The Recovery and Resilience Facility: A Catalyst for Sustainable Investment and Growth | Greece
Evi Dimitropoulou, partner, and Danai Lantzou, associate, of KLC Law Firm provide an in-depth look at the Recovery and Resilience Facility (RRF), a European Union initiative aimed at mitigating the economic impact of the COVID-19 pandemic. They delve into the specific implementation of the RRF in Greece, focusing on the Commercial Banks Mechanism, its structure, processes, and its role in stimulating private investment in key sectors like green energy and digital infrastructure.
What is the RRF?
January 2024 marked the third anniversary of the RRF. Introduced by Regulation 2021/241/EC, the RRF is a pioneering instrument designed to address the adverse effects and consequences of the COVID-19 crisis. This regulation was amended in February to incorporate the REPowerEU funds. In essence, the RRF provides short-term financial support totalling EUR723.8 billion, consisting of loans and investment aid, to fund investments that must be implemented by 31 December 2026.
RRF support is organised into six pillars:
- green transition;
- digital transformation;
- smart, sustainable and inclusive growth;
- social and territorial cohesion;
- health, and economic, social and institutional resilience with the aim of, inter alia, increasing crisis preparedness and crisis response capacity; and
- policies for the next generation, such as education and skills.
On 27 April 2021, Greece submitted to the European Commission the National Recovery and Resilience Plan titled “Greece 2.0” (NRRP). The NRRP is structured around four pillars: (i) green; (ii) digital; (iii) employment, skills, and social cohesion; and (iv) private investment and transformation of the economy. Following a request for the modification of Greece’s recovery and resilience plan, which was endorsed by the Commission on November 2023, the plan is now valued at EUR35.95 billion, with EUR18.22 billion in RRF grants and EUR17.73 billion in RRF loans.
Component 4.7 of the NRRP aims to improve competitiveness and promote private investment and exports, thereby reforming the Greek business environment to accelerate economic recovery and enhance potential growth. This component proposes using RRF loans as financial incentives for private investments. These loans will be channelled through Greek commercial banks and directed towards long-term private sector investments, financing only projects with a positive expected rate of return (positive net present value). Investments eligible for financing under this scheme include those contributing to one or more of the following objectives: (i) green transition; (ii) digital transformation; (iii) innovation, research and development; (iv) economies of scale through mergers, acquisitions and partnerships; and (v) higher exports (the “RRF Commercial Banks Mechanism”).
“The RRF Commercial Banks Mechanism has proven to be an efficient financing tool with enhanced transparency”.
Currently, seven commercial banks plus the EIB and EBRD participate in the RRF Commercial Banks Mechanism, which act as financial intermediaries in the context of the RRF scheme. Each participating commercial bank has concluded operational agreements with the RRF Coordination Agency, enabling them to channel loans through RRF funds.
The Key Steps of the RRF Commercial Banks Mechanism
The RRF Commercial Banks Mechanism has proven to be an efficient financing tool with enhanced transparency. The process is managed exclusively by the commercial banks, except for the assessment of investment eligibility. The key steps are as follows:
- The investor submits to a commercial bank a request for financing under the RRF scheme along with a copy of its investment plan and of the relevant supporting documents;
- The bank conducts a preliminary assessment of the investment’s eligibility, economic viability, and the investor’s financial standing and credibility, in accordance with its internal policies.
- Final approval of the eligibility of the investment is carried out by an independent evaluator, selected at random from a platform maintained by the RRF Coordinating Agency. Upon completion of its audit, the independent evaluator prepares an audit report confirming the following matters: (i) the eligibility of the investment and of the expenses; (ii) the compliance of the investment with the “do not harm principle” introduced under Article 17 of Regulation (EU) 2020/852; (ii) investment’s alignment with the Eligible Pillars and its contribution to the RRF objectives; (iv) the percentage of the RRF tranche relative to the total value of the eligible investment; and (v) the compatibility of the RRF Loan and of the interest rate with state aid rules.
- Upon fulfilment of all conditions, the finance and security documents are executed, and the loan (RRF and the co-financing tranche) is disbursed.
The Structure and Key Principles of the RRF Loan
- Form of loans: The RRF loan can be structured as a term loan or a bond loan. In the case of a term loan, the RRF tranche is exempted from the bank levy under law 128/1975.
- Financing Scheme (RRF ratio): The financing of the eligible expenses should be structured as follows: (i) up to 50% from RRF funds; (ii) a minimum of 30% from the commercial bank and (iii) and a minimum of 20% from the investor’s own equity.
- Form of investor’s own equity: The investor’s equity contribution can be in the form of capital, loans from affiliates, or contributions in kind, as long as the value of the latter does not exceed 10% of eligible expenses and is linked to the eligible investment.
- Loan maturity: The maturity of the loan is set by the commercial bank and cannot be less than three years and not higher than 15 years. Exceptionally, in project finance schemes, the maturity of the loan can be extended up to 20 years.
- Purpose: Loan proceeds are exclusively for financing eligible expenses. Refinancing of existing loans is not permitted, except for bridge loans granted by the commercial bank to the investor after the RRF financing application is submitted.
- Pari passu principle: The RRF loans and the co-financing loans are treated equally and are subject to the same security. Both loans are drawn and repaid concurrently to maintain the RRF ratio.
- Role of commercial banks: The Greek state acts as a lender/bondholder and is represented in the negotiation, signing and further execution of the finance and security documents by the commercial bank pursuant to the operational agreement between them. The latter has discretion to decide and handle all commercial matters.
- Specific RRF undertakings:The RRF loans include several ad hoc RRF covenants assumed by the borrower (such as posting the RRF funding, keeping records of the investment reporting requirements, etc).
How the RRF Scheme Has Boosted Investments
The RRF scheme has undeniably provided investors with immediate and direct access to funding at a significantly reduced interest rate. This has spurred an increase in private funding from banks and other investors, dedicated to the implementation of sustainable investments and structural reforms in Greece, particularly in the areas of green energy and digital infrastructure.
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