Utilities represent a considerable challenge from the financial viewpoint. They generally require massive capital investment involving sunk costs, whilst the financial decision is often accompanied by relatively high regulatory and economic risk, as well as issues of asymmetrical information, incentives, externalities and transaction costs (Florio, 2013). Financial shortages for long-term investment purposes are particularly important, because utilities tend to be capital-intensive and have long maturities. These are some of the major reasons why private sector initiatives alone have often been insufficient to finance the development of utilities around the world. Initiatives from the public sector have also been necessary.
International Financial Institutions (IFI) have assumed an important role as part of public sector efforts to support utilities finance in the post-war period. Indeed, one of the main reasons to create IFI was to facilitate the finance of utilities, for reconstruction, development, growth or cohesion purposes. The pioneer IFI in this respect was the International Bank for Reconstruction and Development (IBRD), founded in 1944, later, to be known as the World Bank3; after which a string of regional financial institutions or developments banks were established, including; the European Investment Bank (EIB) (1958), the Inter-American Development Bank (1959), the African Development Bank (1964), the Asian Development Bank (1966) and the European Bank for Reconstruction and Development (1991). Most of these institutions are based on intergovernmental cooperation among lenders and borrowers and function in a similar way to the World Bank but at the regional level.
Despite the fact the EIB was created as a regional IFI, it actually overtook the World Bank in 1994, as regards the volume of loans to projects in general, and to utilities projects in particular (EIB, 1994; World Bank, 1994). Since then, the EIB has maintained its position as the world's most important financier of utilities projects. In this light, it is surprising that there is a lack of scholarly work on the role of the EIB in financing utilities. General histories of the EIB are available, including both official publications (EIB, 1978 and EIB, 1998) as well as scholarly accounts (Licari, 1969, Bussière et al., 2008 and Coppolaro, 2009). But Robinson (2009) was right when he referred to the EIB as Europe's “neglected institution”. Studies of EIB finance exist, but most of this work is limited to analyzing one sector at a given moment in time. As examples, Griffith-Jones et al. (2011) examined EIB loans to Small and Medium-sized Enterprises; Pinder (1986) and Pinder et al. (1995) focused on the finance of regional development and transport; and Tuijnman (2009) studied loans to education. But these studies do not provide an over-arching perspective on EIB finance. Much more is known about loans by the International Monetary Fund (IMF) and the World Bank than the EIB.4
Hence there is a lack of understanding about the role of the EIB in financing utilities. This omission has become more acute during the ongoing financial and economic crises. The EIB has been criticized for assuming an overly-conservative posture towards lending in the crisis. Both the popular press (Financial Times, 2012a and Financial Times, 2012b) as well as the scholarly community (Lesay, 2010, Kaul, 2012, Griffith-Jones et al., 2012 and Griffith-Jones and Tyson, 2013) have called on the EIB to adopt bolder decisions by increasing the scale of its lending to finance higher risk activities, particularly, to utilities, as a countercyclical policy to assuage the current economic context, specifically towards those countries most negatively affected by the crisis. At the theoretical level too, the ongoing financial and economic crisis is generating a revitalization of economic theory on the role of public investment for growth (Lin and Rosenblatt, 2012, Cortuk, 2013 and Lin et al., 2013).
The main aim of this paper is to start to fill this knowledge gap by analyzing the EIB's contribution to financing utilities over the long-term. To the best of our knowledge, this article represents the first attempt to reconstruct and analyze all loan data for utilities over the life of the EIB. To do so, we extracted data from the Annual Reports available in the historical archives of the European University Institute, Florence, Italy. Our analysis spans the period between 1958, the year the EIB commenced lending, to 2004, the final year that this data is publicly available. 5
Our analysis of the EIB's contribution to utilities finance is framed using key economic history literature (particularly, Hausman et al., 2008 and Millward, 2005). Accordingly, we would expect to see an initial period, from the creation of the EIB to around the 1970s, characterized by a “golden age” as regards the role of IFI in financing utilities, due to their inherent advantages in offering long-term and low interest loans in an age of financial shortages. We would then expect a new phase to be ushered in, characterized by financial globalization and excess liquidity in capital markets, Stiglitz's (2003) “roaring nineties”. In this period, the availability of excess private capital led some scholars to question whether IFI were still important (Klein, 1998) whilst others came to their defense, claiming they were still important, in their providing technical expertise (Rodrik, 1995) and economic stability, engaging as they did in counter-cyclical lending when necessary (Stiglitz, 1998, 120).
To anticipate our findings, our analysis of EIB utilities finance broadly fits into this pattern. We identify a first phase, between 1958 and 1972, where the EIB functions predominantly as a bank to promote regional development in the poorest regions in the European Economic Community (EEC). A key strand of this work was the financing of public utilities projects in the Mezzogiorno, Southern Italy, by far, the poorest region of its Member States. This lending practice was disrupted from 1973, due to the oil crises and the collapse of the international monetary system. EIB finance is associated in this period with promoting a new energy paradigm and as acting as a “sweetener” for new accession Member States. Then, from the middle of the 1980s, a new lending pattern emerges. EIB lending becomes more closely aligned than ever with the objective of consolidating the Single Market project. In this period, utilities projects are prioritized across all Member States – particularly those on the geographical periphery of the Single Market – to further their integration into the market. At the sectoral level, finance is targeted predominantly towards the Trans-European Networks (TENS) – particularly road and railway transportation – as well as those sectors put up for liberalization through sectoral Directives and, often, privatization, particularly, telecommunications, electricity and gas. In this period, we describe the logic of EIB loans as that of a “market-maker”. In sum, EIB finance was initially guided by regional development objectives in the early period, was disrupted and converted in a political one associated with the new energy paradigm, and, finally, emerged as a market-based logic, bolstering the Single Market project.
The rest of this article is organized in the following way. Section Two provides an analytical framework setting out the changing ways in which utilities have been financed over time, grounded in recent economic history literature, before briefly discussing the background to the creation of the EIB and its lending prerogatives, as established in its Statutes (EIB, 1957). We also describe the methodology of data collection. We then turn to the three phases of EIB lending. Section Three analyses the first phase of EIB finance from 1958 to 1972; Section Four describes the transition period, chronicling the EIB's changed role in responding to new policy priorities. Section Five examines EIB lending in the most recent period, from 1985 to 2004, showing its turn to market-making. We conclude with some observations about the real and potential role of the EIB in the ongoing crisis.
Utilities exhibit special characteristics making their
fi
nance
complex. Huge capital requirements, sunk costs and long matu-
rities have meant private involvement has not always been suf
fi
-
cient when
fi
nancing utilities development. Public involvement has
also been important. IFI played an important role in
fi
nancing
utilities from the post-war period.
We observed how much more is known about the contribution
of both World Bank and the IMF than the EIB as regards
fi
nancing
utility projects. This article shed new light on the role of the EIB in
fi
nancing utilities over nearly half a century. In the context of the
ongoing crisis, the EIB has been criticized for not doing enough to
support ailing European economies on their roadto recovery due to
what is perceived as an overly conservative approach to lending
(
Grif
fi
th-Jones and Tyson, 2012; Grif
fi
th-Jones et al., 2012
).
After assembling and processing all data on EIB lending over
time until 2004, we selected all
fi
nance going to utilities projects in
Europe. We then analyzed the data, using an analytical framework
based on the work of
Millward (2005)
and
Hausman et al. (2008)
,
and anticipated wewould encounterdifferent phases in the logic of
EIB
fi
nance. Firstly, an initial period where lending corresponded to
a
“
golden age
”
where the role of IFI was deemed essential due to
private capital scarcity, dollar shortages and so on. And secondly,
from the 1970s, a new phase, consolidated during the 1980s and
1990s, of private capital excess as a result of
fi
nancial globalization,
wherein the continued relevance of IFI would be questioned.
We found that EIB lending can be explained generally, using
these two phases, though there were some important nuances.
There were three clear stages in EIB lending practice. Firstly, from
1958 to 1972, EIB
fi
nance promoted, above all, lending to the
poorestregionsamong its members, in linewith objectiveone of its
Statutes. It functioned as a developing bank for Europe. The year
1973 brought about a rupture in EIB lending practice: oil crises and
the collapse of the international monetary system led to a scenario
whereby EIB
fi
nance became closelyaligned with the Commission
’
s
and Member States
’
interest in achieving energy independence
whilst
fi
nance was used as a sweetener for enlargement. From 1973
to 1985, EIB
fi
nance responded to these two key policy objectives.
From 1986, a new pattern in EIB
fi
nance emerged. As
fi
nancial
globalization and utilities deregulation spread around the world,
and excessprivatecapital helped fuel questionsabout the relevance
of IFI, the EIB looked for a new role inside Europe. As policy-makers
promoted deeper integration and the consolidation of the Single
Market, whilst privatization programmes grew, EIB
fi
nance
boomed,
fi
rstly, towards utilities sectors key to the TENS (road and
rail transport) and, secondly, to those sectors being liberalized
and/or privatized (telecommunications, energy and water, to a
lesser extent). In sum, over nearly half a decade, EIB
fi
nance shifted
from prioritizing utilities for regional development, to promoting
an enhanced market presence in the utilities sector.
Our analysis of the changing role of EIB loans to utilities helps
explain the current predicament facing the EIB. Contemporaryscholars criticize the EIB for an overly-conservative approach to
lending in the crisis and for not taking risks in the name of the
social interest (
Grif
fi
th-Jones et al. 2012; Grif
fi
th-Jones and Tyson,
2013; Kaul, 2012
). Many scholars argue that what is required in
times of austerity is greater
fi
nance of infrastructure in an attempt
to spark growth. The EIB sits in a privileged position to do so, due to
the favorable conditions it enjoys to offer
fi
nance. In the 1950s and
1960s EIB
fi
nance prioritized regional development. Back once
more to the age of crisis and austerity, the EIB should look to its
founding Statutes, written after war and crisis, and
fi
nd the courage
to
fi
nance regional development once more.
