From Recovery to Sustainable Growth" 2017-2018 EIB Investment Report Debora Revoltella OECD 25 January 2018 European Investment Bank Group
2017-2018 EIB Investment Report: Key messages Investment recovery, but no time for complacency Important structural challenges remain: 1. Infrastructure investment 2. Business competitiveness 3. Climate change investment 4. Access to finance Targeted structural policies very much still needed EU, EIB, EFSI, National level European Investment Bank Group 2
Investment recovery, driven by machinery and intangibles, and widespread throughout Europe 6 Real GFCF, contribution by asset, % yoy 10 Real GFCF, contribution by asset, % relative to 2008 4 5 2 0 0-5 -2-10 -4-15 -6 12Q1 12Q3 13Q1 13Q3 14Q1 14Q3 15Q1 15Q3 16Q1 16Q3 17Q1-20 12Q1 12Q3 13Q1 13Q3 14Q1 14Q3 15Q1 15Q3 16Q1 16Q3 17Q1 Machinery Other buildings IPP, Intangibles Dwellings Total Source: EIB elaborations, based on Eurostat 3
1. Infrastructure investment is at low levels Infrastructure investment over GDP % % of GDP 2.5 2.0 1.5 1.0 0.5 0.0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 At low levels, with long term social and economic implications Infrastructure has been de-prioritized in 21 out of 28 countries with limited forecasted improvement Government Corporate PPP Non-PPP project European Investment Bank Group 4
1. Infrastructure Gaps are perceived by municipalities Municipalities perceived underinvestment % net respondents 5
1. Infrastructure Policy action calls for re-prioritization, planning & coordination and technical capacity Municipalities perceived investment constrains, % respondents Budget Debt Ceiling Access to finance Technical capacity Coordination Length of approval process Political and reg. stability 0% 20% 40% 60% 80%100% Share of municipalities Source: EIB municipality survey Policy answer Re-prioritize new narrative on relevance of infrastructure Planning, coordination and development of technical capacity EU, National and Sub- National level Debate on fiscal space to go hand in hand with proper reprioritization, planning & coordination and improvements in technical capacity 6
2. Business Competitiveness - Improving the business environment Impediments to investment % firms Demand for products or services Availability of skilled staff Energy costs Access to digital infrastructure Labour market regulations Business regulations Adequate transport infrastructure Differences by country and sector Impediments are impacting efficient allocation of resources, firms capacity to react to uncertainty and innovation Availability of finance Uncertainty about the future Source: EIB Investment Survey 2017 0% 20% 40% 60% 80% European Investment Bank Group 7
2. Business competitiveness Positive outlook for firms investment, but concerns on quality of the capital stock 12% more firms expect to expand investment 15% firms invested too little in the last 3 years Mostly resulting in concerns about quality of capital Going forward, technological catching up and stronger economic recovery will drive investment Source: EIB Investment Survey 8
2. Business competitiveness - Intangibles, innovation and skills Business R&D Investment over GDP % 4 3 2 1 0 2000 2004 2008 2012 EU US China Japan South Korea Firms investment composition - EIBIS % Intangibles 0% 20% 40% 60% 80% 100% Business environment improvement remains crucial Not only innovation, but also adoption of new technologies All intangibles are important, while policy action mostly targets only R&D Land & Buildings R&D Training Machinery & Eq. Software, IT, website Organisation Skills Source: Eurostat and EIB Investment Survey European Investment Bank Group 9
3. Climate Change Mitigation More investment to deal with future targets European CCM investment, EUR bn and % GDP 300 1.8 250 1.6 1.4 Ok for 2020 targets EUR billion 200 150 100 50 0 2012 2013 2014 2015 2016 1.2 1.0 0.8 0.6 0.4 0.2 0.0 GDP (%) CCM investment will need to increase to reach the EU s 2030 environmental targets Renewable energy Energy efficiency Transport Source: EIB CCM database Forestry etc R&D Mitigation/GDP European Investment Bank Group 10
4. Access to finance a problem for some Financing cross share of firms happy to rely on internal finance and credit constrained firms Share of firms that are happy to rely excl. on internal funds 35% 30% 25% 20% 15% 10% 5% No major issues on average SE DE LU UK MT DK AT ES BE CY SK RO FR CZ EE NL FI IR HU SI BG Dual market: finance constrained firms and financially independent firms co-exist 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% IT PL HR Share of firms that are external finance constrained PT LT LV Constrained market: relatively high share of finance constrained firms EL Base: All firms Question: Data derived from the financial constraint indicator and firms indicating main reason for not applying for external finance was happy to use internal finance/didn t need finance. Financial Constraint indicator include: firms dissatisfied with the amount of finance obtained (received less), firms that sought external finance but did not receive it European Investment Bank Group 24/01/2018 11 (rejected) and those who did not seek external finance because they thought borrowing costs would be too high (too expensive) or they would be turned down (discouraged) Source: EIB Investment Survey
4. Access to finance dissatisfied firms Financing cross firms happy to rely on internal finance and firms credit constrained Dissatisfaction with access to finance Base: All firms who invested in the last financial year (excluding don t know/refused responses) Source: EIB Investment Survey Base: All firms who used external finance in the last financial year (excluding don t know/refused responses). Q. How satisfied or dissatisfied are you with.? *INNOVATIVE: firms that allocated more than one third of their investment spent to the development and introduction of new products; processes and services; YOUNG: firms that are younger than 5 years; INTANGIBLES: firms that allocated a relatively large share (+50%) of their investment spent to intangibles. Source: EIB Investment Survey 12
4. Access to finance - Targeted policies remain key Firms with access to diversified forms of finance can invest more in intangibles Address finance constraints, where they are widespread Generally, targeted policies for growth and innovation More diversification of financing means To have more equity finance (good for the system), incentives have to change to increase demand Source: Key results of various analytical papers EIB Investment Report and EIB Investment Survey European Investment Bank Group 13
Key messages Investment recovery, but no time for complacency 1. Infrastructure investment 2. Business competitiveness 3. Climate change mitigation* investment Structural policies needed: EIB, EFSI, National Focus Properly re-prioritize Adequate financing to be accompanied by planning & coordination and technical capacity Business environment and reallocation of resources key All intangibles, not only R&D, crucial Skills, adoption of new technologies and innovation More investment to reach the 2030 targets 4. Access to finance and finance diversification * Investment in adaptation equally important. Policies for growth and innovation Diversification of financing means Work on incentives to increase demand for equity 14
This is the EIB! European Investment Bank Group 15
EIB Group results 2017 Innovation Environment Infrastructure SMEs EUR 78.2bn EUR EUR EUR EUR 13.8bn 16.7bn 18bn 29.6bn European Investment Bank Group 16
Some figures 901 Record number of operations approved EUR 7.9bn EUR 19bn outside the EU in 2017 of climate action finance in 2017 European Investment Bank Group 17
Why a macroeconomic assessment Modelling the impact beyond results investment direct effect indirect effect induced effect Measured Modelled European Investment Bank Group 18
EIB Group impact 10,924 MW of power created (99.6% from renewables) 572,324 families in EIB-financed affordable social housing Improved healthcare services for 45.7 million people Safer drinking water for 23 million people 3.9 million jobs sustained in 285,800 firms 7.44 million new & upgraded high speed digital connections European Investment Bank Group 19
The Impact Stylised intervention logic for EIB operations Investment effect Direct economic effects (investment) Less the financing and repayments Indirect economic effects in supplier industries Second round effect on income and sector spending, given local resource availability Activity Effects on GDP and employment Travel costs saved, More and better RnD, Higher Human capital, Etc. Structural effect Increase in factor productivity or trade Change in competitiveness European Investment Bank Group 20
Macroeconomic impact Results EIB Group supported operations, based on approvals in 2015-2016 GDP (% increase over baseline) 2.5 Short term, by 2020, EIB Group: 2.3% increase in EU GDP; EFSI by 2020: 0.7% increase in EU GDP EIB Group: EUR 544bn % of GDP increase over baseline 2.0 1.5 1.0 0.5 Investment effect Structural effect Longer-term, by 2036, EIB Group: 1.5% increase in EU GDP EFSI by 2036: 0.4% increase in EU GDP EFSI: EUR 161bn - European Investment Bank Group 21
Macroeconomic impact Results EIB Group supported operations, based on approvals in 2015-2016 Employment (number of Jobs over baseline) 2,500,000 Short term, by 2020, EIB Group 2.25 million jobs; EFSI by 2020: 690,000 jobs EIB Group: EUR 544bn Employment over baseline, number of jobs 2,000,000 1,500,000 1,000,000 500,000 Investment effect Structural effect Longer-term, by 2036, EIB Group: 1.3 million jobs EFSI by 2036: 344,000 jobs EFSI: EUR 161bn - European Investment Bank Group 22
Annex European Investment Bank Group
The model: RHOMOLO Why this model? A range of approaches and models exist. None are perfect. But some are better suited than others. The RHOMOLO model is available, (it exists, it works, and it is possible to get access to); credible (academically vetted and reviewed); suitable (it both at indirect and induced effects on a variety of relevant policy areas for the EIB); and it is already being used (e.g. the European Commission uses it to assess the impact of EU cohesion policies). Approach, model, and the use of the model discussed in relevant forums (e.g. Bruegel event in Brussels) European Investment Bank Group 24
The model: RHOMOLO Model setup complex economic interlinkages Foreign and public savings Domestic/foreign savings Households Investments Physical capital stock High-skill labour Medium skill labour Final goods firms Low-skill labour Regional government Public capital Final demand (hh, inv, gov, all regions) Intermediates inputs (all regions) European Investment Bank Group 25
Communicating the results Interpreting and reporting on the different results Effect over baseline Results should be read as the additional effect in the economy. The underlying model is calibrated in a steady state. To be read as: Employment created by 2020 (not in ), etc. Spillovers Investments in one country can lead to spillovers in others so the results need not relate directly to investment inputs. Data cannot easily be divvied up and compared to investment activity. Only macro regions or set of sector clusters are used Cohesion While results cannot be related directly to investment activities in a country, overall result show: Additionality All EU regions benefit from the impact of EIB supported activities Expressed in percentages to GDP or labour force, results suggest cohesion and periphery countries benefitting relatively more than core regions, both in terms of GDP and jobs. Macro-additionality, not project additionality. The model cannot answer if a specific project would have happened this way or not. It can give an answer to whether the market segment has expanded compared to a scenario without the EIB. European Investment Bank Group 26
Communicating the results Is the scope of the results realistic? Putting results into context The simplest is to compare what is put in to what comes out. An increase of 2.4% in GDP and 1.1% of employment in the EU compares reasonably with the input shock of some 4% of GDP. Comparing results with other RHOMOLO results The EC DG Regio used a similar version of RHOMOLO to assess the macroeconomic impact of Cohesion Policy 2009-2013. EUR 477 billion were expected to have created 2.4 million jobs and increased GDP by 4.2% by 2016 Comparing results with other approaches to EIB/EFSI Several observers tried to gage the impact of EFSI at inception. European Commission expected EFSI to add EUR 330-410 billion to the EU's GDP and create some 1.3 million jobs Oxford Analytica, and economics consulting firm, concluded that the EUR 315 billion of additional EFSI investment would results in a GDP increase of 1.0-1.8%. Comparing with different policy evaluation approaches One example is the US President Council of Economic Advisers assessing the impact of the ARRA. $787 billion of approved ARRA were expected to have created 6.8 million jobs by 2012. European Investment Bank Group 27