Mihails Kozlovs, Latvian Member of the European Court of Auditors:
Increasing EFSI is simply not justified
Policymakers should question the Commission whether the fund is attaining its goal, as extending it at this early stage is probably not the best strategy
Maria Koleva, Brussels
10 February, 2017
Close-up: Mihails Kozlovs is Latvian member of the Luxembourg-based European Court of Auditors (ECA). Before joining ECA earlier this year, he was Deputy Director (Economics, Finance, EU Budget - ECOFIN) and Chairman of the EU Council of Ministers working party on the European Fund for Strategic Investment and of the Financial Counsellors working party during the Latvian Presidency of the EU. Mr Kozlovs has served as well in the Latvian Ministry of Finance and at the Permanent Representation to the EU in Brussels. From 2010 to 2012 he worked as adviser to the Executive Board Director, representing Finland, Norway and Latvia at the European Bank for Reconstruction and Development in London. He holds a Master’s degree in Social Sciences from the University of Latvia and an Executive MBA from the City University London, Cass Business School. Mr Kozlovs is rapporteur on the ECA opinion on “EFSI: an early proposal to extend and expand”, published in November 2016, when we approached him.- Mr Kozlovs, why is it not the right time for the Commission’s proposal that increases and extends the European Fund for Strategic Investments (EFSI), as the ECAs opinion notes? Up to now it triggered a solid amount of public and private investments and the European Investment Bank (EIB) has approved many major infrastructure projects.- First of all, we have to look at the latest regulation that is now in force and we have to understand that the co-legislator has envisaged the discussion about an extension in 2018, based on independent evaluation and track-record of implementation of EFSI that would allow assessing whether it meets all its objectives. Now we are only one year from the start of implementation. The Commission announced its plan to increase and extend the investment fund at the heart of the Juncker Plan and we found little evidence that the increase is justified. From the auditors’ perspective, we don’t have enough information at this stage to judge whether it’s right to extend it now. And in fact, the EIB in its own evaluation said exactly the same, that it is too early to judge about whether EFSI is achieving its objectives. This was basically the main argument for us to say that coming up with an extension at this early stage is probably not the best strategy and this is the advice we are giving to the policymakers, so that they question the Commission on whether EFSI is attaining its goal.- What can be the consequences if this change happens much too early, just a year after the EFSI was launched?- It is difficult to say. We can base our conclusions only on the facts. At this stage I can only state that some of the Commission’s proposals are good, as we say very clearly in the opinion, such as on governance, for example. But the main aim of the Commission’s proposal is to extend the investment period from July 2019 to the end of 2020 and the period in which contracts may be signed from June 2020 to end-December 2022, as well as to increase the EU budget guarantee from €16 billion to €26 billion and the EIB own resource contribution to EFSI from €5 billion to €7.5 billion. We think it is too early to come up with such a proposal.- How can such expansion put under pressure the EU budget for this and the next programming period?- When EFSI was initially created, the EU budget was already put under significant stress. You will remember that we needed to cut considerably two Union’s programmes - Connecting Europe Facility and Horizon 2020, and we also needed to get into the budgetary margins. So, this strain was experienced as recently as in 2015. Now the Commission is suggesting to increase the EU guarantee and the EU guarantee fund. We are effectively creating liability for the EU budget of €26 billion, of which €9 billion will be covered by the guarantee fund and the rest will be contingent liability. And the question now is obviously about how this contingent liability will be managed and monitored in this financial perspective and also in the next financial period and how it will affect the negotiations on the next multiannual financial framework.- Although moderate, there is some economic growth in Europe, and as the Commission’s recent forecast shows, this trend is expected to continue. Isn't this growth tied to the EFSI activities as well?- It’s difficult for the Court of Auditors and for me personally to judge whether and to what extent the data on growth are linked to EFSI activities. I can only note that at the cut-off date for the opinion - 30 June 2016, the amount of disbursement is only around the €1.8 billion, so it’s just this money that has reached the economy. It’s really tough to judge how much EFSI is contributing to economic growth in Europe right now.- In what respect is the proposed increase of the EU guarantee justified for the so called SME window, as the opinion finds?- In our conclusions we said that the Commission proposed an extension to EFSI only one year after its launch and there is little evidence that the EFSI increase proposed by the Commission is justified, except the investments for SMEs where we observed high budgetary consumption. But at this stage we cannot judge whether this budgetary consumption will achieve its objectives. Also, given that budgetary consumption under the investment window is not that high, we suggest it to be further rearranged for the benefit of the SME window. For the latter we should also take into account that the major part of the spending, as we know it, was done by the EIB in the framework of the existing SME budget support programmes, like for example COSME. But we don’t get enough information to see how the genuine EFSI product under SME window has performed.- What are the areas where the EFSI governance and transparency should be clarified and improved?- In our opinion, we are welcoming the Commission’s proposal on EFSI governance. Indeed, the Commission is rightly suggesting to better address the conflict of interests of Investment Committee members and also suggested publishing a scoreboard which this committee basically uses to assess investment projects. In this part of our opinion we also suggested that the decisions of the Investment Committee should contain more information, more justification about why a particular investment operation is approved for the EU guarantee. Especially when it comes to compliance with the additionality criterion.- In what points do you see the potential exaggeration of the impact of EFSI?- Already in one of our special reports published in the summer this year, dedicated to financial instruments in cohesion in the period 2007-2013, we drew the attention of our partners to the issues surrounding financial instruments’ programmes in the EU budget, especially the multiplier methodology. The investment target of EFSI is now €315 billion and it’s very important that we calculate the multiplier effect correctly. In our opinion, we analysed the multiplier methodology that is currently used by the EIB and the Commission and we suggested that they look at the OECD multiplier methodology that we think is a way to reflect the contribution of EFSI more accurately - a contribution to attracting additional investment.- How would the private investors react to the suggested reduction of the provisioning rate for the guarantee fund from 50% to 35%?- We didn’t analyse the potential feedback of investors to the reduction of the provisioning rate. For the private investors, the provisioning rate of the EU budget for the EIB is not of high importance. I think that what they care more about, and this is my personal opinion, is that the investors are getting easier access to capital at better terms and the provisioning rate of the guarantee fund is not directly linked to these variables. The provisioning rate is more important in relationships between the EIB and the budget.- Why is it so important to clarify the treatment for state aid purposes of EFSI operations, which are co-financed from EU funds controlled by Member States?- We have made an analysis of a consultation with stakeholders that took place in September this year. They have pointed out the need to make it clearer what is the state aid treatment when there is a combination of financing from EFSI and the European Structural Fund. We believe that it is important to take on board the stakeholders’ view, therefore we suggested that the Commission should look into this question and potentially develop more precise guidelines on this.- Do you think that that demand-driven project approach is sufficient and is there a need for geographical or sectorial quotas for EFSI?- From the Court of Auditors perspective, this is a decision for the policymakers to take, mainly for the Council and for the European Parliament. In our opinion, we welcome certain efforts from the Commission to address the current issue of geographical and sectorial distribution whereby the limits that are now stated in the investment guidelines are actually currently not adhered to. We welcome the Commission’s proposal and ideas to address this issue but we cannot say what is better, because as I noted, this is a political choice to make.- What is your opinion about the proposed external dimension of EFSI?- I think it is a very interesting proposal and I would say a far-reaching proposal. But at the Court of Auditors we haven’t analysed it yet.- Can the ECA’s opinion be a holdback for the approval of the Commission’s proposal by the European Parliament and the Council, as it is not a special report on the performance of EFSI?- In the current regulation, the co-legislator provided in 2015 three possible scenarios on the basis of the upcoming independent evaluation by the Commission. At the Court we care about sound financial management, we care about the implementation of EU law. The Court provides its assessment and advice to the negotiators but it will be up to them very soon to make a decision on whether to extend and expand EFSI as per the Commission’s proposal or to act otherwise. We’ve already sent the report to all our institutional stakeholders, and it was published also on our website. We also stand ready to provide any clarification the policymakers might need to make the right decision. But I’d like to point out that soon we will start working on a special report on EFSI, which will be published in 2018.