14.08.2017
European Investment Fund

How the EU is crowding out private investors

The EU aims to help kick-start important but risky investment projects through the European Investment Fund. However, the funding also extends to projects that do not meet these criteria and for which private capital is available. By Karsten Röbisch

Two years following its foundation, criticism of the European Fund for Strategic Investments (EFSI) is on the rise. Banks and insurers feel they are losing out because of the European Investment Bank (EIB) supporting projects with EFSI funds, thereby competing with institutional investors. “We have seen projects financed by the EIB with EFSI funds, which private sponsors could most likely have financed themselves,” says Johannes Dresbach, Head of Investment Strategy at Axa Group.

Since July 2015, the EIB has been involved in financing business ventures through its European Fund for Strategic Investments (EFSI). The fund is part of what is known as the “Juncker Plan” through which Commission President Jean Claude Juncker aims to boost EU growth. The EFSI has over EUR 21 bn. to invest in innovative and risky ventures in infrastructure, education, research and, especially, to support the SME sector. The EU wants to get a total of EUR 315 billion worth of investment off the ground, mainly by getting private sponsors on board.

The fund’s purpose is to promote crucial investments
However, there are doubts over whether the funds are being used for their intended purpose. The EIB is seen as a good financing partner due to its competence in appraising projects. It also supports initiatives in such countries as Estonia or Lithuania, which major investors tend to avoid due to their small size and uncertain legal situation. However, the EIB also contributes to projects, which are neither particularly innovative nor considered as strategically significant, for example motorway projects in Germany or a windfarm in Sweden. The mechanical engineering company Heidelberger Druckmaschinen also received a development loan from the EIB. Heidelberg is not exactly a small player with an annual turnover of EUR 2.5 bn.

These ventures have not gone down well with investors, who are concerned about being crowded out by the EIB. “The European Investment Bank has funded infrastructure projects, which would have attracted significant interest from private investors,” argues Holger Kerzel, Head of Equity Portfolio Managements at MEAG, the asset management subsidiary of Munich Re.

EU Parliament criticises project selection
The EU Parliament has also questioned whether EFSI funds are always being used as intended. “Instead of funding pioneering ventures, the EIB is using public guarantees for projects with, at best, a tenuous connection to the EFSI’s aims,” argued the MEPs in their June session. Some of the additional investment, which the EFSI was designed to trigger, is questionable. “There are projects that could have been financed from other sources without using the EU guarantee”, claim the MEPs.

Tim Ockenga, Head of Investments at the German Insurance Association (GDV), also sees evidence of redundancy: one example is the infrastructure and energy projects, which usually have very long lead times. “These projects were in the planning stage before the EFSI had even been thought of. They would have got off the ground anyway through normal market funding,” contends Ockenga. The term “additional investment” therefore obviously doesn’t apply in those cases.

Criticism of the financing volume
Investor ire does not stem solely from the project selection, but also from the amount of financing provided by the EIB. EFSI support is supposed to encourage private investors by taking on the riskier financing tranches, which would be most at risk in the event of the borrower’s insolvency. However, the development bank does not stop there.

“The EIB has started to extend its interests beyond subordinated debt to senior loans,” claims Axa’s Dresbach. This runs contrary to the EFSI’s objective: instead of helping to bring private sponsors in, the European development bank is keeping them out. “The EIB is pushing private investors out instead of supporting them,“ confirms MEAG executive Kerzel.

Brussels plans to expand the EFSI
These interventions are being made at a time when the investment product offering is still eminently manageable. “If there were an abundance of projects, we could live with the EIB’s actions. However, as investment opportunities are few and far between, its interventions are having a big impact on the competitive environment,” says Ockenga.

The current EFSI programme goes up to 2018. However, EU Commission President Juncker is already planning to extend it until 2020. He also wants to add another EUR 12.5 bn. to the fund, increasing its volume to EUR 33.5 bn. and is targeting a total investment volume of EUR 500 bn. Negotiations between the EU Parliament and Council will begin after the summer break. Estonia holds the presidency of the Council of the European Union in the second half of the year, and it has made the conclusion of the negotiations a priority. It would appear, therefore, that private banks and insurers have not seen the last of the EFSI’s unwelcome interventions.