Next Generation Spain: practical advice

Miguel Gil Tertre

7 de Junio de 2020, 19:19

Spain will receive (once the multiannual financial framework has been approved) a considerable amount of grants and loans from the European Union.

Those funds will begin to become available sometime in 2021. Two principles are crucial:

  1. First, that the funds quickly reach the real economy to allow for a faster recovery.
  2. Second, that Spain takes advantage of the volume of funds to think about and execute a modernization of the country’s economic model, to make it more productive and resilient.

To take advantage of this opportunity, it is necessary to prepare in parallel concrete projects and reforms that will lead to a more competitive economic model. Infrastructure projects take an average of two to seven years to materialize in the real economy (between permits, engineering studies, tenders, ...). Smaller projects may take less time but need to be grouped together to reach a critical mass that allows access and use of funds. If the money is to arrive in the real economy soon, these steps must be advanced on previously identified projects. Preparatory work must be done at least one year before funds are available.

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Once the areas are clearly defined in the Commission's proposals, focus on concrete actions and projects around:

  • sustainable investments in line with the European Green Deal
  • investments in the digital transformation of the economy to make it more productive
  • investments in the resilience of the economy (example investment in health systems).

In order to maximize the use of the funds, it is necessary to know them well and to be able to coordinate them to achieve the final objective of modernizing the economy:

  • Cohesion funds (including the Just Transition Fund) reach the regions and are scheduled for seven years by negotiating operational programs. Cohesion funds will be topped up with an additional € 5 billion in 2020 and € 50 billion in 2021 with a different allocation key that addresses immediate needs, depending on changes in GDP and unemployment.
  • The financial instruments of the European Investment Bank are accessible from a certain threshold to any public or private investor (who can call for technical assistance to build their project) without any pre-allocation by country. The countries that present more and better projects will benefit the most from this instrument. A new window will open in InvestEU and the Strategic Investment Mechanism would help guarantee strategic autonomy in the internal market, investing in key value chains. The Solvency Support Instrument will provide support to viable companies. These are all financial instruments based on a guarantee backed by the EU budget. The EU will not take stakes in companies but offer guarantees for investment.  
  • Finally we have the new instrument "Recovery Resilience Facility" under which Member States have to present reform and investment plans that have to be validated by the European Commission and endorsed by a committee of Member States’ representatives. This plan should be in line with the recommendations adopted in the framework of the European Semester. The Commission has proposed that this program receive € 310 billion in grants and € 250 billion of lending capacity available to 27 Member States.

Quality projects and investments 

Spain is a country that has good traditional infrastructures (many of them built in the past with the support of Union funds). In the transformation of the Spanish economic model, it may be necessary to focus also on other, more micro-sized investments for economic and industrial modernization. These projects can become more employment-intensive (as is the case with the energy efficiency of buildings). At the same time, they are more laborious to implement, requiring novel financing models and a greater need to identify and group projects. A balance will have to be struck between job creation, domestic investment and imports (as part of the technological solutions will be imported). 

Among these investments we could consider for example:

  • The modernization and digitalization of the administration, including education, health services and justice.
  • Aid to the tourism sector for its energy, climate and digital adaptation
  • An industry package to enhance presence in European value chains (for example in the automotive sector).
  • In the case of transport infrastructures, for example, investments in rail freight transport and the modernization of port infrastructures could be prioritized.

To carry out these projects, Spain could also benefit from the technical assistance that the Commission's Directorate General for Reform makes available to Member States. 

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This type of investment requires a greater dose of planning and collaboration between the different actors than investments in traditional infrastructures. Collaboration between the public and private sectors is essential from the planning stage. The private sector can provide co-financing and information that can be valuable in planning.

The preparation of the plan must focus on the quality of projects and on a realistic schedule. It is not just about preparing projects, but ensuring their quality and execution based on a precise schedule. All with a good monitoring process based on objectives and good practices.

The plan should be seen as an opportunity to gain competitiveness and reorient the future of the economy itself.

A concrete proposal for structural reform

Poland has one of the highest absorption and execution rates of European funds.

One of the reasons may be the good preparation and effective coordination at the technical level of all the key actors for the creation of 'pipelines' for projects that maximize the use and impact of funds.

A technical committee made up of experts, representing both the relevant Ministries, those responsible for investment in the regions, public development banks (the equivalent of the Official Credit Institute) and representatives of the private sector, is responsible for shaping the 'pipelines' of projects with a horizontal vision regarding the funds:

  • What to present 
  • When to present it
  • What type of financing (subsidy, financial instrument, etc…) is most adapted to the project's needs.

This Committee also maintains a regular dialogue both with representatives of the European Investment Bank, as well as with representatives of the European Commission (negotiation of Operational Programs) or private investors who can co-finance part of the projects.

Coordination between different levels of the Administration (including regional and local levels) is important to ensure coherence in the plan and optimize its chances of success.

A practical example: the renovation of buildings

The renovation of buildings for energy efficiency is a type of investment that covers several objectives:

  • It quickly reaches the whole of the real economy.
  • It enables additional training for workers in the construction sector. 
  • It help to build a more productive economy in line with the Green Deal. 

It is also a point included in Recommendation 3 proposed by the Commission on May 20, 2020 in the framework of the European Semester. 

Different instruments of the Multiannual Financial Framework can contribute to this objective:

  • Cohesion funds can give a boost to subsidies
  • The instruments of the European Investment Bank allow loans to financial vehicles that can give loans
  • The instruments of "Recovery and Resilience" can give a boost to the public budget

What seems important in these circumstances is to develop a plan (for publicly owned buildings, housing, etc ...) to achieve a critical mass of investments (the renovation of an apartment is a modest investment, the renovation of a park of thousands of homes is the target that we should consider) and combine in the best way the existing instruments so that the money reaches the economy soon in each city, region, etc.

In this sense, once the technical and financial possibilities are decided, you can see:

  • How to better combine regional and central funds,
  • What part of the funds can be used as a subsidy and what part as financial instruments (such as loans to homeowners who can return that loan with whatever is deducted from the monthly bill).

The funds proposed by the European Commission for the recovery place the responsibility on the Member States. They will have to think and present investment and reform plans that will be examined by the European institutions and the other Member States.

The Ministry of Economy plays a very important role in this regard, specifically, the model put in place by the Polish administration to coordinate all actors has ensured very high rates of absorption of funds and execution of projects and can serve as an example. This model integrates at a technical level all levels of administration, public banking and the private sector under the coordination of the Ministry.

The opportunity that these funds can present should be used to reflect on a medium-long term plan to modernize the economic model of the country. This reflection must mobilize all the key actors.

Disclaimer: the views expressed are purely those of the writer and may not in any circumstances be regarded as stating an official position of the European Commission

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