The ‘Juncker Plan’– an initiative announced by the European Commission (EC) in January 2015– has the ambitious objective of boosting Europe’s faltering economies by delivering €315 billion of infrastructure investment by 2017.Securing this amount of funding will be a challenge, but should be possible with initiatives such as the European Investment Advisory Hub, says Michael Wilkins, Managing Director of Infrastructure Finance at Standard & Poor’s
European economies remain weak, in part, due to a high infrastructure investment deficit – i.e. a shortfall in spending compared to historical investment levels. To address this, the European Commission (EC) formally adopted the ‘Juncker Plan’ – named after EC president Jean-Claude Juncker – at the start of the year and formally approved in July 2015.
The plan, which has identified a pipeline of 2,000 projects worth an estimated €1.3 trillion, aims to create more jobs and boost economic growth in Europe through increased infrastructure investment over the next three years. But with only €21 billion coming from the public sector, the plan hinges on a significant increase in private investment. As such, convincing investors that the identified pipeline offers lucrative investment opportunities will be key to its success. To this end, the EC has set up the European Investment Advisory Hub (EIAH) to provide investors and project sponsors with a one-stop-shop for expertise and guidance.
Building a case
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The burgeoning infrastructure deficit in Europe is a real concern for many EU member states. For instance, Bruegel – a Brussels-based think tank – has estimated the combined infrastructure deficit of the EU-15 (Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden, and the U.K.) to be about €260 billion since 2006. We estimate the 20-year accumulated investment deficit in the U.K. alone to be about £64 billion (approx. €86 billion).
Furthermore, a study commissioned by the EC and EIB in November 2014 identified that EU investment in 2013 was 15% (€430 billion) below its pre-crisis peak in real terms. If investment does not pick up soon, compliance with the EU’s fiscal rules – which set numerical targets for budgetary aggregates – will be very difficult for EU member states to achieve.
Such investment is particularly important for Europe’s beleaguered economies. Indeed, spending on infrastructure has been shown to benefit the economy far beyond the initial sum invested. For instance, simulations show that each additional £1 spent on infrastructure in the U.K. would increase real GDP by £1.9 over the following three-year period. We also predict that additional spending of 1% of GDP in the U.K. would add more than 200,000 jobs in the same timeframe.
Public funding leads the way
While the need for greater infrastructure spending is clear, many question how the EC’s ‘Juncker Plan’ will realise €315 billion of additional infrastructure investment in the relatively short time-frame proposed – only three years. The EC’s answer is to kick-start the plan with an initial investment of €21 billion from the European Fund for Strategic Investment (EFSI), made up of €16 billion from the EU and €5 billion from European Investment Bank (EIB). The hope is that this initial €21 billion will attract up to 15 times more through the “crowding-in” of private investment.
Indeed, converting €21 billion of EC funding into €315 billion of real long-term investments in just three years is no easy feat. It will require a significant amount of large-scale private investment, particularly from institutional investors such as pension funds and insurers.
European Investment Advisory Hub instils confidence
The success of the plan, therefore, relies on convincing investors that the pipeline of projects provides attractive and viable investment opportunities. One way to do this is to ensure careful project selection in the initial stages, so that funding is allocated to areas where it will produce the best returns.
With this in mind, the EC is encouraging project sponsors to make use of the newly-launched European Investment Advisory Hub (EIAH), which will act as a key pillar of the ‘Juncker Plan’. The EIAH will act as single point of entry for questions related to infrastructure investments within the EU – a service which will be especially useful for sponsors without previous experience in project financing.
The idea is for the EIAH to combine the expertise of the EC, the EIB, national development banks, and authorities from the European Structural and Investment Funds to provide the following:
- Technical assistance for authorities and project sponsors;
- Understanding of project eligibility criteria under the EFSI regulation;
- Local knowledge; and
- A platform for peer-to-peer information exchange and the sharing of project development knowhow.
Certainly, free access to assistance and advice from a professional advisory body such as this will be crucial in helping projects to thrive. Evidence of successful projects will, in turn, help to convince investors that the ‘Junker Plan’ is achievable and realistic, thus, stimulating the scale of investment necessary.
Undoubtedly there is demand from private investors for infrastructure assets. Not only do projects generally offer better yield than investment-grade sovereign bonds or corporate debt, the type of returns match the long-term liabilities of insurers and pension funds. If this demand can be fulfilled by the establishment of attractive investment opportunities, we can be hopeful that infrastructure projects will be realised – providing a significant boost to the global economy. And, in this respect, Europe may provide an example for others to follow.