The EFSI Legacy: Between markets and states

Part 4 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.

By the mission and yardstick that were defined in the EFSI regulation, it has been a success. It is also still relevant as it reaches the end of its life, even though the focus of the initiative has naturally changed with the emergence of new policy goals (for example, a 40% target for investment in climate action) and the evolution of different market failures or suboptimal investment situations.

EFSI dashboard*

European Investment Bank economists used a well-established economic model to assess the future impact of the investments supported by all its operations, as well as for the loans made by the Bank specifically with the EFSI guarantee. Their findings demonstrate that the EIB Group’s loans laid the foundation for long-term growth, beyond providing an immediate boost to the economy. The impact of the EFSI loans is significant. Economists estimate that by 2022, investment under EFSI will increase EU gross domestic product by 1.9% and add 1.8 million jobs compared to the baseline scenario.

Expected impact

To measure EFSI’s impact, EIB economists had to account for the complex interaction between the Bank’s operations and other activities in the economy. They teamed up with the European Commission’s Joint Research Centre in Seville and worked with an economic model called RHOMOLO that was used to calculate whether increasingly scarce public financing was being used effectively.

One of RHOMOLO’s main strengths is that it captures:

• the short-term impact on economic activity;
• changes in productivity and growth in the longer term.

For example, if the EIB finances a road with EFSI support, there is increased economic activity as the road is built. Once the road is complete, the EIB financing continues to generate positive effects because the road reduces travel times and transport costs, thus increasing productivity, growth and job creation. To truly assess the impact of EFSI financing, all these factors have to be measured.

The EFSI Steering Board

In setting up and operating EFSI, the role of the Steering Board was vital. EFSI Managing Director Wilhelm Molterer and Deputy Managing Director Iliyana Tsanova would like to thank the Steering Board, in particular for the insights and guidance of Chairpersons Kerstin Jorna and Gerassimos Thomas and European Investment Bank Vice President Ambroise Fayolle. Molterer and Tsanova add that they are also deeply grateful for the dedication of the staff of the European Investment Bank and European Investment Fund and for the work of the EFSI Secretariat.

Inside EFSI: Confronting COVID-19

EFSI has demonstrated the significant potential harboured by the use of public financing via loans and guarantees, which are an important complement to direct grant financing. It also provides a blueprint for how to fight a crisis. The role it played in the EIB’s response to COVID-19 is a telling example.

When the coronavirus struck, the European Commission joined forces with EU Member States and European institutions to prepare a swift and massive relief package for businesses devastated by the pandemic. EFSI was already at work, immediately delivering hundreds of millions of euros in financing for projects aiming to fight COVID-19.

With EFSI backing, the EIB financed a €50 million deal in May 2020 to fund the COVID-19 trials run by German-Israeli company Pluristem for its treatment using placenta cells to fight infections. In June, the Bank used the EFSI guarantee to provide Germany’s BioNTech with €100 million in financing for its COVID-19 vaccine programme.

“EFSI shows what can be achieved with scarce financing when public and private forces are combined,” says Wilhelm Molterer. “This experience is becoming even more important, given the huge challenges ahead of us.”

One such challenge is climate action. Despite the demands of COVID-19, EFSI is surpassing its targets on this front too. With its mandate extended and increased in 2017, EFSI exceeded its final target of supporting €500 billion in investment six months ahead of schedule, even as it adapted to the impact of COVID-19 on Europe’s economy.

Tsanova adds, “I was excited to see how fast we managed to adapt our strategy and respond to the COVID-19 crisis. We were able to quickly provide urgently needed liquidity to support companies impacted by the pandemic as well as funding for companies working on the development of cures and vaccines. Flexibility is the key to success.”

At a time when budgets are tight and public financing must make every euro go further, EFSI’s structure—and its success—has been remarkable. Its record “will prove useful in the time ahead,” says Molterer.

Before the COVID-19 crisis, Molterer might have expected that the “time ahead” would mainly include the investment components of the European Commission’s European Green Deal and InvestEU, the investment programme planned in part as the successor to EFSI. Unexpectedly, EFSI had to show how it could cope with the devastating blow to Europe’s economy delivered by COVID-19.

EFSI’s immediate response to COVID-19 illustrates the careful thought that went into its original structure and governance, and how finely tuned its operations have become. Some of those best placed to observe these workings sit on EFSI’s independent Investment Committee, which ensures that the European Investment Bank deals proposed for backing by the EFSI guarantee meet the criteria defined in the programme’s regulations.

One member of the Investment Committee, Gordon Bajnai, a former prime minister of Hungary who heads global infrastructure at investment adviser Campbell Lutyens, describes a crisis such as COVID-19 as “like a tsunami. If you survive the first wave, you have a chance to rebuild. If the systems of industrial production are broken and collapse, it can take decades to rebuild—or they might be rebuilt somewhere else, not in Europe.”

That makes EFSI’s swift response to the coronavirus pandemic key. Bajnai, who led Hungary during the financial crisis, says that “in a crisis, money that is given fast is worth three times as much as money given later on.”

*This report is published before the final meeting of the EFSI Investment Committee in December 2020. Therefore the final amount of investment supported is expected to exceed the one disclosed here.