March 25, 2017 / 0 Comments
Against the economic cycle: Small businesses and offshore wind
The Investment Plan for Europe aims to make this a decade in which small and medium-sized businesses and innovative technologies find financial backing that might previously have been denied
Amid the splendour of Michelangelo’s architectural innovations at the Palazzo dei Conservatori on the Capitoline Hill, delegates from six European countries signed the Treaty of Rome on 25 March 1957. The treaty, which included the articles that founded the European Investment Bank, was “a declaration of future good intentions,” according to one historian. For two weeks, we are publishing a series of stories to mark the sixtieth anniversary of the treaty—one for each decade of the EIB story. These are stories of how the EIB helped turn good intentions into reality.
Guarantees for SMEs
In central Bohemia, 30 kilometres south of Prague, TG Scarabeus manufactures specialised foils and packaging, as well as recycling plastic packaging, which it sells in the Czech Republic and Slovakia. The company, founded in 2004, had to buy new machinery to keep pace with technological changes in the industry and needed EUR 137 000 to pay for it. Credit is short for small businesses across Europe, so in 2016 Scarabeus’s owner Miroslav Goiš turned to a guarantee system that ultimately is backed by the European Investment Fund, the EIB Group’s specialist provider of risk finance for small and medium-sized enterprises. Using the EU budget guarantee of the Investment Plan for Europe, an EIF counter-guarantee backed a guarantee from ČMZRB, a Czech bank, which in turn allowed Goiš to receive a loan of EUR 122 000 from Česka Spořitelna, the Czech savings bank. If that sounds complicated, it’s because financing for SMEs across Europe is not a simple problem. In fact, it’s a thorny issue that the EIB Group has been working hard to deal with throughout this decade. The bottom line is clear for Scarabaeus. “Without the guarantees, we couldn’t cover the loan,” says Goiš. “Over time, our competitiveness would go down. So we’re really happy that we got the help from ČMZRB.”
The essence of the EIB Group’s work in the SME sector is that it acts against the economic cycle. This strategy underpins EIB operations in many sectors, particularly during a decade that has seen the EIB and the EIF spearhead the Investment Plan for Europe’s campaign to revive the continent’s economy and crowd-in private capital.
In the case of the SME loans, the aim is that banks which actually lend to small businesses have to worry much less about the risk of the loan, because a European Commission initiative called COSME transfers much of that risk to the EIF with the backing of the Investment Plan for Europe’s EU budget guarantee. Of course, that makes the bank much more likely actually to grant the loan – and that’s good for small businesses. With the EU budget guarantee, the EIB and EIF aim to make banks and private investors feel more secure about putting their money to work. That’s important in the Czech Republic, for example, where the EIF signed its deal with ČMZRB in August 2015. The EIF will counter-guarantee the guarantees made by ČMZRB, a state-owned development bank, to the tune of EUR 115 million. “There’s enough liquidity, but banks require collateral, and that’s missing,” says Lubomir Rajdl, deputy chief executive of the Prague-based bank. “Our programme is really filling a market gap.”
Such a market gap that demand among Czech SMEs led to an increase in the size of the counter-guarantee. In late 2016, the EIF agreed to boost it to EUR 389 million. By the end of 2016 the counter-guarantee had supported 1 880 projects and was securing loans totalling EUR 185 million. By the end of the programme in 2018, ČMZRB expects the counter-guarantee to be backing 3 800 SMEs with loans totalling EUR 556 million.
One of ČMZRB’s first guarantees under this programme was on a EUR 92 500 loan to OVEX Plus, a waste management company in Ostrava, the Czech Republic’s third-largest city. With the loan and some of its own money, OVEX bought a new technology that allows dust-free storage of ash produced by the energy, coal and metal industries across Moravia and Silesia. That’s important in a region where air quality is seriously affected by industrial production. “The technology helps boost our position in the power and energy market in a sustainable and effective way,” says Miroslav Olszovy, executive director at OVEX. “There are also positive environmental aspects of the new technology, which is important, especially for our region.”
These small loans extend the reach of the Investment Plan for Europe to every corner of the continent. On the Danube’s Bulgarian bank, Georgi Dikov runs a factory that makes scaffolding and construction equipment. He received a EUR 34 000 loan from Cibank in Sofia, backed by the Investment Plan for Europe, for the purchase of a second-hand harvester from Germany. Dikov employs 45 people in his factory and five others on a 100-hectare plot of agricultural land in Oryahovo, a town of 5 000 people where the unemployment rate is higher than the Bulgarian average and wages are half the national average. It’s an area with relatively few highly trained workers. “I train people with no education,” says Dikov, “and I turn them into specialists.”
Winds of change
The Cestas photovoltaic plant, which was inaugurated in December 2015, produces clean energy that’s equivalent to the domestic usage of at least a third of the residents of nearby Bordeaux. The activation of its 1 million solar panels marked a big milestone in climate-friendly energy: Cestas was the first major photovoltaic project to be truly competitive with fossil fuel power stations. It was the climax of a long journey for the solar photovoltaic industry. Growth had been slow each year of the 1990s and most of the first decade of this century. However, technological developments and increasing economies of scale brought a boom. And the EIB was there all along. “Cestas is the first big photovoltaic project we see that’s competitive with a fossil fuel alternative,” says David González García, senior engineer in the EIB’s renewable energy division. “Costs have been going down for fifteen years, and now there’s higher supply, standardised equipment, and great economies of scale.”
The EIB’s role in solar photovoltaic is one that’s mirrored in other renewable energy sectors and, in particular, in the offshore wind industry. The Bank often took on solar photovoltaic deals that didn’t attract sufficient private investment. That helped bankroll the research that ultimately made the industry a viable economic prospect. The EIB’s approach is similar in other, less mature, renewable sectors, where it has made big investments in offshore wind farms and the massive concentrated solar power development at Ouarzazate, Morocco. Offshore wind and concentrated solar both produce relatively small proportions of the world’s electricity at present, but the evolution of solar photovoltaic offers an encouraging path for them to follow.
The EIB’s role in supporting innovation is key to understanding the development of offshore wind power. The industry could easily have wiped out in 2008, when the global financial crisis made investors especially leery of risk. Though onshore wind farms were relatively well-developed, offshore technology was still in its early stages. The EIB stepped in when private investment dried up. “Commercial banks were very reluctant to take the risk,” says Alessandro Boschi, head of the EIB’s renewable energy division. “The offshore wind industry wouldn’t have started moving without the presence of the EIB.”
Certainly 2008 would’ve appeared to be a risky time to invest in Belwind, a Belgian project to build Europe’s biggest wind farm 46 kilometres off the Zeebrugge coast in water as much as 37 metres deep. “There was no private money because of the financial crisis,” says Melchior Karigl, an EIB project finance loan officer. Karigl and his colleagues, however, were impressed by the technology that would enable Belwind to sink foundations deeper into the sea than any other project at the time—and also by the audacity of the plan to construct 55 turbine towers over an area of 17 square kilometres. The EIB funded Belwind to the tune of EUR 300 million, half the cost of the project. Belwind now produces enough electricity to power 160 000 homes in Belgium.
The Bank’s investments continue to support an industry that is in a constant state of technological change. Take the blades of the world’s biggest wind turbine, for example. They are 80 metres long, the wingspan of an Airbus A380. The circle they make when they sweep around is larger than the iconic London Eye. And not one but 44 of these turbines are set to be installed in the Norther wind farm, 22 kilometres off the coast of Belgium. Thanks to technological advances and firm financing, wind power is also increasingly affordable. “Electricity generation technologies take a long time to mature,” says engineer González. “For instance, steam turbines took nearly 80 years to become widespread. So for wind turbines to mature, you will need enough trial space and enough R&D investment for the same to happen.”
The EIB is certainly facilitating this trial space. Look at some of its deals in 2016 alone:
- In May, the Bank provided GBP 525 million for construction of the Beatrice wind farm to be built 14 kilometres off the coast of Scotland. It’s the largest single investment in an offshore wind farm thus far. Beatrice will include 86 turbines, generating up to 588MW, enough to satisfy the needs of 520 000 homes.
- In February, March and September, EIB signed agreements providing GBP 160 million to construct transmission networks reaching two more offshore wind farms and GBP 500 million to finance reinforcements of a regional network allowing the connection of more renewable energy producers.
- In October, the EIB signed an agreement with Rentel Wind Farm for up to EUR 300 million to erect 42 wind turbines 34 kilometres off the Belgian coast. With an installed capacity of around 300MW, this will be enough power for approximately 258 000 homes.
- In December, the Bank signed an agreement with Norther to provide EUR 438 million for the London Eye-sized turbines, with a nominal capacity of close to 370MW.
All these offshore wind farm loans were at least partly backed by the EU guarantee under the Investment Plan for Europe. That’s likely to be the story for the next decade of the Bank’s history, too.