28 April 2021

The European Infrastructure Plan

Juliette Cohen

Strategist

In 2020, the European Union gave birth to the largest stimulus plan it has ever funded: NextGeneration EU. This European recovery plan will mobilize 750 billion euros in addition to the 1,074 billion euros planned for the multiannual financial framework 2021-2027 to rebuild Europe post COVID19. The slogan is simple: "a greener, more digital and more resilient Europe". It is a question of taking advantage of this historic budgetary effort to provide funding in the sectors deemed priority by the European Union.

This text proposes to carry out an inventory of European spending on infrastructure. He will notably discuss the evolution of infrastructure spending, give an analysis of the financing methods used by governments as well as a view on the priorities of Next Generation EU but also highlight the execution risks linked to the European recovery program.

Evolution of public spending level on infrastructures in Europe

In Europe, public spending on infrastructure reached on average just under 3% of GDP in 2018, a level very close to that observed in the United States, for example. On the other hand, this figure appears more modest if we compare it to the figures observed in certain Asian countries such as Japan or South Korea where the States devote nearly 6% of their GDP to public investments.

Infrastructure spending is one of the first items impacted by budget restrictions. Thus, since the financial crisis of 2008, we have witnessed a decreasing trend in public investment in infrastructure in Europe, which accelerated after the sovereign debt crisis and the fiscal consolidation that followed. As a result, 24 of the 28 European countries saw their public investment expressed as a percentage of GDP decline between 2007 and 2017. From 2017, public investment nevertheless started to rise again.

In Europe, on infrastructure as on many other subjects, the situation turns out to be very different from one country to another depending on the quality of the stock of existing public infrastructure and the desire to develop public infrastructure.

For example, Sweden spends almost 5% of its GDP in 2019 on public investments while Germany spends less than 3%. The less developed countries of Europe were able to benefit from European funds like Portugal where investments in public infrastructure peaked at more than 5% of GDP in 2010 before returning to 2% on average with the phase of budgetary consolidation. Romania devoted more than 6.5% of its GDP to its infrastructure investments in 2008 and although this proportion has fallen since, it remains nevertheless well above the European average.

In parallel to this decline in public investment, private investment also fell as a percentage of GDP, but to a lesser extent, before recovering in recent years. This decline in private investment may have resulted from both a lack of prospects for demand, a lack of visibility, particularly in regulatory matters in certain sectors where investments are made over the very long term (energy networks or telecommunications networks for example) but also difficulty in mobilizing private investors for projects with a high risk profile.

These joint declines in public and private investment, which fell from 22.4% of GDP in 2007 to 20.1% in 2017 for the European Union, contributed to the constitution of an "investment gap" which represents the difference between investment needs and those actually achieved. In some cases, investments are lower than the capital depreciation observed over the period and that has led to a decline in the value of public infrastructure. This underinvestment has also negative effects on potential growth and productivity in Europe.

What are infrastructures needs?

The European Investment Bank estimates1 the investment need for infrastructure related to energy, transport, water and telecommunications at € 688 billion per year in the European Union. Social infrastructure investment needs (health, education, social housing) are estimated at € 142 billion per year. Overall, infrastructure needs amount to around 5% of the European Union's GDP.

According to an IMF study of 20142, there was a budgetary priority given by the governors to the development of new infrastructures over the maintenance of the old ones during the 10 previous years. However, there is a real need for expenditure for the maintenance and replacement of old and obsolete assets, but also for terminating unfinished connections, whether for example in transport networks or in electricity networks.

Today, three priorities stand out in Europe:

  • Modernization of existing infrastructure, particularly civil engineering, taking into account safety requirements (bridges) and support for climate transition (rail and public transport). They are largely linked to the Trans-European Transport Network (TEN-T) project, which plans to develop a central transport network by 2030 and a global network by 2050 via both road and rail.
  • Energy transition and the development of new infrastructures adapted to new practices (electric vehicles, change in electricity production methods, etc.). They are part of the clean mobility strategies and of the Union's energy strategy. For example, clean mobility development policies have defined targets for the deployment of charging stations for electric vehicles. Today, Europe has 250,000 electric vehicle charging stations and the goal set under the Green Deal is to reach one million charging stations by 2025.
  • ​​​​​​​Digital infrastructures and in particular connectivity (Wi-Fi, 5G, fiber, etc.) are part of Europe's Digital Strategy.

Financing methods / Public Private Partnership / National vs European level

It appears relatively difficult to quantify the amount of public investments made in infrastructure given the complexity of the funding methods and the very different situations between European countries. For example, Public Private Partnerships (PPP) are generally not considered as public investments even if they mobilize public funds or substitute for public funding in some cases. The global vision is made more difficult by the presence of different levels of funding that can be achieved by local authorities, the State and mobilize European funds.

La lecture est également rendue plus difficile par la présence de différents échelons de financement qui peuvent être réalisés par les collectivités locales, l’Etat et mobiliser des fonds européens.

On average, local authorities finance a little more than half of infrastructure investments in the euro zone according to Eurostat data. However, this distribution varies greatly from country to country. Nearly 70% of civil public investment is made by local authorities in France and in Germany 60%.

    European funding can thus be mobilized to develop infrastructures, in particular through the following
    mechanisms that aim to support the economic, social and territorial cohesion policy of the Union:

    • The European Regional Development Fund (ERDF), which can intervene in 4 areas: digital, innovation and research, the low-carbon economy and support for SMEs.
    • The Cohesion Fund (CF) finances transport and environment projects in Member States whose gross national income (GNI) is less than 90% of the Community average (15 countries concerned over the period 2014-2020) in order to reduce economic and social disparities within the area.
    • The European Agricultural Fund for Rural Development (EAFRD) and the European Maritime and  Fisheries Fund (EMFF) focus on investments in their sectors.
    • The European Social Fund (ESF) plays a more indirect role in terms of infrastructure, but it can intervene to finance social infrastructure in Europe.

    The Commission estimates that public investment would have fallen by 45% between 2008 and 2013 in the least developed European countries without the instruments for the cohesion policy of the European Union. European funds have financed nearly € 300 billion of investments through grants via the aforementioned mechanisms for the period 2014-2020, ie 10% of public investments made.

      To increase the funds available to finance projects, the Commission has created several funds, which aim to have a multiplier effect by combining private financing with funds and guarantees provided by the European budget. The best example of this type of device is the Invest EU fund (ex Juncker plan).

        Exemple of the Juncker Plan

        In a context of a very slow economic recovery in Europe and a low level of investment, the investment plan for Europe or the Juncker plan, presented in 2014 by the President of the European Commission, aimed to reverse this trend thanks to a program of €315 billion of new investments in risky sectors that suffering from a lack of financing and struggling to develop within the European Union.

        To achieve these objectives, the European Union, together with the European Investment Bank (EIB), created the European Fund for Strategic Investments (EFSI), the objective of which is to remedy the investment deficit of Europe by setting up an investment support system based on the mobilization of the private sector.

        The total package of 33.5 billion euros of public funding, comprising 26 billion euros from the EU budget,
        supplemented by 7.5 billion euros from the EIB has unlocked more 500 billion euros of additional investment across the European Union since 2015, well above the original target of 315 billion euros. An amount significantly higher than the initial objective of 315 billion euros.

        To ensure the appropriate use of the EU guarantee, EFSI has a governance structure made up of a steering committee and an investment committee. The steering committee decides on its strategic direction, the strategic allocation of its assets and its operating policies and procedures. The investment committee is responsible for selecting projects to receive financing from the Fund, after an initial examination by the EIB. The selection of projects by the committee is made on the basis of the general
        objectives set by the EFSI regulation as well as the guidelines set by the steering committee.

          But what impact has this plan had on the Europeans life? In addition to funding innovative projects and new technologies, the Juncker Plan has supported other EU objectives, such as digital, social and transport policy. Thanks to EFSI, 10 million households have been supplied with renewable energy and 182 million passengers benefit each year from improved rail and urban infrastructure, more than 8 million very high-speed lines have been activated and 28.3 million electricity meters. smart energy
          have been installed3.

          Four years after the establishment of this mechanism, the European Commission is pleased with the results obtained. In 2019, investments under the Juncker Plan increased GDP by 0.9% and led to the creation of 1.1 million jobs. In addition, investments in the EU have returned to pre-crisis levels and continue to increase.

          While the growth objectives have been achieved, the European Court of Auditors presented an audit4 of the plan pointing out the lack of risk-taking of the projects financed as well as the geographical disparity in funding: the Juncker plan remains unevenly distributed over the territory of the European Union. Indeed, it is the most developed countries of the EU that have benefited the most. France tops the rankings.

            Presented on 6 June 2018 by the Vice-President of the European Commission Jyrki Katainen, the InvestEU program intended to mobilize a new wave of investment of at least 372 billion euros succeeds the Juncker plan for the period 2021-2027, which corresponds to the EU's multiannual financial framework.

              Green Deal and Next Generation EU

              In addition to national efforts, the European Commission unveiled its proposed “Next Generation EU” recovery plan last May. The ambition of this plan is twofold: to enable a rapid and strong economic recovery for the European Union as a whole, while accelerating the green and digital transition essential to its future.

              The European recovery plan will make it possible to mobilize 750 billion euros (390 in grants and 360 in loans) in addition to the 1,074 billion euros now planned for the multiannual financial framework (MFF) 2021-2027. The historical nature of the recovery plan is based on its method of financing, which will be provided by a common loan which can be repaid until 2058 through the creation of new own resources. The first have already emerged at the start of the year, such as the plastic tax. New devices could also emerge by 2023 such as a carbon border tax and a digital tax. If these proposals fail, the European
              Commission could, on the other hand, be forced to request an increase in national contributions, paid directly by member states.

                Next Generation EU is based on three pillars:

                • The recovery and resilience facility (RRF) provides € 672.5 billion (almost 90% of the total budget) to support reforms and investments by Member States for a sustainable recovery;
                • REACT-EU provides 47.5 billion euros for support for the recovery in favor of European cohesion and territories;
                • An envelope of 30 billion euros for the financing of various projects such as Invest EU (10 billion euros).

                Participation in the green and digital transition is becoming an important criterion for evaluating the
                national recovery and resilience plans by the Commission. As part of the RRF, Member States must present their economic recovery and resilience plan in full alignment with European values and criteria , in order to access funds.

                It is in light of this importance given to the energy transition that the Green Deal was born, an ambitious plan for the environment aimed at making the Union carbon neutral by 2050. To achieve this, almost every major aspect of the European economy will need to be overhauled, from energy production to food consumption, from transport to manufacturing and construction.

                This pact will take the form of new regulations on strategies for agriculture, hydrogen, building renovation, offshore wind energy, methane pollution, sustainable investment and the circular economy. As these come into force, the 27 member countries will be monitored to ensure that they implement the new rules.


                  Risk of execution and delay

                  In addition to the issues related to the good level of public investment in infrastructure and the risk of
                  underinvestment, we can also raise those of the effectiveness of the investments made. It is a question of evaluating whether the infrastructure investments have been made and if so in the right area, for the right project, under the envisaged conditions and with the expected results? The answers to these questions are difficult as public Investment is long lasting and it often takes years before the expected effects are manifested.

                  A recent ECB study5 estimates that during the last two cycles of the Multiannual Financial Framework, 2007-2013 and 2014-2020, less than 50% of EU structural funds committed to euro area countries have been paid over a period of six years comparable to that of the NGEU. It also notes strong variations in the speed of absorption of European funds between the countries of the euro zone.

                  On the 2014-2020 budget, the European Commission estimates that only 56% on average of the funding
                  provided for by the Structural and Investment Funds of Europe (ESIF) was actually spent at the end of 2020. This figure drops to 43% for Spain or 51% for Italy and rises to 82% for Finland. There is therefore a real stake in improving the effective implementation of European programs in order to have a truly effective budgetary policy. This question appears to be central today, as the Next Generation EU fund is the European instrument which aims to allow fiscal stimulus in certain European countries particularly affected by the Covid crisis.

                  To face this risk of under-spending of European funds, a European regulation5 established the structural reform support program in 2017 in order to help member states to develop and implement reforms that promote growth, in particular through the efficient and effective use of Union funds, whether under the Structural Funds, the Cohesion Fund or other programs.

                  A regulation of February 10, 20216 establishes a technical support instrument on the same model. The MFF also establishes that each project must be accompanied by easily quantifiable objectives and will be the subject of an annual performance review. The European Court of Auditors is responsible for carrying out audits on European programs and the action of European bodies. In its “Report on the performance of the EU budget - Situation at the end of 2019”, it welcomes the fact that the European
                  Commission has started to carry out systematic evaluations of the performance of committed expenditure (Programs Performance Overview) and mentions areas for improvement to enhance transparency of the actions carried out.

                  The Court also issues opinions on the quality of the results obtained by EU policies in relation to the objectives assigned to them. If we take the example of climate policy, it points to the poor cost-effectiveness of actions aimed at achieving the EU's climate and energy objectives. She believes that the excessive subsidy of certain renewable energies, the lack of coordination between Member States
                  and regions, and the lack of cost-benefit assessment of projects limit the effectiveness of the action of European funding in this area.

                    Conclusion

                    After a decade of declining public and private investment in infrastructure in Europe, the introduction of the Juncker plan marked a change in trend and was a real success in terms of the amounts mobilized. It was also an opportunity to develop the methods of selection and monitoring of European projects and thus to strengthen their governance. Today, Next Generation EU and Invest EU will take over and support the post-crisis recovery of Covid and the climate transition. While it is necessary to underline the progress they bring through a common budgetary response, it should also be borne in mind that the amounts they will mobilize only represent around half of the Union's investment needs and that there is a risk of under-spending of the funds allocated in certain countries of the Union. However, aware of this risk, the Commission has been particularly vigilant in approving national recovery and resilience programs.

                      1. EIB - Restoring EU competitiveness, 2016 updated version
                      2. Public Investment, Public Finance, and Growth: The Impact of Distortionary Taxation, Recurrent Costs, and Incomplete Appropriability, April 2014 The Juncker Plan’s impact on jobs and growth, European Commission
                      3. The implementation of the Juncker plan, Cour des comptes (France)
                      4. Towards an effective implementation of the EU’s recovery package. Nico Zorell and Sander Tordoir, ECB Economic Bulletin, Issue 2/2021.
                      5. European regulation UE 2017/825
                      6. European regulation UE 2021/240

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