EIB Financing in EU Municipalities

Krzysztof Szyszko OPEN DAYS 2006

European Week of Regions and CitiesBrussels, 9-12 October 2006

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CONTENT

• EIB lending priorities and activity

• Lending to Local Authorities

• Features of EIB financing

EIB LENDING PRIORITIESAND

ACTIVITY

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EIB - A “POLICY-DRIVEN BANK”

• Established by the Treaty of Rome in 1958 • The “House-Bank” of the European Union• Mission:

– to support implementation of EU policies by providing long-term loan finance for projects promoting European integration

• Financial highlights

– Subscribed capital EUR 150 bn– EIB shareholders: 25 Member States of the European Union – EIB’s lending in 2005: EUR 47.4bn– EIB’s borrowing in the capital markets in 2005: EUR 50bn

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EIB LENDING PRIORITIES

• Economic and social cohesion in an enlarged EU

• Research, Development and Innovation

• Trans-European and Access networks

• Environmental Protection and Improvement, including Climate Change and Renewable Energy

• Support for SMEs

LENDING TO LOCAL AUTHORITIES

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EIB and LOCAL GOVERNMENTS

• The EIB as an institution originally conceived for lending to Member States

– The Member States as the traditional Bank’s counterparts• The shift of the 1990’s

– EU-led developments• EU “Subsidiarity Principle”

– Devolution of responsibilities to lower levels of government

• Organization of EU Cohesion Policy with sub-national levels as implementers of national and European policies

– State-led developments• Trend towards administrative and fiscal decentralisation• Greater political and economical presence of regions and cities• Greater presence of sub-national entities in capital and credit markets

• A trend to stay:– EU recognised strategic importance of regions and cities for growth and employment

» Need for a “sustainable urban development” objective of 2007-2013 cohesion policy– Greater responsibilities delegated to Regions and Cities in the 2007-2013 cohesion policy

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URBAN ELEMENTS – INVESTMENTS IN THE EIB SCOPE OF FINANCING

Water & Waste Water

Urban Revitalisation

Quality of Life

Roads & Public Transport

Health & Social Care

Social Housing

Waste Disposal

EnergySchools & Education

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EIB LENDING ACTIVITYFOR PUBLIC AUTHORITIES

• EIB 2005 total lending volume within the EU: EUR 42bn

• The average share of Public Authority Lending over the last five years amounts to some 35%

• Over the last 5 years, Public Authority Financing reached EUR 70bn

• Public Authorities include Member States, but mainly Regional & Local Authorities and public sector companies specific

• Include direct and indirect lending structures through banks

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RATIONALE FOR EIB PARTICIPATION IN A PROJECT

The EIB can become involved either:

Up stream, where the EIB financial contribution is critical and the EIB’s technical know-how can influence the project’s concept,

Down stream, where the EIB’s contribution supports the overall financial package, or

Horizontally, where the EIB’s loan amount complements EU grants (grant + loan =<90%).

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EIB PROJECT CYCLE

Project eligibility

Signing and disbursement

First contact

Project Due diligence•Economic•Technical•Environmental•Financial

Board of Directors’ approval

ManagementCommittee approval

Loan documentation

Monitoring•Project•Borrower•Guarantor

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Lessons from EIB experience: Criteria for municipal investments

• Quality of Strategic background

– Clear objectives and performance benchmarks• Robust local administrative systems

– “Ownership” and management of the investment scheme• Effectiveness of implementation agencies

– Commitment and understanding at all levels– Experience of staffing

• Critical size• Communication• Critical time-span• Optimisation of financial resources

– EIB loans– Cohesion Policy Funds– Budget resources– Other IFIs

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SAMPLES OF PROJECTSFINANCED BY EIB

• Urban renewal in Liege and Mons, Belgium

• Preservation of the social, architectural and historical heritage: Florence, Rome, Dublin, Athens, Barcelona

• 7 major housing improvement schemes in the UK

• Urban transport system improvements: Lyon, Madrid, Athens, Lisbon, Berlin, Budapest, Prague

• Extension of the underground network - Rome

• Waste water treatment plant – Amsterdam

• Regional schools’ development programme North Lanarkshire, UK

FEATURES OF EIB FINANCING

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HOW IS THE EIB LENDING?

Investment Lending

Single Projects with a cost exceeding EUR 25 million, financed directly by the Bank or via an intermediary credit institution

Framework Lending

Instrument developed to assist public authorities faced with large multi-sector investment programs

Global Lending

Indirect financing of small and mid-sized investment schemes via partner banks

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WHAT ARE THE CONDITIONS OF EIB LENDING?

Quality of credit conditions due to:- Triple AAA standing- Liquidity of EIB bond issues- Non-’profit’ organisation

– Large durationsUp to 25 years and, in exeptional cases, up to 30 years

– Long « Grace periods »Up to 6 years

– No commitment fees– Flexible interest rate formulas that can be targeted to cash-flow of the underlying

project– Different security options – sovereign and bank guaranteed, direct lending without

guarantees, PPP’s? ..

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EIB COUNTERPART REQUIREMENTS?

Detailed assessment carried out on all fiscal, financial, legal and operational features of the public authority…

“should be underpinned by a strong local economy, a sound revenue-generating base, and sufficient size in terms of population and revenues and by an adequate degree of fiscal and financial autonomy.”

“A legal analysis must also confirm that the regulatory regime applicable to public authorities is such that, taken together with a financial position, demonstrates a capacity to repay the Bank's loans..

Acceptable financial and security structure

Direct loans

At least investment grade or the equivalent.

Prudential financial ratios

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EIB PROJECT REQUIREMENTS?

Projects should:

Be eligible for EIB finance;

Be technically sound;

Be financially viable;

Show an acceptable economic return;

Comply with environmental protection and procurement regulations;

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BENEFITS OF EIB FINANCING

• Flexible approach to projects – framework financing for municipal long-term investment programmes – up to 50% of project costs

• Low cost of funding, due to excellent – „AAA” – financial rating of the Bank and funding benefits passed on to the clients

• Flexibility in financial structure – long maturities, various options for currency and interest rate choice

• Supplementing EU Structural and Cohesion Funds, up to 90% of project costs

• Long lasting presence In the European market and expertise in various economy fields throughout the EU

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CONCLUSIONS

• A greater involvement of the EIB towards municipal lending

– Cities as “Engines of growth” • important actors for integration and economic

convergence• direct responsibility for investments

• An updated EIB’s mission supporting EU priorities

• Cohesion policy• Lisbon Process• Education and Research

• New developments supporting European territorial administrations

• Jaspers• Jeremie

• New Board of Governors’ guidelines

• Greater risk• Larger recourse to Public-Private structures

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CONTACT

European Investment BankLending Operations in Poland

Fax: +352 43 79 74 98

Krzysztof Szyszko, Loan Officer, Tel: +352 43 79 74 59szyszko@eib.org

http://www.eib.org/

THANK YOU