Transcription

1 CONSULTATION RESPONSE 26 June 2013 Subject Green Paper of the European Commission concerning the long-term financing of the European economy Issuer BPCE To BPCE 50, avenue Pierre Mendès-France PARIS Cédex 13 Registration number on the register of representatives: The departments of BPCE & Natixis which have provided the response: Natixis Global Infrastructure and Projects & BCA BPCE, BPCE Department of Public Affairs. Launch of the Consultation: 25 April Deadline: 25 June Nb : the comments and the opinions contained in this document were prepared on the basis of various information provided within the time limits. They reflect the position of BPCE as of the date of drafting. They may not in any event constitute a decision or a firm and final commitment by Groupe BPCE. As the second largest banking group in France, thanks to its two flagship brands, Banque Populaire and Caisse d'epargne, Groupe BPCE and its 117,000 employees serve 36 million clients, of which 8.6 million are corporate clients. The companies of the group perform their banking activities as closely as possible to the needs of individuals and territories. With 19 Banques Populaires, 17 Caisses d'epargne, Natixis, Crédit Foncier, Banque Palatine, BPCE International et Outre-mer, etc., Groupe BPCE offers its clients a full range of products and services: solutions for savings, investment, cash management, financing, insurance, investment, etc. True to its cooperative status, the group assists them in their plans and builds a relationship with them over time, thus contributing to 20% of the financing of the French economy. Please find below the BPCE s response to the public consultation launched by the European Commission following the adoption of the Green Paper concerning the manner to increase the 1

2 supply of long-term financing and to improve and diversify the financial intermediation system for long-term investment in Europe. I - EXECUTIVE SUMMARY Groupe BPCE welcomes the initiative of the European Commission, to consult all stakeholders on such a fundamental issue as the long-term financing of the economy, which is an essential component for sustainable growth. As a cooperative Group, relying on its regional banks rooted in their territories, Groupe BPCE has, since its inception, pursued its objective of placing finance at the service of the French economy. It should be noted that BPCE, through its two Networks and Natixis, participates in 20 to 25% of the financing of SMEs. The banking industry is entering a new phase where business models will be required to change. Alternative modes of financing will complement the intermediary banking model which has been proven safe and solid. It is important to emphasize that for banking institutions this consultation provides the opportunity: to enhance their recognized expertise and know-how of long-term financing thanks to the range of skills offered and the varied areas of intervention; to note that the crisis certainly does not call into question the European universal banking model, which has proved to be one of the most resilient models in the world; although regulation is necessary to ensure the proper management of banking and finance activities, it must be adapted to the reality of the different economic models and of our regions. *** Groupe BPCE acknowledges the recognition by European Commission of the important role banks play in providing long-term financing "considering their expertise in risk management, their local knowledge of businesses and their relationship with them. This is particularly true for a Group that has a strong ability to collect resources and transform them, thanks to its universal banking model, its regional cooperative bases and its close proximity with clients. The objective examination of the effects of the 2008 crisis has also shown the strong resilience of the universal banking model, which shows the advantage of having several "load-bearing walls", bringing together all of the business lines: from credit to households and to small and very small enterprises, to wealth management, as well as mergers and acquisitions or financing of major infrastructure projects. Unlike the US, the financing of European economies still relies mainly on banking intermediation. Our continental models are not the cause of the crisis, and despite some difficulties, they have demonstrated resilience in an unprecedented economic environment. Groupe BPCE would like to take advantage of this consultation also to promote the ability of its investment bank, Natixis 1 to find new ways to finance the projects of its customers in a changing environment. 1 Natixis was notably ranked N 1 financial advisor and N 1 arranger for PPP project, concessions and public service outsourcing finance in France ( Source: Magazine des affaires), n 3 best arranger of project finance loans in EMEA by Euroweek in (supprimer. projets). It opened the market for infrastructure financing to institutional investors by means of innovative partnerships with the Ageas Insurance Group in 2012 and more recently with CNP Assurances. 2

3 The implementation of Basel III and the liquidity crisis create barriers for banks to continue to provide long term funding to projects. Some banks have chosen to exit this market but some have decided to adapt to this changing environment and to facilitate the intervention of Institutional investors for the financing of project. By way of illustration, investment requirements in new infrastructure in Europe are estimated between 1,500 and 2,000 billion euros up to However, the new prudential rules will not allow banks to satisfy these requirements by debt under the same conditions as before. The solution is to allow institutional investors who wish to diversify their investments to participate in the financing of these projects. These infrastructure projects are less sensitive to economic cycles and offer a reliable alternative and long-term investment horizons adapted to the expectations of insurance companies, retirement funds and pension funds. Given the characteristics of the infrastructure debt (long duration, low volatility, and high recovery) it is not surprising that the interest of investors for this type of asset class has significantly increased. In order to facilitate the access of institutional investors to the infrastructure debt instruments Natixis has developed an operational infrastructure platform based on co-investment partnerships between the bank and institutional investors 2. Indeed, Natixis has signed two such partnerships over the past year with the Belgium based international insurer Ageas and more recently with the France s leading personal insurer CNP Assurances. This innovative solution provides clients with financial solutions tailored to their projects, and allows institutional investors to have access to this relatively new asset class which offers interesting alternative investment opportunities with the benefit of greater asset portfolio diversification and an attractive risk return profile. The partnership solution is a positive response to the growing demand of infrastructure funding across Europe and the model focuses on matching the skills and expertise of key players in order to provide a supply-side solution to what was a supply-demand mistmatch in specialised infrastructure financing. This solution is not unique therefore we would like to suggest the following recommendations that are in our view necessary for this offer and demand to match : First, European Infrastructure investments levels needs to be restored, Secondly, for those projects to be visible and efficient a consolidated European pipeline of properly selected and evaluated transactions needs to be published, Thirdly, in terms of regulation, projects should benefit from a stable regulatory and tax environment and Solvency II should recognize the specific characteristics of this asset class through the creation of a dedicated calibration of the standard formula. Finally, standardization and transparency of this asset class should be promoted. The structure of Groupe BPCE clearly allows us to provide local assistance and a broader scope, the growth of companies by means of expertise shared by the Major Client bank as well as the Banque Populaire and Caisse d'epargne Networks. On the other hand, Groupe BPCE regrets that in the introduction to this consultation, a large part is dedicated implicitly to the economy s over-dependence on the banking system s intermediation, without recognizing its merits and the severe constraints imposed upon it: Looking beyond the 2 Nouveau modèle de financement des infrastructures -Anne Christine Champion in La Lettre des PPP- juin 2013 in Appendix 3

4 financial crisis, an important question is whether Europe's historically heavy dependence on bank intermediation in financing long-term investment will give way to a more diversified system with significantly higher shares of direct capital market financing, and greater involvement of institutional investors and alternative financial markets. This consultation must not lose sight of its principal goal which is to to initiate a broad debate about how to foster the supply of long-term financing, and how to improve and diversify the system of financial intermediation for long-term investment in Europe. This should not become a trial of the banking intermediation system, which has moreover fully played its role in the real economy during recent years. Whilst we believe that insurance companies, funds and asset managers need to increase their participation to the financing of the economy, this cannot be achieved by a twinkle in the eye. This will necessarily take time. There are still several risks regarding a full disintermediation. We consider it key for bank to remain involved in the process. We can split the financial intermediation in 3 parts : Origination Servicing Refinancing Banks need to be involved at least in the origination. We would agree that on specific and important projects, insurance companies & funds can lend directly to the borrower. But this should remain specific and in our opinion will not be sufficient to allow a full refinancing of the economy. 1. Investors (like life insurance companies and funds) main objective is to provide enough returns to their client/customer/insurers. In order to reach this objective, they will always favour to investinvestments in liquid asset. They may wish to consider investing in illiquid asset like loans only to the extent that they provide excess return. This will always remain immaterial compared to their total assets. 2. Insurances companies & funds are opportunistic. They currently have appetite for alternative assets like loans, in order capture the illiquidity premium. With a higher rate environment, it is highly probable that most of them will revert to liquid assets. 3. Insurance companies & funds will always take an objective credit risk type approach. In case of increase of systemic credit risk, they will completely withdraw from that market, leading to a huge volatility of prices in an adverse environment. Banks will never withdrawn from that market which is part of their core business. 4. Insurance companies & funds do not have direct relations with borrowers, or proximity to their business environment. As a consequence, they will never take a direct interest in local industry inin the same manner as bank would. 5. Banks are not insurers, and the opposite is also true. These are two different activities with similarities. 4

5 It remains that, given Basel 3 liquidity & solvency constraints, banks will not be in a position to meet alone the financing needs of the economy. Insurance companies & Funds need to be involved in various manners either in partnership with banks, or as refinancing providers through securitization mechanisms. In fact, markets can only partially replace financial institutions, by ensuring the proper channelling of available funds towards a long-term environment where the interests of long-term investors and financers are preserved in full compliance with the new prudential regulatory environment. Although reforms undertaken in Europe are justified, they must not prove to have a negative impact on the financing of the European economy. Furthermore, they must not weaken the position of the euro zone s banks in a context of increasingly stiff competition with the rest of the world. In fact, it is important to remember that banking institutions are heavily impacted by successive waves of European reforms as evidenced by Basel III solvency and liquidity agreements (CRDIV, CRR), the Banking Union, Bank resolution rules, the debates surrounding the Vickers Commission or Liikanen High Level Group reports. Contrary to what is observed in Anglo-Saxon countries, the financing of our European economies, and the French economy in particular, is still based mainly on credit and banking intermediation. The new regulatory requirements will necessarily result in a credit crunch and a gradual shift towards alternative solutions, including the increased use of financial markets. From an economic point of view, the coming years look to be very difficult for Europe and the strength of the banking sector is essential in order to sustain the economy, and avoid the risk of a disconnect in terms of growth, as compared to other regions of the world. It is also important to note that the current weakness of the macroeconomic situation has created a climate of uncertainty and risk aversion, especially in Member States subject to financial stress. We should be cautious about any suggestion that a shift from traditional European banking intermediation towards alternative market driven financing solutions would provide the magic answer. The financial crisis and its consequences, in particular the ability of banks to lend long-term, as well as the negative impact on confidence and the appetite of borrowers and institutional investors for risk, should instead encourage the construction of a strong banking sector rooted in the territories and present on all the markets. This is a strategic issue that must be confirmed at the European level. Groupe BPCE also wishes to draw the attention of the European Commission to two last points: One of the major concerns should be the feasibility and the acceptability of the financial solutions that will be offered to SMEs. We are convinced that the issue of access for SMEs to new sources of financing is worth exploring with great care, and there is no doubt that supporting the development of these enterprises is a strategic issue for the European economy. However, this should be conducted in a pragmatic and non-dogmatic manner, and the real constraints for all of the stakeholders in the business chain must be taken into consideration. The emergence of new offers and therefore the rapid development of a specific market for SMEs can only be done on the basis of dynamic economic models which also present a proven business potential for market professionals. A market cannot 5

6 be decreed and must naturally find its economic justification. Finally, access to these new sources of financing will probably require time to adapt for the leaders of SMEs, who are not necessarily experienced with the market mechanisms and who must learn the rules, the benefits and the risks. Before being able to make long-term financing available at a reasonable cost, the economy needs to create and attract savings. Public policies can contribute to this by sound budgetary policies, efficient tax systems and a favourable business environment - which increases the attractiveness of the economy with regard to investments, including foreign investments. Therefore, it is essential that this shift be gradual, proportionate and spread over time. One cannot abruptly change from an economy financed by credit to an economy financed by markets. Full recognition of the universal bank model is essential to develop our businesses, both large and small. Supporting access to financing for SMEs is a strategic challenge. Any debate over alternative sources of finance must be pragmatic accounting for all stakeholders. Emergence of a specific financial market for SMEs must be based on models with proven economic potential for all professionals involved including customers expectations. The banking industry is one of the major pillars of economic growth. Its ability to serve the economy should not be constrained. Level playing field is fundamental. It must innervate all of the regulatory work. It is an essential condition for a free and intense flow of capital in global financial markets. II - THE POSITION OF BPCE First, an overall positive tone is evident from a detailed examination of the text of the Green Paper. BPCE shares the concern of the European Commission to find new solutions in a financial landscape which needs to be reorganized in the face of more and more stringent regulations and a European economy in need of diversified financing. However, BPCE wants to alert the European Commission with regard to several points. 2. The Supply of Long-Term Financing and Characteristics of Long Term Investment Q 1. Do you agree with the analysis out above regarding the supply and characteristics of longterm financing? Long term financing supply will also depend on households behaviours regarding their savings capacities and habits. Savings behaviours vary a lot in Europe. French households, for example, save around 10 % or more of their revenues. These savings will make deposits, which are channelled to credits. 6

7 Q 2. Do you have a view on the most appropriate definition of long-term financing? The definition is quite relevant. Financing over 5 years may be considered as long-term but, in our view, long-term bank financing should be defined as financing by banks by the way of loans, which exceeds the longest maturity of deposits contractually made by individuals. This narrows the subject to financing, which may be scrutinised under long-term ratios such as NSFR. So, long-term financing is characterised by maturities exceeding 10 years, up to 30 years in the euro zone. 3. Enhancing the Long-Term Financing of the European Economy 3.1 The capacity of financial institutions to channel long-term finance Commercial banks Q 3. Given the evolving nature of the banking sector, going forward, what role do you see for banks in the channelling of financing to long-term investments? Long-term investments need long-term financing, which need long-term resources, i.e. long-term deposits (such as life insurance or retirement pension plans funds). But current long-term deposits are invested in govies, real estate, or other low risk profile assets and in low-risk short-term deposits to ensure cash withdrawal. Current long-term deposits as life insurance or pension funds need sizeable projects (over 150 million) in order to finance them. So, for most of the project in numbers banks will be the sole long-term providers. Banks will thus need to have long term deposits and the ability to transform medium term deposits (5-8 years) into long-term financing (up to years). In the area of infrastructure financing, banks have developed specifics skills, know-how and credit chains for the selection, evaluation, structuring and monitoring the transactions throughout the life cycle of the projects. Those skills are key to explain the good historical performance of those projects over time. The preservation of these capabilities is crucial for maintaining the quality of this asset class for institutional investors. There are mainly three ways for them to participate in this new infrastructure debt market: directly by providing loans to borrowers through a significant dedicated team, through a debt fund where the investment decision is delegated to an asset manager; or under a co-investment mechanism with a bank. As most institutional investors lack the in-house resources to analyse, let alone structure and manage complex project financings, the successfull arrangement lies in our opinion 3 in the co-investment partnership model in which each partner contributes its comparative advantage. Indeed, institutional investors can become a reliable source of capital while established banks can stay involved in the origination, the structuring and the monitoring of the transactions using their expertise to deliver properly structured project financings which the banks retain a significant part demonstrating an alignment of interest with the investors. Such solution allows the 3 See, Infrastructure is essentially a partnership story in Appendix 7

8 investor to benefit from a facilitated decision process thanks to the sharing of credit analysis, while they are also able to retain the final say on key decisions. Natixis has signed two such partnerships with the Belgium based international insurer Ageas in August 2012 and more recently with the France s leading personal Insurer CNP Assurances. These agreements involve each insurance company investing in infrastructure loans originated by Natixis within a portfolio of 2 billion euros 4 over the next three years. The first partnership with Ageas had its first investments in late 2012 and early 2013 with the financial close of a French prisons PPP financing. 5 / 6 This principle of co-investment partnership for major projects could also be extended, with some modifications, to more modest-sized projects. The role of commercial banks is also crucial in the emerging European project bonds market. Indeed commercial banks are also involved on the structuring, the underwiring and the placement of project bond financing as well as ensuring liquidity as market makers. provide Thus, we can see that we should not oppose the two models the intermediated and the disintermediated model as two irreconcilable models, but that the success of the European space relies on their complementarity on the basis of the project to be financed. National and multilateral development banks and financial incentives Q 4. How could the role of national and multilateral development banks best support the financing of long-term investment? Is there scope for greater coordination between these banks in the pursuit of EU policy goals? How could financial instruments under the EU budget better support the financing of long-term investment in sustainable growth? National and multilateral development banks have developed strong skills in the economic, social and environmental appraisal of projects. European member states should rely more on those skills at early stage of projects. Furthermore, the creation of a dedicated PPP European Agency (the role of EPEC could be extended) in charge of labelling European projects could reduce the risk of projects to be abandoned or quashed at later stage. This new agency could also bring some consistency in the appraisal of European projects as it is not currently the case in member states where a lot of different value for money methods are currently applied. Effectively, each member state has its own agency to validate the value for money of new projects and may lack the proper information to develop a sustainable regulation (for example to stimulate sustainable investments toward a green energy). This unified value for money appraisal should not only be done at the decision stage but also after realisation of the projects to verify if the project has delivered the promise and if not to identify the reasons. As an example this centralization is currently in operationin Canada where all projects of more than CAD 100mln are submitted by the Provinces to the Federal Government of Canada which validates the value for money and the procurement route (delegation of public procurement) and allocates the Federal grants to the project based on this evaluation. 4 See, press release 5 See, 6 See, Nouveau modèle de financement des infrastructures -Anne Christine Champion in La Lettre des PPP- juin 2013 in Appendix 8

9 National or EU public funds (guarantee schemes or direct funding) should be concentrated on projects that could not be financed by private funds for example where the current status of the country ratings is currently to weak to allow private funding or because of the implementation of a new technology. Q 5. Are there other public policy tools and frameworks that can support the financing of long-term investment? There is a strong need to restore a European pipeline of projects, effectively the crisis has led to a drastic fall in public investments in Europe (see Chart 1A and 1B) Procurement authorities have cancelled or reduced their pipeline of transactions. This explains why the value of PPP transactions reaching financial close in the European market in 2012 dropped by 35% compared to 2011 at the lowest market value since Source : Can additional public investments be financed by public debt in the Euro zone? April 12 th Natixis Economic Research Luckily, Infrastructure investments (when properly evaluated and selected see Q4) are good instruments to generate growth which the European market currently needs (See Natixis Economic Research- How large is the infrastructure multiplier in the euro area?-march 22,2013). In order to insure visibility and consistency for the investors, this European pipeline needs to be consolidated by a European Project Agency (as mentioned in Q4) responsible for collecting national infrastructure plans and to compile them. This pipeline will help the investors to allocate their human and capital resources more efficiently. A further step needs to be done to increase the level of standardization in risk allocation and project documentation. European PPP markets are currently far too much fragmented. It is quite striking that various PPP contract formats between member states and even within various Government agencies generate additional costs and delay for the delivery of given projects. The European PPP Agency could be responsible to collect best practices and produce a standard PPP contract that could be used by procuring authorities facilitating the analysis of the project documents by the Procuring authorities, the sponsors, the lenders and the investors. This European PPP Agency could also introduce performance reporting standards and collect performance reports from procuring authorities to allow the publication of regular consolidated statistics. 7 Review of the European PPP Market in 2012-March 2013, EPEC 9

10 Many tender documents still prevent the involvement of institutional investors. Effectively institutional investors are more reluctant than banks to commit funding for long periods, therefore requirements of fully committed funding at bid submission makes the use of the bond solution very difficult for sponsors even when it is not formally excluded by the procuring authorities. The involvement of institutional investors is also justifying some amendments to PPP contracts notably on voluntary prepayment provisions and refinancing conditions where the investors are expecting some form of compensation for being repaid earlier than their expectations. Without referring to legal considerations, public authorities are still reluctant to depart from traditional banking solutions which they (and their financial advisor) are very familiar with to enter into a new world where they are less equipped to analyse and compare proposals and assess the associated risks. EPEC s efforts to familiarise procuring authorities with the bond solution should be intensified for example by publishing case studies produced by procuring authorities which have already successfully implemented a bond financing option in their tender documents. Institutional investors Q 6. To what extent and how can institutional investors play a greater role in the changing landscape of long-term financing? Institutional investors are now looking to enter into new asset classes with attractive yields, with a propensity to seek long-term investments to cover their liabilities. Many reports have concluded positively of the interest for the Institutional investors to invest in Infrastructure debt 8. Attracted by the stable revenue streams and long-term liability matching characteristics many investors have an increasing appetite for Infrastructure debt. In the second annual Natixis Global Asset Management Institutional Investor Survey recently published 51% of the organizations have responded that they are planning to increase their allocation to Infrastructure over the next 3 years with only 10% reporting their intention to decrease it. Source : NGAM 2013 Global Survey of Institutional Investor survey- June Trends in Large Pension Funds Investment in Infrastructure-November 2012, OECD The role of banks, equity market and institutional investors in long term financing for growth and development- February 2013, OECD. 10

11 As further evidence to this increase in demand from investors, many fund managers have launched dedicated Infrastructure debt vehicles. According to Preqin as of February 2013, 14 unlisted infrastructure debt funds were on the road seeking a record aggregate $8.3 bn in commitments ($5.9 bn dedicated for Europe). Unlisted Infrastructure Debt Funds on the Road over Time, January 2006-February 2013 Current Infrastructure Debt Funds in Market by Primary Geographic Focus Source: Preqin Infrastructure spotlight- February 2013 Even if there is a recent estimate 9 of the share of Institutional Investors lending in 2012 of 10% of all project finance lending ($ 20 billion), it is still difficult to forecast a proportion for the future given the changing regulatory environment for banks, insurers and pension funds. But as evidenced by Preqin the fact that a significant proportion of investors in infrastructure debt have yet to reach their target allocations (see graph below) suggests the potential growth in future investments. The Buy & Hold management of insurers and pension funds makes them natural investors for all long-term assets. But regulations may prevent them for four reasons: 9 Inside Credit: Shadow Banking Looks Set to Capture A larger Share of Project Financing in Standard & Poors- April 16,

12 Banking monopoly and tax laws: in many European countries the banking monopoly or taxation rules restrict the ability of investors to lend directly. There are some possibilities to circumvent this, but these solutions are often ad-hoc and penalize the liquidity of these investments. The creation of a single European investment vehicle that could invests in loans throughout Europe and would be exempt of withholding tax would have a strong ability to reduce the fragmentation of the market. The legal nature of these new assets: currently insurers or pension funds are restricted as to the type of securities they can buy. But national regulations are changing on this point (cf. Italy on project bonds, France on loan funds /FCT). Uncertainty and equity levels of the new Solvency II regulations: not only does this regulation appear to penalise long-term investment, but in addition, it is highly volatile. However, long-term investments, because of their maturity, will one day be subject to this regulation. Insurers are thus obliged to take this into account, with the assumptions of the most unfavourable treatment. In addition, the logic of fair value in the new Solvency II regulation makes insurers sensitive to short term changes in the value of their assets. However, long-term investments in the form of bonds will have volatility and sensitivity which are mechanically very high. This will pose a management problem in the Buy & Hold logic. Q 7. How can prudential objectives and the desire to support long-term financing best be balanced in the design and implementation of the respective prudential rules for insurers, reinsurers and pension funds, such as IORPs? With the continual changes in regulations make it difficult for insurers to take investment decisions; they cannot anticipate the prudential treatment of the investments. As a result, there is a certain amount of waiting by market players, highly detrimental to their participation in long-term financing. The 1 year value at risk approach for the calculation of the insurer s equity does not seem tobe appropriate for investments based on a long-term credit risk. This is fundamentally a measure of market risk but not a measure of credit risk. We understand, however, that this principle is difficult to challenge, and thus questions arise on the valuation of securities, the modelling of the illiquidity premium and thus the spread, which, in our view, should be less volatile than the spread of a conventional corporate bond. On the current standard formula, we strongly support the creation of a dedicated treatment for Infrastructure debt instruments. Effectively the peculiar characteristics of the infrastructure debt evidenced by Moody s and S&P justifies in our view a modification of the capital charge as it currently penalizes Infrastructure because of its long duration and fails to recognize the benefits of its specific characteristics (low volatility, predictable cash flows, security package, diminishing default rates over time and high recovery rate). We therefore believe that infrastructure debt instruments should justify a dedicated classification under the spread risk sub-module (as it is the case within Basel II regulation Art 219 and 211). The classification for preferential treatment of Infrastructure Debt Instruments should be based on the combination of: 12

13 An Infrastructure Asset OECD definition and + A Project Finance Structure Basel II definition (art 219,221) Art 219: Within the corporate asset class, five sub-classes of specialized lending (SL) are identified. Such lending possesses all the following characteristics, either in legal form or economic substance : The exposure is typically to an entity (often a special purpose entity (SPE)) which was created specifically to finance and/or operate physical assets; The borrowing entity has little or no other material assets or activities, and therefore little or no independent capacity to repay the obligation, apart from the income that it receives from the asset(s) being financed; The terms of the obligation give the lender a substantial degree of control over the asset(s) and the income that it generates; and As a result of the preceding factors, the primary source of repayment of the obligation is the income generated by the asset(s), rather than the independent capacity of a broader commercial enterprise. Art 211: Project finance (PF) is a method of funding in which the lender looks primarily to the revenues generated by a single project, both as the source of repayment and as security for the exposure. This type of financing is usually for large, complex and expensive installations that might include, for example, power plants, chemical processing plants, mines, transportation infrastructure, environment, and telecommunications infrastructure. Project finance may take the form of financing of the construction of a new capital installation, or refinancing of an existing installation, with or without improvements. These criterias are well known by market participants (Sponsors, Lenders, Rating Agencies) and benefit from strong historical data. Effectively it is by the combination of those two criterias that project finance is currently defined by the bank regulation and by rating agencies. The same definitions are used by S&P and Moody s for their statistical default and recovery studies. Those instruments which satisfy this combined definition should benefit for a dedicated treatment that can take the form of a cap on the spread shock or to a reduction in the confidence interval of the standard formula in order to take into account the reduced volatility of those instruments. The use of advanced internal models is often suggested as an alternative to the creation of a new asset class under Solvency II. We believe however that those internal models will be in practice restricted to the largest insurers (due to human and financial costs to develop those models). We therefore wish to underline that only a modification of the standard formula will allow the development of a competitive and liquid European infrastructure market. Q 8. What are the barriers to creating pooled investment vehicles? Could platforms be developed at the EU level? The risk of this type of vehicle being classified as securitization under Solvency II is currently an extremely strong disincentive for insurers. It is essential to clarify the definition of securitization 13

14 under Solvency II. At the least, it should be considered that the most senior tranche may not be more risky than the underlying assets. Q 9. What other options and instruments could be considered to enhance the capacity of banks and institutional investors to channel long-term finance? For banks, As suggested under question 4, long-term deposits help banks capturing long-term resources on their balance sheets to make long-term loans. Banks must continue to make transformation under regulatory constraints and control to be defined in order to protect private depositors. Specific long-term envelopes from MDB or NDB may be at banks disposals to channel them to finance long-term investments. For institutional investors: They should be incited to co-invest alongside commercial banks having the same regulatory and due diligence constraints and capabilities. A project debt and/or bond market should be organised in order to create some liquidity on long-term loans/bonds. For public entities, specific tools such as project government bonds dedicated to a specific project should be developed. This could channel deposits to national or European project to sustain and improve European competitiveness. 3.2 The efficiency and effectiveness of financial markets to offer long-term financial instruments Q 11. How could capital market financing of long-term investment be improved in Europe? Apart from the UK market, there is almost no project bond market in Europe. The Project Bond Initiative was launched by the EIB and the European Commission precisely to initiate the creation of this market for greenfield transactions. Unfortunately the reduction of project pipelines already mentioned, the weak rating profile and low appetite for southern Europe transactions has led to a reduction of appetite for this instrument. Nevertheless, we expect the first PBCE transaction to materialize this year. One possible route to increase its usage could be to allow the PBCE to be applied for brownfield transactions. Effectively a lot of possible transactions are currently in the books of the banks which given the lack of an efficient secondary market for project loans are not able to reduce their exposure. Those transactions are more suitable targets for bonds given the stronger appetite of investor for brownfield (even if more and more investors are less reluctant for construction risk). By allowing that deleveraging of banks to happen, free capital could be reallocated to finance new projects. 14

15 3.3 Cross-cutting factors enabling long-term saving and financing Q 15. What are the merits of the various models for specific savings account available within the EU level? Could an EU model be designed? a. A short-term (liquid) savings account will not give medium term resources to anyone to make long-term investments. As the transformation risk should be reduced, the savings account maturity must be extended to 5 years minimum. Incentive rates and tax conditions may be used to increase deposit maturities. Maturities up to 8 to 10 years may be envisaged. But transformation will remain, with associated risk. This is not a barrier and can be properly managed. With maturities up to 8 to 10 years and with a limited transformation system banks would be able to make 20 year amortizing loans. Banks will need to keep these deposits on their balance sheets and not transfer them to NDB or MDB in order to distribute loans to medium size projects. NDB and MDB are equipped to serve numerous requests as it is commercial banks roles. These infrastructure savings accounts may have an induced transfer effect from other savings accounts if real rate conditions are too attractive. This should also be managed. We have to bear in mind that EU interest rates are diverse, which is a constraint on developing EU common rate conditions, i.e. EU common savings account. Risks associated to projects should also be properly managed to protect individual deposits. We must avoid another Eurotunnel. b. An EU model seems to be designed as needs and constraints are the same all over Europe. Nevertheless, induced effects on other savings accounts may be diverse between EU countries. If interest rates are different between countries, it will be difficult to imagine a savings account at EU level. If interest rates are different and as banking market is open, access to long-term deposits at different conditions would create competition advantages/disadvantages between banks and countries. So, the way may be to encourage banks and depositors (households) to increase their long-term accounts/savings through tax incentive and adequate deposit guarantee and leave the market defined rate conditions. To conclude, the idea seems promising, but its implementation faces some important difficulties. 15

16 Taxation Q 17. What considerations should be taken into account for setting the right incentives at national level for long-term savings? In particular, how should tax incentives be used to encourage longterm saving in a balanced way? a. What considerations should be taken into account for setting the right incentives at national level for long-term savings: see point b. hereunder. b. Tax incentives be used to encourage long-term savings in a balanced way. Tax incentive must encourage long-termism against short-termism. This can be done through immediate advantages on inland revenue tax. Moreover, as we all look for improving future generations ability to have better lives, long-term deposits channelled into project, which will wider public benefits to everyone, these deposits should bear transmission tax incentives when transmitted to children or grand-children. Information and reporting Q 24. To what extent can increased integration of financial and non-financial information help provide a clearer overview of a company s long-term performance, and contribute to better investment decision-making? Information sharing and disclosure is one of the high level principles of long term investment financing by institutional investors identified by the OECD. Relevant information on the characteristics and performance of Infrastructure debt over time are mainly within banks (including multilaterals). Some of data collection exercises related to the implementation of Basel II Internal Rating Base Models were undertaken by Standard s & Poors and Moody s but the collected information are not yet sufficient from an investor point of view as they were not designed initially for this purpose. Therefore efforts should be made to increase the transparency of this asset class. Increasing transparency of the asset class was one of the aims which presided to the endorsement by Natixis of a 3 year research chair partnership with EDHEC Risk Institute on the investments characteristics on infrastructure debt instruments. Q 25. Is there a need to develop specific long-term benchmarks? Increasing transparency on the performance of infrastructure debt will permit the constitution of publicly available benchmarks that are needed for valuation of loans by investors and for the pricing of European project bonds similarly with what makes the Canadian project bond market successful and efficient. 16

17 APPENDIX 1. Can additional public investments be financed by public debt in the euro zone?, April 12,2013-NATIXIS Economic Research-Patrick Artus 2. How large is the infrastructure multiplier in the euro area? March 22, NATIXIS Economic Research-Sylvain Broyer 3. Infrastructure is essentially a partnership story- Benjamin Sirgue April Eurofi Newsletter 4. Nouveau modèle de financement des infrastructures- Anne Christine Champion- La Lettre des PPP juin

18 18

19 19

20 20