The Club of Long-term Investors

by Franco Bassanini

Franco Bassanini
Chair of Italian Public Development Fund (Cassa Depositi e Prestiti)

Fifty years ago, immediately after the Second World War, some European states realized they could no longer continue to “live” on their own. When Alcide De Gasperi, Konrad Adenauer and Robert Schuman started the creation of the European Community, the reasons of the founders were not only economic but also political, geopolitical, social and cultural. Beside the ambition of creating a barrier against a new outbreak of tragic fratricidal wars in Western Europe, the founders were conscious of the inadequacy of the geopolitical and economic dimension of national states in a global context dominated by big powers such as the U.S.A. and the Soviet Union. However, they soon realized that a Community consisting of six Member States was too small for the new global scenarios. Subsequently, Britain, Ireland, the Iberian states, Austria and most of Scandinavia joined the Community.

After the fall of the Berlin Wall, the enlargement to Eastern Europe became unavoidable. Eastern and Western Europe had been divided for decades by the Iron Curtain but they were united by a common history, culture and geopolitical interests. Nevertheless, it has been a difficult and complex process because of the diversity of development levels and the multiplicity of legal and economic frameworks. This process is still to be completed.
Originally formed by the six founding states, the European Union, after the last enlargement in 2007, includes today twenty-seven Member States. It has now a continental dimension. The EU is the third largest area in the world for population. In addition, it is the first region for GDP. However, it will lose its primacy if it does not increase its rate of growth. As for its political influence, the EU needs to strengthen its political unity to defend a multipolar system of global governance against the risk of a Sino-American bipolarity. In the era of global competition, Europe is in fact a “small continent”. The rhythm of globalization has suddenly increased. Technology allows a worldwide increase in trade, financial and cultural exchange. The economic competition intensifies. Migration brings a large crowd of people to the richest areas of the planet. Today, Europe is realizing it can no longer “live” isolated. Larger economies such as China, India and the U.S.A. compete in the new geopolitical and geo-economic order and large areas of regional cooperation, around one billion people’s worth, gravitate towards these countries. Given the new multi-polar global governance and the economic competition of the new millennium, the EU runs the risk of being inadequate if it does not become the centre of a wider regional system. It should enlarge both to the neighbouring countries of the Mediterranean and the Near East and the Eastern Europe and Western and Central Asia. Therefore, it is important to disentangle the Union for the Mediterranean (UfM) from the political difficulties that hinder its takeoff. In addition, it is necessary to create new instruments for financial and economic cooperation between the European countries and the countries of southern and eastern coast of the Mediterranean. It is of common knowledge that the takeoff of the UfM is facing many difficulties. In the political arena, it suffers from the Israeli-Palestinian conflict on the one hand, and the tendency of Northern and Central Europe to focus on EU’s relationships with the east, on the other. In addition, on the economic and social arena, the gap between the Northern and Southern shores, which is still wide, boosts large-scale migration flows that create integration problems for the countries of the northern shore.
The answer lies in a stronger and more effective cooperation in the political, economic and cultural sectors. Important though they are, both the financial and economic cooperation with these countries will function as a support for the political cooperation. Population dynamics, growing markets, renewable energy – which lack in the northern countries - can be found hundreds of miles southwards. On the other hand, what is missing in the South – such as technology, organization and, therefore, the factors of investment and production - can be found in the North. From Mauritania to Turkey, the countries bordering the Mediterranean amount to nearly 300 million people, they have a growth rate of 1, 5% per year and an economic growth rate of 4-6% annually, despite the impact the financial crisis. The development of these countries is therefore a challenge for Europe’s sustainable growth, competitiveness and political role in the new global scenario.
To this end, first it is important to promote and support businesses, especially SMEs, and create a modern financial sector to ensure the flow of investment needed for a rapid economic convergence between the different areas of the region. The Commission Milhaud, of which I was a member, has revived the idea of establishing a development bank for the Mediterranean to be jointly managed both by the countries of North and South of the Mediterranean (and possibly by the countries of the Gulf). The FEMIP of the European Investment Bank could be its first core, to which other financial institutions could join afterwards: public participation institutions (such as the Caisse des Dépôts, the Cassa dei Depositi, the Spanish Ico, the Moroccan CGD, and, if possible, the German KfW), States and institutions from North Africa and the East, and in case, the SWFs from the Gulf. On the other hand, it is necessary to speed up the building of infrastructure in the area, to finance massive investments in water, energy, transport, telecommunications, health, human resources and urban infrastructure. The demand for infrastructure in the southern Mediterranean will be significant in the next years. According to recent market analysis, in the period 2010-2015, the volume of investment in infrastructure projects in this area will be about 150-200 billion Euros. European financial institutions and enterprises of the construction sector could be largely involved in the financing and implementation of infrastructure projects. However, it is impossible that – given the current fiscal crisis of the European states due to the financial crisis of 2008-2009 - these investments are supported by a handout from the European Union or its individual Member States. Indeed, handouts are less available even for European infrastructure projects.
Nevertheless, Europe can rely on some important assets:
1) The high propensity to save of households;
2) The strength and reliability of European economy and institutions;
3) The growing need for emerging economies to diversify monetary reserves, loans and investments, which today gravitate around the dollar area. With the support of a system of rules and incentives, an increasing proportion of household savings in Europe, as well as other private and public capital from Europe and abroad can be channelled towards the financing of infrastructure investments that guarantee a safe and stable yields over time both in Europe and in the Mediterranean. The meeting between the supply of long-term and low-risk loans and the demand of infrastructure financing may consist of a series of innovative financial instruments that can collect and channel private capital towards long-term investments. An important role in their definition, promotion and implementation will be played by a “family” of public-capital institutional investors, such as the Cassa Depositi e Prestiti (CDP), the European Investment Bank (EIB), the French Caisse des Dépôts et Consignations (CDC) and the German KfW. Thanks to the public or “social” nature of their stakeholders (states, local governments, foundations, bank), which is often characterized by state guaranteed special instruments, investors can collect private capital to finance activities that guarantee a safe and not-speculative yield, even if deferred over time. The “InfraMed” Fund was established in order to finance infrastructure in the countries of southern and eastern shores of the Mediterranean. The Fund is the first operational instrument adopted within the framework of the Union for the Mediterranean. It will intercede for the development of energy, environment, telecommunications, transport and urban infrastructure. InfraMed will be the largest infrastructure fund of the area. The agreement establishing InfraMed was signed in Paris on May 26, 2010 by CDP, CDC, Bei, Caisse de Dépôt et de Gestion of Morocco (CDG) and the Egyptian EFG-Hermes. The collection of additional resources from new investors will be possible up to achieving the maximum size of the fund amounting to 1.2 billion euro of equity capital by November 2011. In addition, the Fund will be provided with further 2-3 million euro’s worth of debt facilities.
The Fund has a regional vocation. The countries involved are Algeria, Egypt, Israel, Jordan, Lebanon, Libya, Mauritania, Morocco, Palestinian Territories, Syria, Tunisia and Turkey. The inclusion and the participation of Israel in a fund partially financed by Arab countries are noteworthy. The fund will focus on long-term diversified investments with a significant but not speculative IRR (internal rate of return), which will promote the economic and social progress of the countries involved. In addition, it will support the economic recovery of the Mediterranean region by offering new opportunities to European businesses. In contrast with other infrastructure equity fund, InfraMed will promote greenfield projects with particular focus on sustainable development. Its chief objective is the promotion, in the market competition, of investments in projects on infrastructure within an area characterized by the highest rate of urban growth in the world. Its governance structure will ensure the independence of management, considering the nature of the main long-term institutional sponsors.

InfraMed, along with the equity fund for the financing of European infrastructure called “Marguerite”, is a good example of a “family” of investment funds that could play a significant role as instruments for the raising and exploitation of private capital in long-term strategic projects. Besides, it can be a spur for the industrial or financial investors unwilling to investment in this sector at their own risk. However, the establishment of a regulatory framework will be crucial to promote long-term investments, both for accounting and prudential rules and for fiscal and financial incentives. To encourage these reforms, a “Club of long-term investors” was established by EIB, CDC, CDP and KfW. One year after its creation, it gathers financial institutions with total assets of about three thousand billion euro, including China Development Bank, Russian Development Bank and some SWFs of the Gulf.
In a wider context, InfraMed has its own specific role: it can contribute significantly to the revival of a strategic Mediterranean cooperation. It will contribute to make the Mediterranean a “laboratory” for a development model, which can valorize the diversity of its cultures, deal with the dramatic issue of climate change and invent the energy of the future.