Pension funds, take note. Jean-Claude Juncker, European Commission president, wants your money to invest in a laundry list of up to 2,000 projects totalling €240bn in infrastructure and €75bn in small and medium-sized enterprises (SMEs). More precisely, the new European Fund for Strategic Investment (EFSI) will create senior debt tranches for investment in projects including integrated power grids, alpine rail tunnels and Romanian motorways.
The European Investment Bank’s (EIB) project bond credit enhancement (PBCE) and bond initiative is seen as a model; the EFSI has been described as “PBCE on steroids”.
The EFSI will take €5bn from the EIB and €16bn in EU guarantees; the Commission estimates €1 of protection can result in €3 of subordinated debt per project, creating a safety buffer for private investors, and that €1 of subordinated debt enables €4 in senior debt and €1 in subordinated, resulting in the 1:15 multiplier effect.
The EFSI will invest in riskier projects or take the junior tranches in lower-risk projects, leaving the senior tranches for external investors.
Projects will need to make sense from an investment standpoint, so a key objective will be to navigate the twin goals of providing an attractive investment return and the need to channel the investment assets most effectively towards the projects and companies most likely to provide growth.
The EFSI’s proposed administrative council will be crucial to the success of the initiative: it must be independent and impartial if it is to attract investor confidence, and it must have the right level of technical expertise. The spectre of Japan’s ‘bridges to nowhere’ in the 1990s has not gone away, and S&P has already picked holes in some of the proposed projects.
Experience to date shows that institutional investors like high-quality infrastructure projects in sectors such as energy, and are highly allergic to political interference, as experience in Norway (the repricing of undersea pipeline tariffs) and Spain (solar energy feeder tariffs) has shown. The right kind of infrastructure project is currently in short supply.
Pension funds have been involved in direct SME financing for some years, and there are already a number of initiatives at play in different EU member states, including the Netherlands and France.
So far, these initiatives are domestic in nature, meaning they are attractive to local investors who can score political brownie points. It is less certain whether cross-border SME financing will be so attractive.
The Commission is also working to a tight deadline as it wants all of the €315bn to be deployed by the end of 2017. Given the nature of investment decision-making, mobilising pension capital by then looks rather ambitious.