Explanatory Memorandum to COM(2020)453 - Public sector loan facility under the Just Transition Mechanism - Main contents
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This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2020)453 - Public sector loan facility under the Just Transition Mechanism. |
|---|---|
| source | COM(2020)453  |
| date | 28-05-2020 |
1. CONTEXT OF THE PROPOSAL
On 11 December 2019, the Commission adopted a Communication on the European Green Deal, drawing its roadmap towards a new growth policy for Europe. This growth policy is based on ambitious climate and environmental objectives and on participatory processes bringing citizens, cities and regions together in the fight against climate change and for environmental protection. In line with the objective to achieve EU climate-neutrality by 2050 in an effective and fair manner, the European Green Deal announced a Just Transition Mechanism to provide means for facing the climate challenge while leaving no one behind. The most vulnerable regions and people are the most exposed to the harmful effects of climate change and environmental degradation. At the same time, managing the transition requires significant structural changes. Citizens and workers will be affected in different ways and not all Member States, regions and cities start the transition from the same point or have the same capacity to respond.
As further detailed in the Communication on the European Green Deal Investment Plan 1 , adopted on 14 January 2020, the Just Transition Mechanism will focus on those regions and sectors that are most affected by the transition given their dependence on fossil fuels, including coal, peat and oil shale or greenhouse gas-intensive industrial processes and have less capacity to address the challenges of the transition. The Just Transition Mechanism consists of three pillars: a Just Transition Fund implemented under shared management, a dedicated just transition scheme under InvestEU, and a public sector loan facility to mobilise additional investments to regions concerned.
The proposal for establishing the Just Transition Fund 2 was adopted by the Commission on 14 January 2020. It sets up in particular the content, scope and rules applicable when implementing the Fund. The territorial just transition plans are instrumental to the programming and implementation of the Fund – the plans need to set out the key steps and timeline of the transition process and identify the territories most negatively affected by the transition towards climate neutral economy.
The proposal for a Just Transition Fund also includes, in its Annex I, a methodology which will be used for calculating the shares for Member States’ allocations under this Fund.
Contents
The public sector loan facility of the present proposal constitutes the third pillar of the Just Transition Mechanism. It will support public investments, through preferential lending conditions. These investments will benefit the territories most negatively affected by the climate transition as identified in the territorial just transition plans for the purposes of the Just Transition Fund.
This facility will consist of a grant and a loan component. The grant, financed from the EU budget from assigned revenues and budgetary resources, will reduce the financial burden for beneficiaries resulting from the reimbursement of the loan that will be provided by a finance partner. While the grant component of EUR 1.525 billion is intended to be implemented with the European Investment Bank (EIB) being the finance partner of EUR 10 billion, the possibility to cooperate with other finance partners is provided for in order to explore other modalities of cooperation over time, in particular in case of possible future increase of Union resources, or in case specific implementation challenges arise. With the contribution of EUR 1.525 billion for the grant component from Union support and the EIB lending of EUR 10 billion from its own resources, the public sector loan facility aims at mobilising between EUR 25 and 30 billion of public investments over the period 2021-2027. However, public entities in less developed regions generally suffer from lower public investment capacity. Therefore, the grant rates provided to projects promoted by such entities should be comparatively higher but should not exceed 20% of the loan (i.e. 5 p.p. higher grant coverage at most). Less developed regions are those with a GDP per capita inferior to 75% of the average GDP of the EU-27 as defined under cohesion policy rules.
The work programme for the facility will specify the criteria for project selection and for their prioritisation, in case demand exceeds funding resources under national allocations. Those criteria may be further detailed in the call for proposals. The criteria will take into account the project’s contribution to the objectives identified in the territorial just transition plans, the overall objective of promoting regional and territorial convergence and the grant’s contribution to the viability of projects. Priority should be given to projects contributing directly to climate transition. The criteria may also include the energy efficiency first principle, as defined in the Energy Union Governance Regulation 3 and echo the principles and the guidance referred to under Section 4.2 of the Communication on the European Green Deal Investment Plan.
Support under the facility shall only be made available to Member States with at least one territorial just transition plan established in accordance with Article 7 of Regulation [JTF Regulation] and approved by the Commission as part of a programme or a programme amendment. In order to secure access to the facility, the grant component will be available to eligible projects to Member States through nationally earmarked allocations to be respected during a first stage (expressed as a share of the available overall budget of the instrument). These national shares will be determined based on the allocation methodology detailed in Annex I of Regulation [JTF Regulation].
However, in order to reconcile this objective with the need to optimise the economic impact of the facility and its implementation, these national allocations should only be earmarked until 31 December 2024. Beyond this date, the remaining resources of the Union support to the grant component of the facility will be available without any pre-allocated national share and on a competitive basis at Union level. Both the Commission and the EIB will make sure that allocation among Member States over the last three years of the 2021-2027 period ensure predictability for investment, and follows a needs-based as well as a regional convergence approach.
The facility will support public entities and cover a wide range of investments, on condition that these investments contribute to meet the development needs resulting from the challenges raised by the transition towards a climate neutral economy, as described in the territorial just transition plans. The design of these investments will take into account accessibility for persons with disabilities, in line with the United Nations Convention on the Rights of Persons with Disabilities.
By supporting investments that do not generate sufficient revenues and that otherwise would not obtain financial support without a grant element, the facility aims at providing public sector entities with additional necessary resources to address the social, economic and environmental challenges resulting from the climate transition. It will also enable these public entities, benefiting from higher endowment of public assets, to become more resilient to future symmetric and asymmetric shocks including disasters.
In addition, resources are dedicated to advisory support in order to promote the preparation, development and implementation of eligible projects.
The scope of support of the Just Transition Fund (first pillar of the Just Transition Mechanism) is limited to investments alleviating the social and economic costs of the climate transition for the territories identified. It focuses on the economic diversification of these territories and the reskilling, job search assistance and inclusion in the labour market of the workers concerned through grants, primarily. The second and third pillars of the Just Transition Mechanism will be able to support a wider range of investments both from a sectoral and geographical perspective in order to reinforce the actions and objectives of the Just Transition Fund. A wider coverage of development needs will therefore be possible, in so far as the support will benefit regions identified in the territorial just transition plans.
The support under the public sector loan facility will also be complementary to the financial products offered by the dedicated just transition scheme under InvestEU (second pillar of the Just Transition Mechanism). Whereas that scheme would aim at crowding in private investment, and supporting public investment that generates enough revenues to be financially viable, the public sector loan facility will focus on public investments with insufficient revenues, which would not be financed through a loan without the grant component.
Given the difference among the projects, their economic features and the beneficiaries targeted, the interventions under the three pillars should be complementary.
2. LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY
• Legal basis
EU action is justified by Article 174, paragraph 1, TFEU: ‘The Union shall develop and pursue its actions leading to the strengthening of its economic, social and territorial cohesion. In particular, the Union shall aim at reducing disparities between the levels of development of the various regions and the backwardness of the least favoured regions’.
Article 175, paragraph 3, TFEU also provides that ‘if specific actions prove necessary outside the Funds and without prejudice to the measures decided upon within the framework of the other Union policies, such actions may be adopted by the European Parliament and the Council acting in accordance with the ordinary legislative procedure and after consulting the European Economic and Social Committee and the Committee of the Regions’.
Union support is based on Article 322, paragraph 1, TFEU: ‘The European Parliament and the Council, acting in accordance with the ordinary legislative procedure, and after consulting the Court of Auditors, shall adopt by means of regulations: (a) the financial rules which determine in particular the procedure to be adopted for establishing and implementing the budget and for presenting and auditing accounts; (b) rules providing for checks on the responsibility of financial actors, in particular authorising officers and accounting officers’.
• Subsidiarity and proportionality
The scale of the challenges raised by the transition towards climate neutral economy and addressed by the Just Transition Mechanism requires EU action. The transition challenge represents an EU-level dimension and scale and can therefore be more efficiently addressed at EU level.
In particular, the capacity of public entities to access financing, in order to implement investments which do not generate sufficient revenues, should be enhanced by providing grant support.
Providing this grant support at EU level, through direct management, ensures equal access to public entities from all Member States for the benefit of the territories most negatively affected by the climate transition – as identified in the territorial just transition plans. Together with the loan provided by the EIB, the grant component of the facility increases the attractiveness of the investments concerned to other financing sources or institutions as well.
Furthermore, the design of the facility respects the proportionality principle by providing temporarily earmarked national shares and differentiated levels of grant support depending on the level of development of the territory concerned.
• Choice of the instrument
In accordance with the ordinary legislative procedure as set out in Article 175, paragraph 3, of the Treaty, the choice of instrument is a Regulation of the European Parliament and of the Council.
3. Impact assessment and stakeholder consultation
• Stakeholder consultation
In May and June 2018, the Commission adopted its proposals for the post-2020 long-term budget and the next generation of programmes and funds. As an integral part of this process, the Commission conducted a series of public consultations covering major spending programmes to gather views from all interested parties on how to make the most of every euro of the EU budget.
The public consultation on the EU long-term budget in the area of cohesion took place from 10 January 2018 to 9 March 2018 and received 4 395 replies. 85% of the respondents considered the transition to a low-carbon and circular economy, ensuring environmental protection and resilience to climate change, to be an important challenge. However, only 42% of the respondents considered this challenge to be adequately addressed by the current programmes/funds.
In the context of the negotiations on the post-2020 long-term budget, the European Parliament in its resolution of 14 November 2018 called for the introduction of a specific allocation (EUR 4.8 billion) for a new ‘Just Energy Transition Fund’ to address societal, socio-economic and environmental impacts on workers and communities adversely affected by the transition from coal and carbon dependence.
This call has been echoed by the Committee of the Regions, which has issued an opinion 4 on the socio-economic structural change in Europe's coal regions, calling for the provision of additional funds helping address the specific needs of coal regions. The opinion suggested in this regard to allocate EUR 4.8 billion to a new ‘Fair Energy Transition Fund’, designed to mitigate the social, socio-economic and environmental impact of transition in these regions.
In its conclusions of 18 October 2019, the European Council stressed its determination that the EU continues to lead the way in a socially fair and just green transition in the implementation of the Paris Agreement. The European Council also endorsed, through its conclusions of 12 December 2019, the objective of achieving a climate neutral EU by 2050, in line with the objectives of the Paris Agreement. In addition, it endorsed the principle of providing tailored support for regions and sectors most affected by the transition through a Just Transition Mechanism, including a Just Transition Fund, together with a dedicated just transition scheme under the InvestEU and a public sector loan facility.
• Impact assessment
The Proposal for a Regulation of the European Parliament and of the Council on the European Regional Development Fund and on the Cohesion Fund 5 has been accompanied by an impact assessment 6 , which has validated the delivery system proposed for these Funds.
The impact assessment also examined the challenges to be addressed by the next multiannual financial framework and cohesion policy. It confirmed the need, consistent with the outcome of the public consultation, to support a clean and fair energy transition, through a dedicated policy objective and a corresponding thematic concentration mechanism (see Chapters 2.2 and 3.2).
Therefore, the objective of the Just Transition Mechanism is justified, as it aims to ensure a fair energy transition through alleviating the economic and social costs stemming from the transition towards a climate neutral economy. The Just Transition Mechanism, under its third pillar, will support the territories most negatively impacted, address the development challenges raised by transition and provide public sector entities with resources to invest in projects facilitating the transition to climate neutrality.
The unevenly dispersed effects of the energy transition had also been pointed out in the impact assessment (see Chapter 3.3). In particular, the latter highlighted the challenges that the most affected regions face due to their reliance on solid fuel production and the high share of solid fuels in their electricity generation mix. This assessment justifies the proposed concentration of the third pillar of the Just Transition Mechanism on the most negatively impacted territories and the proposed temporary earmarking of national shares for the grant component, in accordance with the methodology proposed under the Just Transition Fund.
The above analyses and impact assessment elements support the objectives and the main features of the third pillar of the Just Transition Mechanism.
The scope of sectors expected to benefit from investment support is very large and potentially covers all public investments falling under the competences of public entities, which can cover, for instance, energy and transport infrastructure, district heating networks, public transport, energy efficiency measures including renovation of buildings, investments supporting transition towards circular economy, land restoration and decontamination, as well as up- and re-skilling, training and social infrastructure. The activities supported will be identified in a tailored manner, in the light of the specific development needs detailed under each territorial just transition plan.
This proposal is accompanied by a Staff working document, detailing the rationale and the justification for setting up the facility, together with the mechanisms envisaged to monitor and evaluate its achievements.
4. BUDGETARY IMPLICATIONS
The total budget proposed for the grant component of the facility is EUR 1.525 billion. It is envisaged to finance this amount mainly with assigned revenue EUR 1.275 billion and partly with appropriations programmed under the Multiannual Financial Framework (MFF) 2021-2027 for EUR 250 million.
EUR 1 billion of the assigned revenue foreseen would stem from the estimated surpluses of the provisioning of the European Fund for Strategic Investments (EFSI) after its constitution phase, ending in 2022. The EFSI Regulation sets out the provisioning rate of the EU guarantee of EUR 26 billion at 35%, which represents EUR 9.1 billion to be held in the EFSI guarantee fund. The constitution of the provisioning has been programmed over 2015-2020 for commitments and 2016-2022 for payments. The end of the investment period provided by the EFSI Regulation for approvals is 31 December 2020 and 31 December 2022 for the signature of contracts by the EIB and the European Investment Fund (EIF) with beneficiaries or financial intermediaries. The provisioning rate of 35% has been set out based on an evaluation carried out by the Commission in September 2016, which estimated potential losses at 33.4%. The current estimate of potential losses based on data as of 31 December 2019 provided by the EIB and the EIF is below that percentage. The lower percentage of provisioning is mainly due to the following circumstances:
·the total amount of guarantee calls of EUR 180.2 million in the first four years is lower than the conservative assumptions used to estimate potential losses,
·the actual funding costs covered by the EU guarantee so far are lower than expected due to the benign interest rate environment,
·the foreign exchange exposure is lower than expected due to a large extent to the withdrawal of the United Kingdom from the EU.
In this context, it is foreseeable that EUR 1.17 billion of provisioning would not be consumed by the EU guarantee and, therefore, EUR 1 billion could be assigned to the proposed facility. It is planned to assign this revenue from 2023 onwards, once the total EFSI portfolio has been signed by the EIB and the EIF and a more accurate estimate of potential losses can be carried out. In the meantime, the constitution of the provisioning for EFSI guarantee should continue as initially programmed as the low rate of losses in the first four years does not prejudge the future evolution of the EFSI portfolio.
The remaining EUR 525 million will be partially financed from resources from the Union budget, for an amount of EUR 250 million in current prices. The proposal will feed into the negotiation on the next MFF and expectedly will be integrated into the framework of an overall agreement on the next MFF.
Lastly, the proposal will be financed by EUR 275 million of assigned revenue from the repayments from financial instruments established by the programmes indicated in Annex I to this Regulation. It has been proposed to finance also EUR 1 billion of the InvestEU programme provisioning with reflows from the same financial instruments. The current estimate of repayments from those financial instruments during the period 2021-2032 is EUR 2.1 billion, out of EUR 5.9 billion of assets foreseen by 31 December 2020, sufficient to cover the needs of InvestEU and the public sector loan facility.
In accordance with Articles 21(6) and 22 of the Financial Regulation, in the budgetary lines accommodating the assigned revenue of the public sector loan facility and of InvestEU, the estimated amount of revenues for the year to be allocated to the public sector loan facility and to InvestEU will be indicated respectively in the general remarks included on the annual draft budget proposed by the Commission.
From the financial envelope for the grant component, up to EUR 25 million from assigned revenues will be allocated to advisory services to support the preparation and implementation of eligible projects.
5. OTHER ELEMENTS
• Detailed explanation of the specific provisions of the proposal
The legal framework consists of a dedicated proposal for a Regulation on the public sector loan facility and focuses on the following features:
·setting out the subject matter and the scope of the facility;
·setting out the objectives of the facility;
·detailing the budgetary resources and the sequenced access to temporarily nationally earmarked allocation shares;
·setting out the implementation method under direct management;
·setting out the conditions for eligibility;
·detailing the condition for terminating grant agreements;
·determining the form of support and the applicable grant rates.