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

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 07.03.2005 
COM(2005) 75 final 

COMMUNICATION FROM THE COMMISSION 
TO THE COUNCIL AND THE EUROPEAN PARLIAMENT 

European Initiative for Growth 
Feasibility report on 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 
Feasibility report on EU loan guarantee instrument for TEN-Transport projects 

Table of contents 

1. 

2. 

3. 

3.1. 

3.2. 

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

Co-operation with the EIB ........................................................................................... 4 

Market testing............................................................................................................... 4 

The market testing exercise.......................................................................................... 4 

Market feedback........................................................................................................... 5 

3.2.1.  Market demand and impact of the guarantee instrument ............................................. 5 

3.2.2.  Size of the instrument and risk diversification............................................................. 6 

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

4. 

Final remarks................................................................................................................ 7 

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1. 

EXECUTIVE SUMMARY 

Within the framework of the Growth Initiative, in its Communication of 11 November 2003 
the Commission identified possible areas of action and set out key decisions to be made by 
the Council and the European Parliament. Specifically, the idea of assessing the creation of a 
possible new financial tool, i.e. an EU guarantee instrument, to support TEN-T projects, was 
proposed,  with  the  particular  aim  of  attracting  higher  private  sector  participation.  This 
Commission proposal was supported by the European Investment Bank (EIB). 

The ECOFIN Council of 25 November 2003 adopted the final report on the European Action 
for Growth1 highlighting that issues to be resolved before any commitment concerning an EU 
guarantee  instrument  can  be  made  may,  inter  alia,  include  “the  funding  of  the  instrument, 
appropriate risk diversification and budgetary risk management and its administration”.  

The  European  Council  of  12  December  2003  endorsed  the  European  Action  for  Growth  on 
the basis of the reports presented by the Commission, the EIB and the ECOFIN Council. The 
Council  invited  “the  Commission,  in  accordance  with  the  ECOFIN  report,  …,  and,  in 
cooperation with the Member States, to further examine the necessity of developing a specific 
EU  guarantee  instrument  for  certain  post-construction  risks  in  TEN  transport  projects,  to 
report  on  the  results  of  that  examination  and,  if  appropriate,  to  present  a  proposal  in  this 
regard.”  

Following this request, the Commission services, in collaboration with the EIB, carried out a 
market testing exercise to examine the feasibility of a loan guarantee instrument for transport 
projects. The general opinion of the market testing participants was that the general concept of 
an  EU  loan  guarantee  scheme  covering  the  immediate  post-construction  risks  in  financing 
transport projects would be welcome and useful. An EU guarantee programme for projects of 
European  significance  could  perform  a  constructive  role  in  complementing  existing  funding 
resources by filling certain market gaps, especially for very large and/or cross border projects.  

Subject to some technical modifications of the original Commission concept, in order to better 
respond  to  market  needs,  the  main  impact  of  the  guarantee  instrument  was  deemed  to  be  a 
positive  signal  to  private  sector  lenders.  Such  a  signal  could  well  facilitate  the  favourable 
conclusion of financial packages. Several institutions stressed that if applied to traffic revenue 
based schemes, under the current market circumstances, this instrument would be more useful 
for  PPP  road  projects  which  are  typically  financed  by  a  large  number  of  users.  For  the  EU 
guarantee to add value to projects whose traffic flows depend on a restricted number of larger 
decision makers, the nature of the guarantee would need to be adapted in order to take into 
account the fact that the revenues would be based on availability, rather than traffic.  

In  the  light  of  the  market  testing  exercise,  the  Commission  has  concluded  that  it  would  be 
appropriate  to  put  in  place  a  new  EU  loan  guarantee  instrument  to  support  TEN  transport 
projects,  in  particular  priority  cross-border  projects.  The  proposal  for  the  design  of  the 
guarantee  instrument  is  presented  in  the  Commission  Communication  to  the  Council 
COM(2005)76. 

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ECOFIN of 25 November 2003, 15352/03 

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This feasibility report is divided into 4 sections. Following the executive summary, section 2 
outlines  the  complementary  roles  of  the  Commission  and  EIB  in  the  financing  of  transport 
infrastructure projects. Section 3 presents the market testing exercise and section 4 concludes 
the  report.  This  feasibility  report  is  accompanied  by  a  staff  working  paper  SEC(2005)323, 
which presents the aide-mémoire of the market testing exercise and provides an overview of 
public financing programmes for transport infrastructure projects. 

2. 

CO-OPERATION WITH THE EIB 

The Communication from the Commission of November 2003 spelled out the reinforced role 
that  the  EIB  and  the  Commission  were  called  upon  to  play  for  the  development  of  TEN-T 
projects,  in  particular  the  projects  under  the  Quick  Start  List.  The  specific  forms  of  EIB 
intervention included a commitment to lend EUR 50 billion under a TENs Investment Facility 
(TIF) in support of TENs priority projects as well as a set of innovative interventions aimed to 
facilitate  access  to  private  finance  for  the  European  Growth  Initiative.  Among  the  latter, 
particular attention was given to EIB capacity to increase the availability of debt finance for 
the early, preparatory stages of projects, under the Structured Finance Facility (SFF) with an 
overall reserve allocation of EUR 500 million. This would allow an overall financing volume 
of  up  to  EUR  4  or  5  billion  (a  substantial  part  of  which  might  be  committed  by  the  end  of 
2006)  depending  on  the  composition  of  the  SFF  portfolio.  While  it  is  foreseen  that  SFF 
products could be applied both to i2i2, PPP and TENs operations, a substantial portion should 
be available for the latter, enabling the SFF to facilitate the financing of priority projects by 
extending the scope of the EIB’s financing through the provision of senior loans or guarantees 
(incorporating pre-completion and early operations risks), subordinated loans and guarantees, 
mezzanine finance and derivatives.  

There is a clear complementary link between the aforementioned set of EIB instruments and 
the  EU  Guarantee  instrument,  and  in  particular  between  the  SFF  and  EU  guarantee 
instrument.  The  combined  use  of  these  EIB  resources  and  additional  Commission  resources 
could  considerably  increase  the  volumes  of  total  Community  support  available  for  TEN 
transport projects and result in higher attractiveness for private sector participation.  

3. 

MARKET TESTING  

3.1. 

The market testing exercise 

The  first  phase  of  market  testing  was  carried  out  during  March  2004  by  a  team  from  the 
Commission  services  in  close  collaboration  with  the  EIB.  During  this  exercise  public 
authorities,  mainly  ministries,  Public-Private-Partnership 
financial 
institutions,  advisers  and  monoline3  insurers  were  approached  in  order  to  gather  their  views 
on the original Commission concept for a guarantee instrument4. The team met with experts 
from organisations and institutions in France, Germany, Ireland, Italy, Portugal, Spain and the 

taskforces, 

(PPP) 

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The “i2i” initiative (Innovation 2000 Initiative) was launched by the EIB after the Lisbon Summit. 
Monoline insurers provide insurance cover for a single line of risk, namely for an individual financial 
risk related to one financial transaction.  
The  original  proposal:  The  Commission  guarantee  would  guarantee  a  share  of  senior  debt  during  the 
ramp-up  period  of  a  transport  infrastructure  project.  The  remaining  share  during  the  ramp-up  period 
should be covered by the Member States and the private sector. 

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United Kingdom. The transport unit of the EBRD was also visited. The institutions consulted 
are  the  leading  participants  in  the  European  Union  and  neighbouring  countries’  transport 
infrastructure financing markets.  

Prior  to  the  meetings,  a  consultation  paper  comprising  10  questions  was  sent  to  the 
participants in order to establish a consistent basis for the market testing (Annex 1 of the staff 
working paper SEC(2005)323). The paper covered three main issues: 

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Market demand and impact of the guarantee instrument; 

Size of the instrument and risk diversification; 

Risk sharing between Member States, private sector and the EU. 

Following  the  first  phase  of  market  testing,  the  design  of  the  possible  instrument  was  fine-
tuned in order to better respond to market demand. Thereafter, the team approached a further 
selection  of  rating  agencies,  advisors  and  monoline  insurers  in  order  to  receive  additional 
comments on the effectiveness and impact of the updated design.  

3.2.  Market feedback 

3.2.1.  Market demand and impact of the guarantee instrument 

Cross border projects and large scale, long-term projects involving a number of participants 
(public  authorities  possibly  from  different  countries/regions,  sponsors,  financial  institutions, 
etc.)  are  costly  and  complex.  Participants  in  the  market  testing  exercise  thought  that  the 
“stamp  of  approval”  from  an  EU  guarantee  would  be  universally  seen  as  sending  a  strong 
positive  signal  to  the  private  credit  and  capital  markets  with  respect  to  a  specific  project. 
Depending  on  the  context,  this  type  of  EU  commitment  could  enhance  the  standing  of 
projects, increasing their attractiveness to lenders, and could help keep negotiations on track if 
financial difficulties were to arise during the life of the projects. A few participants believed 
that  the  Community  involvement  could  accelerate  the  decision  procedures  of  public 
authorities  and  could  lead  to  faster  and  higher  quality  projects.  The  guarantee  would  be 
particularly useful in Objective I areas, where it is more difficult to attract commercial bank 
lending and investors for financing transport infrastructure projects.  

There  was  however  a  more  mixed  response  on  the  economic  added  value5  of  the  original 
scheme,  especially  if  the  Commission  insisted  on  the  (initially  envisaged)  combined 
requirements that the guarantee be partial in amount and over time, restricted to senior debt 
and  to  eligible  projects  of  certified  investment  grade  creditworthiness6.  Under  these 
restrictions,  the  premium  of  the  EU  guarantee  would  have  to  be  very  low  to  produce  any 
material impact on financing costs. Similarly, under such tight restrictions, the impact of the 
guarantee on the creditworthiness/ rating of the project would be limited or negligible.  

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Economic  added  value  in  this  context  means  reduced  financing  costs  and  the  volume  of  private 
financing accessible to the project. 
Rating agencies assign credit ratings to determine the creditworthiness of an entity, project, bond etc. 
These rating agencies created grading systems to reflect the relative credit quality. The highest quality 
are "AAA" rated transactions and the credit scale descends to "C" and finally to "D" or default category. 
"Investment  grade"  encompasses  “AAA  down  to  BBB"  letter  ratings  (Standard  &  Poors)  or  "Aaa  to 
Baa" (Moody's). "BB" ratings and lower are called "speculative grade" and have a higher risk of default. 

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A  majority  of  the  institutions  pointed  out  that  subordinated  debt  and  mezzanine  financing7 
would  be  required  for  senior  debt  to  achieve  investment  grade  rating,  and  to  attract 
commercial banks to finance the projects which are subject to substantial  traffic risk.  Many 
participants  proposed  that  the  Community  should  provide  a  mezzanine  instrument.  A 
potentially  attractive  technical  form  for  such  an  instrument  was  suggested  to  be  a  full 
guarantee  of  specific  subordinated  tranches  of  medium-term  credit,  which  are  often 
instrumental  to  ensure  a  sufficient  buffer  of  liquidity  during  the  initial  phase  of  operation. 
These facilities are often provided by banks in a stand-by form, generally available to cover 
shortfalls in operating revenues, up to a pre-determined ceiling. Such structures, when they 
include a proper degree of subordination, lessen the risk to senior lenders by supporting the 
timely service of senior  debt and,  furthermore,  might  facilitate  restructuring  negotiations  by 
giving  additional  time  for  action  to  sponsors,  lenders  and  national  authorities  if  the  project 
faces difficulties.  

3.2.2. 

Size of the instrument and risk diversification  

Participants  indicated  that  a  typical  standby  credit  line  for  projects  with  lower  risk  profiles 
might  reach  up  to  10%  of  the  senior  debt  and  be  limited  to  a  short  time  period.  However, 
riskier  projects  will  need  higher  amounts  and  longer  availability  periods,  in  order  to  cover 
possible ramp-up8 delays.  

Consulted  bodies  believed  that  a  positive  feature  of  the  guarantee  instrument  was  that  it 
comprised  a  number  of  projects  of  different  geographic  location,  sector  and  size  into  one 
portfolio  and  thus  obtained  a  higher  level  of  diversification  at  the  European  level  than  it 
would be possible to achieve at the national level.  

Additionally, given that these projects will overlap only partially over time, and that selection 
criteria will be set to ensure at least a partial annual repayment and eventual full recovery of 
the amounts paid out under the guarantee, a considerable leverage effect should be achievable. 
Within the design of the instrument, one could also consider an early release of the guarantee 
when the projects reach an acceptably high performance level. A partial release could also be 
possible based on set performance triggers and/or the repayment schedule of the loans.  

3.2.3.  Risk sharing  

The  Commission  had  initially  proposed  to  introduce  a  formal  risk-sharing  requirement 
between  the  Community  and  Member  States’  authorities,  financial  institutions,  banks  and 
equity shareholders. In principle this was broadly welcomed by the commercial institutions. 
The  common  view  was  that  risk-sharing  between  the  public  and  private  participants  would 
ensure  that  any  mismanagement  risks  would  be  adequately  and  independently  controlled, 
which would lower the overall risk.  

Many  national  authorities  stressed  that  Member  States’  involvement  in  the  risk-sharing 
feature  should  respect  prevailing  national  characteristics.  As  not  every  country  issues 
guarantees  for  national  investment  projects,  a  strict  limitation  to  guarantee-sharing  would 
make  this  instrument  inapplicable  in  many  countries.  Some  institutions  have  therefore 

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Mezzanine financing generally refers to a layer of financing between senior debt and equity. In terms of 
priority of payment, it  is subordinated to senior debt, but senior to common stock or equity. While it 
supports a higher level of risk than senior debt, its remuneration is also higher than that of the latter. 
The first years of the operational period are called ramp-up period. 

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suggested  that  the  Community  should  cover  the  full  risk  of  the  stand-by  credit  line.  A  full 
guarantee  would  achieve  a  zero-risk  weighting9  for  the  underlying  credit  line  and  minimise 
the cost to the promoter. As banks have to absorb the risk during the whole maturity of the 
senior debt, and the volume of the senior debt is, in any case, a large multiple of the volume 
of  the  stand-by  credit  line,  some  institutions  questioned  the  additional  requirement  that  the 
risk of the stand-by credit should be shared. They argued that equity shareholders are typically 
included  in  the  risk-sharing  via  restrictions  on  dividend  distributions,  and  that  further 
technical arrangements could be put in place to protect the Commission (e.g. “cash-sweep”10 
provisions).  

4. 

FINAL REMARKS 

In  the  light  of  the  market  testing  exercise,  the  Commission  has  concluded  that  it  would  be 
appropriate  to  put  in  place  a  new  EU  loan  guarantee  instrument  to  support  TEN  transport 
projects, in particular cross-border priority projects.  

The  proposal  for  the  design  of  the  guarantee  instrument  is  presented  in  the  Commission 
Communication to the Council COM(2005)76. 

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Capital adequacy ratios are a measure of the amount of a bank’s capital expressed as a percentage of its 
risk weighted credit exposures. The loans a bank has made are weighted, according to their degree of 
risk. In general terms one can say that loans to governments are given a zero percent weighting whereas 
loans to individuals without collateral are weighted at 100 percent. Banks can benefit from the status of 
the European Commission so that they do not have to allocate capital for the stand-by credit line which 
is fully guaranteed by the Commission. This is a substantial advantage for the banks which provide the 
stand-by  credit  and  for  the  borrower,  which  may  benefit  from  reduced  financing  costs  for  this  credit 
line. 
Cash sweep means that all cash available after having paid operating costs is entirely used to reduce the 
amount of debt. 

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