The EFSI Legacy: Lessons learned

Part five in ‘The EFSI Legacy’ series

The European Fund for Strategic Investments has been a game-changer for economic stimulus programmes backed by EU public financing and for the European Investment Bank. ‘The Legacy’ is a series that tells the story of the European Fund for Strategic Investments (EFSI) from 2015 to 2020 through interviews with the Managing Director, Deputy Managing Director, members of the Investment Committee and final beneficiaries across Europe

Download ‘The EFSI Legacy’ book here.

Some of the first reviews of EFSI were undertaken very early—perhaps too early—when the portfolio was still small and not sufficiently diversified to draw general conclusions. Topics and issues that early reviewers said needed further analysis were often repeated by subsequent reviewers as if they had been proven, and frequently cited as increasingly severe negative inferences.

Throughout the programme, the EFSI team has examined its own operations critically and constructively and taken recommendations by third parties on board. Here are some of their thoughts on the process of self-evaluation.

Wilhelm Molterer

EFSI is just one pillar of the Juncker Plan. The two others are the regulatory environment and the advisory component. I am a bit disappointed that the public debate is all about EFSI. Because EFSI can never replace an investment-friendly environment or a lack of governance and structure.

We can see that “one size fits all” doesn’t work. Because you have an economy in country X that cannot be compared to the economy in country Y. Whatever happens in the future, such instruments have to take these regional situations into account, meaning that we have to engage with the national promotional banks and national advisory institutions.

A third point is that the plan was for EFSI to do more in blending [EFSI-guaranteed EIB loans] with structural funds. This has not been the case, at least not to the extent that I would love to have seen. There was a discussion about the Omnibus Regulation bringing the legal frameworks of EFSI and the Structural Funds a bit closer. To be honest, this did not really work. You need a regulatory push to bring these environments together legally, but a political push from the managing authorities in the Member States is also urgently needed.

The fourth point is that the EFSI regulation speaks about the ambition for more cross-border projects – crossing borders with countries that are neighbours of EU countries, but also crossing borders between EU Member States. We only have a few real cross-border projects. This cross-border issue might become specifically relevant in the future. If you look at the studies conducted by the EIB’s economists, what you see is that administrative borders no longer have the same relevance for economic development as they used to.

These are the points where I see potential for the future. 

Has the Investment Committee rejected any deals?

The Investment Committee may reject a request for the EFSI guarantee for many reasons (and is not legally required to justify any rejection). To avoid damaging an underlying project in the real economy, rejections are not published. But they have happened, and been duly reported to the European Commission and the European Parliament on a strictly confidential basis.

Dalia Dubovske, Investment Committee member, independent PPP expert and investment project development advisor

Additionality was quite a mystical word in the beginning. The concept was extensively discussed. There were several occasions when we made the decision not to support a project because there was a lack of evidence supporting additionality. Of course, we were assessing the social and economic benefits, alongside a discussion of whether it was appropriate to use the EFSI guarantee. Investment Committee members submitted enquiries for further information. Over these five years, we made extensive efforts to adapt the project presentation template to support the efficient exchange of information between EIB project managers and Investment Committee members. The people on the EIB side know all about the background. We were the final step. Sometimes we received information that was too general and we needed details to justify our decision. We asked questions that were relevant for us and this gave the EIB loan officers a different perspective, allowing them to see things in a new light.

Working on the Investment Committee strengthened my idealism about Europe. I gained experience in remaining constructive when there is disagreement on key issues. I support the idea of strong  national promotional institutions to tackle market gaps. I will continue my career using this distinct experience to guide me.

Has the Investment Committee been too complacent in approving the EFSI guarantee?

The Investment Committee does not rubber-stamp EIB projects, or take guidance from the Commission, the EIB or other parties in its decision-making on the EFSI guarantee. Investment Committee members frequently question details of proposals and challenge EIB assertions in the guarantee requests. They vote on each proposal individually in their capacity as Investment Committee members, and they are not entitled to abstain from any decision (unless subject to a conflict of interest, in which case they are not privy to the Investment Committee’s documents and excluded from all of its discussions and decision-making). Only if a majority of the Investment Committee members approve a given proposal can the EFSI guarantee be made available. The decision is binary (a yes or no vote, with no option for conditional approval) and it is final. Since the beginning of 2018, the Investment Committee has also justified each of its positive decisions in a public document explaining its rationale.

Andreja Kodrin, Investment Committee member and chief executive of Quintaum, Slovenia

The governance structure might look unusual, because it’s not what you would expect from a typical fund’s investment committee. But the structure was set up very prudently, in particular because it was a bridge between the European Commission’s policies and the European Investment Bank’s modus operandi as a financial institution. As members of the independent members of the Investment Committee, we brought to this structure an independent and agile perspective on the investment’s rationale and additionality, while pursuing the ultimate goal of maximising value for EU citizens and taxpayers. In the end our diversity brought independence and market drivers to an otherwise institutional structure.

EFSI was intelligently set up at the initial stage, but it also evolved based on comments and questions from the Investment Committee. The extensive knowledge that came from every member of the Investment Committee gave us insight into the different perspectives of each project. In terms of my own background, I was able to combine my knowledge of corporate finance and how venture and private equity funds operate with the underlying need for all these projects to build competitiveness and resilience to climate change. At the moment of decision, I always kept in mind EU citizens, for example the working single parent somewhere in the EU, struggling at work, coping with kids and the daily commute, but who at the end is the taxpayer and who contributes to the financing of the guarantee for all these new investments. EFSI is not only about how the economy can be more competitive; it’s also about how the project might make life better for all EU taxpayers. If we don’t have our citizens constantly in our minds, we create yet another bubble that’s distant from those to whom the projects should be dedicated.

What happens to “rejected” projects?

A negative decision by the Investment Committee is binding. It prohibits the EIB from using the public guarantee for the proposed financing. Negative decisions are reported periodically and on a confidential basis to the Commission and Parliament. A negative Investment Committee decision does not mean that the underlying investment cannot proceed. It may still be financed at some point, potentially on other terms by other financiers, or even by the EIB which would then bear the entire risk without the backing of the EFSI guarantee.

One of the criticisms from outside was about what additionality actually means. Observers seemed to expect the EIB or the Investment Committee to produce a set answer, as if it were a mathematical formula. As if you could plug in the numbers and out the answer would pop. But the point of the Investment Committee is that it takes expertise to assess additionality. It isn’t just a computer algorithm. You have to have experts debating and voting on it. The reason the Investment Committee is made up of people with diverse and profound economic expertise is rooted in the need to assess this less-than-clear-cut measurement.

Manfred Schepers, Investment Committee member and member of the supervisory board of Nederlandse Waterschapsbank

With my background in development banking, my focus was on additionality, on asking whether an investment really needed EFSI support and if it could not be handled by the private sector instead. That remains very much a grey area, I think. It’s dependent on the price of the capital, because there’s a price for everything. If we’re going to have instruments like this, there comes a point in time—and this is more about the economic theory of public versus private finance—that we need to ask whether public finance is crowding out the private sector versus filling a gap. It’s a really fundamental issue.

There were heated discussions on projects. There were definitely diverging opinions and debates on various aspects of project additionality. But that was our job. There was no easy formula that you could apply. This is a qualitative criterion and it was open to sometimes subjective interpretation by the individual members of the Investment Committee. But the criterion needed to be properly understood, based on the members’ experience and knowledge. It was their different backgrounds in infrastructure investment, or research and development, or development banking, or all kinds of sectoral experience or market knowledge that helped each individual make their minds up.

Iliyana Tsanova

This was the right instrument to tackle the challenge we were facing at the time. So what would I do differently? I would try to communicate more clearly to the public what this instrument is, and how companies could benefit from it. At the beginning, there was some confusion about what EFSI was and what the role of the EIB was. I would also try to work more closely with the Member States to ensure that they know how to fully benefit from instruments like EFSI.

Success factor #1

The design of the instrument was appropriate for the challenge to be tackled. Two clear and equally important objectives were laid out in the EFSI regulation and achieved by the programme: additionality and investment mobilised in the real economy.

Thierry Deau, Investment Committee member and founder and chief executive of Meridiam, Paris

We focused very much on additionality. All members of the Investment Committee were very conscious of the fact that if we were going to use taxpayers’ money, there had to be a good reason. We relied on the pillar assessment of the documentation that was proposed. But everyone’s experience came into play from a sector perspective. Obviously, there were a number of things—for example, market failure, which is quite well-defined and at same time not well-defined—that gave us an additional perspective on whatever the EIB staff were proposing as an analysis. We brought discipline and consistency to the assessment of additionality. The climate and the climate transition were a big topic, but we all shared the view that economic growth was not just about jobs. Access to social services was also pushed as much as research and development, even though R&D was a concern for everyone because there is a real market failure in this field in Europe. We focused on making sure every one of the projects could have real impact.

On additionality, we had two debates. Once with EIB staff, because they initially had a concept of additionality that was that if something fits the regulation, it’s additional, and therefore let’s move along. Then we had an internal debate to figure out what we thought was important, really assessing the impact. We came to a real consensus, I think, after the first year and half.

Professionally, this was a rewarding conversation that broadened my knowledge and understanding of sectors that I don’t necessarily deal with every day. I’m on the investment side. I’ve known the EIB for 30 years. But things that were new for the Bank—SMEs, for instance—gave me a broader view of how financial products in the EU were percolating through the economic framework via SMEs with various financial intermediaries, which is quite fascinating. It gave me a wider overview of the efficiency of EU instruments. From the outside, it can look a little complex. But it’s not that complex.

For me, it was a truly European experience. I was pleased that there were ten of us from different Member States coming to a consensus on what was important in terms of supporting an economic programme and deploying this instrument. Europe is often caricatured, but when it comes to doing things in a concrete way, we can actually be quite efficient. That strengthened my belief that we probably need more Europe. And we need Europe to be more concrete.

Success factor #2

Clear roles and responsibilities at the institutional level between the European Commission and the EIB Group, and at the operational level between the EIB Group, the lender, and EFSI, the guarantor

Dalia Dubovske, Investment Committee

EFSI was not just another pocket of money. It came with the call for broad structural reforms and with the European Investment Advisory Hub. When formulating any economic programme, we need to understand how it will work and be implemented, and by whom—along with what is needed to make it happen. Policymakers have to think ahead in terms of how operations should or shouldn’t be implemented and what actions they envisage. Sometimes the reality can deviate from what was intended by policymakers, if the policy decision was vague.

Gordon Bajnai, Investment Committee member, former Hungarian prime minister and head of global infrastructure at Campbell Lutyens

EFSI is an unprecedented experiment in how to combine public and private resources. It’s a combination of a policy-driven stimulus programme with private resources that becomes a significant multiplier of this private financing. It’s an illustration of how to combine public policy goals with private sector resources and interests in the best way. The question is how do you channel private money to serve the common good? EFSI is the answer.

The programme was conceived at an historic moment for Europe when Juncker’s Commission wanted to create a recovery plan from the previous crisis. But from a recovery plan and stimulus programme, this post-crisis management tool evolved into an economic development tool, focusing on the greening of Europe, green infrastructure, research and innovation and small and medium-sized enterprises, plus an overarching cohesion target. It became an industrial economic policy tool. With COVID-19, we may be going back to the roots of EFSI. What Europe needs now is a classic stimulus programme. It’s good that we now have something tried and tested for that.

The Investment Committee’s role is to make sure that the public policy goals are present and achieved in each and every project and that they are matched with the private sector’s market interests. The Investment Committee is an independent body and is not driven by the bureaucratic or administrative concerns of an EU institution like the EIB. But it’s not driven by the profit considerations of the private sector either.

How do we make sure that public policy considerations don’t kill the mobilisation of private finance? We have to strike a balance. We were independent and not part of the Bank, but our mission was to continuously represent public policy goals.

Additionality was one of the most frequent and meaningful debates in the committee. It’s no easy task for the EIB to balance being additional with optimising how private resources are crowded in—that is, to achieve the public policy goal with the minimum use of public money. I couldn’t say that the best possible results were always attained, but overall I believe that we did go in the right direction.

Success factor #3

Lean and efficient EFSI governance

Gordon Bajnai, Investment Committee

It was almost like a psychological or sociological experiment. Find a group of eight independent experts who haven’t met, all from very different walks of life and different parts of Europe, put them in a room and give them a task that’s complex but which serves a higher mission. They have to work together for quite a few years. How do they learn to work together, driven by that mission? It restores your faith in mission-driven benevolence and people’s capacity to see beyond narrow personal interests.

Professionally, the opportunity to see a broad aspect of European investment policy at work—SMEs or infrastructure and R&D—gave me unparalleled insight into where Europe is heading, but also where the problems are. I really enjoyed every minute of  the experience.

Personally, I was always happy in my life and in my career to take on tasks that I felt were bigger than myself, that were about more than just me. This was clearly how each one of us on the Investment Committee felt. It was a role where we were working towards goals going far beyond our own interests or walks of life. It was an honour to be able to do that.

Success factor #4

Using the entire EIB Group machinery for implementation

Vicky Kefalas, Investment Committee member and head of investment and development projects at Consolidated Contractors Company, Athens, Greece

The Bank and the EU have created an environment of impeccable diligence, and also of inclusion and diversity. These exemplary qualities were evident in everything the Bank did in relation to EFSI. Not only did a lot of effort go into everything, there was also an environment facilitating discussion and openness to finding areas where there was room for improvement.

A lot changed over time with EFSI. The application form itself looked very different in December 2015 than it does now. That’s a result of [the Investment Committee’s] contribution and the Bank’s willingness to listen and improve. It was a very good environment that stressed collaboration. Willi Molterer had a very catalytic role. He’s passionate about facilitating EFSI and respected members’ opinions while providing a forum for discussion. The secretariat did a very good job. EFSI was a well-oiled mechanism. I regard it as a professional accolade to have been appointed to serve on the committee. I was there in December 2015 at the inception and I stayed through the extension of the term.

You read about and are exposed first-hand to current investments in projects in different sectors across the various Member States, so that you know what companies will invest in, even in times of economic crisis. I had access to the Bank’s background references along with its outlook on risk, compliance and sustainability. We had distinguished guest speakers from within the Bank coming to give presentations at almost every session. We had presentations at the opening of the committee and during lunch. For example, the chief economist, Debora Revoltella spoke. We heard from the head of compliance, from the president many times and from members of the Steering Board. This created a very open environment.

Personally, I take away a lot of satisfaction knowing that I was able to help make hundreds of projects across Europe a reality, providing jobs, heating and access to finance for SMEs, at a time when Europe needed it the most. The effect will be long-lasting. A real structural contribution was made. EFSI supported a large financing package for14 regional airports in Greece, for example. This, for Greece, is huge. For me this is the greatest source of satisfaction.

Success factor #5

Engagement with National Promotional Banks

Member States willing to engage, for example through their national promotional banks or other dedicated structures, benefited more and earlier from EFSI support. Those that thought EFSI undermined grant systems benefited less. The European Court of Auditors surveyed and interviewed national promotional banks as part of its 2019 EFSI report and found that “the majority of NPBIs appreciated the increased cooperation with the EIB Group.”

Iliyana Tsanova

Not all the Member States responded to and maximised EFSI’s benefits to the same extent. If I look back, there are a few reasons that could explain this outcome. First of all, it took some time for the new concept of EFSI funding as a financial instrument to be fully understood by the market. Second, if we look at Member State level, the proper implementation of EFSI requires a mature, knowledgeable and well-established banking sector because local banks and national promotional banks are a key partner for us in providing funding to SMEs. Countries that have strong national promotional banks were more successful in benefiting from EFSI—Poland, France and Italy are among the top performers. Third, government initiatives to promote investments in priority sectors are very, very important. If you look at innovation investments, the countries that benefited most have a strong industrial footprint and well-developed national programmes to support research and development. The same goes for the climate. Countries with well-structured national programmes to achieve the objectives of the Paris Agreement are those that have benefited most from investment in renewable energy, energy efficiency and other investments in that area. Last, it’s a well-known fact that countries that have a good environment for doing business attract more investments. Here the role of government is important. Unless you have a fair or good regulatory system in place and the rule of law, you cannot be attractive to investors.

Thanks to EFSI, the EIB has strengthened its cooperation with national promotional banks massively. Through the European Investment Advisory Hub, we also helped these banks to improve their capacity to fulfil their mission on the ground. Many Member States understood that national promotional banks are really key to helping them tackle country-specific investment gaps and design tailor-made products that are not always sufficiently available at the central level. One of the legacies of EFSI is that the national promotional banks are very important players. They have local presence, the mission and local market knowledge and they have a huge role to play going forward.

The Investment Plan for Europe steps in

Marguerite I launched in 2010, right after the financial crisis. At that time, investors were reluctant to put their money into greenfield infrastructure. But the €710 million fund was a success, with investments around Europe from German offshore wind farms to French broadband. By the time the European Investment Bank and the national promotional banks started to put together Marguerite II, the European economy had changed and a different market gap needed to be filled. There was now plenty of money looking for mature infrastructure investments. But new infrastructure—known as “greenfield” projects—in certain sectors and locations was still seen as too risky. So the banks set Marguerite II’s sights on just that.

The fund had commitments of €705 million by November 2017 from the European Investment Bank and the national promotional banks. It added a private investor in 2018 with another €40 million. The EFSI guarantee allowed the European Investment Bank to double its investment in Marguerite II to €200 million, by far the EU bank’s largest investment in an infrastructure fund. “Marguerite also brings another element to EFSI,” says Barbara Boos, head of infrastructure funds at the European Investment Bank, “because it’s a project supported by five national promotional banks as a genuinely cross-border investment with a European vision.”

More lessons…

Articulating the need for EFSI support, i.e. market failure/suboptimal investment situation

Fabio Pammolli, Investment Committee member

Additionality cannot be easily embedded in deterministic algorithms. I do not see any easy solutions beyond the methods we adopted that would allow us to achieve more than we did. The assessment of additionality is a combination of expert behaviour, data analytics and evidence-based analysis. Using independent experts on the Investment Committee is a very intelligent way to address this topic. The probability for us on the Investment Committee to have false positives was relatively low, because of the quality of the work from the services of the Bank. They took our advice into consideration from the very first iteration of the process. They even modified the way they collected information and presented the dossiers.

Some ambitions of the legislators have not been fully met and warrant reflection for the future:

Investment platforms designed as a new form of intermediation to facilitate the support of smaller and local projects. Once the rules for investment platforms were codified, a significant number of them were established. However, the investment platform model has been most successful in Member States where there is a strong local national promotional bank as the implementing partner. Expectations that investment platforms could be a substitute for Member States having a strong national promotional bank have not been fulfilled.

Very few cross-border operations. This is true of both intra-EU deals and cross-border deals with non-member countries. With hindsight, the main obstacle to these projects is rarely ever the availability of financing. Rather it is red tape and diverging national legal or regulatory requirements. Here the third, regulatory Pillar of the Investment Plan for Europe is much more relevant than EFSI.

Blending of EFSI with EU or national grants and structural funds. This has been a qualified success, but is still hampered by diverging legal, reporting and other requirements between the different sources of public funds. The Omnibus Regulation —introduced in 2018 to clarify the way the Investment Plan for Europe interacted with other EU financial instruments—helped to some degree, but is not a silver bullet.

The European Investment Advisory Hub has provided hands-on support to many prospective project promoters, but has not had a strong link with EFSI financing. Linkage from project preparation to financing support with the public EFSI guarantee could be strengthened, if that is the political intention.

Geographic concentration

Nieves Rodriguez Varela, Investment Committee member and independent investment project advisor

Although we were from different countries, the country itself was never a topic for discussion, when we were deciding on the guarantee. We didn’t push our own country’s perspective. You see a project and not the country. I would like to see some additional criteria, because some countries are clearly more favoured than others, and not necessarily those in the greatest need. The most developed countries are better prepared to access the guarantee. If the real aim is to develop Europe as a whole, we should focus on countries that are the most in need of the guarantee, the countries that are the most in need of the funds. This would, of course, be possible if Europe could do something about the regulatory frameworks in these countries and monitoring the use of the funds.

Wilhelm Molterer

The extension of the EFSI regulation and its refinement are an indication of what happened in the first two and a half years, because the extension was not just an increase in the investment volume, it was an increase in the ambition for transparency. It introduced the climate target and added cohesion support as a self-standing eligibility criterion. Already here, a lot was introduced on the basis of the evaluations, where the regulators added these points to the regulation’s amendments. This was an important first step.

The second important step is the fundamental idea of InvestEU as the successor to EFSI after 2020 with 75% of the InvestEU guarantee deployed by the EIB Group, but 25% by national promotional banks. I find this a fascinating idea, this link between an EU-wide, active financial institution like the EIB with the national promotional banks acting on the ground. Here you can really combine knowledge of the market, this regional knowledge, with the very fundamentals of European strategy.

The third aspect seems to be that the legal environments of EFSI (and InvestEU) and the structural funds are being brought closer together. It is easier to combine structural funds with financial instruments, and that can achieve much higher leverage from the structural funds.

For me, these are the three main lessons learned. Additionality and transparency remain the name of the game. I think sooner rather than later, the standards introduced on these issues—impact and transparency— thanks to EFSI will be the standards for the EIB as a whole.

Last but not least, one of the lessons is that the EIB Group has to act as a group. What we saw more and more in these years was that at the beginning, you had EFSI deployed by the EIF through the SME window while the infrastructure and innovation window was handled by the EIB. But over time, the two windows became more closely integrated with each other, and you see more and more interlinkages between the EIB and the EIF in terms of financial tools and instruments. Acting as a group is one of the most critical lessons that our teams will have learned over the last couple of years.