EUROPEAN INVESTMENT BANK E U R O P E A N F U N D F O R S T R A T E G I C I N V E S T M E N T S S T E E R I N G B O A R D EFSI STRATEGIC ORIENTATION

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1 EUROPEAN INVESTMENT BANK SB/22/2017 Document Final FOR DECISION E U R O P E A N F U N D F O R S T R A T E G I C I N V E S T M E N T S S T E E R I N G B O A R D EFSI STRATEGIC ORIENTATION Update of June 2017 Proposal by the EC & the EIB

2 Questions concerning this note should be referred to EFSI Secretariat:

3 STRATEGIC ORIENTATION OF EFSI 1 INTRODUCTION The general objectives of EFSI and its implementing rules are defined in the EFSI Regulation 1 and in the Management Agreement ("EFSI Agreement") established between the Commission and the EIB. The present document constitutes the first review of the Strategic Orientation of EFSI, which was adopted by the EFSI Steering Board in December The Strategic Orientation should be fully aligned with both the political orientation of the Commission and the requirements of the EFSI Regulation and it takes into account the developments during the first phase of the implementation of EFSI, in particular the development of new products, the revision of the EFSI Agreement as well as the feedback received on various occasions by the Steering Board from a wide range of stakeholders, notably during the Steering Board meeting with stakeholders organised on 7 September It also takes into account the evaluations undertaken by the EC 2 and the EIB 3 which were published in September and October 2016 as well as the external evaluation undertaken by EY 4. It must also be seen in the context of the discussion on the legislative proposal adopted by the Commission on 14 September 2016 on the extension of the EFSI. Moreover, the Commission proposed a number of changes to the Common Provisions Regulation, inter alia, to facilitate the combination of EFSI and European Structural and Investment Funds (ESIF) resources 5. Information on approved operations can be found on and The pages are regularly updated after the monthly EIB and EIF Board of Directors meetings. Besides mobilising finance for investment through EFSI, the Investment Plan for Europe consists of measures to help finance reach the real economy. The main instruments to make this happen are the European Investment Advisory Hub (EIAH, and the European Investment Project Portal (EIPP, 1 Regulation (EU) 2015/1017 of the European Parliament and of the Council of 25 June 2015 on the European Fund for Strategic Investments, the European Investment Advisory Hub and the European Investment Project Portal and amending Regulations (EU) No 1291/2013 and (EU) No 1316/2013 the European Fund for Strategic Investments (OJ L 169, , p. 1). 2 COM (2016) 597 final and SWD (2016) 298 final COM (2016)597 final. 1.

4 2 SCOPE OF THE STRATEGIC ORIENTATION OF EFSI Article 7(2) of the EFSI Regulation calls for EFSI to be governed by a Steering Board, which, for the purpose of the use of the EU Guarantee, is to determine, in conformity with the general objectives set out in Article 9(2) of the EFSI Regulation on the Strategic Orientation of the EFSI, including the allocation of the EU Guarantee within the Infrastructure and Innovation Window (IIW) and any decision to be taken under Article 11(3) 6 and Section 7(b) 7 of Annex II of the EFSI Regulation. The boundaries for the Strategic Orientation of the IIW and the SME Window (SMEW) are broadly determined by the following key reference documents: EFSI Regulation, in particular Articles relating to Additionality (Art. 5), Eligibility criteria (Art. 6), Requirements for use of EU Guarantee / General objectives (Art. 9(2)), Eligible instruments (Art. 10) 8 EFSI Investment Guidelines (Annex II of the EFSI Regulation), further outlining for the IIW eligible counterparts, project types and instruments; general principles related to additionality; risk profile of investment windows and debt / equity sub-portfolios; exposure limits and sectorial / geographical diversification EFSI Scoreboard of indicators for application of the EU Guarantee for the IIW (Delegated Regulation supplementing the EFSI Regulation 9 ) composed of four pillars assessed individually and covering: contribution to EFSI policy objectives; quality and soundness of the project; technical and financial contribution; and complementary indicators EFSI Agreement (amended in July 2016), in particular Articles on Windows, Products, Eligibility, Additionality and Complementarity (Part D); and Key Performance (KPI) / Monitoring Indicators (KMI) (Schedule II) and for the SMEW, Schedule VII on SMEW products. The EFSI Strategic Orientation focusses on two critical sets of issues: (i) the balance and diversification of the EFSI portfolio, also in view of risk management, and (ii) the practical implementation of EFSI and the EIB's origination capacity. It aims at guiding decision-making during the implementation of EFSI. It may be reviewed by the Steering Board in light of new policy developments also taking into account the experience acquired. EIB and EIF should ensure a coherent approach across the EFSI financing windows with a view to mobilise additional investment, in the meaning of Article 5 of the EFSI Regulation and to maximise where possible the mobilisation of private sector capital. EFSI aims to act as a catalyst and not substitute for finance provided by other actors, such as private market operators or National Promotional Banks (NPBs), by 6 Upwards adjustment of the initial limit for full guarantee on funding or guarantees provided by EIB to the EIF. 7 EFSI Investment Guidelines - Exposure limits for EFSI: Steering Board to receive detailed overview of risk limits, supervise development of risk profile of the EFSI portfolio and adopt appropriate measures if deemed necessary. 8 RCR operations reported under the SMEW fall out of the scope of the provisions relating to the EU Guarantee coverage see section 6.2 below. 9 Commission Delegated Regulation (EU) 2015/1558 of 22 July 2015 supplementing Regulation (EU) 2015/1017 of the European Parliament and of the Council by establishment of a scoreboard of indicators for the application of the EU guarantee (OJ L 244, , p. 20). 2.

5 addressing market failures so as to ensure the most effective and strategic use of public money, in line with the principle of additionality. This is reflected in the Key Performance Indicator measuring the amount of private finance mobilised or the Key Monitoring Indicator tracking the co-financing with NPBs. The Steering Board recalls that the EIB, when applying its rules, policies and procedures, shall, in its financing operations, comply with applicable EU legislation and agreed international and EU standards and, therefore, shall not support projects under EFSI that contribute to money laundering, terrorism financing, tax avoidance, tax fraud and tax evasion. In addition the EIB shall not enter into new or renewed operations with entities incorporated or established in jurisdictions listed under the relevant EU policy on non-cooperative jurisdictions, or that are identified as high risk third countries pursuant to article 9.2 of Directive 2015/849, or that do not effectively comply with EU or internationally agreed tax standards on transparency and exchange of information. The EIB may derogate from this principle only if the project is physically implemented in one of those jurisdictions, and does not present any indication that the relevant operation falls under any of the categories listed in the previous paragraph. The Steering Board encourages the EIB to monitor and take into account for the adaptation of its policies and procedures the developing EU policy principles on antitax avoidance. The Strategic Orientation is complemented by several other papers foreseen in the EFSI Regulation and the EFSI Agreement, covering specific aspects such as the methodologies for calculation of multipliers 10 and KPIs/KMIs 11, or policies and rules for cooperation with NPBs and Investment Platforms 12. In addition, the Commission published a brochure designed to help local authorities and project promoters make full use of the complementarities of the EFSI and European Structural and Investment Funds (ESIF), as referred to in Article 9(7) of the EFSI Regulation GENERAL STRATEGY BACKGROUND Economic rationale of EFSI EFSI aims at mobilising at least EUR 315 bn of total investments over a period of three years to boost investment in the identified areas that are important for restoring EU competitiveness and increasing employment. EFSI aims at addressing structural investment needs, improving investor confidence and helping to compensate for constrained risk-bearing capacity and fragmentation. 10 IIW and SMEW Multipliers documents: tion_en.pdf culation_en.pdf _investment_platforms_and_npbs_or_institutions_en.pdf 13 "European Structural and Investment Funds and European Fund for Strategic Investments complementarities", published in February

6 More specifically, EFSI should catalyse new investment in projects, which implement strategic, transformative and productive investments with high economic, environmental and societal added value 14. The EFSI Regulation (Article 9(2)) specifies, in particular for the IIW, the types of projects and sectors considered most critical to boost investment in Europe. Projects of common interest seeking to complete the internal market, including e-infrastructure, projects of common interest in urban and rural development, social fields, and in the environmental and natural resources fields are singled out. So are projects strengthening the Union s scientific and technological base, including the development of key enabling technologies. These types of projects are concentrated in a number of areas, which are identified as eligible for EFSI support in the EFSI Regulation. Furthermore, EFSI foresees a particular focus on improving the access to finance for SMEs and mid-cap companies, which are the focus of the SMEW. EFSI seeks to support projects that demonstrate economic soundness and long-term impact. The focus lies on the economic rationale for the individual project and on the extent to which the project addresses market failures or sub-optimal investment situations and supports the long-term competitiveness of the Union. Against this background, the EFSI should promote the Union s long term growth potential, while helping on reducing regional disparities. For the assessment of the impact of investments triggered by EFSI, employment is an important Key Monitoring Indicator. As part of the project appraisal, the EIB will systematically forecast the employment impact which forms part of the Scoreboard pillar 2. Moreover, indicators specific to unemployment in the country where the project is located also form part of the Scoreboard pillar 4 complementary indicators. Therefore, this information is taken into account in the decision on the use of the EU Guarantee under the IIW. Furthermore, the aggregated overall impact of EFSI-supported activity on employment will be assessed and subject of regular reporting and evaluation. Additionality Additionality is a key principle of the EFSI Regulation. EFSI is to support economically and technically viable projects which are consistent with EU policies and which provide additionality. Additionality is defined in Article 5 of the EFSI Regulation, outlining the following elements: i) operations supported by EFSI should address market failures or sub optimal investment situations and could not have been carried out in the period during which the EU Guarantee can be used, or not to the same extent, by the EIB group without EFSI or under existing EU financial instruments; and ii) individual EFSI operations and the overall EFSI portfolio shall typically have a higher risk profile than the portfolio of investments supported by the EIB under its normal investment policies. 14 As confirmed by the Cost-Benefit Analysis undertaken in line with Union standards (see e.g. recent CBA Guide for Cohesion Policy 4.

7 Moreover, the EFSI Regulation specifies that EFSI supported projects shall be considered to provide additionality if they carry a risk corresponding to EIB special activities, as defined in Article 16 of the EIB Statute and by the credit risk policy guidelines of the EIB. The EFSI Regulation also allows EFSI operations that do not fall under the Special Activity category, but still respond to the policy requirements mentioned above. EIB should continue to engage under EFSI in Special Activity financing to support riskier operations by also engaging with new clients, implementing new products and exploring new market areas. In doing so, the EIB together with the Commission should strive to ensure that EFSI and EU financial instruments like InnovFin or Connecting Europe Facility (CEF) or other mandates remain complementary to each other. In addition, EIB should continue to promote projects linking two or more Member States. The Scoreboard is an important element in the assessment by the Investment Committee of the appropriateness of granting the EU guarantee. The EIB and the external evaluation highlighted that the EFSI documentation prepared for the Investment Committee (IC) and in relation to the EFSI Scoreboard included a more comprehensive description of other factors supporting the additionality of projects. The Investment Committee members, in their assessment of the eligibility of projects presented to be included in the EFSI Portfolio for the purpose of granting the EU Guarantee, also took into account the Special Activity criterion in conjunction with other criteria, notably the financial constraints faced by project promoters, on the basis of the documentation provided by the EIB. The Steering Board encourages the EIB to enhance the information provided to the Investment Committee on how the proposed operation addresses market failures or sub-optimal investment situations including for instance to which extent EFSI allowed the EIB to finance investments that would not have been financed otherwise to the same extent by the EIB, to engage with new clients, to implement new products or to get involved in new market areas. Among the operations proposed for benefiting from the EU Guarantee under the EFSI, particular attention should be given to those having features of subordination, risk-sharing, cross-border characteristics or exposure to specific risks. Transparency The Steering Board expects increased transparency on the decisions of the Investment Committee on the granting of the EU Guarantee under the EFSI and a publication of the Scoreboard, excluding any commercially sensitive information, in the context of the proposed extension of the EFSI and invites the EIB to proceed with the ongoing preparations to that effect. Investment impact An important Key Performance Indicator for EFSI will be the investment impact. The overall target of investment mobilised through financing under EFSI is EUR 315bn, to be delivered by the EIB through the IIW and by EIF through the SMEW, on the basis of market demand, to support investment and financing. 5.

8 This target is to be delivered on the basis of an overall capital contribution under EFSI from the EU and the EIB of EUR 21 bn, representing a target global multiplier effect of 15. The EFSI Regulation and the EFSI Agreement ensure that EIB has an obligation to make the most efficient and effective use of the underlying First Loss Piece (FLP). The EFSI Regulation entered into force on 4 July The target of EUR 315 bn of investments is linked to operations approved, signed or entered into force within the first three years from this date (i.e. by 04/07/2018). The initial investment period of EFSI is 4 years in terms of approvals and 5 years in terms of signatures. The Strategic Orientation related to the investment impact covers the complete initial investment period. In order to maximise the investment impact, in view of the rapid uptake of operations under the SMEW and its significant potential to mobilise large volume of investments throughout the EU (in particular due to the strong market demand for existing instruments), the EFSI Steering Board decided in July 2016 to reallocate EUR 500mn of the EU Guarantee capacity under EFSI from the IWW to the SMEW, as foreseen in Article 11(3) of the EFSI Regulation, thereby increasing the maximum volume of the EU Guarantee coverage for the SMEW from EUR 2.5bn to EUR 3bn. Expressing the Key Performance Indicator in terms of total investment impact rather than EIB and EIF financing volumes represents a substantially different approach to their usual practice (e.g. under the respective Corporate Operational Plans). This new approach provides in particular the EIB with higher risk taking capacity and also more flexibility with regard to the choice of the optimal product for specific situations, in line with the EIB s business model and credit risk guidelines. However, in certain cases the contribution to EFSI objectives through the EIB intervention and its catalytic effect could be optimised through an increase in EIB s financing stake in the transaction. 6.

9 4 GEOGRAPHICAL DIVERSIFICATION AND GEOGRAPHICAL CONCENTRATION LIMITS In accordance with the EFSI Regulation, EIB s instruments (loans, guarantees etc.) shall be granted for the benefit of operations carried out in the Union, or involve entities located or established in one or more Member States and extend to one or more third countries 15. The detailed question of what types of projects involving thirdcountries fall within the category of operations extending to third countries required further analysis and was subject of specific Steering Board guidance on the basis of a non-exhaustive typology of cross-border projects which are deemed eligible under EFSI 16. The Steering Board also approved a guidance document 17 on investment in funds which carry out activities not only in EU Member States under the IIW. In addition to the political rationale for ensuring broad geographical and sectorial (see section 5) coverage, avoiding risk concentration of a portfolio is justified from a financial management perspective. Risk diversification allows to decrease the risk of a portfolio of assets and hence increase the leverage that could be achieved with a defined level of EU Guarantee. Avoiding excessive geographic concentration of IIW The EFSI Investment Guidelines provide that best efforts shall be made to ensure that at the end of the initial investment period a wide range of sectors and regions will be covered and excessive sectorial or geographical concentration is avoided. The EFSI Investment Guidelines require the Steering Board to adopt indicative geographical diversification and concentration limits and guidelines applicable to the IIW. These limits and guidelines are established as follows: 1. In order to avoid EFSI-supported operations from being concentrated in any specific territory: i. At the end of the investment period, the EFSI should aim to cover all 28 EU Member States; ii. At the end of the investment period, the share of investment in any three Member States together (measured by signed loan/investment amounts) should not exceed 45% of the total EFSI portfolio. 2. While the decision to support an operation should be based on the quality of the operation itself, the macro-economic environment where the project is taking place is also considered. To that end, EIB should pay particular attention to the complementary indicators defined in pillar 4 of the Scoreboard. 3. The indicative limits outlined above complement the principles expressed through the EFSI Agreement and the Scoreboard, including consistency with 15 Falling within the scope of the European Neighbourhood Policy, including the Strategic Partnership, the enlargement policy, the European Economic Area or the European Free Trade Association, or to an overseas country or territory as set out in Annex II to the TFEU, whether or not there is a partner in those third countries or overseas countries or territories efsi_regulation_en.pdf 17 efsi_regulation_en.pdf 7.

10 Union policies and EFSI objectives, quality of the operation, as well as the economic and technical viability of the operation. While recognising that it is too premature to conclude, the issue of unbalanced geographical distribution was pointed out by several stakeholders, in particular during the stakeholders consultation event of 7 September This concentration, in particular towards non-cohesion eligible Member States, was also highlighted in the EIB s and external evaluations on the functioning of EFSI. However, the projected volume of approvals seems to indicate 18 that there will be an increase of projects in Member States which benefitted less from EFSI support so far, with a more balanced geographical repartition of investments. It must be noted in addition that the size of the national economy naturally influences the average size of projects and investments available in the Member State and a comparison of EFSI investment mobilised with the Member State's GDP or per capita can also be used in this context as an illustration of geographical outreach. The Commission and the EIB should continue their local outreach campaigns to help explain and promote the benefits of the Investment Plan across the EU. In some Member States, the EIB has opened new offices or expanded existing ones to provide more support locally. The Steering Board considers that this extended local presence should be pursued in Member States with stronger needs. This proved successful in Greece where the EIB recently expanded their support team, which soon showed positive results with the first EFSI projects approved in Greece. Also, the enhanced cooperation with NPBs should help generate more projects in countries less covered so far. In addition, the Steering Board encourages the Commission and the EIB to increase their efforts to facilitate where appropriate operations combining financing under EFSI and ESIF in order to ensure a rapid enhancing of the geographical and sectorial coverage and to facilitate the development of a strong pipeline through Europe, in particular in Cohesion Member States. The European Investment Advisory Hub should continue its working to extend its cooperation with partner institutions in order to reach a wider range of beneficiaries across the EU, in particular in Member States that have less benefited of EFSI to date. Such cooperation should allow enlarging the scope of advice delivered under the Hub, as well as the sourcing of requests. Moreover, the EIAH should provide advice on the combination of other sources of Union funding with the EFSI. Thus, the EIAH would be able to actively contribute to the geographical diversification of the EFSI, by supporting the EIB to originate projects where needed. The macro-economic environment of projects is also taken into consideration. In line with the EFSI Regulation, the Investment Committee is provided with dedicated Scoreboard including macro-economic information on the country and sector where 18 The projected volume of approvals relates to the EFSI operations for which the EIB Management Committee has approved the start of the appraisal by Services. These projections are preliminary and expected to change. In addition, based on the nature of the EFSI operations (i.e. high risk and more complex structures) and in line with the experience on Special Activity operations whose attrition rate is higher than standard EIB operations, it is expected that the projected volume of approvals is subject to high volatility. 8.

11 the investments are taking place. The EFSI Investment Committee is regularly informed of the evolution of the EFSI portfolio. In light of the above-mentioned elements, it is too early at this stage to assume that the indicative limits and guidelines will not be met. The Steering Board encourages the EIB to pursue the above activities with a view to further improve the geographical distribution of the IIW and will monitor closely the developments in this respect. Avoiding excessive geographic concentration of SMEW The EIF will aim for the SMEW at reaching all the EU Member States and also at achieving a satisfactory geographical diversification among them. Reporting, monitoring and follow-up The geographical distribution of EFSI is subject to the regular semi-annual reports (KPIs/KMIs reports), providing breakdowns by country and by region. The Steering Board will continue monitoring closely the balanced progress in respecting the indicative limits and guidelines set out above. In case the implementation progress gives reason to assume that the indicative limits and guidelines might not be met at the end of the initial investment period, the Steering Board shall review the progress of the overall portfolio, analyse possible existing market failures which are not yet addressed by EFSI investments and related reasons, and prepare recommendations for specific actions to be taken by EIB to help develop the project pipeline, including with the support of the EIAH, or step up communication activities, or take other appropriate action. If appropriately justified, the Steering Board may decide to modify the indicative limits following consultation of the Investment Committee and written explanation to the European Parliament and Council. 5 SECTORIAL DIVERSIFICATION AND CONCENTRATION LIMITS According to the Investment Guidelines, in order to manage sector diversification and concentration of the EFSI portfolio, the Steering Board shall set indicative concentration limits for the IIW in respect of the volume of operations supported by the EU Guarantee at the end of the initial investment period. The indicative concentration limits shall be made public. The Steering Board may modify these indicative limits, following consultation of the Investment Committee and written explanation to the European Parliament and the Council. The EFSI Regulation (Article 9(2)) contains the general objectives of EFSI which correspond to the eligible sectors/areas for EFSI guaranteed operations (i.e. EIB or EIF financing or investment under EFSI). The EIB classifies each operation in the eligible sectors/areas in a mutually exclusive manner 19. The sectors/areas are: a) Research, development and innovation 19 In addition, each operation, for reporting purposes, is classified using the Statistical Classification of Economic Activities in the European Community (NACE). For the purposes of setting sector concentration limits for EFSI, using the 7 sectors/areas defined by the EFSI policy objectives under Article 9.2 of the Regulation are considered to be more suitable than the 21 sectors on NACE level 1, which are comprehensive but cover also activities that are not EFSI relevant. 9.

12 b) Development of the energy sector in accordance with the Energy Union priorities c) Development of transport infrastructures, and equipment and innovative technologies for transport d) Financial support through the EIF and the EIB to entities having up to employees e) Development and deployment of information and communication technologies f) Environment and resource efficiency g) Human capital, culture and health In order to provide broad-based support to investment activity, excessive concentration of EFSI operations in any particular sector or sub-sector is to be avoided. At the same time, too rigid limits on sector exposures may also be counterproductive as they would not respect market needs, might compromise the quality of operations, and would not allow for a broad portfolio diversification and hence would not allow for effective risk management. The definition of indicative orientations by sector and sub-sector and their monitoring over time aims at managing these trade-offs. Against this background, an indicative concentration limit of 30% of the IIW portfolio of signed operations in any one sector, as defined in the sector classification of Article 9(2) of the Regulation, is deemed appropriate. This concentration limit applies at the end of the initial investment period, whereas the EFSI IIW portfolio may initially have higher levels of concentration. EIB s internal projected volume of approvals until the first quarter of 2017 indicates 20 that the energy sector will remain the first sector under EFSI, with around 30% of the pipeline. Therefore the energy sector may remain above the 30% indicative target over the short term. The Steering Board encourages EIB to pursue its efforts to respect the indicative concentration limits. While the EFSI has been conceived as a demand-driven initiative, the EIB will continue their efforts to diversify the sectorial impact of EFSI, in particular with the deployment of new products and increased cooperation with NPBs. The Commission and the EIB will also work together to increase the blending opportunities between EU grants and EFSI support to financing. Moreover, the EIAH could also play an active role in developing projects that would support the sectorial diversification. In particular, the EIAH may contribute by increasing its advisory support to investment platforms development, PPPs, financial instruments, project identification and preparation. As mentioned in the EIB s evaluation, these efforts, while remaining dependent on market demand, should increase the outreach of EFSI in those sectors which benefit less of EFSI at this stage. A better balance between sectors should not be achieved by reducing the number of projects under any particular sector under the EFSI. Instead, more emphasis should be put, inter alia, in fully implementing the support 20 The projected volume of approvals relates to the EFSI operations for which the EIB Management Committee has approved the start of the appraisal by Services. These figures are preliminary and expected to change. In addition, based on the nature of EFSI operations (i.e. high risk and more complex structures) and in line with the experience on Special Activity operations whose attrition rate is higher than standard EIB operations, it is expected that the projected volume of approvals is subject to high volatility. 10.

13 that the EIAH can provide towards a more balanced sectorial coverage of operations under the EFSI. Reporting, monitoring and follow-up The sectorial distribution of EFSI is subject to the regular semi-annual reports, providing breakdowns by sectors/areas as defined above. The Steering Board will continue monitoring closely the balanced progress in respecting the indicative limits and guidelines set out above. In case the implementation progress gives reason to assume that the indicative limits and guidelines might not be met at the end of the initial investment period, the Steering Board shall review the progress of the overall portfolio, analyse possible existing market failures which are not yet addressed by EFSI investments and related reasons, and prepare recommendations for specific actions to be taken by EIB to help develop the project pipeline, including with the support of the EIAH, or step up communication activities, or take other appropriate action. It is too early to assume that the indicative limits and guidelines will not be met. However, these limits and guidelines could be reviewed at a later stage in order to take into account in particular the Climate Action objectives in line with COP21 and the inclusion of other sectors as suggested by the Commission in the legislative proposal on the extension of EFSI (e.g. agriculture). If appropriately justified, the Steering Board may decide to modify the indicative limits following consultation of the Investment Committee and written explanation to the European Parliament and Council. 6 PRODUCTS AND COUNTERPARTS Examples of products to be utilised to implement EFSI and their specific EFSI-related features are laid down in Annex 1 which also contains a description of the collaboration with certain counterparts, in particular the NPBs, and establishment of Investment Platforms. The EIB, in order to respond adequately to market needs, may develop new products in addition to those presented in Annex 1. 7 REVIEW OF THE STRATEGIC ORIENTATION In line with the requirements of the EFSI Regulation, the Steering Board shall regularly review this Strategic Orientation for EFSI. The present first review was adopted by the Steering Board on 13 September The Steering Board expects to further review the Strategic Orientation, to take into account the further implementation of EFSI, once the Regulation on the extension of EFSI, which is currently under legislative procedure, is adopted and the related amendments to the EFSI Agreement are signed. In the context of the reviews, the Steering Board shall look inter alia at the deployment of EFSI, the use of the EU Guarantee, the support to EU policy objectives and EFSI's complementarity and synergies with other EU funded instruments (especially the ESIF) as well as geographical and sectorial distribution 11.

14 and concentration. In addition, it shall supervise the evolution of the risk profile of EFSI with the view to consider appropriate measures if necessary. Finally, in order to review, on a regular basis the implementation of EFSI, the Steering Board shall receive, on a semi-annual basis KPI / KMI monitoring reports, including, where relevant additional monitoring information at product or sector level, as well as detailed information aggregated at portfolio level with regard to sector and country concentration/diversification, as well as on the overall risk profile of the portfolio. 12.

15 Annex 1 PRODUCTS AND COUNTERPARTS The increased risk bearing capacity through the EU Guarantee enables EIB and the EIF to reach new market areas, new client types (including the micro and small part of the SME category), and develop additional ways to engage with existing client types. 1. Under the IIW The EFSI operations under the IIW will generally fall under EIB s Special Activities risk category. In general terms, operations are being explored within seven broadly defined categories, as follows: (i) Corporate Junior (or Subordinated) Debt, (ii) Corporate Senior Debt, (iii) Project Finance Junior (Subordinated) Debt, (iv) Project Finance Senior Debt, (v) Risk sharing with Financial Intermediary (FI)/Investor, (vi) Equity-type risk individual operations, (vii) Equity-type risk portfolio operations, and (viii) bank intermediated operations. Figure 1: Simple overview / examples of product types and counterparts EFSI operations shall be structured in order to maximise, where possible, the mobilisation of private sector capital. The EFSI Investment Guidelines underline in section 2(b) that the EU Guarantee shall be granted to support directly or indirectly the financing of new operations. Refinancing operations can only be supported on an exceptional and well justified basis under specific conditions outlined in the EFSI Investment Guidelines. The EU Guarantee cannot be used to include retroactively into the EFSI portfolio signed EIB operations During the transitional phase as referred to in Article 24 of the EFSI Regulation, the EU Guarantee under EFSI could however be granted by the Commission to specific operations approved by the EIB and the EIF after 1 January 2015, including if already signed. 13.

16 Similarly, opportunities to fund projects with public sector counterparts are also explored. These may comprise projects with private sector co-financing or, ultimately, projects where the residual financing is provided by the public sector, should it be established that private financing be unavailable. The majority of the operations signed under IIW have been structured through direct products such as e.g. Investment Loans or Equity type products. Several equity investments in infrastructure funds have also been made. In the context of new product development, EIB recently developed the hybrid product which is a new deeply subordinated instrument aimed at supporting corporates, in particular utilities, with large investment programmes and facing balance sheet constraints. A significant attraction of the product is partial equity treatment by credit rating agencies during the period to the first call date (5-10 years), which can directly support new investment activity by enhancing balance sheet headroom. In addition, an increasing number of operations are being delivered through intermediated structures, such as Multi-Beneficiary Intermediated Loans or guarantees to FIs, and newly developed risk-sharing financing (see next section) and equity type products. A significant share of this financing shall be delivered under EFSI IIW through FIs, including NPBs. Moreover, the EIB may rely on the EIF to implement certain types of operations under a bilateral arrangement. With a view to better communicate the products offered under EFSI, the EIB publishes on its website a list of potential products offered using the EU Guarantee, for example a repository of product sheets, building on but not limited to - the information already existing on its website. IIW Debt Portfolio: risk-sharing financing through intermediaries General considerations Within the general framework of intermediated operations, a product currently being implemented under the debt portfolio is risk sharing structures in cooperation with FIs, including NPBs. In risk-sharing operations, the EIB assumes the risk on underlying transactions in order to support the origination of an EFSI eligible new portfolio of loans. Linked Financing Such risk sharing operations can be structured as linked whereby EIB guarantees up to 50% of new EFSI eligible operations originated by a partner FI during a predetermined allocation period 22. These structures can either be linked partial delegation, i.e. EIB retains the right to approve/reject any addition to the portfolio, or linked full delegation i.e. EIB delegates to the FI the selection of the loans based on pre-defined criteria. 22 An alternative structure could be for instance supply chain financing operations where the EU guarantee would cover payments of invoices from EU entities to enable the origination of new EFSI eligible loans. For such products to be eligible, the possible cross-border dimension will comply with the criteria set out in section e) of the Steering Board document on geographical eligibility of cross-border operations involving non-eu entities under EFSI (SB/17/16). 14.

17 Risk retained by Financial Intermediary Guaranteed by the EIB Figure 2: Simple overview / examples of Linked Guarantee Schemes FI Portfolio of transactions to be created Guarantee 50% EIB Guarantee to FI Risk Sharing Guarantee fees Guarantee payments as Guarantor De-linked Financing Risk sharing operations may also be structured as de-linked whereby EIB guarantees up to 50% of a selected number of existing identified performing (at the date of signature of the EIB guarantee) loans 23, the reference portfolio. In order to benefit from the guarantee, the FI commits to building up a portfolio of new EFSI eligible loans (not guaranteed by EIB), the new eligible portfolio. In this structure, regulatory capital of the FI would normally be released on the guaranteed portfolio in order to support the origination of the new portfolio. The coverage of the EU Guarantee shall become effective from the point at which the portfolio of new financings reaches a pre-defined minimum volume which can range from 1 to 2 times the guaranteed portion of the reference portfolio 24. This may occur in full or proportionally. 23 Under the delinked product, loans are guaranteed on an individual basis. The de-linked product will be available to NPBs or banks, including those under ongoing restructuring with a restructuring plan approved by Commission decision. It will not be available to: - Banks with a capital shortfall at the time of the signature of the EIB transaction based on EIB due diligence or supervisory public announcements. If a capital shortfall occurs during the defined timeframe for allocation of new loans, the EIB guarantee will not allow for additional loans to be added (i.e. the guarantee rate is frozen). - Banks in liquidation, wind-down or resolution. - Cover non-performing loans. Exceptionally, the de-linked product could be available if it is done at market price, at least on a pari-passu basis with the private sector participating at least with the same amount and to the extent that new EFSI eligible loans are signed. 24 In line with EIB rules and procedures and in order to achieve a medium to high external multiplier, the pre-defined minimum and targeted volumes will be determined on the basis of the structure of the risk sharing-product, the track-record in the ability of the FI to build up portfolios in the targeted sectors and other commercial features of the transaction. The FI will still be required to build the targeted volume of the new eligible portfolio. 15.

18 The projects originated by the FI under the new portfolio will need to fulfil the EFSI requirements in terms of additionality and other eligibility criteria in order to be included in the EFSI portfolio. The EIB will ensure that the existing portfolio ("reference portfolio") will only include operations with borrowers incorporated in the EU and exclude operations with borrowers that belong to EIB excluded sectors. This is the example of a simple structure that allows for efficient risk management in order to increase new lending by the FI. Figure 3: Simple overview / examples of de-linked Guarantee Schemes Investment in Asset-Backed Securities (ABS) tranches transactions under EIB Special Activity Similarly, Asset-Backed Securities (ABS) or other portfolio structured finance transactions are products by which the EIB can take risk on a tranche (typically lower rated senior or mezzanine) of a given portfolio of existing loans 25. Tranches are typically structured using securitisation techniques. ABS and similar structured portfolio products under EFSI entail a high external multiplier since they implicitly entail a leveraged, yet controlled, risk 26 as the FI is contractually required to build up an EFSI eligible new portfolio of loans which is a multiple of the EIB investment in the mezzanine tranche. EIB would typically enter into this type of transaction under structures relying only on a risk transfer under synthetic structures (i.e. by way of a guarantee on the relevant tranche of the portfolio and not the purchase of notes backed by the existing loans). Other structures might also be possible, i.e. by way of funded/cash securitisation, through the purchase of mezzanine notes. Coverage of the EU Guarantee in respect of loan substitutes/de-linked financing shall become effective from the point at which the portfolio of new financings is of an amount equal to EFSI Guaranteed Operation. This may occur in full or proportionally. Figure 4: Simple overview / examples of Mezzanine Guarantee in a Synthetic Securitisation 25 The EIB will ensure that the portfolio of existing loans will only include operations with borrowers incorporated in the EU and exclude operations with borrowers that belong to EIB excluded sectors. 26 E.g. whereas an investment in a mezzanine ABS tranche implies a nominal exposure that is a low percentage of a given portfolio, the risk incurred and regulatory capital requirement are much higher. 16.

19 The EU Guarantee will support EIB interventions in Investment Platforms including debt funds only to the extent that the risk profile of the portfolio of the underlying assets (taking into account possible credit protection provided by other parties including EU instruments) would carry a risk in line with the definition of additionality as defined in Article 5 of the EFSI Regulation. Further products may be developed subject to the provisions of the EFSI Regulation. The creation of IIW Debt Portfolio - Hybrid ring-fenced from the main EFSI IIW Debt Portfolio - Standard Under the EFSI IIW debt portfolio, EIB faces strict constraints. This is because EIB, although not subject to banking supervision regulation, is applying the Advanced IRB approach under CRD/CRR to ensure compliance with best banking practice as required by its Statute. The EU Guarantee consists of an FLP protection on a portfolio of debt operations, resulting in a synthetic securitisation of this portfolio. For Capital Adequacy Ratio (CAD) purposes, EIB will apply the Supervisory Formula Approach (SFA) of the Basel III framework for securitisation structures. In practical terms, this means that each underlying asset benefiting from EU Guarantee under the EFSI IIW debt portfolio needs to be rated internally by EIB (based on a validated model). EIB has validated internal rating models for its common products, including the direct support to corporates, banks, and project finance. These internal rating models are used for risk-sharing operations with no or partial delegation. Nevertheless, for risk sharing debt operations with full delegation to FIs (which therefore are typically not rated internally by the EIB) the IIW standard debt portfolio, which according to the SFA requires full EIB rating for each underlying operations, cannot be used. Similarly, for securitised portfolio operations (Asset Backed Securities - ABS) and similar structures, which are considered as a re-securitisation from a regulatory point of view (as the EFSI portfolio is, in itself considered as a securitisation), the IIW standard debt portfolio cannot be used. Therefore a specific, ring-fenced portfolio has been set up to accommodate such operations with full delegation and to allow the transparent lending to entities that cannot be internally rated with a validated model. This sub-portfolio is kept structurally separate from the EFSI IIW standard debt portfolio - the regulatory capital requirement for this new portfolio would not be 17.

20 calculated under the supervisory formula approach - and can support lending by EIB which, capital-wise, is hence be treated alike equity risk. A EUR 1bn from the EUR 10.5bn FLP dedicated to the EFSI IIW debt portfolio has been allocated to this hybrid compartment (IIW Debt Portfolio Hybrid) aiming at an internal multiplier of at least 3 times through an EIB contribution. The IIW Debt Portfolio Hybrid can accommodate important operations such as ABS and other portfolio structured transactions, risk sharing with full delegation to FIs (including NPBs) and/or loans to funds, and/or any loans to entities that do not fit the current requirements of EIB s risk models (i.e. for which the EIB has not yet developed validated risk models and hence cannot apply the Advanced Rating Methodology under Basel rules27). The projects supported by FIs or funds will comply with the eligibility and additionality criteria set out in the EFSI Regulation. IIW Equity Portfolio The IIW equity portfolio is key for the EFSI implementation in particular in terms of multiplier impact. The EIB will deliver under this portfolio through essentially two pillars: (i) direct equity-type financing, and (ii) indirect equity financing. The resources dedicated to the equity portfolio are limited to EUR 5 billion (fully allocated upfront by the EU and the EIB, 50/50 pari passu). This portfolio will only be used for operations with an equity type risk profile, which according to the EFSI Regulation must be priced in line with market terms. Equity-type financing Corporate innovation investments and project finance represent the core of the EIB financing activities over the last decade. In addition, over the last decade the EIB has also been offering various quasi-equity products. These products can take various forms other than actual direct equity (i.e. EIB holding ordinary or preference shares in an undertaking). In the last few years, the EIB started to successfully combine the concept of financing of innovation and innovative project structures through quasi-equity loans. Although more complex than pure equity and more risky than pure debt, the quasiequity product has had a major impact on the EIB s ability to address market gaps in regard to availability of risk capital for innovation by Mid-caps and infrastructure financing. The products foreseen under the direct equity-type financing include the following: a) Growth Finance for Mid-caps This quasi-equity window builds mainly on the success of the quasi-equity operations piloted in 2015/16 under the InnovFin s Mid-cap Growth Finance (MGF) programme. It offers extremely high additionality and represents a unique financial instrument developed specifically by the EIB to address the need of long-term growth capital. 27 These investments would require full capital allocation until such validated model is in place. 18.