The EFSI Legacy: Pressing issues

The financial arm of the Investment Plan for Europe, the European Fund for Strategic Investments, tackles three pressing issues—economic, environmental and non-financial barriers to investment, capacity constraints and subdued investment activity. The plan was designed by the European Commission and the European Investment Bank in 2014 and launched for a five-year period in the summer of 2015.

It was born from the diagnosis that following the 2008 financial and economic crisis, investment activity in Europe was far too low and that the competitiveness gap between Europe and other parts of the world was growing rapidly. These problems were driven by a credit crunch for private sector financing (despite ample liquidity), a fragmented banking system, underdeveloped capital markets and severely limited public resources, as well as other non-financial investment barriers.

As the financing arm of the Investment Plan for Europe, EFSI enables and challenges the European Investment Bank Group to increase support for viable projects with risk profiles that go beyond the EIB’s own risk-bearing capacity. As a public policy instrument, it also has to address market failures and suboptimal investment situations.

From the beginning, EFSI had three clear objectives: additionality, mobilised capital and impact. The eligibility of each project for the EFSI guarantee is assessed based on these three criteria. The EIB Group remains the lender or financier, with all related activities performed by the EIB (such as due diligence, funding, risk management, legal and contractual requirements towards the client, monitoring, governance, etc.). That allows EFSI governance (as the guarantor) to focus solely on the crucial decision as to whether the EU guarantee should be made available, based on the assessment of the EFSI eligibility criteria. This keeps the process lean and efficient.

The EIB Group has a detailed reporting obligation towards the European Commission (which provides the guarantee) and the European Parliament (which legislates the EFSI regulation).

Wilhelm Molterer, Managing Director 

Here’s how I would describe EFSI to someone who knew nothing about it. You have two big machines. One is called the EIB Group. The other is the EU budget. As long as the two machines are running in parallel and not interconnected, their efficiency is no more than acceptable. But if you put the strength of these machines together, you are not just doubling the effort—you are making three to five times more out of what you put in. EFSI has an even higher level of multiplication. If you have a budget guarantee of €1, you make €15 in terms of the investment volume supported in the real economy. That is the real story.

When EFSI started, the problem was not liquidity. The European Central Bank did a great job of stabilising the markets, and the banks had liquidity. The issue was their limited risk-bearing capacity. If you really wanted to restart the economy in the European Union, you had to take on some of the risk to enable both the public and the private sector to invest again. Call it a type of insurance that we offered at that time, focusing not only on economic stabilisation, but also on a return to growth-enhancing investment. This was the real key: we had to do what the markets needed, which was not to provide liquidity, but to bear some of the risk. This was also why new products were deployed relatively quickly. Risk-sharing instruments were not available at the EIB before, at least not to the same extent. Quasi-equity [also known as venture debt], providing the capacity to support innovative and fast-growing companies, did not exist at the Bank before EFSI. The EIF had the scope to do substantially more, because the guarantee gave it more firepower, whereas at the EIB it was about doing things differently. It was all about higher risk-taking and being additional. That was the fundamental story.

The second surprising thing was that originally, we all thought the main users of EFSI financing would come from the public sector, but this turned out not to be true. The private sector came to us and said, “We want to be the first movers in this.” At first, it seemed that companies supported by an EFSI loan from the EIB might be perceived as rather risky. But within months, it turned out to be the other way around. Companies realised that the markets reacted totally differently, saying, “if you have an EIB loan with an EFSI guarantee, you are more innovative. You are an interesting company, a company that looks forwards and not backwards.” This was a clear indication that we were on the right track. What we ultimately did was show that there was demand in the market.

There had not really been anything like EFSI before. InnovFin provided some guidance about where we wanted to go because it mixed financial instruments with the EU budget. But it was very narrowly focused. EFSI is much broader and supports real needs in the market. First and foremost, small and medium-sized enterprises (SMEs): in some countries, we had a real credit crunch at the time and SMEs had no access to financial products. The second thing was innovation, research and development. The third was infrastructure—in some regions of the European Union, this is still a critical part of making the economy stronger. And last but not least, the climate and the environment.

Iliyana Tsanova, Deputy Managing Director

I would point out four aspects that make EFSI unique and define its legacy. It was the first, highly visible flagship initiative of the European Commission on such a large scale and with such an impact. EFSI was a real pan-European response to a massive economic and social challenge the EU was facing at the time. The second point is that EFSI revolutionised how public funding can be used as an instrument to mobilise capital and catalyse investment, instead of one-off grants, and this philosophy is here to stay. Third, EFSI clearly demonstrated that an economic recovery package can be fully in line with sustainability objectives. Lastly, EFSI was deployed very quickly in the real economy without unnecessary bureaucracy, thanks to its efficient governance, simple management rules and the clear objectives set in the legislation.

Wilhelm Molterer

Iliyana is a strong personality. It’s great to work with her. She aims very high and sets extremely high standards for whatever she does. She has also brought in something new because she comes from the EBRD, another international financial institution, but with a totally different culture and history. And since she is from Bulgaria, she has a strong sense of the region’s needs. This combination of a strong personality with fresh ideas and a specific background—this is the wonderful contribution that Iliyana makes to the bright picture of our EFSI tapestry.

Another important point is that the Juncker Plan is not just EFSI. It’s also about the regulatory environment and the advisory component. Iliyana had a keen interest in this advisory component from the very beginning because she knew from her last job and previous role as Deputy Prime Minister of Bulgaria exactly how important this advisory component is. This is what made her contribution so important, beyond the fact that she is a wonderful person.

EFSI is not a separate legal entity. It is a guarantee facility with an independent governance structure. For the banking operations, EFSI relies fully on the EIB Group as the financer of all investments. In addition, as the guarantor, EFSI has a lean and efficient governance structure that provides legitimacy and transparency, without delaying the ultimate financing decision.

1. Steering Board, with three Commission representatives and one from the EIB, and since 2018 with a non-voting expert nominated by the European Parliament. It provides a strategic overview and guidance on implementation guidelines and monitors the EFSI portfolio. It is involved in individual proposals only for exceptional cases.
2. Managing Director and Deputy Managing Director. These two politically vetted posts are implanted within the EIB following nomination by the Steering Board and a public vote by the European Parliament. They are responsible for the day-to-day management of the activities of the guarantor and report to the Steering Board on a quarterly basis. They are voting members of the Investment Committee and answerable to EFSI, not the European Investment Bank. They are strictly not involved in EIB project preparation.
3. The Investment Committee, an independent body of eight external experts, plus the Managing Director, or the Deputy Managing Director in his absence. It is the gatekeeper to the public guarantee for projects submitted by the EIB. The decisions of the Investment Committee are final and taken by a majority vote. In their decisions, Investment Committee members are strictly independent from guidance by the Commission, the EIB, the European Parliament or any other party. Investment Committee approvals for the use of the EFSI guarantee are public. Since 2018, the rationale for the decisions has had to be explained in specific documents available for public consultation on the EFSI pages of eib.org

Inside EFSI: The Investment Committee

Wilhelm Molterer

When did the idea develop that there would be an Investment Committee and that it would play this part?

It was a journey. There were two questions that were finally also discussed with the Parliament. The first was whether we would call it the European Fund for Strategic Investments—this was because legally it’s not a fund, it’s a guarantee facility. At the beginning this created some confusion in the market because people were approaching the EIB and saying, “Okay, I want to invest in this fund. Where is this fund? What’s the legal entity?” The other question was why the Investment Committee was called that. Because this committee doesn’t decide on investments. It decides on the use of the public guarantee. One option was to call it the guarantee committee. Finally, things took on their own momentum. But this was more about labelling. The fundamental principles were agreed from the very beginning.

In the legislative process was there a moment when you thought it might not happen or that it might take on a completely different form?

There was one point. That was interesting. It was at the beginning of the discussion in Parliament. There was a legal proposal sent to the Parliament and it was more or less the same as the one that was finally adopted. One parliamentarian said, “We are happy, we want to do this, but we want to have political control.” We, the EIB and the Commission, said to them, “If you want to kill this instrument, make it political. If you want to have it succeed, then keep this market approach in place.” This was a very fundamental decision. Finally, the European Parliament accepted that it’s market-driven, not policy-driven. But we agreed that we would have a scoreboard in place to give us a clear indication about additionality. Second, we agreed to keep the Investment Committee truly independent. Third, Parliament had the final say in selecting the Managing Director and the Deputy Managing Director.

The two posts were published and between 40 and 60 persons applied for Managing Director and the same number or even a little more for Deputy Managing Director. Finally, the Commission and the EIB made a shortlist and when there was one candidate for each position, Iliyana and I were voted in by the European Parliament, confirmed by a large majority.

Fourth, we agreed with the Parliament to make it a transparent process by publishing the project scoreboards and, since 2018, the Investment Committee’s rationale documents also. Since 2018, the Parliament has also had an observer on the Steering Board, former EU Commissioner László Andor.

How were the members of the Investment Committee selected and who are they?

First of all, the regulation said it must be 50-50 concerning gender. It was one of the first pieces of legislation at EU level to include this principle. The advertisement said that candidates must have market backgrounds. They should have also a broad overview of the European economy from the perspective of various sectors. There also had to be regional, and not just gender, diversity. Finally these colleagues were selected by the Steering Board, which was already in place at that time. This was more or less the guiding, governing body of the whole process, with three members from the European Commission and one EIB member, Vice President Ambroise Fayolle. They had the job of selecting the eight members of the Investment Committee. These were people from different regions with different market backgrounds and were absolutely independent. This was one of the fundamental principles of the Steering Board’s selection process.

Iliyana Tsanova

The Investment Committee brought legitimacy and transparency to the process of approving the projects and ensuring that the public funding had the impact it was supposed to have. The Investment Committee is really the guardian of the guarantee facility—which is basically funding from EU taxpayers. The Committee played a very, very important role in ensuring that EFSI is not distorting the market, but actually doing the opposite in that we are catalysing investments. The members are experts with knowledge and know-how from all kinds of economic fields. They are passionate Europeans dedicated to fulfilling their mission to the highest possible standard.

I am proud that EFSI is such a great example of progressive policymaking by the EU, because the requirement to have a gender-balanced team was set out clearly in the regulation. It is not only about gender, it is also about national diversity. Diversity really enhanced the work of the Investment Committee and boosted the quality of our discussions. We benefited from the range of experiences and strengths present in the room, as well as different points of view.

Every time I have the opportunity to share my story and my experience with other women and girls, I do so with pleasure. It is very important to inspire other women who definitely need to feel empowered and become more ambitious and less afraid of pursuing their dreams.