COMMISSION STAFF WORKING PAPER EXECUTIVE SUMMARY OF THE IMPACT ASSESSMENT
Date: 2011-10-19
Institutions: European Commission
Subjects: EIB loan, credit guarantee, energy transport, financial aid, financing method, information technology, innovation, new technology, project of common interest, trans-European network, transport network

EUROPEAN COMMISSION 

Brussels, 19.10.2011 
SEC(2011) 1239 final 

COMMISSION STAFF WORKING PAPER 

EXECUTIVE SUMMARY OF THE IMPACT ASSESSMENT 

Accompanying the document 

COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN 
PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL 
COMMITTEE AND THE COMMITTEE OF THE REGIONS 

A pilot for the Europe 2020 Project Bond Initiative  

Proposal for a 

REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL 

amending Decision No 1639/2006/EC establishing a Competitiveness and Innovation 
Framework Programme (2007-2013) and Regulation (EC) No 680/2007 laying down 
general rules for the granting of Community financial aid in the field of the trans-
European transport and energy networks 

{COM(2011) 659 final} 
{SEC(2011) 1237 final} 

 
 
 
 
  
 
  
 
 
 
 
 
 
1. 

INTRODUCTION 

This document provides the executive summary of the Impact Assessment on the pilot phase 
of  the  Europe  2020  Project  Bond  Initiative.  The  intention  is  to  put  in  place  a  support 
mechanism  that  would  allow  infrastructure  projects  to  access  capital  market  funding  to 
complement  more  traditional  bank  lending.  In  view  of  the  financing  problems  faced  by 
projects  at  present,  the  need  to  test  the  desing  and  ensure  market  acceptance  of  a  new 
Initiative  it  is  proposed  to  launch  a  pilot  phase  for  the  transport,  energy  and  ICT  sectors 
already in 2012-13. The pilot phase will be funded by redeploying a total of EUR 230 million 
from the TEN-T, TEN-E and CIP budget lines. 

The pilot will serve to improve its effectiveness under the Connecting Europe Facility (CEF), 
which  will  place  EU  infrastructure  financing  on  a  more  coherent  basis  in  the  2014-2020 
period. This impact assessment covers primarily the pilot phase. 

In  order  to  fulfill  the  ambitious  goals  of  the  Europe  2020  strategy  significant  investment  is 
required.  Despite  the  financial  support  of  the  Community  budget  through  grants  from  the 
TEN-budget  line,  the  Structural  Funds  and  Cohesion  Fund,  the  Competitiveness  and 
Innovation programme as well as the European Investment Bank loans, many TENs and other 
infrastructure projects remain incomplete for various reasons. The Commission has identified 
the lack of investment as a significant obstacle to the implementation of the goals1. 

This Initiative is a part of the Europe 2020 strategy, which was endorsed by the European 
Council  on  17  June  2010  and  aims  to  make  Europe  a  smart,  sustainable  and  inclusive 
economy,  which  delivers  high  levels  of  employment,  productivity  and  social  cohesion  in  a 
sustainable  manner.  To  boost  growth  and  jobs,  the  EU  has  identified  seven  flagship 
initiatives,  two  of  which  are  the  "Digital  Agenda"  and  the  "Resource  Efficient  Europe". 
They  relate  to  Trans-European  Networks  (TENs)  in  the  areas  of  transport,  energy  and 
telecommunications. 

In the period 2014-2020, the instrument would not necessarily need to be limited to the areas 
of  CEF  in  future;  projects  in  other  infrastructure  sectors,  such  as  social  sectors,  renewable 
energy  or  certain  space  projects,  could  be  eligible  provided  they  meet  the  economic  and 
financial  prerequisites.  Thus  the  instrument  should  be  open  to  use  in  other  policy  contexts 
including  structural  and  cohesion  funds  and  external  policies.  The  formulation  of  the  CEF 
proposal should not preclude this. 

2. 

PROBLEM DEFINITION 

Europe  faces  enormous  infrastructure  investment  needs  in  transport,  energy  and  ICT 
networks, estimated to be of EUR 1.5 trillion to EUR 2 trillion, to meet the policy goals of the 
Europe 2020 strategy. Of course, there are also substantial investment needs in other areas of 
infrastructure,  but  these  will  not  be  considered  further  at  this  stage.  In  other  words,  the 

1 

See  for  instance  the  Transport  White  Paper  -  SEC(2011)  359;  the  Communication  on  Energy 
Infrastructure Priorities to 2020 and beyond : A blueprint for an integrated European energy network - 
COM(2010)  677;  Digital  Agenda  for  Europe  -  COM(2010)  245;  European  Broadband:  investing  in 
digitally driven growth - COM(2010) 472. 

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aggregate figures could easily translate into annual financing volumes of EUR 200 billion or 
more.  The  lack  of  investment  as  a  significant  obstacle  to  the  implementation  of  the  goals 
presented above is the cause for the TEN projects being delayed  or abbandoned. Therefore, 
the existing problem is mainly defined by the nature and extent of infrastructure funding gap. 

At present, public sector infrastructure investment in the  EU averages approximately  1% of 
GDP or EUR 120 billion per annum, out of which about 80% is investment in transport and 
most of the remainder in social infrastructure such as schools and hospitals.  

Increasingly,  governments  have  encouraged  the  private  sector  to  finance  infrastructure 
investment, either on a purely private sector basis through privatisation, through concessions 
or, more recently, using the public-private partnership (PPP) model as a basis. Such privately 
funded projects are typically financed with equity from sponsors or other investors and bank 
loans. 

However,  the  step  change  in  investment  needed  to  meet  the  Europe  2020  objectives  is  well 
beyond "business as usual" and requires a reconsideration of funding and the EU intervention. 

Without the initiative (baseline  scenario) the EU would  continue with the current system of 
grant  financing  for  individual  projects  without  any  use  of  so-called  financial  instruments  in 
the energy and ICT sectors. In the transport sector, the two existing financial instruments, the 
Loan  Guarantee  Facility  for  TEN-T  (LGTT),  which  supports  bank  loans  to  certain  types  of 
transport  projects,  and  the  Marguerite  Fund,  which  takes  equity  investments  in  transport, 
energy and climate-related projects, will continue until their expiry. 

The lack of infrastructure financing would subsequently affect all countries in the EU due to 
being transit countries or geographical periphery. The affected groups include citizens in all 
Member  States,  who  benefit  from  the  infrastructure  and  ultimately  fund  it,  either  as 
consumers  or  tax  payers,  tendering  authorities  which  may  not  have  multiple  competitive 
financing offers and project promoters, who may not be able to get financing for their projects 
at  present,  affecting  employment  directly.  This  would  also  affect  their  sub-contractors, 
potentially including SMEs. 

3. 

ANALYSIS OF SUBSIDIARITY 

The right for the EU to act in the field of infrastructure financing is set out in Articles 172 and 
173 which provide that in order to achieve the relevant objectives the Union (…) may support 
projects of common interest supported by Member States.  

The Europe 2020 Project Bond Initiative complies with the subsidiarity principle as the choice 
of  the  EU  Regulation  for  financing  trans-European  networks  projects  with  project  bonds  is 
best  suited  to  provide  an  efficient  and  inexpensive  means  to  attract  high  levels  of  private 
sector financing. It will be the first EU financial instrument benefiting infrastructure projects 
across several sectors with similar financing needs and will as such produce higher benefits in 
terms  of  market  impact,  coherence,  administrative  efficiency  and  resource  utilisation.  By 
focusing  on  optimising  the  use  of  EU  funds,  the  initiative  will  aim  to  improve  the 
effectiveness of both EU and Member States action within this division of competencies. 

As capital markets transcend national borders, so efficiency dictates that a financing scheme 
should do the same. This also avoids distorting financial markets. Countries outside of the EU 

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have their own policies to support infrastructure financing. Thus, a European initiative would 
level the international playing field for European projects seeking funding. 

In  summary,  the  EU  has  the  potential  to  achieve  the  twin  objectives  of  increasing 
infrastructure financing and creating an infrastructure bond market better in the EU and more 
completely than the Member States. 

4. 

OBJECTIVES OF THE EU INITIATIVE 

The general two-fold objective of the Initiative to stimulate investment in infrastructure and to 
establish debt capital markets as a new source of financing. The specific targets of the pilot 
phase  Initiative  include  enhancing  up  to  3-6  TEN-T  projects,  1  TEN-E  and  up  to  1-3 
broadband projects to allow them to issue bonds. The number of projects will depend on the 
volume of financing required for each project, ie the higher the volume, the more EU budget 
allocations are needed for one single transaction. The EU budget contribution is expected to 
attract 15-20 times in additional investment. As the pilot phase is necessarily limited in scope, 
budget and time this can only be a first step towards creating an infrastructure bond market in 
the EU by acting as a catalyst for private-sector bond solutions. 

These  objectives  dovetail  with  existing  EU  policies  and  strategies,  such  as  Europe  2020  as 
well  as  the  ambitious  energy  and  climate  policy  goals  –  the  "20-20-20"  objectives.  The 
Initiative,  together  with  other  financial  instruments,  is  an  important  building  block  for  the 
Connecting Europe Facility (CEF) proposed for the transport, energy and ICT sectors in the 
Multi-annual Financial Framework (MFF) 2014-2020.  

5. 

POLICY OPTIONS 

On  the  basis  of  the  measure  in  use  to  address  the  existing  financing  gap  and  achieve  the 
identified objectives in the area of infrastructure, three main options have been explored: 

Option  1:  Grant  funding,  no  new  financial  instrument  (baseline  scenario).  This  would 
entail the exclusive reliance on the use of grants from the public purse, including the EU with 
bank  loans  as  the  main  source  of  private  sector  financing.  In  the  area  of  transport,  the  two 
existing financial instruments would continue during the pilot phase. 

Option 2: Regulatory incentives for infrastructure financing The EU as a whole does not 
have  a  true  project  bond  market  Financing  in  Europe  has  traditionally  been  dominated  by 
banks  and  a  truly  integrated  and  liquid  bond  market  only  started  developing  after  the 
introduction  of  the  single  currency.  As  a  result  of  the  banks'  better  knowledge  of  their 
customer  and  ability  to  analyse  infrastructure  financing  proposals,  they  are  able  to  accept 
riskier  financing  structures  than  bond  investors.  Thus  one  of  way  of  addressing  the 
infrastructure financing problem would be to require better security packages from sponsors 
or making investment more attractive to investors. 

Option 3: The use of a financial instrument The financial instrument would take a form of 
an EIB guarantee or an EIB loan. It has the advantage  of not being imposed,  but driven by 
market demand. If well-designed, it is highly flexible and can respond to market needs in a 
timely manner.  

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The Initiative would cover pre-identified transport, energy and ICT priority infrastructure and 
would complement the existing sources of project financing through bank loans. The initiative 
divides  the  project  debt  into  a  senior  tranche  and  a  subordinated  tranche,  which  is,  in  turn, 
senior to equity. The subordinated tranche may either be in the form of a subordinated loan 
given to the company at the outset, i.e. it is funded, or it may be in the form of a contingent 
credit line, which the company can draw on in case of need, i.e. it is unfunded. A mix of a 
funded and unfunded tranche could also be envisaged, depending on the characteristics of the 
project. 

The  presence  of  a  subordinated  tranche  improves  the  risk  profile  of  the  senior  debt,  which 
increases  the  attractiveness  of  the  senior  debt  to  investors  allowing  the  senior  tranche  to  be 
issued  as  a  bond.  The  desired  credit  quality  can  be  generally  described  as  one  reaching  a 
rating of BBB+ or above, which is likely to require a subordinated tranche of up to 20% of the 
senior debt of the project. The aim is to expand the investor base for private debt funding of 
projects  to  bond  investors.  The  mechanism  of  the  Initiative  would  rely  on  the  risk-sharing 
between EIB and the EU.  

Other alternatives concidered but discarded at an early stage and not assessed in detail include 
direct  senior  lending  by  EU  or  EIB,  a  full  debt  service  guarantee,  a  loss  reserve  fund  and 
creating a European Infrastructure Bank or Guarantee Agency, which either do not promote 
capital market financing or distort the incentives of the different players. 

6. 

ASSESSMENT OF IMPACTS 

Option  1:  Grant  funding  would  mean  accepting  a  continuing  shortfall  in  infrastructure 
investment and private financing sources, to the detriment of European long-term sustainable 
growth. The economic and social impact of built projects would be otherwise unaffected. The 
infrastructure that would be implemented would likely be built at a higher than necessary cost 
to society. There is a risk that key EU infrastructure would be sacrificed for national priorities. 

Option 2: Regulatory incentives may allow more bond financing. The economic and social 
impact  of  built  projects  would  be  otherwise  unaffected.  However,  the  final  cost  to  the  tax 
payer is likely to be higher as the cost of additional capital is passed on. Further, the costs of 
compliance in the selected sectors may also be high and lead to market distortions, but this is 
difficult to evaluate. In any case, this option is unlikely to be implemented quickly. 

Option  3:  The  financial  instrument  would  take  a  form  of  a  contingent  credit  line  or  a 
subordinated  loan.  Again,  the  economic  and  social  impact  of  built  projects  would  be 
otherwise unaffected, but the cost to tax payers is expected to be lower. 

The  table  below  presents  an  synoptic  description  of  the  different  impacts  of  the  options 
impacts. 
in  what  concerns  other  economic,  social  and  environmental 
considered 

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Option 

Option 1: 
Grant funding 

Option 2: 
Regulatory incentive 

Criteria 

Option 3: 
Financial instrument + 
possibly regulation of the 
capital markets 

TENs 
Capital markets 

Partly 
No 

Achieved objectives 
Partly 
Maybe 

Yes 
Yes 

Economics 
impacts 

Social impacts 

Environmental 
impacts 

- Only small 
efficiency gains 
possible 
- Continuing lack of 
financing 
- Relative decrease of 
the long-term EU 
growth potential and 
competitiveness  
- Higher than 
necessary 
infrastructure cost to 
society 

- Grant funding to 
projects that could be 
financed in the market 
- Potential lack of 
funding for weaker 
projects  
- Key EU 
infrastructure 
subordinated to 
national priorities 
- Disproportionality of 
cross-border projects 
reducing cohesion in 
EU 
- No particular 
environmental impact 

Impacts of the options 
- No cost on budget 
- Distortion of the decision 
making leading to the mis-
allocation of funds2 
- More costly for sponsors, 
tendering authorities and 
tax payers, thus  
less infrastructure being 
built 
- Less potential of 
extension due to barriers of 
different regulation  
- Disproportionately large 
compliance costs for 
SMEs 
- Sponsors looking for the 
highest return projects due 
to higher costs 
- Non-implementation of 
weaker projects 
- Increasing 
disproportionality cross-
borders and lower 
cohesion in EU 

- Higher costs leading to 
less infrastructure built 
with reduced potential 
(positive and negative) 
effects 

- Most final funding attracted 
at lower cost 
- Stimulated implementation 
of large infrastructure projects 
with national and cross-border 
benefits 
- More access to the 
infrastructure provided at a 
reasonable price 
- More diverse financing 
possibilities created 
- Positive effect on growth 
and competitiveness of the EU 
- Market-driven 

- Pension and insurance funds 
securing a higher rate of 
return for pension policy 
holders, i.e. citizens 
- Greater market integrity 
leading to better services, 
higher investor confidence 
and greater participation in 
financial markets 
- More jobs created by 
stimulating new infrastructure 
and economic growth 

- Acceleration or enabling of 
financing for projects with 
environmental impacts that 
would not otherwise take 
place 
- Implementation of the 
Europe 2020 strategy with 
positive environmental impact 

2 

Due  to  increased  costs  of  financing,  sponsors  are  likely  to  be  looking  exceptionally  for  the  highest 
return projects, which could lead to non-implementation of weaker but still viable projects in particular 
sectors, while investors might invest in infrastructure projects due to regulatory advantages rather than 
the quality of the underlined projects, which would lead to the mis-allocation of funds. 

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The table above shows that: 

• 

• 

• 

From an economic point of view, Option 3 seems to be preferable overall. In fact, 
while  achieving  both  objectives  identified  at  lower  overall  costs,  if  appropriately 
priced it creates no market distortion and lower administrative burden. 

From a social point of view, both Option 2 and 3 could make it easier for economic 
entities  to  raise  capital,  provide  the  necessary  infrastructure,  stimulate  growth  and 
create  more  jobs.  However,  Option  3  is  more  desirable  as  it  would  benefit 
institutional  investors  such  as  pension  and  insurance  funds,  who  invest  in  financial 
instruments in order to secure a higher rate of return for pension policy holders, i.e. 
citizens. 

From an environmental point of view,  the general objectives of the EU  initiative 
only relate to the financing of projects. Projects themselves are the entities that might 
cause environmental impacts.  

The  following  summary  table  set  out  the  advantages  and  disadvantages  of  the  different 
options, measured against the criteria of their effectiveness in achieving the related objectives, 
and  their  efficiency  in  terms  of  achieving  these  options  for  a  given  level  of  resources  or  at 
least cost. Each scenario is rated between "---" (very negative), 0 (neutral) and "+++" (very 
positive).

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Criteria

Impact on 
stakeholders 

Effectiveness 

Efficiency 

Option 

Objective 1: Stimulating investment in infrastructure, especially TEN-related 

Option 1: 
Grants 
Option 2: 
Regulatory incentives 

Option 3: 
Financial instrument  

0 

0 

0 

(--) some 
administrative 
burden for both 
companies and 
investors, but 
(0) unchanged for 
Member States in 
case no additional 
monitoring 
required 
(-) Lower 
administrative 
burden for 
companies and 
Member States, but 
(---) higher for 
investors  
(--)requires 
investor education 

(+) partially enables 
implementation of some 
TENs 
(--) could create 
conflicts between 
regulation in each sector 
and requirement for 
more capital 

(0) does not increase cost 
on budget 
(---) increases cost to 
almost all types of 
stakeholders 
(--) would affect all 
projects and financiers, not 
only those using bonds 

(+) budget contributions 
will be strictly capped 
(+++) lower infrastructure 
investment cost expected 
over the project lifetime 

(++) facilitates the 
implementation of TENs 
(++) encourages single 
market 
(+++) stimulates 
competition between 
bank and bond markets 
(---)depends on other 
conditions such as 
market acceptance, 
procurement practicies, 
regulatory framework 
and perceived 
uncertainties by 
investors 

Objective 2: Establishing debt capital markets as a new source of financing 
(---)  

(---) 

Option 1: 
Grants 

(---) no incentive 
available for 
investors and 
projects 
 (0) does not create 
new investment 
tool 
(+) some private 
initiatives as a 
niche activity 
might evolve  
(++) widens choice 
of financing 
instruments 
(--) promotion and 
education required 
for a novel EU 
instrument  

Option 2: 
Regulatory incentives 

Option 3: 
Financial instrument  

EN 

(+) may establish debt 
capital markets as 
financing source 
(+) may attract some 
funding 

(+++) stimulates new 
sources of financing and 
(++) possibly creates 
new asset class 
(+++) attracts most of 
funding 
(--) factors such as 
controlling or 
monitoring creditor 

8 

(---) higher financing costs 
(---) unclear wether it will 
attract additional funding, 
in which case the 
additional cost would have 
been unnecessary 

(++) lower financing cost 
expected  
(-) uncertainties remain as 
regards additional costs 
such as rating or listing 

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requires multiple 
approaches 

Option 2 is the least costly from a Commission perspective, but it imposes costs on all project 
sponsors, small and large, without a clear benefit. Since there is no incentive for banks and 
investors to adjust behaviour, the desired development of capital markets may not take place. 
It  is  expected  to  have  rather  negative  impact  on  stakeholders  as  well  as  perform  poorly  in 
terms  of  effectiveness  and  efficiency  compared  to  other  options.  It  is  therefore  the  least 
preferred option. 

Option 1 does not per se raise costs on any stakeholders, but nor does it generate additional 
funding  from  loan  or  capital  markets.  It  would  also  have  no  influence  on  effectiveness  and 
efficiency of achieving identified objectives. This is therefore the second-most/least desirable 
option. 

The  preferred  option  is  the  use  of  a  financial  instrument  –  Option  3,  since  it  gives  market 
participants economic incentives to adapt their behaviour without imposing blanket regulatory 
costs.  It  is  considered  to  be  the  most  effective  solution  with  the  most  positive  impact  on 
stakeholders and the most tangible improvement of the financing of infrastructure. 

7. 

MONITORING AND EVALUATION 

The  Commission  may  work  through  one  or  several  financial  institutions  with  a  public 
mission, which would normally receive and assess the applications for support, the financial 
structure  of  the  project,  its  economic  viability  etc  according  to  their  internal  rules  and 
procedures. The pilot phase will be implemented in particular with EIB. 

EIB  Financing  Operations  will  be  managed  by  the  EIB  in  accordance  with  the  EIB's  own 
rules  and  procedures,  including  appropriate  approval,  audit,  control  and  monitoring 
measureswhich are the subject of regular reporting to the Commission.  

The  Commission  already  collects  data  on  the  EU  bond  market  and  may  also  request 
information  from  the  banks  that  place  the  project  bonds.  These  sources  and  specific 
performance indicators will help the Commission to review the pilot phase before the end of 
2013  in  order  to  draw  conclusions  on  the  future  design.  The  mid-term  review  of  the  CEF 
facility will assess whether the scheme introduced (still) adds value and should be maintained. 

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