Financial Engineering serving Corporate Needs: a Partnership between the Public Utilities and the Private Sector

Synthesis of the presentation of Mr. Paul Goldschmidt, Director, DG II, European Commission organised at the invitation of Groupe Schneider.

Financial engineering takes in the whole range of options that can be considered in drawing up a financial package.

The development of financial engineering in Europe :
Financial engineering in Europe (which is lagging well behind the United States in the techniques it deploys) should take on a new dimension with the introduction of the Euro.
In addition to the fact that investors will no longer face an exchange risk, the single currency will lead to a lengthening in maturity date options for issues by public or semi-public bodies and an expansion in the range of credit facilities.

The Euro, whose use also implies more rigorous budgetary discipline, requires the restructuring of financing methods. In fact, the availability of public funds (State budget and public loans) for financing major infrastructure projects will be increasingly regulated. At the same time, the move towards a system of capitalisation for the social security and pensions systems should make it possible to meet the new financing requirements. A structural change in the relationship between the financial players in the public and private sectors would therefore appear essential.

Change in the relationship between the public and private spheres :
This change in the relationship between the players from the public and private spheres requires greater human mobility between the two sectors in to order to allow each one better to understand the constraints and motivations of the other. In the context of their co-operation, the private sector must accept the principles underlying the way in which the public utilities work, which are not necessarily linked to the aims of profitability.

Furthermore, it can more easily become involved in financing profitable projects than the public utilities which have only limited resources. Thus there is no use in deploying limited public funds where private funds could be mobilised. It is essential to ensure that public and private involvement is complimentary. This is where the careful planning of a financial package comes fully into its own.

On that basis, how best can public money be allocated ?

Priority allocation of public funds :
Taking financial responsibility upstream for any action which leads to the subsequent mobilisation of private funds for the benefit of undertakings (financing of environmental impact studies, profitability studies…..)
Encouraging the raising of funds aimed at attracting investment into difficult sectors such as small and medium-sized businesses, or deprived areas, …
Taking on risks that lie within the jurisdiction of public authorities (risks linked with administrative authorisations, changes in legislation, …)
Re-allocating the financial spin-offs of an infrastructure project (increase in the tax base, …) in order to improve it or make it profitable.

Methods of intervention :
Intervention by the public authorities in the form of direct subsidies, reimbursable or otherwise.

Sharing the risks in terms of the nature of these risks : commercial risks for the promoters, political and administrative risks for the public authorities.
Allocation of the resources by the public authorities for the carrying out of projects justified by taking account of the non-financial elements (social considerations, …)
To conclude, financial engineering and how it can help industry should be pursued in the context of a partnership between the public and private sphere and therefore requires a change in attitudes.