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Smart Investments: Choosing the Right Players

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11/01/2022

Smart Investments: Choosing the Right Players

Economy Energy

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Smart Investments: Choosing the Right Players

Author

Milo Rignell

Fellow - AI & Emerging Technologies

Investing in Europe

Faced with the economic impact of the Covid-19 crisis and the current digital and environmental challenges, Europe and its Member States have launched particularly ambitious recovery and investment plans for the future. This not only raises the question of investment targets, but also of the levers and players needed to deploy these colossal amounts of capital.

To discuss these issues, Institut Montaigne and the Sciences Po School of Management and Innovation are holding a series of events on the future of investment in Europe. This article follows the fourth event focused on the link between public and private investment, with Agnès Bénassy-Quéré, Chief Economist at the French Treasury; Estelle Brachlianoff, COO of Veolia; Denis Ribon, President of ArchiMed; and Natacha Valla, economist and Dean of the Sciences Po School of Management and Innovation.

Investment has withstood the Covid-19 crisis

The economic impact of Covid-19 posed a real risk for private investment. Nevertheless, the impact on investment usually associated with a drop in GDP was mitigated by low interest rates, companies’ investments to adapt to new conditions such as remote working, and government measures such as production tax rebates and subsidies to private investment. In the third quarter of 2021, investment was above its Q4 2019 level, particularly for household (+3.8%) and business (+2.3%) investment. Companies are pursuing investments to adapt to new challenges in a post-pandemic world, households are investing their savings - in housing in particular - and governments have launched unprecedented stimulus plans focused on investment.

The importance of calibrating public and private investment

While public investment should be careful not to crowd out private players, some scenarios require interventions in order to fill market gaps and to support strategic sectors.

Many countries are also taking advantage of laxer budgetary scrutiny induced by the pandemic to support, or even reposition, certain key industries.

"Defensive" investments are needed to support low-growth sectors that are unattractive to private investors, yet whose erosion poses a dangerous risk of dependence on foreign actors. A recent example would be active pharmaceutical ingredients, such as paracetamol, whose production was largely relocated to China and India. Such investments are all the more important as many countries are also taking advantage of laxer budgetary scrutiny induced by the pandemic to support, or even reposition, certain key industries. However, other tools also exist to ensure the resilience of Europe's supply chain, such as storage and diversification of sources.

In the long term, regardless of the adopted strategy, this resilience can only be effectively structured in a coordinated way at the European level.

Support from public investment is also useful for high-growth industries in which the return on investment exceeds the five-year investment cycle on which most private investors rely. This is particularly true for certain industrial sectors, which require especially heavy investments and for which the break-even point sits beyond markets’ investment horizon. In these cases, public subsidies for private investment make it possible to bring the investment cycle back within the target range of private players. This allows for the financing of bioproduction factories, for instance: by covering 25% of the total investment costs, public players manage to attract the remaining 75% from private players.

Public authorities must guarantee the stability of the investment framework

In the current macroeconomic context of accumulated savings and low interest rates, access to capital is not the main constraint on investment. It is even less the case for projects aimed at meeting the requirements of the ecological transition, which are the first to benefit from the noticeably green stimulus plans. Moreover, in large part thanks to the 2019 PACTE Law, the French government’s Action Plan for Business Growth and Transformation, savings are increasingly directed towards companies, for example through unit-linked insurance plans rather than guaranteed euro funds.

However, despite seemingly abundant capital, the delay in the trajectory of the National Low-Carbon Strategy (SNBC) would still involve additional investments of €13 billion to €17 billion per year until 2023, according to the Institute of Economics for Climate (I4CE). Funding these projects is not only dependent on available capital but also on the ability to design and identify viable projects, to deploy them and to industrialize them on a large scale. This last step relies strongly on the presence of built ecosystems and major players capable of consolidating them and carrying out large-scale projects.

The delay in the trajectory of the National Low-Carbon Strategy (SNBC) would still involve additional investments of €13 billion to €17 billion per year until 2023.

When it comes to investments in the ecological transition, this financing depends above all on the stability of the investment framework in the medium to long term: the price of carbon, the country's energy mix over the next 5 to 10 years, ESG regulations and green taxonomy, etc. If public players are able to provide a predictable framework, private players can then work to develop environmentally and economically viable solutions. This has been the case, for example, with the system of fees successfully implemented to finance water projects throughout France. Under these conditions, a regulatory framework can even become a competitive advantage for our country and for Europe, by encouraging companies to invest early in these future challenges.

Co-written with Elise Lannaud, Research Assistant

Copyright: JOEL SAGEI / AFP

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