Seminar on Long-term finance for Growth Companies in Europe

On Wednesday 3 June, TheCityUK launched the latest International Regulatory Strategy Group (IRSG) report Long-term Finance for Infrastructure and Growth Companies in Europe at an event kindly hosted by Norton Rose Fulbright LLP. The report comes from the IRSG, which we co-sponsor with the City of London Corporation. Below is an overview of the keynote speeches and panel sessions from the day.

Sir Gerry Grimstone, Chairman, TheCityUK and Standard Life

Sir Gerry began his speech by underlining the vital contribution of the financial and related professional services industry to the UK economy, which provides employment for over 2 million people right across the country. Infrastructure is an area on which all facets of the financial industry have a view.

As highlighted by Sir Gerry, the UK is now recognised as the pioneer in the use of the private sector to provide public services. The UK has moved away from almost total dependence on the public sector to the point where almost two thirds of infrastructure investment comes from the private sector. The latest National Infrastructure Plan shows this trend continuing, with just 20.6% of the planned investment in the infrastructure pipeline coming from public investment. A further 13.8% is expected to be a mix of public and private sources, with 65.6% being purely private sector originated.

Recommendations from the IRSG's Long-term Finance for Infrastructure and Growth Companies in Europe report will enhance the allocation of capital, the management of risk, and the ‘partnership’ element of public-private-partnerships. According to Sir Gerry, the infrastructure gap represents the difference between what we need to invest and what can be afforded. Although UK investors have already begun to focus on the matching of asset to liability attractions of infrastructure (long term stable returns against long term pension or insurance liabilities), filling the infrastructure gap and matching infrastructure projects and finance across Europe will not work without a vibrant intermediation sector.

Miguel Gil-Tertre, Member of Cabinet of Jyrki Katainen, Vice-President for Jobs, Growth, Investment and Competitiveness

The seminar provided an opportunity to take stock of what the European Commission has achieved so far and discuss their plans for the coming months. The European Commission was represented by Miguel Gil Tertre, Member of Cabinet of Jyrki Katainen, Vice-President for Jobs, Growth, Investment and Competitiveness. Miguel came back on the recent successful negotiations on the EFSI between the Council, the Commission and the Parliament. The EBI is going to deploy €60 billion for the EFSI, which will focus on SMEs and mid-cap companies. Miguel shared the Commission’s insights on the structure of the European Investment Project Pipeline and the future role of the risk department of the EBI which will conducting the assessment of eligible projects.

With regards to the concrete implementation of the EFSI, Miguel noted that the EBI will not only be investing in projects, but also in funds. He underlined the importance of the role local partners can play in Europe to help investors and in companies understand which instruments are better tailored for their needs and therefore facilitate the work of the EBI.

Miguel also highlighted the new philosophy of the Juncker’ Commission and the coordinated efforts of all Commissioners to remove barriers to investment and enhance the certainty and relevance of regulatory requirements across Europe.

Panel session I and Q&A - Long-term Finance for Infrastructure and Growth Companies in Europe

Rachel Lomax, Chair, IRSG

Rachel focused on policy issues that prevent investment. She explored the resources available in the public sector to enhance the private sector’s management of public services and utilities. Rachel also identified political uncertainty in the EU as one of the major barriers to long-term investment.

Though President Juncker’s Investment Plan is a positive step forward, one of the challenges facing the Commission is the matching process between infrastructure projects and investors. Rachel tackled the difference of appetite among private providers of public services across the EU and regulatory issues regarding the implementation of the EFSI in the summer.

She put the emphasis on the cultural divide between UK and the rest of Europe regarding financing environments and the role of the private sector in infrastructure investment. The poorest quality countries end up paying exorbitant rates which defeats the idea of financing infrastructure without state aid. This divide needs to be reduced and the IRSG, chaired by Rachel, welcomes the conclusion of the negotiations on the EFSI.

Miles Celic, Director of Group Strategic Communications, Prudential plc

Miles Celic presented an outline of Long-term Finance for Infrastructure and Growth Companies in Europe, highlighting its main themes. TheCityUK published its first report in this series, titled Finance for jobs and growth in Europe, in 2014 and set out visions to address challenges in long-term financing for infrastructure projects. The report was broadly welcomed in Strasbourg and Brussels. Long-term Finance for Infrastructure and Growth Companies in Europe builds up on this first report and proposes 29 specific recommendations to free up and enable investment in infrastructure and to promote growth companies in Europe.

Miles explained the econometric model used in the report to measure the impact of increased infrastructure spending on jobs and growth. It has been estimated that the gap between planned spending on infrastructure and what is needed will require €600 billion additional annual investment to 2020. Increased spending on infrastructure would create an additional 125,000 jobs in a year in the EU. An additional 1.1m jobs would be created over six years in the 20 countries included in the model.

Infrastructure needs are particularly pressing in the European energy sector. The findings of the report were welcomed by representatives of Hungary, Greece, Slovakia and Slovenia during a roundtable organised by TheCityUK on 30 April. Miles also highlighted the growing inability of the public sector across Europe to keep providing utilities and other public services vis-à-vis an ageing population with growing needs. To address these needs efficiently, the private sector needs to be engaged and investment in long-term infrastructure assets needs to be incentivised intelligently.

Jacqueline Minor, Head of the European Commission Representation in the United Kingdom

Jackie shared her insights on the European long-term financing debate and in particular the Commission’s Investment Plan and the EFSI. Although the EFSI only represents one part the Commission’s Investment Plan, it does reflect a shift in the European Commission’s budget and functioning, moving away from grants to guarantees. Among other objectives, the EFSI aims at facilitating the business environment in Europe, enhancing the Energy Union project, developing a capital markets union and promoting a digital Single Market.

Jackie explored the links between the EFSI and the work of the EBI. She welcomed the recent conclusion of the negotiations on the EFSI, with the ESFI now expected to become operational in the summer. As underlined by Jackie, the rationale behind the EFSI is to manage risk and fill the investment gap, especially for transport, energy, environmental and resources management projects. One part of the EFSI will be dedicated to SMEs under certain conditions. Jackie also explained the regulatory underpinning of the EFSI and how projects will be selected. She emphasised the importance of the objective evaluation by the EBI of the viability of projects put forward, through appropriate eligibility criteria.

Sir John Armitt, Head of the Labour Party’s Infrastructure Policy Review

Sir John focused on the strong links between politics and infrastructure projects and the importance of gathering political support for any major project. Many infrastructure projects failed in the past because private investors realised too late that these projects were on the wrong track.

Sir John addressed the issue of revenue risk and what impact this can have on private investors. He also mentioned the issue of pricing risk and highlighted that pricing risk at the EU level would lead smaller countries of the EU to pay an exorbitant price. As he stated, passing all risks on to the private sector is not a viable solution, as the pricing of risk will simply be passed on from tax payers to customers. The allocation of risk in infrastructure projects is crucial to their success and neither the public nor the private sector on their own can manage these risks. It is through the partnership between the public and private sector that risk can be properly allocated so that long-term finance for infrastructure and growth companies can deliver jobs and growth.

Geoffrey Spence, Chief Executive, Infrastructure UK

Shortly after General Election, Geoffrey detailed the work programme of the new government and its commitments, especially regarding the increased public expenditure in transportation (road-building, rail etc.). The Juncker Plan was broadly welcomed by HMT as a vehicle to kick start growth in Europe.

Geoffrey also highlighted the role of the public sector to fund very specific, relatively risky investment projects (off shore platforms, telecoms, energy, etc) where public intervention is unavoidable to carry out these projects successfully. He also shared insight on the financing of the latest UK Infrastructure Plan.

Geoffrey firmly believes that appropriate procurement rules and incentive frameworks will contribute to change public perception of public-private-partnerships. European procurement rules also need to evolve to enhance the functioning of capital markets.

Panel session II and Q&A - A Practitioner’s View of the Commission’s Investment Plan

Jeffery Barratt, Senior Consultant, Norton Rose Fulbright LLP and Chair of TheCityUK’s Infrastructure & Energy Group

With regards to Juncker’s Plan and the EFSI, Jeffery strongly believes that the priority should be to focus on the delivery of credible and financeable projects rather than creating a wish list of projects.

Jeffery welcomed the European Investment Project Pipeline to encourage private sector investment in infrastructure. It is important that infrastructure projects are not delivered on a sporadic one off basis but that developers and financiers can see a pipeline and flow of deals which will encourage them to bid and also provide the right competitive environment for a number of potential bidders to participate in.

Jeffery also shared his insights on an appropriate allocation of risks between the public and private sector. Some risks are appropriate for the public sector to take and others should be taken by private investors.

Jeffery calls for a review and simplification of the plethora of European financing vehicles and instruments which lead to confusion in terms of what is available in the financing of projects. There was also a concern expressed that a number of initiatives on best practices in infrastructure resembling the EBI’s (rolled out by organisations including the UN or the Asian Development Bank) could cause confusion.

Tomas Gärdfors, Partner and Head of Nordic, Norton Rose Fulbright LLP

Tomas focused mainly on the European energy infrastructure opportunities – Projects of Common Interest and the Energy Union which is the most important project since the establishment of the European Coal and Steel Community. He detailed the new opportunities offered by the Energy Union project and the proposed EU reforms to access new sources of funding, as part of the jobs and growth agenda.

According to Tomas, the EFSI’s main purpose should be to facilitate the matching of investors and projects rather than funding projects per se. If projects are not feasible without the EU’s support, they will not happen even with the EU’s support. Though the European Investment Project Pipeline is a good step forward, it should not allow the EBI to crowd up infrastructure projects to the detriment of private funding, especially in Eastern Europe. Public investors involved in the delivery of the infrastructure plan should take care not cannibalise private investors.

Terry Morgan CBE, Chairman, Crossrail

Terry brought a project management and implementation perspective to the debate on the Commission’s Investment Plan. In particular, he spoke about the case of Crossrail as a good example of public spending benefits in infrastructure. A third of the financing Crossrail receives comes from the national government, and the rest from local taxation and private investors. Terry also mentioned the different aspects of the delivery of public-private-partnerships, including financing, designing and construction phases. The ‘partnership’ element of PPPs is important, and state aid should be considered as a solution when the private sector fails to support long and risky projects.

Terry also shared his insights on the importance of appropriate macroeconomic policies to maintain an innovative and sustainable environment for infrastructure projects. The continuity of expertise between projects creates a valuable skillset and a storybook which builds on success. If there are no projects, the expertise will go elsewhere and will be lost, hence the need for a European Investment Project Pipeline.

Allan Baker, Global Head of Power Advisory & Project Finance, Société Générale

Allan commented on the Commission’s Investment Plan from a bank’s perspective. He spoke about the role of banks in financing long-term infrastructure projects. As noted by Allan, there is a wall of funding available for good infrastructure and energy projects, but the difficulty for banks is to find these good projects. Though the European Investment Project Pipeline can provide more visibility to good projects, there is a risk that this pipeline will become a queue. The EFSI should not be perceived as a source of cheap financing and risk mitigation.

Moving from a concept to an actual project, taking into account risks and political changes, is incredibly challenging. A lot of infrastructure projects in the nuclear sector, such asoff shore wind, need additional support. However, the energy sector is affected by policy inconsistency, cuts in public funding and frequent changes in the regulatory regimes, which discourage investors. New infrastructure projects, such as those relating to carbon capture are very policy-driven.

Allan also discussed trends in long-term financial intermediation and the complementary nature of different types of finance for long-term projects. Institutional investors have better ability to invest in long-term projects, and President Juncker’s Investment Plan should facilitate institutional investors’ access to long-term assets.

Chris Wrenn, Managing Director, Co-head of Infrastructure Debt, BlackRock

Chris commented on the Commission’s Investment Plan from an asset manager’s perspective. In particular he spoke about how BlackRock selects and designs infrastructure projects and presented the assessment and quantification of project risks.

There is therefore a wall of money for investment-grade projects without much uncertainty. As Chris noted, the European Investment Project Pipeline will catalyse confidence and help the EIB concentrate on valuable projects. Investing in infrastructure is a strategic decision, not an opportunistic one. In addition, connectivity between the procurement authorities and the funding companies should be enhanced to facilitate the relationship between the public and private sector.

However, the European Commission needs to be aware that a government guaranteed debt is not a popular asset. From an asset manager’s perspective, clients are not interested in buying sovereign debt with a low return rate and want good quality investments which are relatively risk-free in return for yield.

This event was our latest contribution to our ongoing work that identifies ways in which the financial sector addresses the policy challenges facing Europe and it sets out how the EU could become more globally competitive. More work is underway building on the ideas of this latest report and please get in touch if you would like to become more involved. You can download a copy of the report here.