Given the enormous need for infrastructure investment in Europe, EU Commission President Jean-Claude Juncker has put forward a far-reaching plan to draw in private capital. Yet while sufficient capital is generally available in international financial markets, many obstacles remain. Roland Berger Strategy Consultants, in a study drawn up on behalf of United Europe, put forward six key proposals to make the “Juncker Plan” work. On March 18, the study in Brussels was presented in Brussels with an immediate – and very interesting – reaction given by Wilhelm Molterer, Vice President of the European Investment Bank (EIB).
In principle, it should be easy. On the one side, there are private investors worth trillions of euros searching for reasonable business opportunities in an environment shaped by high liquidity and extremely low interest rates. On the other side, Europe urgently needs massive investment in infrastructure in order to boost competitiveness and growth. According to recent estimates, EU countries should be investing EUR one trillion in infrastructure over the next three years alone.
Yet the match is not happening. Recent analyses found that global institutional investors, for instance pension and insurance funds, have capital amounting to approximately EUR 900 billion at their disposal for investments in infrastructure. Yet very little of that is finding its way into actual projects.
That is why EU Commission President Jean-Claude Juncker has proposed a European Fund for Strategic Investment (EFSI) to attract private capital into infrastructure and innovation. But it is far from certain that the EUR 21 billion in EU money will achieve the desired leverage effect to attain total investments of EUR 315 over the next three years.
What exactly are the obstacles? And what can be done about them? On behalf of United Europe, experts from Roland Berger Strategy Consultants drew up hands-on and implementation-oriented proposals for a European infrastructure investment model. The study “Squaring the circle: Improving European infrastructure financing” was presented in Brussels on March 18 at an event hosted by the European Investment Bank, the institution in charge of making EFSI a reality.
A Byzantine planning regime
With about 30 experts present from EU institutions, associations and companies involved in infrastructure policy and financing, it was a highly interested and knowledgeable group that had gathered in the EIB’s new offices overlooking Rond Point Schumann. To add to the interest of the event, EIB Vice President Wilhelm Molterer and his top experts gave an immediate reaction to the proposals outlined by Roland Berger and United Europe
“The money is there, but it is not being used,” the President of United Europe, Wolfgang Schüssel, said in his introduction. For the Juncker plan to be successful, several conditions would have to be fulfilled, he added. First, EU funds would have to be used as first loss piece for the commercial transactions to absorb risks. Then, the EFSI would have to focus on commercially viable projects. Finally, what Schüssel called “the Byzantine planning regime” in the EU’s 28 member states would have to be simplified and harmonised.
A big chunk of money
Heiko Ammermann, senior partner at Roland Berger Strategy Consultants and author of the study, was equally blunt in his assessment. Under the present circumstance, he explained, the Juncker plan would work only for the EU’s bigger and more affluent countries.
There, Ammermann said, investors might find a sufficient number of promising projects to make it worth their while to learn about the regulatory framework. Also, in these countries political conditions could be expected to be reasonably stable. Countries in southern as well as central and eastern Europe would find it much more difficult to attract investors.
“It is a big chunk of money. So how do we make the most of this great concept?” Ammermann asked. “If this is really to be a European plan, it needs to also work in those countries that have suffered the most from the crisis or that have the most to catch up on. But investment in the smaller countries is only going to happen if we harmonise regulation at the EU level.”
Six key elements
But it is not just that at present, regulation is too complex, unpredictable and fragmented across countries, making it very costly for investors to keep up with legislative developments throughout the EU. According to the study, risk structure and expected yields are not aligned. Supervisory requirements for banks and insurance companies pose obstacles, governance mechanisms fail to meet investors’ requirements, and standardised projects are few and far between.
To allow for a comprehensive and systematic approach to making the “Juncker Plan” work, Ammermann proposed a “European Infrastructure Investment Model” comprising six key elements:
1. Create a pipeline of investment-grade projects
2. Stock the pipeline with current projects to kick-start the market
3. Tailor risk-return profiles to different types of investors
4. Make private infrastructure investments financially viable
5. Establish a robust ownership and governance model
6. Actively manage project risks
De facto, European institutions – namely the European Investment Bank – would become co-developers of infrastructure projects, Ammermann explained in Brussels. “Given the amount of public money involved, there is a pretty high stake to closely monitor the implementation of the projects,” he said.
In his commentary about the study, EIB Vice President Wilhelm Molterer concentrated on three messages: he welcomed the input on implementing the Juncker plan, he warned against being overambitious about possible regulatory reforms, and he assured the audience that the European Investment Bank had the expertise and the means to make the EFSI work.
Some praise, some caution
“This study contains interesting ideas, though I have trouble believing in quick fixes,” Molterer said. For instance, the proposal for standardised contracts was worth looking into, he added. The EIB could develop contracts that would become the de facto standard without needing any harmonisation of national laws. Another good idea was to bundle projects to ensure a sufficient size to attract private investment as well as a better risk structure.
On other points, Molterer was more critical of the proposals put forward in the study. Transferring existing projects into the EFSI framework in order to quickly offer investment opportunities would not be acceptable. The European Parliament would only agree the release of EU funds if it was clear that they would go towards new investment.
Also, the EIB could not possibly take on the entire regulatory risk for these investment projects if it wanted to protect its Triple-A rating, Molterer explained. “Finally, I am very critical of the idea of being a kind of co-developer.”
“There is a lot in the study which is interesting and a lot which we fully support,” Molterer concluded. “But these days we also have to do a lot of expectation management. The EIB can do a lot, but it cannot do everything.”
A lively discussion ensued in which the audience asked about the political pressure the EIB was facing: pressure both to get the projects out quickly, and to spread them across member states irrespective of economic merit. Also, a company expert remarked, there was far too little public understanding for the need for infrastructure investments to be profitable.
Calls for a mentality shift
“What we need is a mentality shift,” Wolfgang Schüssel agreed in his final words. “We have to explain to electorates that investing means you have to have a return on investment.”
This, of course, wasn’t the first time that United Europe was discussing the need for such a mentality shift. In October 2014, Schüssel had presented a study on privatisation policies in Europe which outlined not only the revenue potential of privatisation, but even more importantly the productivity and growth gains to be expected.
You can download the study here
See also: Press Release Roland Berger Study