Is it possible to accelerate public investment without increasing national taxes or public debt? The authors of this piece believe so, and present a mechanism to relieve member states’ public finances, which are already burdened by ballooning deficits and galloping deficit ratios. The novelty of the mechanism stems from bringing a widely used private sector financing technique – namely that of leasing – to the sphere of public finance, and organising it at the pan-European level.
Imagine a Public Infrastructure Leasing entity for Europe (PILE, for short). This vehicle would issue bonds in international markets against the finest financial conditions, guaranteed by the member states. The proceeds would be used to finance adequate built-to-order public infrastructure. The assets would remain under the ownership of PILE, and be leased to the requesting authorities for an agreed duration. The negotiated leasing fees would be accounted for as operational expenditures in the national budget, doing away with upfront national borrowing needs. In this way, PILE becomes a flanking device to achieve the huge amounts of infrastructure investment envisaged, for example on energy conversion and digital transformation under the EU’s Next Generation strategy.
PILE is a flexible tool, whose scope must be defined by the shareholding member states. Its fields of application are in principle unlimited, and could range from leasing green energy-efficient public buildings that focus on the digital transition, such as in educational and research facilities, e-government data centres, or postal services, thereby forming the link between the online and real-world delivery, to catering for health infrastructure to cope with insufficient or outdated capacity, to energy infrastructure to enable smart grids, communally owned renewable energy parks, energy-efficient street lighting and related infrastructure. Traditional bricks and mortar public infrastructure could also qualify for the leasing concept, for example transport infrastructure (bridges, bicycle paths, sidewalks, airports, roads and railways) and wet infrastructure (water treatment, or coastal restoration infrastructure, to name but a few). Cultural heritage (libraries, historical sites/buildings/art) and strategic infrastructure such as military satellites, border protection equipment, civil protection airplanes and refugee hosting infrastructures could also be included. Obviously, where infrastructure is already provided by private entities, PILE would not have a public sector mission.
The specific capacities of PILE would enable economies of scope and scale, improve transparency, and foster convergence in the quality and safety of public infrastructure across shareholding member states. As a collateral value, PILE bonds may be seen in the global international financial markets as a European safe asset.
Maintaining the momentum of recovery
The European Council proudly announced a European Recovery Plan (ERP) worth €750 billion on 21 July of this year. After several days of intense debate, the Council decided that the first part of the ERP, worth €390 billion, would be issued as grants. The second part, €360 billion, would be allocated to member states in the form of loans. The purpose of ERP is also twofold: first, to provide economic support to member states that have been worst affected by the Covid-19 crisis. Second, to assist member states in preparing for the Next Generation EU, the official name of the plan aimed at greening and digitally transforming the EU.
The ambition of ERP is to generate a Keynes-Marshall kind of momentum to boost real production in member states. Unfortunately, public finances in many member states have continued to deteriorate, induced by the Covid-19 calamity. In this context it is reasonable to assume that hesitant consumers and firms will consider the possibility of future tax increases. This in turn keeps aggregate demand below its pre-crisis potential, thus hampering the stimulus objective of the ERP.
Is it possible to envisage a flanking device for the ERP that reinforces the macroeconomic rebound in the short run, endorses productive capacity in the long run while, at the same time, promotes the modernisation of the EU economy? It is well understood that public infrastructure investments offer significant multiplier effects and facilitate the productive capacity of economies for future years. However, there are national public finance constraints. How then to implement these necessary public investments without further endangering the debt level in member states?
A lease model for public infrastructure
By leveraging this guarantee by member states and/or triple-A rated EU institutions to implement public infrastructure through financial leasing, the result would be an entity that could issue bonds and tap financial markets for the best financial conditions when doing so. The proceeds of these bonds would then be injected into public infrastructure. Yet instead of bearing the full investment cost upfront, governments would be paying but a ‘rent’ (lease fee) to PILE over many years.
Given its low borrowing costs, PILE’s lease fees could be kept to an attractive (i.e. cheap) rate. Thanks to significant economies of scale and scope, PILE could procure capital goods and services on a competitive basis, in line with EU rules and requirements. Furthermore, PILE could serve another valuable role: it could evaluate projects on their technical and economic soundness and ensure best practices from a social and environmental point of view. PILE would thus ensure convergence in the quality and safety of infrastructure across member states.
The advantage for the recipient (or ‘lessee’) member state is as follows: the annual lease fee is booked in the national accounts as an operational cost, which reduces governments’ annual financing needs (spreading out the investment over long periods of time). It leaves the member state with some budgetary ‘oxygen’ to deal with domestic priorities (Covid-19, or other) as it sees fit, without having to put infrastructure investments on hold. In fact, upfront national borrowing is no longer needed to finance the investment outlays and the national debt level does not increase.
There are also advantages for those member states that have managed to maintain low public indebtedness and may be better able to deal with the impact of the current crisis. It would allow them to embark on a looser fiscal stance than the other member states, which might be perceived as more helpful to jumpstart their own economic growth. Moreover, the governance set-up of the public leasing entity would target priority investments, e.g. in the context of the proposed Green Deal. The governance design of PILE would favour oversight and control by all member states, which are the ultimate beneficiaries and owners of PILE. It would internalise moral hazard risks, if any, and ensure democratic accountability. Being of interest to all member states, PILE’s political harvest would be that it may achieve consensus without too much difficulty in the European Council and the European Parliament, as well as in national parliaments.
The advantage for PILE itself is a predictable revenue stream over long periods of time that comes from taking (diversified) low public sector risks and having a strong physical asset portfolio. This would allow PILE to issue new bonds to allow the process to continue. Moreover, the shareholders of PILE may receive dividends, which they can reserve to be re-invested by PILE. Incidentally, the EIB has the statutory right to set up subsidiaries (a ‘fund’, like the European Investment Fund), that could act as a ‘PILE’ in the manner outlined above. The EIB also has the capacity and experience to assess such projects.
A collateral merit is that PILE’s bonds may be seen in the global financial markets as a European safe asset. PILE would eventually become a leading issuer of euro-denominated bonds, worldwide. Given the nature of PILE and the characteristics of public infrastructure, the bonds issuances would be medium to long term, virtually risk free, and thus encourage the diversification of assets from USD denominations for pension funds, insurance companies, banks, and other institutional investors. The bonds could also be attractive for retail demand (e.g. households), thereby channelling the accumulated stock of precautionary savings back into productive investments.
Last but not least, these bonds would offer a new and interesting tool under the ECB’s Asset Purchase Programme. It may also resolve a legal obstacle under the Treaty on the Functioning of the European Union that forbids the ECB from engaging in monetary financing of national budget deficits (i.e. subscribing to newly issued national bonds in the primary markets).
But there is some urgency here
In essence, the purpose of PILE is to provide a supplementary and largely autonomous financing vehicle that can flank the EU recovery plan and durably boost investments, even beyond the current crisis. The set-up and governance of PILE would also help to address the under-investment in key infrastructure that is seen during times of sustained growth. To make the model quickly operational, the entity could envisage, in its first phase, focusing on suitable mature but postponed investment projects in member states. Consideration could also be given to the acquisition of already existing public infrastructure assets to help increase the volume of its operations. The private Australian Macquarie Group already applies the lease concept for public infrastructure assets, for example. The novelty of PILE is that it would have the allure of a sovereign wealth fund at the level of the EU, specialised in public infrastructure leasing. It would allow both for the sustainability of productive infrastructure investments in member states, and relieve upward pressure on deficits/debts and current/future tax levels.
Authors: W. Moesen (wim.moesen@kuleuven.be) is Professor Emeritus of Public Finance at KU Leuven, Belgium. P. Vanhoudt (p.vanhoudt@eib.org) is a lead economist and deputy Spokesman of the College of Staff Representative at the European Investment Bank. The views expressed in this note remain those of the authors only and may in no way be taken as endorsed positions by the EIB or by any of its internal bodies.
The full working-paper from which this commentary is taken is available from the authors upon request.