The Council of Ministers will approve this Tuesday the first step to launch the investment instrument España Crece, dubbed as a sovereign fund and aiming to mobilize 120 billion euros, according to government sources confirmed to EL PAÍS. The fund facilitates the transition from the European recovery plan, the largest public support program launched to date in Spain, which ends this August. With España Crece, the Government equips itself with an unprecedented investment arm and does not set a deadline to use it, so it can inject money into the economy without the anxiety of the demanding EU funds deadline, which will leave part of the money unspent. Among the spending objectives is defense, an area not covered by the European funds.
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The Executive will give the order this Tuesday to the Treasury to make the capital transfer that will be managed by the Instituto de Crédito Español (ICO). The funds are divided into two lines: 2.8 billion euros from leftover transfers from the recovery plan and 10.5 billion euros charged to unused credits from the program, which is the tranche with which ICO will go to the market to finance the full power of the new instrument.
According to ICO’s calculations, for every euro received, the entity has the capacity to borrow five on the markets, up to 60 billion euros. ICO, the closest thing to a public bank that Spain has, issues international debt backed by the country’s credit rating, either in the Brazilian or Turkish market, two very competitive venues where the two largest Spanish banks (Santander and BBVA) operate and accompany it in the issuances. Another advantage of this instrument is that it does not count in national accounting as public debt for the Spanish Treasury.
Once ICO has raised the planned 60 billion, it will seek private investors to accompany it in the range of investment instruments it will deploy and for which details are still pending. This co-investment will be done as usual at ICO on a one-to-one basis (for every euro ICO puts in, the private part puts in another euro), doubling the capacity up to 120 billion.
Money for Defense
The perimeter or investment mandate is still to be defined and will be worked on in the coming weeks according to the schedule agreed with Brussels. The spirit of the recovery plan will be followed, which seeks to support transformative activities. This will favor investment in the technology sector, but also in care and green investments. Unlike the current recovery plan, which was designed to help the countries most affected by the 2020 pandemic, defense will this time be one of its investment areas.
ICO will give loans, as is its usual business, but will also buy direct stakes in companies, something that until the deployment of European funds was not common in Spain. It will take over from the agencies that are now playing that role of state investor, with a prominent role of the Sociedad Española de Transformación Tecnológica (SETT), which was founded by José Luis Escrivá, now governor of the Bank of Spain, with the ambitious goal of investing around 16 billion euros.
Anxiety to spend
SETT reduced its allocation a few months ago in the recovery plan revision to 2.7 billion euros, of which it has already committed half although more operations are expected to be announced imminently. This company only invests accompanied by private agents and the size of operations in immature sectors, and therefore risky, has been smaller than expected. Other investment vehicles, such as Sepides, Cofides, and CDTI have entered as shareholders in different start-up (emerging) Spanish companies charged to the European plan, which has sometimes caused overlap. A government source acknowledges that several public entities may have coincided negotiating at the same time with the same company. Three sector sources say that the anxiety to spend of these entities before the plan ends is perceived, which has flooded the Spanish entrepreneurship ecosystem with public money in recent months and has raised some suspicions about the effect of this appetite on the prices paid.
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Centralized command
The España Crece fund will act as a gateway so that the economy does not suffer a sharp step effect when from summer the funds can no longer be spent. SETT says it will continue “its proactive work of identifying operations” that ICO will then execute. The complete governance is yet to be developed and it is not clear what role these agencies will have, which in any case will continue to manage the portfolio of their holdings. But the final word will be with the ICO General Council, which is made up of independent directors. Although the entity commits to consulting with the autonomous communities on their investment priorities, the new instrument will be centralized and will be free from the complexity layer of the rescue fund that had to be executed by several State Administrations.
ICO says it will be a “patient investor” and although the vocation is to complement the market in certain operations, these will have to enjoy solvency to count on public support.
The entity expects demand to govern the fund’s activity and, lacking a horizon, it will be modulated with economic evolution or with new needs detected in the future. Through a digital platform, companies will be able to interact directly with ICO to find the best co-investment formula. This direct relationship, which is recent, will be enhanced, since the entity works with banks as intermediaries to channel public funds. In this new stage, ICO will assume more risks, terms and areas of action will be expanded.
Investment in intangibles, one of the weak points of the Spanish economy, will be another objective. ICO is studying how to support investment in employee training or patent generation. It is a rare circumstance that economists grouped in the Spanish Productivity Council had demanded the creation of a similar vehicle, which channels and surgically boosts certain sectors that improve the productive structure of the Spanish economy.
The new fund will also operate the 2.8 billion euros in grants, with which ICO will promote loans to developers to boost the creation of affordable rental housing. This line is the most urgent and they will try to deploy it quickly as announced when presenting the sovereign fund at the beginning of the year.
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