs to be supported by guarantees from COSME and specific (riskier) portfolios with loans for innovative projects to be supported by guarantees from Horizon Furthermore, both types of portfolios can also be supported by structural funds at regional / national level. Such a solution will not break the existing rules, because already now we have normal portfolios supported by CIP, innovation portfolios supported by FP 7 (Risk Sharing Instrument) and both can be supported by JEREMIE. For further information on this position paper, please contact: Gerhard Huemer Director Economic and Fiscal Policy E: g.huemer@ueapme.com T: MAISON DE L'ECONOMIE EUROPEENNE - RUE 58 JACQUES DE LALAING 4 - B-1040 BRUXELLES TEL +32 (0) FAX +32 (0) info@ueapme.com

61 "LESSONS LEARNT" Contribution by Christophe Bourdillon Permanent Delegate of the Group CDC to the EU Institutions 59

62 CHRISTOPHE BOURDILLON Group Caisse des Dépôts (CDC) Permanent Delegate to the EU Institutions Christophe Bourdillon is the Permanent Delegate of Group Caisse des Dépôts (CDC) to the EU institutions. As such, he manages lobbying activities at the EU level and CDC s strategic partnerships with other European long term financial institutions. Christophe entered CDC in 1985 at the Finance and Banking General Directorate. He spent a major part of his carrier in this Directorate until 2000, with two different experiences: one at the Paris Stock Exchange, as Director of Finance and administration from 1996 to 1999 and the other, as National expert at the General Directorate of Economic and Financial Affairs of the European Commission. As such, he participated to the introduction of the single currency in the EU. In 2001, he joined CDC Ixis (a subsidiary of Caisse des Dépôts), first as deputy Managing director of the private equity branch, then as General Secretary to the CEO of CDC Ixis Investment Bank. In 2006, he managed the operations of NYSE-Euronext in Italy before reintegrating the Group Caisse des Depots, at the International and EU affairs Directorate. He graduated from Ecole nationale de l Administration in

63 EUROPEAN AND INTERNATIONAL AFFAIRS DEPÂRTMENT PERMANENT REPRESENTATION TO THE EUROPEAN INSTITUTIONS Brussels, 18 April 2012 Seminar on the Efficiency of the Use of Financial Instruments 25 April 2012, European Parliament, Brussels At a time of budget constraint and economic crisis, financial instruments can provide a new important financing stream for strategic investment and help fulfil the EU 2020 strategy s objectives. Indeed, the sovereign debt crisis but also new prudential rules (Basel 3, Solvency 2) in the banking and insurance sectors will dramatically reduce public and private investment capacities and foster a need for alternative source of financing. Support mechanisms provided through innovative financial instruments such as loans, guarantee or equity help to create revolving forms of financing, making them more sustainable over the long term. They are suitable to address sub-optimal investment situations which have proven to be financially viable. In a number of policy areas, their economic impact is higher than grants in terms of satisfying the market needs and optimising the leverage effect of the EU budget. In addition, financial instruments can help to address huge needs for long term investment that EU faces by Be it only in the field of transport and energy infrastructures, these needs are valued at 1600 billion by the European Commission assessments. In this respect, financial engineering can help (through risk sharing mechanisms for example) to attract private and public financing sources on long term investment projects. Financial instruments have therefore a huge potential in promoting EU competitiveness and sustainable growth. Yet, assessments carried out of existing financial instruments showed that progress can be made to increase their consistency and their full economic and social impact. Obstacles to their efficient implementation are well known and shared: lack of expertise in financial engineering by management authorities; onerous and complex requirements resulting in additional costs; persistent differences in the interpretation of the regulations by the stakeholders concerned (the Commission, Member States, management authorities, operators, EIF) etc. While the use of financial instruments could be usefully extended both in terms of scope and scale in the next programming period ( ), this paper aims to bring forward three main proposals that may contribute to a successful implementation of those instruments. 1. Creating a simpler and more transparent legal framework adapted to the specificity of financial instruments EU funds should of course be used in the respect of strict reporting and transparency rules. Nevertheless, operational requirements of financial instruments should not pose an overly restrictive administrative burden on intermediaries and final beneficiaries so as to be broadly and efficiently used. This change appears particularly reasonable given that one is not dealing with subsidies but with repayable funding. 61

64 The following possibilities could be explored in order to optimise the chain of public sector intervention from EU level down to local level, where financial engineering is concerned: - To simplify the regulations or adopt specific regulations compatible with the practices of financial operators (commitment period, management costs, etc.) - To avoid any possible differences in the interpretation of the regulations and thus avoid legal uncertainty As far as the cohesion policy is concerned, persistent differences in the interpretation of provisions between the Commission, Member States, fund managers, financial operators, audit and certification authorities, particularly as to what qualifies as State aid, the determination of management costs, the period of the fund, which generally does not coincide with the programming period of structural funds, or as to the conditions governing withdrawal from funds, restrict the development of financial engineering instruments. This issue of legal certainty is vital for those involved. - To clarify and standardise the reporting rules A fair balance should be found between the reliability of the information required and the attractiveness of these mechanisms for private partners, and this will be achieved, in particular, by the definition of a limited number of standard indicators at EU level. - To take more account of the timescale It often takes several years (10 to 20 years) for an investment in the field of infrastructure to be profitable and amortised. Therefore, the life time-of these new financial instruments (especially in the field of cohesion policy) should better match the one of the projects. 2. Building on the existing field expertise of national financial institutions to implement innovative financial instruments EU innovative financial instruments require building on existing entities having experience in funding management and expertise of domestic market. In this respect, public authorities as well as national and local, public or private financial institutions,, have a crucial role to play in the implementation of EU financial instruments, as it will allow to: - draw on their substantial knowledge of the prevailing market circumstances as well as their position on their national market, thus maximizing outreach of EU support ; - ensure that setting up of financial instruments are managed efficiently ; - maximise the leverage effect of the EU budget ; - avoid duplication of public support through a coordinated approach combining forces, thus raising efficiency of EU support. Strengthening cooperation with national and regional public financial entities would most likely enable to establish a solid platform for the future management of the EU instruments. It will moreover enable to complement EIB/EIF activity. In this respect, effort should be made to associate in the most effective way national intermediaries alongside the EIB Group to the design of future financial instruments and their management rules (Debt and Equity platforms). 3. Address the preference for subsidies of local authorities The development of financial instruments requires a change in the perceptions of risk inherent to the investor function. In the field of Cohesion policy, public authorities in many EU Member 62

65 States are ill-equipped to integrate them in their processes. A key challenge for Europe is to accept the possibility of losses on investments and to place more confidence in those involved. It is also to make public authorities more familiar with the concept of return on investment. If confirmed by the European Council and Parliament, the new financial strategy of the European Union to make more extensive use of financial engineering instruments would mark a major change in the allocation of EU finance after 2013, involving the gradual rebalancing of an almost exclusively co-financing approach (non-repayable financial support) towards a long term co-investment approach (repayable financial support). Their implementation through local, national and EU intermediaries increase EU visibility and citizens acceptance of EU activities. To achieve their full potential, they need however a legal framework which takes into account their specificities. The viability of this framework will depend heavily on its capacity to attract private investors in those instruments. EU proposals in this field should therefore be tested on institutional investors to find out what their approach would be to this kind of long term financial product, subject to a restrictive framework and providing lower yields than those available on the markets. About the Group Caisse des Dépôts The Caisse des Dépôts is the French public financial institution serving economic development. It was founded in As a long-term investor, it serves the general interest, in support of public policies pursued by the French government and local authorities. Over years, the Group has developed an expertise in the deployment of financial engineering instruments and in the management of public mandates on behalf of third parties. The Caisse des Dépôts Elan 2020 strategic plan has set four priorities aimed at addressing the most pressing issues facing France, namely: housing and urban development, universities, SMEs and sustainable development. 63

66 "LESSONS LEARNT" Contribution by Christian Krämer KfW Bankengruppe, First Vice President Corporate Affairs 64

67 CHRISTIAN KRÄMER Christian Krämer heads KfW s office for Management Affairs / Federal and European Affairs. This includes responsibility for the bank s liaison offices in Brussels and Berlin. Among his current tasks are the management of all strategic questions with respect to KfW s general approach to the European market. He started in KfW s legal department in 1999 and moved to KfW IPEX Bank (International Project and Export Finance) which covers all international commercial activities in the bank. Christian spent several years in asset based aircraft finance including restructuring and remarketing activities in the downturn after After that he moved to the bank s energy finance department being responsible for a team covering power plant and water deals mainly on project finance structures. Christian holds a law degree from the University of Cologne. 65

68 EU Financial Instruments: KfW s Experience Christian Krämer European Parliament, Brussels, April 25, 2012 A bank with a wide array of functions Domestic promotion International business We promote Germany Business Area Mittelstandsbank Promotion SMEs, business founders, start-ups Business Area Privatkundenbank Promotion construction of new housing and modernisation as well as education Business Area Kommunalbank Financing municipal infrastructure projects and global loans Germany/Europe agency business for Federal Government We ensure internationalisation Business Area Export and Project Finance International project and export finance Promotion of environmental and climate protection We promote development Business Area Promotion of Developing and Transition Countries Promotion of developing and transition countries KfW KfW Bankengruppe - Efficient Use of Financial Instruments Brussels 24th April

69 60 years of KfW Financing with a public mission Promotional bank of the Federal Republic of Germany Founded in 1948 as Kreditanstalt für Wiederaufbau Shareholders: 80% Federal Republic, 20% federal states Headquarters: Frankfurt am Main Branches: Berlin, Bonn and Cologne Representative offices: around 70 offices and representations worldwide Balance sheet total at end 2011: EUR 49.8 billion Financing volume 2011: EUR 70.4 billion Around 4,763 employees (2011) Best rating: AAA/Aaa/AAA KfW KfW Bankengruppe - Efficient Use of Financial Instruments Brussels 24th April KfW in partnership with the EU Implementation of EU Programmes in Germany, Europe and Worldwide Germany - Competitiveness and Innovation Framework Programme (CIP) Guarantee: For KfW Start-up programme - Risk Sharing Finance Facility: Framework Agreement Europe - SME Finance Facility (SMEFF) - Municipal Finance Facility (MFF) - Energy Efficiency Finance Facility - Preparatory Action Programme - JASPERS - Fonds Marguerite - ELENA International - Regional Investment Facilities Africa (ITF) Neighbourhood (NIF) Western Balkan (WBIF) Latin America (LAIF) Asia / Central Asia (AIF / IFCA) - European Financing Partners (EFP) - Other Investment Funds Funds European Fund for South-East Europe (EFSE) Green for Growth Fund (GGF) KfW KfW Bankengruppe - Efficient Use of Financial Instruments Brussels 24th April