Investment barriers in the European Union 2023 E-Book

European Investment Bank

• Herausgeber: European Investment Bank
• Kategorie: Fachliteratur
• Sprache: Englisch
• Veröffentlichungsjahr: 2024

Seitenzahl: 149

Beschreibung

Discover key insights from the Investment barriers report 2023, an authoritative assessment by the European Investment Bank Group on investment hurdles in the European Union. The report underscores the pivotal role of investment in the economy while meticulously detailing the constraints that impede investment at the national and EU level. This year's report takes a particular look at the role of commercial power purchase agreements in renewable energy projects, climate resilience investments in transport systems, antimicrobial resistance, the forestry sector, and cross-border infrastructure projects. It is an essential read for anyone looking to understand the investment landscape within the European Union.

Leseprobe

Investment barriers in the European Union 2023

A report by the European Investment Bank Group

About the European Investment Bank

The European Investment Bank Group is the world’s biggest multilateral lender. We finance sustainable investment in small and medium-sized enterprises, innovation, infrastructure, and climate and environment. We have financed Europe’s economic growth for six decades and are at the forefront of EU crisis response, leading the world in climate investment and backing development of the first COVID-19 vaccine. We are committed to triggering €1 trillion in investment in climate and environmental sustainability to combat climate change by the end of this decade. About 10% of all our investment is outside the European Union, where our EIB Global branch supports Europe’s neighbours and global development.

Contents

Foreword

Executive summary

Part 1: Investment barriers identified in EIB operations

Introduction

Forestry

Commercial power purchase agreements

Resilient roads

Antimicrobial resistance

Cross-border projects

Part 2: EIB Group investment and finance surveys — non-financial corporates and small and medium businesses

EIB Investment Survey 2023 (EIBIS)

A bleak short-term outlook for corporate investment

Investment barriers and finance constraints are elevated and increasing

Pressed by structural transformation needs, investment is showing resilience

The climate emergency is becoming more pressing for EU firms

To remain competitive, European corporates must continue investing

EIF analysis of smaller corporates and small and medium businesses

Annex: EIBIS 2023 country profiles

Foreword

Investment is crucial to the EU economy as it fosters economic growth, job creation and innovation. Investment enhances productivity, infrastructure development and overall competitiveness, contributing to the long-term stability and prosperity of the region. A business-friendly environment provides vital support to the European economy, which is currently facing various deep structural challenges, macroeconomic shocks and fierce global competition, as well as the challenges associated with climate and digital transitions, energy security and social and economic cohesion.

Several barriers hinder investment and economic growth in the European Union, including regulatory complexity, bureaucratic hurdles and differing national policies. Investment barriers diminish the economy’s productive capacity and suppress long-term economic growth and employment. For example, regulatory uncertainty creates risks about the potential revenue of projects, which in turn reduces their viability and therefore investment, private sector interest and innovation. Fragmented markets diminish producers’ incentives to invest by reducing the potential size of the end-market. This makes large investments in research and development or new production capacity even more uncertain and risky. Weak planning and project preparation capacity among promoters in the public sector reduces the efficiency of government investment. This undermines the scope of the public sector to enhance future economic prospects. Without adequate access to finance, companies — especially those that are small or medium businesses – cannot roll out the investment necessary to fulfil their potential to innovate and grow. In turn, this limits the creation of new jobs.

Addressing investment barriers is essential to stimulate financial support and to enhance sustained economic development in the European Union. Many stakeholders in the European Union, most notably the European Commission, but also individual Member States, are committed to removing obstacles to investment. The European Investment Bank Group, with 65 years of project experience and market knowledge across many countries and economic sectors, has first-hand experience of barriers that hamper the implementation of investment projects on the ground. The European Investment Bank’s analysis of project-level investment barriers is aggregated at the economic sector level and constitutes part of project due diligence and the continuous monitoring of the investment environment in which the Bank operates. This experience is directly relevant to EU initiatives that aim to improve the investment environment.

This project experience is further complemented by information gathered through various European Investment Bank Group investment surveys, collecting data on investment barriers from the perspective of EU and US companies. The annual European Investment Bank Group Survey on Investment and Investment Finance (EIBIS) is an EU-wide survey that gathers qualitative and quantitative information on investment activities by small and medium businesses and larger corporates, including their financing requirements and the difficulties they face. Such survey data provide a wealth of unique firm-level information about investment decisions and related financing choices. The European Investment Bank Municipality Survey, covering 744 municipalities across the European Union, gathers data on past and planned investments, as well as the obstacles municipalities face and their progress on digital and green transitions.

The European Investment Fund focuses on small and medium businesses and collects complementary information about investment barriers from the perspective of finance practitioners. The fund regularly performs general and specific market research (for example, by-products, countries or investment theme), undertaking a range of equity and private debt surveys among financial intermediaries. The fund also cooperates with the European Microfinance Network on a survey of microfinance providers. These surveys are powerful information tools. The 2023 European Investment Fund Venture Capital Survey, for example, received 472 responses from venture capital general partners and therefore offers a very representative picture of the market regarding sentiment, challenges and barriers and selected topics of high policy relevance. For example, the topics this year are scale-up financing, European strategic autonomy and the role of people, particularly their skills, and diversity.

Understanding what is happening on the ground and the barriers faced by projects, companies, and finance practitioners when investment projects are designed and implemented is the first step in creating and offering appropriate policy support measures. The European Investment Bank Group continues to build and share knowledge and information about investment barriers and is ready to support policy measures that tackle such obstacles across sectors and EU Member States.

Teresa Czerwińska

Vice-President

European Investment Bank

Executive summary

This report describes and examines barriers and bottlenecks to investment in EU Member States as encountered and observed by the European Investment Bank (EIB) and the European Investment Fund (EIF). In addition, the report includes complementary findings from EIB Group surveys of EU corporates and finance practitioners, with some illustrative case studies.

Economic context

The European economy entered a soft-landing phase in the second half of 2023, with downside risks going forward. Slowing economic growth, high uncertainty and tight monetary policy pose a threat to firms’ investment plans. Simultaneously, the competitiveness of EU firms is increasingly being challenged by structural factors, and investment needs related to digitalisation and climate change are becoming more urgent. Preserving investment for the digital and green transformation and competitiveness of the EU corporate sector during times of tightening fiscal space requires effective and targeted incentives and catalytic public investment.

Summary – Part 1: Investment barriers encountered in EIB operations

At the project level, this year’s report highlights barriers related to climate investments by examining the forestry sector, commercial power purchase agreements (PPAs) and climate-resilient roads. The report also explores a critical issue in the health sector, namely that of antimicrobial resistance. Finally, investment barriers are examined in the context of cross-border projects — investments much needed to ensure efficient functioning of the EU single market.

Forestry

Investments in the forestry sector have the potential to contribute positively to various crucial issues in the sector, such as mitigating climate change, developing the wood-based bioeconomy and protecting biodiversity. However, a lack of coordination between the various policies and strategies affecting the forestry sector can lead to inertia, or even an inability to act. In addition, many wood-processing companies consume a lot of energy and are therefore sensitive to regulations that affect energy prices. The lack of adequate insurance mechanisms is a growing barrier to investment in the forestry sector given the risks associated between increasing forest stocks and more frequent extreme climate-related events, such as forest fires. In addition, forestry sectors across the European Union are highly fragmented in general, with many small and medium businesses and microenterprises, which results in relatively high unit costs. Combined with the high volatility of timber prices, these factors make investment risky and uncertain. Constraints on public sector developers can also increase the costs and risks incurred by private investors when investing in projects involving the public sector. Moreover, while environmental, climatic and commercial contexts have become more complex, the budgetary capacities of the public forestry sector have not increased to the same extent. Finally, assessing the expected benefits of a forestry investment and its degree of risk can be challenging for external financiers (particularly when small companies, startups or innovation investments are involved) if there is not enough information available. This is often the case in the forestry sector, where information on forest resources (species, qualities, dimensions) is often insufficient and/or difficult to access. This makes it difficult for investors in value chain activities to make informed decisions.

Commercial power purchase agreement markets

Technological advances and the steep decline in the cost of renewable energy projects over the last two decades has allowed some markets to develop and operate competitive renewable energy without the need for public financial support. Concurrently, more corporates are seeking to “decarbonise” their operations and are looking for credible proof of such decarbonisation to show their customers and shareholders. Long-term PPAs between a renewable energy project and an offtaker have become an increasingly popular tool to demonstrate the “greening” of corporate power consumption. Policymakers have shown a strong interest in commercial PPAs as they view these agreements as a fiscally attractive way to support the renewable energy sector (instead of public support schemes) and increase market efficiency. Commercial PPAs are a vital tool to de-risk projects (or project portfolios) and are therefore often central to investment decisions. However, the commercial PPA market remains confined to a relatively small number of corporate buyers because of its complexities and the counterparty risk requirements involved. The demand for corporate PPAs from offtakers remains constrained by investment barriers such as a lack of regulation, concerns about creditworthiness, difficulties in managing exposure to power price risks, and the challenges arising from the longer-term nature of commercial PPA contracts.

Resilient roads

Climate change has brought new challenges to preserving the operational resilience of transport systems under stress from the impacts of climate change. While investment is needed to adapt transport infrastructures to the impacts of climate change, additional approaches are needed to anticipate, absorb, accommodate or recover from these impacts. However, there are numerous barriers hindering the necessary investment in climate change resilience. These include the fast-evolving and incipient regulatory environment, its complexity and its lack of legal clarity. The market for road adaptation and resilience is considerable but is currently experiencing fragmentation and a limited and immature supply of specialised services. There is also an absence of broadly accepted methodological standards for resilience solutions. Public project promoters face considerable budget constraints and lack the necessary expertise and strategic policy guidance. In addition, investments in resilience appear to have limited eligibility under national investment budgets. Designing resilience programmes so that they can be classified as fiscal investments, rather than just maintenance, is a prerequisite for facilitating investment in resilience in EU Member States. Enabling and supporting promoters to take advantage of the various EU funds and schemes for investments in resilience would be instrumental in incentivising such investment in the Member States.

Antimicrobial resistance

Antimicrobial resistance directly impacts human and animal health and carries a heavy economic burden because of the treatment costs and reduced productivity caused by sickness. Antimicrobial resistance threatens health advancements made by modern medicine, as routine medical procedures may become impossible to perform due to the risk of untreatable, life-threatening infections. Furthermore, investments to address the problem face numerous barriers. First, the uptake of new antibacterial treatments is slow because new products are reserved for drug-resistant infections to preserve their effectiveness. Consequently, the traditional reimbursement model that underpins the commercial value of assets — where revenues are linked to sales volumes — undervalues advances in the field compared with the benefits they bring to society. This generates a negative incentive for developers and suppliers of novel antimicrobial resistance products that reaches across the value chain, lowering the appeal of research, development and innovation activities in the sector. In addition, differing healthcare systems and budgets across the Member States fragments and complicates the market for companies considering investment. The issues in the field of antimicrobial resistance are often insurmountable for small and medium businesses and mid-cap firms, for which the commercial risk translates into financial risk as it directly increases their cost of capital and ability to attract investors.

Cross-border projects

Cross-border infrastructure projects are central to the completion of the EU single market because they enhance connectivity and reinforce economic and social cohesion. However, cross-border infrastructure projects still face many investment barriers and challenges. Common barriers derive from the inherent nature of cross-border projects, that is, they involve two or more countries and often span difficult terrain. These barriers lead to common consequences such as longer lead times and/or cost overruns compared with typical infrastructure projects that take place within a single country. They may also lead to a lower and more dispersed economic interest linked to an asymmetric distribution of costs and benefits, which can make them a lower priority for one or more of the national governments involved.

Summary – Part 2: EIB Group survey-based evidence

The second part of the report summarises survey findings on investment and financing barriers at the company level. The survey results are complemented by several illustrative case studies. The survey evidence presented covers the view of EU corporates as well as some insights from municipalities and finance practitioners. The findings are drawn from the 2023 edition of the EIB Group Survey on Investment and Investment Finance (EIBIS) and the 2022 edition of the EIB Municipality Survey. In further detailing the financing conditions facing small and medium businesses and emphasising the critical issue of inadequate employee skills as a significant barrier to investment, this section then reports on the EIF SME Access to Finance Index (ESAF) and various EIF surveys of finance practitioners: EIF Venture Capital Survey, EIF Private Equity Mid-Market Survey and a survey on European microfinance providers.

The case studies of skills and education in small and medium businesses illustrate how EIF funding can help overcome investment barriers and exemplify how the EIF addresses a specific thematic priority: supporting skills and education. Investments in skills contribute to growth, competitiveness and social convergence, as well as addressing challenges related to digital transformation in the labour market and the shift to a carbon-free economy and society.

Non-financial corporates and small and medium businesses

This year, high uncertainty and monetary policy tightening have had a major impact on the investment outlook and the barriers to investment encountered by businesses. The 2023 EIB Group Survey on Investment and Investment Finance shows that a growing percentage of firms, particularly small and medium businesses, are reporting financial constraints in both the European Union and the United States. Among longer-term barriers to investment, those most frequently cited by firms were high uncertainty, a shortage of skilled staff, and — particularly in the European Union — high energy costs. Meanwhile, green and digital transitions are continuing on the ground. EU firms have stepped-up investment in advanced digital technologies but still need to maximise the returns from their investments. In addition, the climate emergency is becoming increasingly pressing. While EU firms are investing more in energy efficiency, their investment in adaptation remains too low and the firms face long-term challenges to their global competitiveness stemming from persistently higher energy costs versus those of key global competitors (namely, the United States).

The European Union has proven relatively resilient to the recent sequence of shocks that have hit its economy, including the COVID-19 pandemic and geopolitical turmoil. However, persistent inflation and rising interest rates are adding to the financing challenges faced by small and medium firms in the European Union. Tight financial conditions could prove to be a significant constraint for the ongoing post-pandemic recovery process, as economic growth has been sluggish of late.

Higher interest rates have significantly increased funding costs for small and medium businesses, potentially leading to a deterioration of existing debt portfolios. In addition, higher interest rates are creating a challenging environment for private equity and venture capital, raising concerns about a potential reduction in the supply of risk finance for innovative small and medium businesses.

The short-term risks to growth are on the downside, as Russia’s aggression against Ukraine continues and inflation is set to remain above the target of the European Central Bank (ECB) in the near future. In the medium term, climate risk and mounting mitigation and adaptation investment needs may prove to be an additional risk factor that could crowd out other productive investments. This leaves a vital role for policymakers in ensuring a continuous flow of financing to Europe’s most innovative and most vulnerable small and medium businesses, in the face of rising capital expenditures and elevated capital costs.

The EIF SME Access to Finance Index shows that the COVID-19 pandemic negatively impacted the sentiment of small and medium business owners and that businesses of this size remain more likely to be financially constrained compared with large firms. The index also shows that the COVID-19 impact was particularly heavy for small and medium businesses in South-Eastern Europe, where business sentiment was markedly more pessimistic than in the rest of the European Union.

Financial market practitioners

Private equity or venture capital remains an essential source for startup, young and high-growth companies to create value, often through innovation. Preliminary results from the most recent EIF Venture Capital Survey show that fund managers are particularly concerned about fundraising and the exit environment. At the level of their portfolio companies, recruiting high-quality professionals with appropriate skills remains very challenging. Within the management teams of portfolio companies, skills gaps are observed in leadership/people management, selling/pitching and strategic planning. Fund managers that can provide professional advice and access to networks can help bridge such gaps.