Communication from the Commission to the Council and the European Parliament - European Initiative for Growth - Concept for the design of an EU loan guarantee instrument for TEN-Transport projects {SEC(2005) 323}
Date: 2005-03-07
Institutions: European Commission
Subjects: EU financial instrument, EU growth strategy, structural policy, trans-European network, transport network

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 07.03.2005 
COM(2005) 76 final 

COMMUNICATION FROM THE COMMISSION 
TO THE COUNCIL AND THE EUROPEAN PARLIAMENT 

European Initiative for Growth 
Concept for the design of an EU loan guarantee instrument for TEN-Transport projects 

{SEC(2005) 323} 

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COMMUNICATION FROM THE COMMISSION TO THE COUNCIL AND THE 
EUROPEAN PARLIAMENT 

European Initiative for Growth 
Concept for the design of an EU loan guarantee instrument for TEN-Transport projects 

Table of contents 

1. 

2. 

2.1. 

2.2. 

2.3. 

2.4. 

2.5. 

2.6. 

2.7. 

2.8. 

2.9. 

Executive summary...................................................................................................... 3 

The revised proposal for a guarantee instrument ......................................................... 4 

The EU guarantee instrument....................................................................................... 4 

Key objectives.............................................................................................................. 5 

Main benefits................................................................................................................ 5 

Eligible projects ........................................................................................................... 6 

Risk sharing.................................................................................................................. 6 

Legal base..................................................................................................................... 7 

Cost of the guarantee to the Community...................................................................... 7 

Provisioning and pricing .............................................................................................. 8 

Impact on the Community budget and liquidity fund .................................................. 8 

2.10.  Management................................................................................................................. 9 

3. 

Final remarks.............................................................................................................. 10 

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1. 

EXECUTIVE SUMMARY 

Following the request of the European Council of December 2003, the Commission services, 
in  collaboration  with  the  European  Investment  Bank  (EIB),  carried  out  a  market  testing 
exercise to examine the feasibility of a loan guarantee instrument for transport projects. The 
market testing exercise is presented in the Commission Communication COM(2005) 75 final. 

Consultations  with  a  number  of  experts  throughout  the  European  Union  have  led  to  some 
technical  modifications  of  original  Commission  ideas  set  out  in  the  Communication  of  11 
November 20031 on the Growth Initiative. 

The  goal  of  the  guarantee  instrument  is  to  increase  the  leverage  capacity  of  limited  public 
resources  to  stimulate  private  sector  investment  in  priority  TEN-transport  (TEN-T)  projects 
by providing credit assistance.  

The instrument will provide useful support for specific types of PPPs and for a specific period 
of  the  project  cycle.  It  will  thus  widen  the  range  of  TENs  financing  instruments.  The 
guarantee instrument will only achieve full impact if the proposed total TEN budget of € 20 
billion  is  adopted.  This  will  signal  to  investors  that  the  completion  of  networks  is  realistic. 
The guarantee instrument will therefore complement European grant financing but not replace 
it.  

Under  the  new  design  of  the  instrument  the  EU  would  issue  loan  guarantees  to  mitigate 
revenue  risk  in  the  projects’  early  years.  Specifically,  the  guarantee  would  fully  cover  a 
liquidity cushion, called “a stand-by credit line”, which would only be drawn upon in cases 
where  project  cash-flows  are  insufficient  to  service  senior  debt.  These  stand-by  credit  lines 
would cover around 10% of the total senior debt (in certain more risky cases up to 20%) and 
would not usually exceed 5 year maturities. To be eligible for the EU loan guarantee, projects 
must receive a comparable level of financial support from the Member States or other national 
public authorities, in a form that recognises the diversity of the tools available and which is 
appropriate to different national realities. 

In line with the original proposal, the guarantee would be priced in order to cover the risk and 
management costs relating to the instrument.  

If  the  guarantee  were  called,  the  Commission  would  obtain  a  financial  claim  which  would 
rank subordinated to the senior debt but senior to equity. This mezzanine debt would have to 
be paid back by the borrower to the Commission as and when project revenues permit.  

The funding of the instrument will be carried out under the new Financial Perspective, under 
the  budget  heading  for  Trans-European  Transport  networks  for  the  period  2007-2013.  This 
action is already included in the financial framework of the proposed TEN-T regulation2. The 
Commission  risk  assessment,  based  on  a  model  using  published  data  from  rating  agencies, 
suggests  that  a  budget  allocation  of  EUR  1  billion  could  support  around  EUR  20  billion  of 

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COM(2003) 690 of 11 November 2003 
COM (2004) 475 final - Financial Statement, page 41" 

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senior  debt,  assuming  a  portfolio  of 
investment  grade 
creditworthiness.  In  any  case,  the  provisioning  mechanism  and  liquidity  fund  would  reduce 
the risk of a direct call on the Community budget to a negligible level. 

transactions  with  a  near 

The Commission envisages selecting an international financial institution for the management 
of the instrument and considers to the EIB Group to be an appropriate management candidate. 

The  conclusions  of  this  paper  provide  the  basis  for  launching  an  EU  loan  guarantee 
instrument  for  TEN-T  projects  within  the  framework  of  the  Commission’s  proposal  for  a 
Regulation of the European Parliament and of the Council determining the general rules for 
the granting of Community financial aid in the field of trans-European transport networks and 
energy  amending  Council  Regulation  (EC)  nº  2236/953  (the  “new  TEN-T  Financial 
Regulation”).  While  this  scheme  would  not  come  into  effect  until  2007,  the  Commission 
together with the EIB would envisage drafting implementation rules during 2005 and would 
then start selecting and assessing projects to be included in the portfolio from 2007 onwards.  

This  Communication  is  intended  to  create  a  basis  for  further  discussions  in  particular  with 
Member States authorities on its implementation, its management and the possibilities for the 
Member States to provide comparable support. 

This  report  is  divided  into  3  sections.  Following  the  executive  summary,  section  2  presents 
the  proposed  design  of  the  EU  guarantee  instrument,  its  funding  and  provisioning  needs,  as 
well as its management requirements. Section 3 concludes the report. This Communication is 
accompanied by the Commission staff working paper SEC(2005)323. 

2. 

THE REVISED PROPOSAL FOR A GUARANTEE INSTRUMENT 

The  following  sections  provide  a  description  of  the  revised  design  of  the  loan  guarantee 
instrument. The Commission staff working paper SEC(2005)323 includes a general overview 
of stand-by credit lines and more detailed information on the indicative main features of the 
instrument in order to facilitate the understanding of this topic. 

2.1. 

The EU guarantee instrument 

in  particular 

Under the new design, the Community would guarantee up to a predetermined cap rate, and 
possibly up to a nominal ceiling, a stand-by credit line in a PPP type of project. The guarantee 
would  cover  unexpected  debt  service  shortfalls  due  to  certain  specific  risks  which  would 
to 
include 
availability/performance  risks  provided  that  these  risks  can  be  reasonably  assessed. 
Concerning  availability  payment  based  projects,  the  EU  guarantee  could  only  cover  well 
isolated risks which are not linked to the management of the project and which would not give 
rise to moral hazard for the concessionaire/operator. Depending on the creditworthiness of the 
project,  the  stand-by  credit  line  would  be  around  10%  of  the  senior  debt  outstanding  at  the 
time of completion and in certain cases the percentage could go up to 20%.  

risks.  The  guarantee  might  also  be  extended 

traffic 

The Community would not necessarily be exposed over a long period of time. The guarantee 
would  cover  only  the  early  years  of  operations  of  a  project,  the  so  called  ramp-up  period, 
which would not exceed 5 years.  

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COM(2004) 475 final of 14 July 2004. 

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This  guarantee  would  be  available  for  projects  demonstrating  a  near  investment  grade 
creditworthiness.  The  requested  creditworthiness,  linked  to  the  financial  viability  of  the 
projects,  would  limit  the  likely  calls  on  the  guarantee  instrument.  If  called,  the  Community 
would acquire a claim corresponding to the funds provided. The seniority of the claim on the 
borrower would, in principle, rank subordinated to the senior debt, in order to maximise the 
credit enhancement provided by the EU, but in any case senior to all equity layers.  

The Community would share the concerns of market investors about timely reimbursements 
and financial liquidity, but the Community would be a more ‘patient lender’ than the private 
sector. The claim should be reimbursed to the Community as soon as there are revenues left 
after  having  paid  the  operational  costs  of  the  projects  and  the  debt  service  of  the  senior 
lenders.  If  justified,  the  reimbursement  schedule  could  be  structured  so  that  the  available 
revenues  are  divided  between  the  Community  and  the  equity  shareholders  (partial  cash-
sweep).  The  patient  lender  approach  enables  the  private  investors  to  meet  their  investment 
goals, possibly allowing the project sponsors to complete a favourable financing package in 
an  acceptable  period  of  time  and,  in  the  event  of  problems,  to  make  a  satisfactory 
restructuring.  

It is essential that the guarantee instrument should provide a workable response to the needs 
of  market  operators  i.e.  it  should  be  a  standardised  product  that  can  be  taken  into 
consideration  during  the  early  steps  of  project/concession/financing  negotiations.  In  cases 
where the project is based on revenues that do not have a substantial ramp-up period and/or is 
linked to stable revenue sources, the EU guarantee may not be needed.  

At the same time, the guarantee should be as flexible as possible so that it can be adapted to 
the needs of the projects, for example if the concessionaire changes or if a debt restructuring 
takes place. Consequently, the design of the guarantee instrument should make it possible to 
take into account the differences between countries and between projects in terms of length of 
construction period, length of ramp-up periods and sectors (road, railway, maritime, aviation, 
inland waterways, intermodal platforms).  

2.2. 

Key objectives 

The goal of the EU guarantee instrument is to leverage limited public resources and stimulate 
private capital investment in transport infrastructure projects by providing credit assistance to 
projects of European significance. The key objectives of the instrument are to: 

– 

– 

– 

– 

Facilitate and accelerate the completion of projects of European significance; 

Encourage  private  participation  in  those  projects  and  new  approaches  to  financing 
them; 

Fill market gaps for guarantees; 

Avoid excessive exposure to the Community budget by relying on market mechanics 
whilst achieving high levels of leverage for budget resources. 

2.3.  Main benefits 

Stand-by credit line providers often try to protect themselves from improper utilisation of the 
credit  line,  for  instance,  to  defer  a  clearly  unavoidable  insolvency.  For  this  reason,  they 
include  clauses  targeted  at  preventing  drawdown,  for  example  in  cases  of  material  adverse 

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change  or  violation  of  performance  covenants.  Rating  agencies  look  unfavourably  on  these 
provisions  as  they  might  inhibit  utilisation  precisely  when  it  is  most  needed.  The 
attractiveness of  an EU guarantee instrument is reflected in its potential to de-facto insulate 
the stand-by credit line providers from a major project risk. 

Not  being  subject  to  project  risk  and  benefiting  from  a  zero-risk  weighting  for  regulatory 
purposes because of the EU guarantee for the full amount of principal, interest and other debt 
service charges, the providers of standby credit could limit such charges to a minimum. Also, 
lending capacity would, in principle, be available to increase the amount of senior debt, which 
would benefit from the improved liquidity situation of the project. Assuming that the charge 
for  the  EU  guarantee  is  risk-based,  but  not  market  based,  and  depending  on  the  scale  and 
frequency  of  the  drawn  amounts,  significant  reductions  could  be  achieved  in  the  cost  of 
finance.  

The  common  perception  that  the  EU  guarantee  would  have  strong  symbolic  effect  which 
could facilitate the conclusion of financial packages should not be overlooked. Finally, from 
the point of view of the Commission, it is important to stress that a significant proportion of 
the projects for which the EU guarantee would be called would probably be able to service the 
EU  claim  in  a  reasonable  time  frame.  This  means  that  the  global  leverage  effect  of  this 
instrument could, in fact, be substantial and potentially lead to a more efficient utilisation of 
EU funds. 

2.4. 

Eligible projects 

All projects that are eligible under the TEN-T Financial Regulation, and in particular priority 
projects, would also be eligible for support by the guarantee instrument. However, precedence 
would be given to cross-border projects.  

Typically  the  senior  debt  of  the  projects  is  expected  to  have  a  near  investment  grade 
creditworthiness before the support of the EU loan guarantee. At the time of application, the 
sponsors  have  to  demonstrate  near  investment  grade  creditworthiness  of  senior  debt  on  the 
basis of the project’s overall economic and financial viability. From the point of view of the 
Commission, such a requirement is put in place to ensure that the project’s overall risk profile 
is manageable, that  the provisioning  needs for the EU guarantee  are  not excessive, and that 
the overall financing of guarantee scheme is feasible within the Commission’s budget. From 
the point of view of commercial lenders, such requirements should enable an optimal leverage 
while guaranteeing a timely service of debt.  

2.5. 

Risk sharing 

In  line  with  the  original  idea  of  the  instrument,  to  be  eligible  for  the  EU  loan  guarantee, 
projects must receive a comparable level of financial support from the Member States or other 
national  public  authorities,  in  a  form  that  recognises  the  diversity  of  tools  available  and  is 
appropriate to different national realities. While the market deems it to be very important that 
Member States/national authorities provide comparable financial support to the project in the 
form  of  grants,  guarantees  or  similar,  there  is  no  need  for  a  strict  requirement  for  Member 
States  to  be  co-guarantors  in  the  instrument.  Moreover,  this  might  not  be  possible  as  some 
Member  States  are  not  willing  to  set  up  a  specific  mechanism  to  provide  guarantees  either 
themselves or through other public entities for a limited number of projects. The requirement 
on  Member  States  and  regional  authorities  would  be  the  provision  of  sufficient  financial 

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support  in  whatever  form  in  order  to  contribute  at  least  equally  with  the  Community  to 
achievement of the required creditworthiness.  

Risk-sharing with the private sector is a powerful tool to leverage Community funding. The 
projects should involve an appropriate level of private  participation  in  the  form  of  debt  and 
equity, depending of course on the type of project. The EU guarantee instrument would cover 
the stand-by credit lines that are available for a limited time period, i.e. during the ramp-up 
phase thus enhancing the credit quality of the senior debt during this period. In contrast the 
senior lenders would have to cover the risk during the whole maturity of the senior debt. The 
equity shareholders would still have the incentive to invest and manage the project properly as 
their  return  expectations  would  be  ensured  by  a  structured  reimbursement  schedule  if  the 
guarantee were to be called. 

2.6. 

Legal base  

Article  155,  paragraph  1,  third  indent,  of  the  EC  Treaty,  foresees  the  possibility  for  the 
Community to provide loan guarantees for TEN transport projects. Council Regulation (EC) 
No 2236/95 of 18th of September 1995, as amended4, lays down general rules for the granting 
of Community financial aid in the field of Trans-European networks. 

At present, Article 4(c) of this Regulation only includes provisions for “contributions towards 
fees  for  guarantees  for  loans  from  the  European  Investment  Fund  or  other  financial 
institutions”. It is therefore necessary to amend Regulation 2236/95 to provide a legal base for 
the type of innovative guarantee instrument discussed in the present document.  

Consequently,  the  Commission  has  adopted  a  proposal  for  a  Regulation  of  the  European 
Parliament and of the Council determining the general rules for the granting of Community 
financial aid in the field of the trans-European transport networks and energy and amending 
Council  Regulation  (EC)  No  2236/95  for  the  period  2007-20135  so  as  to  include  the 
possibility  for  the  Commission  to  issue  loan  guarantees  to  cover  financing  shortfalls  during 
the first years of TEN-T project operations.  

This general legal provision should be complemented by implementation rules, taking account 
of the advice of the TEN-T Financial Assistance Committee. The utilisation of this instrument 
will rely on the fulfilment of general eligibility conditions and project selection criteria as laid 
down  in  the  amended  Regulation  and  in  the  implementation  rules  to  be  adopted  by  the 
Commission.  

2.7. 

Cost of the guarantee to the Community 

The  Commission  has  to  set  aside  capital  reserves  to  cover  the  long-term  risk  related  to  the 
guarantee instrument. Analogous to a private banks’ loan reserve, the main cost represents an 
estimate  of  expected  and  unexpected  losses  associated  with  the  provision  of  the  guarantees 
issued.  In  addition,  Commission  would  have  to  pay  the  management  fee  to  the  managing 
agent  (see  point  2.9  hereunder)  and  any  auditing  or  legal  costs  relating  to  a  possible 
Community  claim.  An  appropriate  provisioning  system  and  the  creation  of  a  liquidity  fund 

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Regulation  (EC)  No  807/2004/EC  of  the  European  Parliament  and  of  the  Council  of  21  April  2004, 
amending  Regulation  (EC)  No  2236/95  laying  down  general  rules  for  the  granting  of  Community 
financial aid in the field of trans-European networks; OJ L 143 of 30.4.2004., page 46 
COM(2004)475 final of 14 July 2004. 

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should reduce the risk of direct and unexpected calls on the Community contingent liability to 
a negligible level. When an un-drawn stand-by credit line expires, the guarantee would expire 
as well. 

2.8. 

Provisioning and pricing 

The  objective  of  provisioning  is  not  to  minimise  the  overall  risk  exposure  but  to  optimise 
exposure, i.e. to take prudent risks in order to increase the leverage capacity of Community 
funds as much as possible. Forecasting the long-term cost of the guarantee instrument requires 
estimates  of  the  loss  probabilities  of  the  projects  (expected  and  unexpected  losses)  and 
possible  correlations  between  the  projects.  A  provisioning  framework  should  ensure  that 
sufficient budgetary resources are set aside to cover the underlying risk. 

The Commission will make use of a provisioning model which has been developed internally 
following  discussions  with  rating  agencies  and  using  available  statistical  data6  and 
information7. The provisioning model is presented in the Commission staff working document 
SEC(2005)323. This model is based on the assumption that the guarantee instrument would 
be available to cover shortfalls due to traffic risk, though it would need to be adapted if the 
instrument were to be extended to availability/performance risk. It also incorporates a buffer 
for  potential  downgrading  of  the  creditworthiness  of  the  portfolio.  For  risk  management 
purposes, limits to exposure for individual projects should be determined. 

Ideally each beneficiary should pay an up-front premium, which could be charged when the 
guarantee  is  signed  or  when  the  guarantee  becomes  effective,  i.e.  after  the  substantial 
completion  of  the  project,  and  would  be  payable  either  as  a  one-shot  payment  or  as  annual 
premiums to be paid during the remaining life of the guarantee.  

If the EU guarantee were called, the beneficiary will be required to reimburse the amount of 
outstanding capital and interest to the Community. As the Community claim is comparable to 
mezzanine financing, the amount due following the call should be priced according to the risk 
taken and reflecting management costs. 

The appropriate pricing system will require further fine-tuning. In any case, the pricing will 
be set in such a way that the guarantee instrument would cover its expected costs. 

2.9. 

Impact on the Community budget and liquidity fund 

The funding of the instrument should be foreseen under the new Financial Perspectives i.e. for 
the period 2007-2013, under the budget heading for Trans-European Transport Networks. The 
Community  budget  would  have  to  cover  the  amounts  needed  for  the  operations  and 
management.  

The  Community  would  need  to  enter  into  irrevocable  guarantee  commitments  very  early  as 
part  of  the  completion  of  financing  packages  for  projects,  normally  before  full  construction 
begins. Budget resources would therefore have to be committed and paid during the following 
years  in  line  with  the  Financial  Regulation.  The  amount  committed  would  constitute  a  first 
‘provision’  against  calls  on  the  guarantees  themselves.  Such  a  provision  would  not  be 

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Standard & Poor’s, Infrastructure Finance, Traffic Forecasting Risk: Study update 2003, November 06, 
2003. 
Fitch, A risk assessment model for federal credit, 15 March 1999. 

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intended to cover 100% of the face value of the outstanding loan guarantees (mainly principal 
plus  interest)  and  there  would  therefore  remain  a  residual  contingent  liability  on  the 
Community budget. The prudent rules governing the provisioning of the instrument (see point 
2.7  above)  will  keep  the  risk  of  such  a  residual  liability  at  a  negligible  level.  The  residual 
contingent liability of the Community will be properly taken into account in the Community 
budget  through  a  ‘pour  mémoire’  budget  line  as  is  currently  the  case  of  the  Community 
Guarantee for the EIB external lending mandate. 

In order to have an effective and practical payment mechanism, the Commission should create 
a liquidity fund for the guarantee instrument. The liquidity fund would cover the management 
costs of the instrument and guarantee calls. The resources of the liquidity fund should be built 
up based on the project pipeline and the above mentioned provisioning system. It is estimated 
that the total investment costs for the priority projects8 in the enlarged EU amount up to EUR 
140  billion  for  the  period  2007-2013.  It  is  expected9  that  the  private  sector  would  provide 
approximately up to 20% of these costs as equity and debt financing so that the private sector 
financing  could  amount  up  to  EUR  28  billion.  Assuming  a  portfolio  of  transactions,  which 
have  a  near  investment  grade  creditworthiness,  a  budget  allocation  of  EUR  1  billion  could 
support guarantees on about EUR 20 billion of debt. An indicative annual breakdown of the 
budgetary  needs  is  presented  in  Annex  3  of  the  Commission  staff  working  paper 
SEC(2005)323. 

Any reimbursements and interests earned would be added to the resources of the instrument. 
The liquidity  fund  could have  a self-sustaining and/or revolving character thus reducing the 
long-term  need  for  commitments  and  payments  from  the  Community  budget,  which  would 
otherwise be needed to cover new operations. At a certain stage, an examination of funding 
needs  should  be  carried  out  and  the  resources  not  needed  to  cover  guarantee  calls  and 
management costs could be returned to the Community budget.  

2.10.  Management 

In order to comply with the principle of good governance, the most appropriate course would 
be for the Community to entrust all its guarantee management activity under this instrument 
to a single managing agent, under appropriate arrangements. The managing agent should have 
an in-depth knowledge of project financing, together with appropriate credit risk management 
systems  in  place  in  order  to  assess  the  project  risks  and  to  manage  the  provisioning  system 
and the liquidity fund in the long-term. It should also have in-house legal  expertise  and the 
appropriate front office staff to interface with financial institutions, monoline insurers, venture 
capital  funds,  national  authorities  and/or  shareholders.  The  managing  agent  will  have  to 
demonstrate its ability to enter into a long-term contractual relationship with the Commission 
for  the  management  of  the  instrument  (minimum  15  years).  The  lifetime  of  the  guarantee 
instrument  makes  it  difficult  to  envisage  an  outsourcing  of  management  to  a  purely 
commercial body.  

On the other hand, the management of this type  of  financial  instrument differs significantly 
from the current grant management practice, which seems to effectively exclude recourse to 
an  agency,  unless  it  was  staffed  with  specialist  project  financial  expertise.  The  most 

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Priority  projects  within  the  meaning  of  Annex  III  of  the  amendment  n°  884/2004/EC  to  the  Council 
Decision n° 1692/96/EC on the guidelines for the development of the trans-European transport network. 
The Van Miert report considered that the private sector could contribute up to 20% of the total cost of 
the transport project but under certain conditions.  

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practicable  option  would  be  to  select  an  international  financial  institution  as  the  managing 
agent, an obvious candidate being the EIB Group.  

The managing agent would have the mandate to undertake all guarantee activities in line with 
the  best  banking  practice  on  behalf  of  and  at  the  risk  of  the  Commission.  However,  the 
Commission  would  be  responsible  for  monitoring  the  instrument  and  reporting  to  the 
budgetary  authority.  The  Staff  working  paper  provides  further  details  on  the  tasks  of  the 
managing agent.  

The Commission would take the final decision on the guarantee by approving the eligibility of 
the  projects  through  an  appropriate  mechanism  to  be  agreed  with  the  Member  States.  The 
Commission will also periodically report to the budgetary authorities based on the accounting 
and reporting provided by the managing agent. 

3. 

FINAL REMARKS 

The  guarantee  instrument  will  increase  private  financial  participation  for  specific  kinds  of 
PPPs. It will complement European grant financing but not replace it.  

The  explicit  objective  of  the  instrument  is  to  induce  private  investment  in  transport 
infrastructure  mainly  through  facilitating  the  conclusion  of  financial  packages.  Project 
sponsors and banks will seek to use the EU loan guarantee to maximise the creditworthiness 
of  senior  debt  obligations  and  to  achieve  a  less  expensive  overall  financial  package.  By 
guaranteeing the stand-by credit lines, the EU would assume a greater credit risk because its 
potential future claim on project revenues is subordinate to that of the senior lenders. The EU 
guarantee would not eliminate the risk for the senior lenders, but it would offer greater debt 
service coverage for the senior tranche and thus boost its creditworthiness. The EU guarantee 
would be priced so as to reflect the risk taken by the EU and the management costs relative to 
the management of the instrument. 

The EU loan guarantee instrument would enhance the financial viability of the overall project 
without exposing the Community to excessive credit risk. A positive feature of the guarantee 
instrument is that it would comprise a number of projects of different geographic location and 
size  into  one  portfolio  and  thus  be  able  to  obtain  a  level  of  diversification  at  the  European 
level  which  would  not  be  possible  at  a  national  level.  The  Commission  considers  that  the 
current provisioning model is sufficiently robust to take a decision in principle on the creation 
of  the  guarantee  instrument.  The  precondition  for  the  modelling  and  functioning  of  the 
provisioning system of the guarantee instrument is the availability of relevant statistical data. 
A proper monitoring/assessment system of project risks is needed in order to collect statistical 
data during the coming years. This would improve the fine-tuning of provisioning in order to 
obtain the best possible leverage for the Community budgetary funds.  

The  current  TEN  Financial  Regulation  does  not  provide  a  legal  base  for  this  kind  of 
innovative  guarantee  instrument.  Therefore,  the  proposal  for  the  new  TEN  Financial 
Regulation  2007-2013  has  been  drafted  so  as  to  allow  the  implementation  of  the  guarantee 
instrument in 2007. The funding of the instrument is foreseen under the proposed TEN budget 
2007-2013 of EUR 20 billion. The Commission would prepare implementing rules at an early 
stage.  This  would  ensure  that  projects  could  be  included  in  the  guarantee  portfolio 
immediately  following  the  adoption  of  the  new  TEN  Financial  Regulation,  thus  securing  a 
degree of portfolio diversification right from the start.  

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10 

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FINANCIAL STATEMENT 

LEGISLATIVE FINANCIAL STATEMENT 

1. 

NAME OF THE PROPOSAL : 

EU loan guarantee instrument for TEN-transport projects 

2. 

ABM / ABB FRAMEWORK 

Policy Area(s) concerned and associated Activity/Activities (Activities ABB) 

Trans-European  networks,  1.  Objective :  Develop  the  network  and  priority  projects  2. 
Objective : Improve the efficiency of the financial aid to the network, 3. Objective : Connect 
the trans-European networks with neighbouring countries 

Inland, air and maritime transport: 3. Objective : to promote a more environmentally friendly 
transport system  

3. 

BUDGET LINES 

3.1. 

Budget  lines  (operational  lines  and  related  technical  and  administrative 
assistance lines (ex- B.A lines)) including headings : 

06.0301  (Financial  support  for  projects  of  common  interest  in  the  trans-European  transport 
network) 

3.2. 

Duration of the action and of the financial impact: 

The  operational  period  of  the  instrument  concerning  new  commitments  covers  at  least  the 
period 2007-2013.  

3.3. 

Budgetary characteristics : 

Budget 
line 

Type of expenditure 

New 

EFTA 
contribution 

Contributions 
from applicant 
countries 

Heading in 
financial 
perspective 

060301 

Non-
comp 

Diff10 

NO 

NO 

NO 

No [1 a] 

10 

Differentiated appropriations 

EN 

11 

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4. 

SUMMARY OF RESOURCES 

4.1. 

Financial Resources (indicative amounts) 

Important remark: all financial resources in terms of operational expenditure indicated in this 
financial statement are already included in the financial framework of €20,350 billions of the 
Commission  proposal  for  a  Regulation  of  the  European  Parliament  and  of  the  Council 
determining the general rules for the granting of Community financial aid in the field of the 
trans-European  transport  networks  and  energy  and  amending  Council  Regulation  (EC)  n° 
2236/9511. 

4.1.1. 

Summary  of  indicative  commitment  appropriations  (CA)  and  indicative  payment 
appropriations (PA) 

A  precise  quantification  of  the  annual  budget  allocations  for  the  EU  Loan  Guarantee 
Instrument is difficult at this stage due to limited availability of projections of eligible projects 
that  are  expected  to  involve  private  sector  participation.  A  working  assumption,  consistent 
with the overall Van Miert objectives, is to consider a flow of private sector debt financing of 
the order of EUR 3 billion per year in the period 2007-2013, with all the TEN priority projects 
receiving private support. 

Based on the provisioning model, developed by the Commission and EIB services, the table 
below presents a scenario requiring a total budget allocation of around EUR 1 billion, with a 
specified annual breakdown. It should be noted that, while the exact amount needed and the 
timing will vary, front-loading of approximately one third of the total budget in the first year 
would  be  needed  for  the  following  reasons.  Firstly,  as  the  portfolio  effect  builds  up  only 
gradually, the level of provisioning needed for the first project is almost twice as large as the 
amount  needed  for  the  last  one.  Secondly,  as  interest  accumulates  on  the  early  budget 
allocations, the overall need for budget allocation in the later years is further diminished.  

The  detailed  calculation  of  the  provisioning  rates  (used  in  the  table  below)  is  presented  in 
Annex 3 ‘technical paper’ of the Commission Staff working paper. 

11 

COM/2004/0475 final (COD 2004/0154) – Financial statement for TEN-T projects, page 41 

EN 

12 

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Amounts in EUR million 

Private sector 
lending 

Number 
of 
projects 

Provisioning Calculation 

Interest 

Budgetary needs

Year 

Annua
l 

Cumul  Cumul. 

Rate 

Cum
ul. 

Cumul. 
Buffer 

Cumul. 
total 

2007 

3,000 

3,000 

5 

10.3% 

309 

0 

2008 

3,000 

6,000 

10 

7.1% 

426 

43 

2009 

3,000 

9,000 

15 

6.2% 

558 

56 

2010 

3,000 

12,000  20 

5.7% 

684 

68 

2011 

3,000 

15,000  25 

5.5% 

825 

83 

309 

469 

614 

752 

908 

2012 

3,000 

18,000  30 

5.5% 

990 

99 

1,089 

2013 

3,000 

21,000  35 

5.3% 

1,113  111 

1,224 

*) 

0 

15 

23 

31 

38 

45 

54 

Annual 

Reques
t 

309 

144 

122 

108 

117 

136 

81 

310 

150 

120 

120 

120 

120 

80 

21,000 

1,017 

1,020 

*) Provisioned amounts are capitalised at a 5% annual rate 

These indicative calculations do not take into account the fees paid by the beneficiaries for the 
guarantee, nor the management costs of the guarantee instrument to be agreed with the agent. 
Nevertheless, it is foreseen that the fees paid by the beneficiaries will be set at an appropriate 
level, in order to cover the management costs of the instrument. 

Concerning payment appropriations, the working assumption is that the amount of indicative 
annual commitments is paid to a trust account during three years in order to cover potential 
future  guarantee  calls.  For  example,  the  commitment  of  €  310  million  in  2007  is  paid  as 
follows: € 100m in 2007, € 100m in 2008 and € 110m in 2009. 

EN 

13 

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EUR million (to 3 decimal places) 

Section 
no. 

Expenditure type 

2007 

2008 

2009 

2010 

2011 

2012 
and 
later 

Total 

Operational expenditure12 

Commitment 
Appropriations (CA) 

8.1 

Payment  Appropriations 
(PA) 

a 

b 

310 

150 

120 

120 

120 

200 

1.020 

100 

150 

200 

130 

120 

320 

1.020 

Administrative expenditure within reference amount13 

Technical 
& 
administrative  assistance 
(NDA) 

8.2.4 

c 

n.a. 

n.a. 

n.a. 

n.a. 

n.a. 

n.a. 

n.a. 

TTOOTTAALL  RREEFFEERREENNCCEE  AAMMOOUUNNTT  

Commitment 
Appropriations 

Payment 
Appropriations 

310 

150 

120 

120 

120 

200 

1.020 

100 

150 

200 

130 

120 

320 

1.020 

a+c 

b+c 

Administrative expenditure not included in reference amount14 

Human 
associated 
(NDA) 

resources 

and 
expenditure 

Administrative  costs,  other 
than  human  resources  and 
associated 
not 
included in reference amount 
(NDA) 

costs, 

0,324  0,324 

0,324 

0,324 

0,324 

0,648 

2,268 

8.2.5 

d 

8.2.6 

e 

n.a. 

n.a. 

n.a. 

n.a. 

n.a. 

n.a. 

n.a. 

Total indicative financial cost of intervention 

2007 

2008 

2009 

2010 

2011 

2012 
and 
later 

Total 

310,324 

150,324 

120,324 

120,324 

120,324 

200,648 

1.022,268 

100,324 

150,324 

200,324 

130,324 

120,324 

200,648 

1.022,268 

TOTAL  CA 
cost 
Resources 

of 

TOTAL  PA 
cost 
Resources 

of 

including 
Human 

including 
Human 

a+c
+d
+e 

b+c
+d
+e 

12 
13 
14 

Expenditure that does not fall under Chapter xx 01 of the Title xx concerned. 
Expenditure within article xx 01 04 of Title xx. 
Expenditure within chapter xx 01 other than articles xx 01 04 or xx 01 05. 

EN 

14 

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4.2. 

Human Resources FTE (including officials, temporary and external staff) – see 
detail under point 8.2.1. 

Annual 

Year n  n + 1 

n + 2 

n + 3 

n + 4 

n + 5 
and 
later 

of 

3 

3 

3 

3 

3 

3 

requirements 

Total 
number 
human resources 

At  this  stage  one  could  estimate  that  an  average  of  3  persons  of  existing  Commission  staff 
would be necessary under the condition that the operational management of the instrument is 
mandated to an operating agent.  

Co-financing details 

In accordance with the requirements formulated in the final report of the Growth Initiative of 
November  2003,  the  market  deems  it  to  be  very  important  that  Member  States/national 
authorities provide comparable financial support to the project. However, the market and the 
consulted  governments  felt  that  it  is  not  appropriate  to  enforce  a  strict  requirement  for 
Member States to be co-guarantors in the instrument. Instead the financial commitment may 
take the form of equity, grants or other types of guarantees. Moreover, a strict co-guarantee 
requirement  might  make  the  implementation  of  the  instrument  impossible  as  some  Member 
States are not willing to set up a specific mechanism to provide guarantees either themselves 
or through other public entities for a limited number of projects. The requirement on Member 
States  and  regional  authorities  would  be  the  provision  of  significant  financial  support  in 
whatever form in order to contribute at least equally with the Community to the achievement 
of the required creditworthiness. Co-financing modalities cannot be given in this stage. They 
can  only  be  given  on  the  basis  of  concrete  guarantee  applications.  However,  the  eligibility 
conditions,  to  be  concretised  subsequently,  will  define  the  rules  of  co-financing  in  more 
detail. 

Contingent liability 

The  Commission  has  to  set  aside  capital  reserves  to  cover  the  long-term  risk  related  to  the 
loan  guarantee  instrument.  Analogous  to  a  private  banks’  loan  reserve,  the  main  cost 
represents an estimate of expected and unexpected losses associated with the provision of the 
guarantees issued.  

The  objective  of  provisioning  is  not  to  minimise  the  overall  risk  exposure  but  to  optimise 
exposure, i.e. to take prudent risks in order to increase the leverage capacity of Community 
funds as much as possible. Forecasting the long-term cost of the guarantee instrument requires 
estimates  of  the  loss  probabilities  of  the  projects  (expected  and  unexpected  losses)  and 
possible correlations between the projects.  

The Commission and EIB services have developed a methodology to set provisioning rates, 
taking  into  account  the  diversification  obtained  through  the  portfolio  effect  and  consistent 
with  an  AAA  rating  of  the  guarantee  instrument.  This  model  has  been  developed  following 

EN 

15 

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discussions with rating agencies and using available statistical data15 and information16. The 
details  of  the  provisioning  model  are  presented  in  the  Commission  staff  working  document 
SEC(2005)323.  This  model  also  incorporates  a  buffer  for  potential  downgrading  of  the 
creditworthiness of the portfolio.  

This provisioning system and the creation of a liquidity fund should reduce the risk of direct 
and unexpected calls on the Community contingent liability to a negligible level (AAA rating 
of  the  guarantee  instrument).  The  residual  contingent  liability  of  the  Community  will  be 
properly taken into account in the Community budget through a ‘pour mémoire’ budget line 
as is currently the case of the Community Guarantee for the EIB external lending mandate. 

4.2.1.  Compatibility with Financial Programming 

Proposal  is  compatible  with  financial  programming  2007-2013  as  proposed  by  the 
Commission (COM (2004) 101 final). Moreover, the guarantee instrument is already foreseen 
by  the  Commission  Proposal  for  the  new  TEN-transport  regulation  COM(2004)475,  which 
provide for the financial framework. 

Financial Impact on revenue 

This instrument has no direct impact on the Community budget.  

In fact, the instrument will have revenues, such as fees and interests earned on the funds on 
the trust account, but these amounts will be used for the purposes of the instrument.  

The appropriate pricing system will require further fine-tuning. In any case, the pricing will 
be set in such a way that the guarantee instrument would cover its expected costs. In line with 
the original Commission proposal from November 2003, the loan guarantee would be priced 
in  order  to  cover  the  risk  and  management  costs  relating  to  the  instrument.  Ideally  each 
beneficiary should pay an up-front premium, which could be charged when the guarantee is 
signed  or  when  the  guarantee  becomes  effective,  i.e.  after  the  substantial  completion  of  the 
project, and would be payable either as a one-shot payment or as annual premiums to be paid 
during the remaining life of the guarantee.  

Furthermore,  if  the  guarantee  were  called,  the  Commission  would  obtain  a  financial  claim 
which would rank subordinated to the senior debt but senior to equity. This mezzanine debt 
would have to be paid back by the borrower to the Commission as and when project revenues 
permit.  As  the  Community  claim  is  comparable  to  mezzanine  financing,  the  amount  due 
following  the  call  should  be  priced  according  to  the  risk  taken  and  reflecting  management 
costs. 

15 

16 

Standard & Poor’s, Infrastructure Finance, Traffic Forecasting Risk: Study update 2003, November 06, 
2003. 
Fitch, A risk assessment model for federal credit, 15 March 1999. 

EN 

16 

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5. 

CHARACTERISTICS AND OBJECTIVES 

5.1. 

Need to be met in the short or long term 

Council and Parliament have adopted on 29th April 2004 the revised TEN T guidelines which 
include a list of 30 priority projects. The implementation of these priority projects is estimated 
at a total cost of € 225 bn, € 140 bn of which in the upcoming period of financial perspectives. 
Such a substantial investment task cannot be financed by the public sector alone.  

5.2. 

Value-added  of  Community  involvement  and  coherence  of  the  proposal  with 
other financial instruments and possible synergy 

In a number of publications, the Commission has underlined the role the private sector should 
play to achieve those objectives17. The guarantee instrument is the major new instrument to 
attract  private  capital  and  will  have  a  strong  leverage  effect.  Once  applicable,  this  will 
contribute  to  the  achievement  of  the  goal  to  attract  20%  private  co-financing  to  the  TENs 
implementation. Due to the strong public attention related to the new instrument, this impact 
may  already  be  visible  from  2007  on  but  will  be  more  substantial  towards  the  end  of  the 
decade. 

The  goal  of  the  guarantee  instrument  is  to  increase  the  leverage  capacity  of  limited  public 
resources  to  stimulate  private  sector  investment  in  priority  TEN-transport  (TEN-T)  projects 
by providing credit assistance.  

The instrument will provide useful support for specific types of PPPs and for a specific period 
of the project cycle. It will in so far widen the range of TENs financing instruments.  It  has 
also  to  be  underlined  that  its  elaboration  and  application  will  not  serve  as  a  substitute  for 
Community grant co-financing. On the contrary. It will only achieve full value if the proposed 
total  20  bn  €  TENs  budget  will  be  adopted.  The  guarantee  instrument  will  in  so  far 
complement European grant financing but not replace it. 

Under  the  new  design  of  the  instrument  the  EU  would  issue  loan  guarantees  to  mitigate 
revenue  risk  in  the  projects’  early  years.  Specifically,  the  guarantee  would  fully  cover  a 
liquidity cushion, called “a stand-by credit line”, which would only be drawn upon in cases 
where  project  cash-flows  are  insufficient  to  service  senior  debt.  These  stand-by  credit  lines 
would cover around 10% of the total senior debt (in certain more risky cases up to 20%) and 
would usually not exceed 5 year maturities.  

The granting of a community guarantee may lead to synergies with other financing forms for 
TENs  projects,  including  the  investment  policy  of  public  investment  banks  and  it  may 
contribute  to  increase  the  confidence  of  financial  markets  in  the  feasibility  of  the  TENs 
(priority) network as a whole. 

An important positive feature of the guarantee instrument is that it would comprise a number 
of  projects  of  different  geographic  location  and  size  into  one  portfolio  and  thus  be  able  to 

17 

They  include:  COM  2003  132  on  innovative  financing  of  the  trans-European  transport  networks,  the 
final report of the High level group on the transport trans-European network of June 2003, published on 
the  ‘Europa’  website,  the  justification  and  explanation  of  the  amendment  of  the  TEN  T  guidelines 
(Decision Nr. 884/2004) and the “exposé des motifs” and the financing rules itself of the proposed TEN 
financial regulation of July 2004 for the upcoming period of financial perspectives 2007-2013. 

EN 

17 

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obtain  a  level  of  diversification  at  the  European  level  which  would  not  be  possible  at  a 
national level. 

5.3. 

Objectives, expected results and related indicators of the proposal in the context 
of the ABM framework 

Trans-European networks :  

1. Objective : Develop the network and priority projects; output : budget allocation in favour 
of the 30 priority projects and with special attention to the promotion of privately co-financed 
projects. 

2.  Objective :  Improve  the  efficiency  of  the  financial  aid  to  the  network;  output : 
implementation of the TENs budget and application of current rules to increase the leverage-
effect  of  the  budget.  Careful  scrutiny  of  procedures  and  rules  in  order  to  improve  the  PPP 
financing  possibilities.  Preparation  of  the  multiannual  programme  for  the  period  of  the  new 
implementation  rules,  eligibility  criteria  and 
financial  perspectives.  Preparation  of 
organisational  settings  for  innovative  financing  instruments  including  the  guarantee 
instrument. 

Inland, air and maritime transport: 

Objective :  to  promote  a  more  environmentally  friendly  transport  system:  output :  CLWP 
2005  Communication  on  the  mid-term  state  of  the  implementation  of  the  White  paper 
« European  transport  policy  for  2010 :  time  to  decide  CLWP  2005 :  Communication  on  a 
common transport infrastructure tarification framework, including ports and airports  

5.4.  Method of Implementation (indicative) 

ٱX  

Centralised Management 

X  ٱ Directly  by  the  Commission,  with  a  view  to  delegate  certain  tasks  to  an  international 
financial institution, preferably the EIB Group 

ٱIndirectly by delegation to: 

ٱExecutive Agencies 

ٱBodies set up by the Communities as referred to in art. 185 of the Financial Regulation 

ٱNational public-sector bodies/bodies with public-service mission 

ٱShared or decentralised management 

ٱ  With Member states 

ٱ  With Third countries 

ٱ Joint management with international organisations (please specify) 

Relevant comments: 

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18 

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The lifetime of the guarantee instrument makes it difficult to envisage a complete outsourcing 
of management in general and especially an outsourcing to a purely commercial body. 

In order to comply with the principle of good governance, the most appropriate course would 
be  for  the  Community  to  supervise  the  application  of  the  instrument  and  to  entrust  all  its 
guarantee management activity under this instrument to a single agent. The agent should have 
an in-depth knowledge of project financing, together with appropriate credit risk management 
systems  in  place  in  order  to  assess  the  project  risks  and  to  manage  the  provisioning  system 
and the liquidity fund in the long-term. It should also have in-house legal  expertise  and the 
appropriate front office staff to interface with financial institutions, monoline insurers, venture 
capital funds, national authorities and/or equity providers. The agent will have to demonstrate 
its  ability  to  enter  into  a  long-term  contractual  relationship  with  the  Commission  for  the 
management of the instrument (minimum 15 years). The most practicable option would be to 
select an international financial institution as the managing agent, an obvious candidate being 
the EIB Group.  

6. 

MONITORING AND EVALUATION 

6.1.  Monitoring system 

By Commission Services 

6.2. 

Evaluation 

6.2.1.  Ex-ante evaluation 

Following the request of the European Council, the Commission and EIB services carried out 
a  market  testing  exercise  between  March  and  July  2004.  For  this  exercise,  the  services 
developed a questionnaire, which was discussed with the market testing participants. Results 
of this exercise are outlined in the Commission Communication  on feasibility report on  EU 
loan  guarantee  instrument  for  TEN  Transport  projects.  Furthermore,  if  the  Member  States 
provide a positive opinion on the setting up of this instrument, the Commission could consider 
carrying  out  a  stakeholders’  consultation  in  order  to  obtain  the  opinion  of  a  larger  circle  of 
stakeholders. 

6.2.2.  Measures  taken  following  an  intermediate/ex-post  evaluation  (lessons learned from 

similar experiences in the past) 

An ex-post evaluation can only be made at a later stage in case this guarantee instrument is 
implemented. 

6.2.3.  Terms and frequency of future evaluation 

This  is  a  very  long  term  instrument  and  therefore  the  first  evaluation  on  its  implementation 
thereafter  a  second  evaluation  end  2012.
will  be  carried  over 

in  2010  and 

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7. Administrative Expenditure  

The  needs  for  human  and  administrative  resources  shall  be  covered  within  the  allocation 
granted to the managing service in the framework of the annual allocation procedure. 

7.1 Number and type of human resources 

Types of 
post 

Staff to be assigned to management of the action using existing resources (number 
of posts/FTEs) 

Year n 

Year n+1 

Year n+2 

Year n+3 

Year n+4 

Year n+5 

A*/AD 

3 

3 

3 

3 

3 

3 

B*, 
C*/AST 

Officials 
or 
temporary 
staff18 
(XX 01 
01) 

Staff  financed19  by 
art. XX 01 02 

staff20 
Other 
financed  by  art.  XX 
01 04/05 

TOTAL 

3 

3 

3 

3 

3 

3 

The  indicative  amount  of  administrative  expenditure  relating  to  the  human  resources  at  the 
Commission services is calculated is follows: € 108.000 per person on average, an average of 
3 persons of Commission existing staff under the condition that the operational management 
of the instrument is mandated to an operating agent: 

18 
19 
20 

Cost of which is NOT covered by the reference amount 
Cost of which is NOT covered by the reference amount 
Cost of which is included within the reference amount 

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