Cooperation and networking of financing for infrastructure projects
A large number of credit institutions and investors are often involved in the financing of large infrastructure projects. Depending on the size and supraregional significance of the project, several development banks may even be involved. The relevance of networking in infrastructure financing is illustrated here by the example of wind farm financing.
Banks, savings banks, insurance companies, private equity, development banks and investors play a prominent role in the financing of future technologies and investments in infrastructure. These must be interlinked for the financing of large-scale projects. On the one hand, because the large-loan restriction in bank regulation requires syndicated lending. On the other hand, because the banks and investors can use their respective expertise as a specialisation advantage for corresponding sub-areas of financing in complex financings. Complex financings therefore require cooperation and the use of synergies.
Large infrastructure projects and investments in the energy transition can often only be realised with the help of this networking. Networking in financing is therefore a highly relevant topic, especially for the digital and climate-neutral transformation in NRW. This is particularly relevant if EU funding is to be used regionally. The system of development banks consists of several levels that must cooperate with each other. At the European level there is the European Investment Bank (EIB), the European Investment Fund (EIF) and the European Bank for Reconstruction and Development (EBRD), at the national level in Germany there is the KfW Bankengruppe (Kreditanstalt für Wiederaufbau) and development banks at the state level, e.g. NRW.BANK in North Rhine-Westphalia. The European Union promotes the digital and climate-neutral transformation, for example, through the European Fund for Strategic Investments (EFSI) and its successor InvestEU. Both funds offer first-loss guarantees from the EU budget to the EIB Group to mobilise private capital. These instruments can provide funding for projects that are higher risk. These are usually investments in the future competitiveness of the EU. There is no quota by sector or country. The criterion for the use of these funding instruments is that the projects are eligible for funding, i.e. that they contribute to making the EU digital and climate neutral.
The EIB provides the European funds. The instruments of the EIB serve to mobilise capital from investors, national development banks and commercial banks. This is illustrated below by the example of the financing of wind farms, which usually involves a larger consortium of financiers and investors. One reason for the networking of the individual debt and equity providers is the distribution of the risks that can occur. The guarantee instruments of EFSI and InvestEU thus have an important role to play, because they can improve the distribution of risk for private financiers and thus make the financing of infrastructure projects more attractive for them. After all, private capital can often only be mobilised if risk-averse financiers also make their capital available for financing.
NRW.BANK is the second largest development bank in Germany after KfW. In addition to classic loan promotion programmes and risk hedging, the Equity Investments unit plays a major role as an anchor investor in private equity and venture capital investments, especially in innovative and technology-oriented start-ups, but also in debt- and equity-financed infrastructure projects that can enable and accelerate transformation.
Financing of wind farms in Germany
EIB loans amounting to almost EUR 2.2 billion were used to finance six wind farms in Germany. This has enabled the mobilisation of further private and public capital. In order to ensure the necessary cooperation, however, a large number of players in the financial sector had to be networked in advance. For example, loans for the Trianel Borkum West II wind project in the German North Sea were provided by the EIB and NRW.BANK, while KfW Ipex Bank, a subsidiary of KfW, supported the project as an insurance and technical bank and as a pre-financier for VAT. In addition, the Belgian bank Dexia provided guarantees to secure the loan. This shows that several development banks can also be involved in such projects, and that the banks and investors use synergies by bringing their respective expertise and specialisation advantages into the financing. Nine shareholders participated in the Global Tech I offshore wind farm as equity investors, while 16 commercial banks provided the debt capital in addition to the EIB and KfW. Cooperation between development banks, namely the EIB and KfW together with Bremer Landesbank, can also be found in the financing of the Butendiek wind farm. These examples show that synergies exist between the individual financiers, which should be used for the financing of complex large-scale projects. To improve financing, especially for the financing of the digital and climate-neutral transformation, it should therefore make sense to further expand these cooperations.
In Germany, the volume of European funds drawn down for the financing of wind farms is not even average in terms of economic output compared to the rest of Europe. While the EIB finances wind farms in the EU with a volume of 0.07 per cent of the EU’s gross domestic product, its financing contributions in Germany amount to only 0.06 per cent of the German gross domestic product. This may be partly because other countries have more favourable conditions for steady wind compared to Germany. But it may also mean that Germany could make more use of the potentials from EFSI and InvestEU.
Front-runner in the use of European funding
In terms of the use of European funding for the digital and climate-neutral transformation in the wind energy sector, Belgium is the front-runner in a European comparison. EIB funds amounting to 0.3 percent of Belgium’s gross domestic product were called up for wind farms here. The total amount of funding there is 1.5 billion euros. For example, guarantees from the EFSI amounting to 250 million euros were used for the two wind farms Mermaid and Seastar. EFSI guarantees were also able to mobilise private capital for Northwester II. The high ambitions in Belgium for the expansion of wind power can also be attributed to the planned nuclear phase-out as well as the goal of completely abandoning fossil energy by 2050. In any case, the figures illustrate how important the European guarantees are for mobilising private capital and thus for financing the energy transition.
The wind farm on Mount Orites near Paphos in Cyprus is rather small compared to other wind farms, and the funding of 65 million euros by the EIB is also rather small in European comparison. But measured in terms of the size of the Cypriot economy, this funding, amounting to 0.28 percent of Cyprus‘ GDP, ranks second in the EU.
Austria ranks third in the use of European subsidies, with subsidies used amounting to 0.2 per cent of Austria’s gross domestic product. For the largest Austrian wind farm, guarantees from the EFSI were also used to mobilise private capital. UniCredit Bank Austria financed this together with the EIB. EFSI guarantees were also used to finance the Prinzendorf III, Powi I, Bruckneudorf and Höflein West wind farms. Compared to countries with access to the sea, the expansion of wind energy in Austria has made strong progress. The strong demand for EFSI funds can thus probably be attributed to Austria’s ambitious climate targets.
Other countries make little use of subsidies
Among the countries that use the EIB’s guarantee and credit instruments for the expansion of wind energy only in below-average volumes is France, for example, despite its access to the sea and thus to steady wind. The credit volumes used are only 0.04 percent of the French gross domestic product. In France, three floating wind farms were financed. This makes it possible to install the turbines in deeper waters, where the wind blows stronger and more steadily. One possible reason for the under-utilisation of European funding may be that the focus of energy production in France is more on the use of nuclear power.
In Italy, the use of funds for the expansion of wind power is also below average, despite the long coasts. Here, too, the utilised funding volumes amount to only 0.04 percent of the Italian gross domestic product. Two projects with a total volume of 750 million euros were funded.
Complex financing requires networking
The financing of energy transition projects in particular, but also for projects to complete the digital and climate-neutral transformation in general, is complex not only because of the volumes required, but also because of the barely assessable default risks. As many of these financings have a higher risk structure, guarantors help to mobilise private funds. The EFSI and InvestEU provide the necessary guarantee instruments to mobilise private capital for the climate-neutral transformation.
However, the fact that EIB funds are used to different extents in the individual European countries does not only have to do with the different wind conditions in the individual regions, which are an important condition for the installation of wind power plants. For example, countries with access to the sea can naturally expect more investment in wind power than countries without access to the sea. Not to be neglected are the different political efforts towards an energy turnaround, which are, for example, significantly more ambitious in Belgium and Austria than in France, which is also reflected in the different number of wind power projects and thus the different levels of involvement of development banks.
These examples illustrate how important networking and cooperation of financing – in the case of large projects, especially with the European level – are for the implementation of the energy transition and the transformation of NRW’s economy. Fin.Connect.NRW aims to strengthen the networking of banks, development banks, insurance companies and investment funds across the board. The examples show the relevance of this networking. However, the expansion of synergies is not only relevant for the financing of wind farms, but can also be transferred to the financing of infrastructure for the use of hydrogen or the use of carbon capture and storage and is therefore highly relevant overall for the financing of the digital and climate-neutral transformation.