Connecting Europe Facility - connecting who, and what, exactly?

The economic crisis has accelerated the development of new financial instruments for the next EU budget period in 2014-2020. The main intention behind these instruments is to deliver substantial levels of new investment money from increasingly limited public resources in order to plot a path towards Europe’s economic recovery.

This article is from Issue 54 of our quarterly newsletter Bankwatch Mail

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The ‘Connecting Europe Facility’ (CEF) is one such EU sponsored mechanism that relies on these newly touted instruments. It is hoped, certainly by the European Commission, that in the 2014-2020 period the CEF will deploy EUR 50 billion to leverage private investments worth ten times more in transport, energy and telecommunication projects of European interest. In the words of European Commission president José Manuel Barroso: “The Connecting Europe Facility and the Project Bond Initiative are a perfect demonstration of the value added that Europe can provide.”

Indeed, in many cases, the EU is in a comparatively better position to ensure time and cost efficient handling of certain policies than the sum of national authorities acting individually. Common action could be cost-saving in terms of access to financial resources, especially in the context of the ongoing economic crisis.

However, a closer look at the CEF throws up at least three reasons for being sceptical about the public benefits that may or may not accrue from this shiny new vehicle emblazoned with the EU flag.

Repackaging twentieth century projects

The first area of concern is bound up with uncertainties over what kind of transport, energy and telecommunication projects are to be financed by the CEF. Smart, sustainable and fully interconnected infrastructure is being promoted as the main objective in the Commission’s proposal. However, the recently concluded consultation on those priority energy projects to be financed by the CEF has raised doubts about the extent of the ‘smartness’ and ‘sustainability’ involved in these same projects.

The EU’s ambitious target to cut its greenhouse gas emissions by 80-95 percent by 2050 will require enormous efforts since a major shift in thinking is needed to ensure a rapid transition beyond modes of living based on constantly increasing energy consumption. The apparently easier path for solving this problem – if the priority energy projects consultation is anything to go by – involves securing more energy imports in order to cover the gap between demand and EU internal production.

Bankwatch’s review of the list of priority energy projects (pdf) notes that securing increased electricity imports from neighbourhood countries has already received a great deal of attention in the draft list of projects of community interest. It involves projects such as one connecting a nuclear power station in Kaliningrad to bordering countries, as well as a series of new gas and oil pipelines for importing hydrocarbons from neighbouring countries.

Wrapped up in this is another troubling trend identified in the proposed list of projects: the strong focus on expanding infrastructure to support the expansion or increase of the lifetime of fossil fuel energy generators, such as in the case of high-voltage transmission lines for coal power plants in Bulgaria.

The current list of priority projects can be viewed, in fact, as little more than a compilation of outmoded and dated projects, many of which have uncertain financial feasibility, and are being developed by state authorities or large utilities for the purpose of national security of supply or export. Dubbing these as ‘innovative projects’ that will form the backbone of European infrastructure custom-built for EU 2050 ambitions is highly questionable.

More public guarantees for the private sector

The second critical aspect of the CEF initiative is economic – will the infrastructure built via the CEF cost less to the public than traditional direct investments?

The proposal supports many large private sector transport and infrastructure projects of low investment quality. There are, it has to be stated, a few energy projects in the frame that will clearly help support the linkage of renewable installations – yet these are decidedly marginal in the overall scheme of things. Bankwatch’s estimation is that 95 percent of the projects involve high-voltage transmission lines that appear to have very little to do with integrating small scale renewables schemes or ‘smart’ energy systems.

In terms of gross value for money, the financial instruments that feature within the CEF umbrella are distinctly devoted to securing profits and low risks for private investors engaging in infrastructure projects. For example, the heavily trailed ‘Project bonds’ instrument will be able to guarantee secure payments for gas flowing through the proposed Nabucco gas pipeline – bond holders will receive their fixed interest rates. If the demand for gas drops, and revenues fail to materialise, the EU budget will continue to pay interest rates to bond holders.

In other words, the Project bonds mechanism will make projects look profitable by subordinating the financial support and interests of the public in favour of private sector investors and bond holders who will be the beneficiaries of guarantees and subordinated debt.

Moreover, as if to add further to the risks that would be taken by the EU and the EIB under the CEF, it has been proposed that both institutions relinquish any controlling creditor position and simply allow private sector financiers – bond holders or private banks – to be the lead negotiators over any given project’s financial future as its lead creditors.

The public – seen but not really heard, again

The third major area of concern involves the transparency and accountability of the new financial instruments – the lack of such could undermine the CEF’s effectiveness at the EU level. Notably, however, the process of selecting the infrastructure projects under consideration has thus far been dominated by the member states and large energy utilities. Numerous projects in the current list are opposed by local communities or civil society on account of their potentially harmful environmental or social impacts.

The European Commission has attempted a public consultation, publishing the list of proposed projects at the end of July and providing EU citizens with roughly two months – in the summer period – to make comments on the proposal. Regretably, this consultation was never seriously discussed at the national level or in national languages. Strikingly too, much of the proposed list of projects could well have major impacts on people and communities outside the EU – stakeholders that have not been effectively consulted in the recent process.

On the road to recovery from the economic crisis, Europe does need real innovative financial instruments that are able to address the needs of future generations, without endowing them with excessive financial debt. The currently available instruments foreseen within the CEF are not geared up to service smart, sustainable, low-scale energy provision. This is something that Europe needs to urgently address. The over-arching issue remains, though – smart, sustainable energy projects are a rare breed within the currently conceived CEF.