COMMISSION STAFF WORKING PAPER 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) 1237 final 

COMMISSION STAFF WORKING PAPER 

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) 1239 final} 

 
 
 
 
  
 
  
 
 
 
 
 
 
TABLE OF CONTENTS 

1. 

1.1. 

1.2. 

1.3. 

1.4. 

2. 

Procedural issues and consultation of interested parties .............................................. 3 

Background for the development of the Europe 2020 Project Bond Initiative............ 3 

Organisation and timing............................................................................................... 4 

Consultation and expertise ........................................................................................... 5 

Results of the consultation of the Impact Assessment Board ...................................... 5 

Context and problem definition ................................................................................... 6 

2.1. 

Political context and legal base .................................................................................... 6 

2.1.1.  Policy for the future: Europe 2020............................................................................... 6 

2.1.2.  Connecting Europe Facility.......................................................................................... 6 

2.1.3.  Funding ........................................................................................................................ 7 

2.2. 

Problem definition........................................................................................................ 7 

2.2.1. 

Infrastructure funding gap: Nature and extent ............................................................. 7 

2.2.2.  Funding: Drivers and underlying causes...................................................................... 8 

2.3. 

2.4. 

3. 

3.1. 

3.2. 

3.3. 

4. 

4.1. 

4.2. 

4.3. 

Baseline scenario, assumptions and affected parties.................................................. 10 

Subsidiarity ................................................................................................................ 11 

Objectives................................................................................................................... 12 

General policy objectives........................................................................................... 12 

Operational objectives................................................................................................ 12 

Link with EU Strategies ............................................................................................. 13 

Identification of possible EU options in the pilot phase ............................................ 13 

Option 1: Grant funding, no new financial instrument (baseline scenario) ............... 13 

Option 2: Regulatory incentives to increase infrastructure financing, no financial 
instrument................................................................................................................... 14 

Option 3: The use of a financial instrument to attract additional infrastructure financing
.................................................................................................................................... 14 

4.4. 

Alternative financial options discarded at an early stage........................................... 17 

5. 

Analysis of Impacts.................................................................................................... 19 

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5.1. 

5.2. 

5.3. 

5.4. 

5.5. 

5.6. 

6. 

Option 1: Grant funding, no financial instrument...................................................... 19 

Option 2: Regulatory incentives................................................................................. 20 

Option 3: Use of a financial instrument ..................................................................... 22 

Budgetary impact ....................................................................................................... 24 

Administrative burden................................................................................................ 24 

Risk analysis/uncertainties of policy choices............................................................. 25 

Comparison of options and choice of preferred action .............................................. 26 

6.1. 

Comparison of impacts of different options............................................................... 26 

7. 

Monitoring and evaluation ......................................................................................... 29 

Annex I: Public consultation .................................................................................................... 32 

Annex II: Past EU experience with financial instruments ....................................................... 39 

Annex III: Past and future infrastructure financing ................................................................. 40 

Annex IV: The general economic and social case for infrastructure investment..................... 47 

Annex V: An illustrative project example................................................................................ 49 

Annex VI: Detailed design and risk-sharing ............................................................................ 51 

Annex VII: Other issues potentially affecting the success of the project bond initiative ........ 55 

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1. 

PROCEDURAL ISSUES AND CONSULTATION OF INTERESTED PARTIES 

Identification 

Lead DG: Directorate-General for Economic and Financial Affairs (ECFIN) 

Agenda Planning: 2011/ECFIN/022 

1.1. 

Background for the development of the Europe 2020 Project Bond Initiative 

Despite  long-standing  EU  policy  and  grant  spending  on  Trans-European  Networks  (TENs),  the 
Commission has found that the completion of key infrastructure projects is delayed or abandoned 
with  one  of  the  principal  reasons  being  lack  of  investment.  The  Connecting  Europe  Facility 
(CEF)  for  the  period  2014-2020  will  put  European  funding  for  transport,  energy  and 
telecommunications infrastructure on a solid and coherent basis for the longer term1.  

However,  Europe  is  facing  financing  problems  already  now.  Government  spending  is  being 
reduced  and  long-term  bank  lending  continues  to  be  scarce.  Project  finance  volumes,  after 
recovering  somewhat  in  2010,  have  declined  dramatically  in  the  first  half  of  20112.  Thus,  at  a 
point in time, where infrastructure projects could contribute most to aid the European recovery, 
the financing is more challenging than it need be3.  

Currently, infrastructure projects in the EU have de facto no possibility to access finance from the 
bond  markets.  Therefore,  the  Commission  suggests  putting  in  place  a  support  mechanism  that 
would  increase  projects'  access  to  capital  market  debt  funding  to  complement  grants  and  bank 
financing. The Europe 2020 Project Bond Initiative would be a cross-sector initiative to expand 
the  available  sources  of  financing  of  infrastructure  projects,  especially  in  the  transport,  energy 
and  ICT  sectors  where  current  traditional  sources  of  financing  are  insufficient.  The  aim  is  to 
attract  institutional  investors  to  the  capital  market  financing  of  projects  with  stable,  predictable 
cash flows by raising the credit quality of project bonds issued by private companies. The pilot 
phase of this Initiative would be rolled out with the European Investment Bank (EIB) in 2012 and 
2013.  

The Initiative will build on more than ten years of experience of using financial instruments4 to 
implement  EU  policies.  In  the  2007-2013  financial  framework,  a  new  generation  of  successful 
financial  instruments  were  put  in  place  in  cooperation  with  the  EIB,  notably  the  Risk-Sharing 
Finance  Facility  (RSFF)  under  the  7th  R&D  Framework  Programme  and  the  Loan  Guarantee 

1 
2 

3 

4 

See further point 2.1.2 
Source Infrastructure Journal (IJ). Western Europe declines from EUR 33 billion to 26 billion, half of which 
is transport and energy (IJ's data for Eastern Europe distorted by Russia and Turkey, hence not included). 
See  also  the  Impact  Assessment  on  the  Connecting  Europe  Facility  and  the  Impact  Assessment 
accompanying the legislative proposals for the ERDF and Cohesion Fund. 
Pioneered in the area of SMEs 

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Instrument  for  TEN-T  projects  (LGTT)5.  The  mid-term  reviews  of  the  latter  two,  which  are  of 
particular relevance in the context of the project bond initiative, are attached in Annex II.  

As a project bond-type, cross-sectoral financial instrument does not yet exist at European level, 
the  pilot  phase  in  2012-2013  would  allow  testing  its  design  and  market  acceptance  in  order  to 
improve its effectiveness under CEF for the 2014-2020 period. In the pilot phase, the focus would 
be on projects at a relatively advanced stage6 to accelerate the implementation and facilitate the 
creation of a project portfolio. In order to gather relevant experience to ensure rapid take-up post-
2013, EIB is willing to work on concrete operations in parallel with the legislative process (i.e. 
prior to the formal political decision) in order to have first transactions executed in 2012. 

This impact assessment covers mainly the pilot phase of the Europe 2020 Project Bond initiative, 
but  refers  to  the  2014-2020  operational  phase  where  relevant,  and  focuses  on  financing  in  the 
projects  in  transport,  energy  and  telecommunication  areas.  The  pilot  phase  will  be  limited  in 
scope, budget and number of projects compared to the post-2013 phase. 

Finally,  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. In addition, 
further financial institutions should have the possibility to participate in 2014-2020 in line with 
the Financial Regulation. 

1.2. 

Organisation and timing 

Since  the  announcement  of  the  Initiative,  Directorate  General  (DG)  ECFIN  has  been  working 
with  EIB  services  in  order  to  define  its  main  parameters  and  with  DGs  MOVE,  ENER  and 
INFSO.  

An inter-service steering group was formed to ensure that the impact assessment for the formal 
legislative  proposal  captures  all  necessary  policy  aspects  that  have  to  be  clarified  to  ensure  the 
success of the Initiative. In addition to DGs ECFIN, MOVE, ENER and INFSO it comprises DGs 
BUDG,  COMP,  ENTR,  ESTAT,  MARKT,  REGIO,  RTD,  SJ  and  SG  as  well  as  the  TEN-T 
July  2011.
Executive  Agency.  The  group  met  3 

times  between  May 

and 

5 

6 

LGTT  aims  to  attract  long-term  bank  lending  in  TEN-transport  projects.  Under  LGTT,  the  EIB  provides 
financing (credit enhancement) to the projects whereby the Commission covers a share of potential losses 
through a risk-sharing mechanism. The EU budget earmarked for LGTT amounted to EUR 500 million with 
matching funding from the EIB. The multiplier effect is 20, i.e. LGTT is expected to attract EUR 20 billion 
of senior loans.  
E.g. projects already at preferred bidder stage and/or refinancing of projects during construction) 

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1.3. 

Consultation and expertise 

External consultation 

With  a  view  to  assess  market  demand  for  the  Initiative  and  possible  obstacles  prior  to  the 
development  of  a  fully  fledged  proposal,  a  public  consultation  was  launched  on  28  February 
2011.  The  consultation  paper  was  subsequently  made  available  on  the  website  of  the  DG  for 
ECFIN. In addition, it was sent out to numerous stakeholders directly. It thus benefited from the 
maximum publicity possible to compensate for the minimal prior notification.  

Stakeholders had until 2 May 2011 to make their contributions via the Europa website or via a 
functional mailbox. Over 130 responses were received. In addition, a conference was held on 11 
April in Brussels with more than 250 participants. The Initiative was generally viewed favourably 
and  many  suggestions  made,  mainly  to  extend  its  scope  to  social  infrastructure,  environmental 
infrastructure and renewable energy projects. The positive impact of the project bond initiative in 
attracting  private  finance  and  in  particular  institutional  investors  to  infrastructure  projects  was 
also highlighted by the stakeholders. The majority of responses considered that the initiative will 
facilitate financing due to a more solid structuring of long-dated projects.  

As  the  detailed  summary  of  the  consultation  in  Annex  I  shows,  the  minimum  standards  of 
consultation were met. 

1.4. 

Results of the consultation of the Impact Assessment Board 

Following the hearing with the Impact Assessment Board on 31 August 2011, the Board sent its 
opinion  on  2  September  2011.  This  impact  assessment  report  concentrates  on  the  pilot  phase 
which  is  subject  of  the  draft  Regulation  and  also  explaines  the  link  to  the  CEF  financial 
instruments  as  requested  by  the  Board.  Based  on  the  recommendations  received,  the  report  has 
been redrafted along the following main lines: 

The Board's request to strengthen the justification of the initiative has been included throughout 
the document. The current market situation has been explained more in details in particular under 
points  1.1  and  2.2  with  link  to  the  impact  assessment  accompanying  CEF.  The  aspect  of  value 
added of the initiative is included as a new subject under point 4.1. A new Annex V provides an 
example  of  a  possible  project  in  order  to  facilitate  the  understanding  of  the  readers  on  the 
functioning of the initiative. In addition, a section on pricing is included under points 5.3 and 4.1. 

As the Board considered that the options and their impacts should be more clearly formulated, the 
sections  4,  5  and  6  have  been  redrafted,  including  subsidiarity  and  administrative  burden,  for 
which more detailed comments were provided by the Board earlier during the process. Section 7 
on monitoring and evaluation has been improved to better reflect the Board's request to spell out 
more extensively the monitoring and evaluation arrangements including performance indicators. 
This reflects the monitoring and evaluation arrangements laid down in the draft Regulation on the 
launch of the pilot phase.  

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2. 

CONTEXT AND PROBLEM DEFINITION 

2.1. 

Political context and legal base 

2.1.1.  Policy for the future: Europe 2020 

Given the challenges of a changing and increasingly inter-connected world, the EU developed the 
Europe 2020 Strategy, which takes a holistic view of Europe's policy goals and was endorsed by 
the European Council on 17 June 2010. The objective is to make Europe a smart, sustainable and 
inclusive economy, which delivers high levels of employment, productivity and social cohesion 
in a sustainable manner. To this end, the EU has identified seven flagship initiatives, of which the 
Digital  Agenda  and  Resource  Efficient  Europe  are  of  particular  relevance.  The  Digital  Agenda 
objectives are to ensure that every European has access to basic broadband by 2013 and to fast or 
ultrafast  broadband  by  20207.  The  Resource-efficient  Europe  flagship  aims  to  support  the  shift 
towards a resource-efficient and low-carbon economy, thereby decoupling economic growth from 
resource  and  energy  use,  reducing  CO2  emissions  and  promoting  greater  energy  security  while 
enhancing  competitiveness.  This  will  require  a  significant  transition  in  transport  and  energy 
systems.  

2.1.2.  Connecting Europe Facility 

CEF  will  provide  the  longer-term  framework  ensuring  that  projects  in  energy,  transport  and 
telecommunication  are  developed  and  implemented  in  a  timely  and  effective  manner.  A 
comprehensive strategy of prioritised opportunities of infrastructure projects, as proposed by the 
Commission on 29 June 20118, has significant potential to attract more private sector financing 
and at the same time help to complete the internal market. The strategy, including the selection of 
projects  eligible  for  funding  is  transparent,  thus  ensuring  a  high  level  of  certainty  for  all 
stakeholders. Within this strategy the setting of policy priorities, regulations, incentive schemes, 
close co-ordination between stakeholders, information and awareness campaigns are required to 
establish the overall framework conditions for infrastructure investments, enforcing behavioural 
changes  amongst  stakeholders  and  accelerating  the  pace  of  intervention.  Grants  and  financial 
instruments,  each  under  a  distinct  set  of  financial  rules,  would  be  available  in  a  co-ordinated 
manner.  

Financial  instruments  are  needed  to  reduce  specific  barriers  that  prevent  the  flow  of  debt  and 
equity finance. Their main objective is to attract and facilitate private sector finance of projects. 
At  the  same  time,  increased  investment  activity  in  infrastructure  projects  stimulates  the  global 
development  of  post-crisis  financial  markets,  enhances  the  pace  of  economic  recovery  and 
promotes  growth.  The  Europe  2020  Project  Bond  Initiative  will  become  an  integral  part  of  the 
risk-sharing instruments of CEF for the period 2014-2020. The main objective of the pilot phase 
in  2012-2013  would  be  immediate  support  for  infrastructure  projects  and  preparation  of  the 
operational phase of the Initiative in 2014-2020.  

7 

8 

The  2020  goal  has  two  parts:  (i)  all  Europeans  have  access  to  much  higher  internet  speeds  of  above  30 
Mbps and (ii) 50% or more of European households subscribe to internet connections above 100 Mbps. 
COM(2011)665 

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2.1.3.  Funding 

In  the  past,  a  large  number  of  projects  of  common  interest  have  benefited  from  grant  support 
from the Union budget9. The European Investment Bank (EIB) has also greatly contributed to the 
financing  of  these  projects  through  loans10.  Nonetheless,  many  TENs  remain  incomplete  and 
recent  communications  and  white  papers11  all  indicate  the  lack  of  investment  as  a  significant 
obstacle to the implementation of projects. The area of transport is most advanced in the use of 
financial instruments with the joint EU-EIB LGTT facility and the Marguerite Fund, where the 
EU is a co-investor alongside several banks. Experience so far shows a clear need to prepare the 
ground for the implementation of such schemes in order to have sufficient stakeholder awareness 
and acceptance. 

However, both grants and financial instruments have tended to be segregated by policy area until 
now, although financing requirements are often similar. By putting its infrastructure financing on 
a more coherent footing, the EU can ensure that key projects can draw on all available sources of 
funds and funding instruments in a cost efficient manner.  

The bond markets in Europe are de facto not used for the financing of infrastructure projects. The 
proposed Europe 2020 Project Bond Initiative aims to increase the access to debt capital markets 
for infrastructure projects of European interest, using appropriations from the EU budget.  

Initially, the three target areas transport, energy and telecommunication will be covered, but later 
on the Initiative may also benefit other types of infrastructure. To allow the launch of the pilot 
phase,  it  is  proposed  that  EUR  200  million  are  redeployed  from  the  TEN-T  budget,  EUR  10 
million from the TEN-E budget and EUR 20 million from the CIP budget.  

As regards funding under CEF for the period 2014-2020 up to 20% of the available budget could 
be used for risk-sharing and equity instruments depending on the identified funding gap.  

2.2. 

Problem definition  

2.2.1. 

Infrastructure funding gap: Nature and extent 

Europe faces enormous infrastructure investment needs in transport, energy and ICT networks in 
this decade, totalling EUR 1.5 trillion to EUR 2 trillion12, to meet the policy goals of the Europe 
2020  strategy,  i.e.  annual  financing  volumes  of  EUR  200  billion  or  more.  Of  course,  there  are 
also substantial investment needs in other areas of infrastructure, but these will not be considered 
further at this stage. 

9 
10 
11 

12 

TEN budget lines, Structural Funds and Cohesion Fund. 
See Annex III for further details. 
Digital  Agenda  for  Europe  COM(2010)245,  European  Broadband:  investing  in  digitally  driven  growth 
COM(2010)472,  Roadmap  to  a  single  European  Transport  Area  COM(2011)144,  Transport  White  Paper 
SEC(2011)359 and Energy infrastructure priorities for 2020 and beyond COM(2010)677. 
Sources  Transport White  Paper  SEC 0359/2011,  Energy  Communication  2010/677,  A  Budget  for  Europe 
2020  -  Part  II,  COM(2011)  500,  see  also  the  impact  assessment  accompanying  the  Connecting  Europe 
Facility proposal. 

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At  present,  public  sector  infrastructure  investment  in  the  EU  averages  approximately  1%  of 
GDP13 or around EUR 120 billion per annum. It is estimated that about 80%, EUR 95 billion is 
investment in transport and most of the rest in social infrastructure, i.e. schools and hospitals14.  

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.  Traditionally,  users 
paid directly for each use of an infrastructure project, e.g. in the case of toll roads. Although user 
charges  work  well  for  such  cases,  not  all  types  of  infrastructure  can  be  financed  this  way.  The 
concept  of  availability  payments  has  therefore  been  developed,  whereby  a  public  sector  body 
makes regular payments over an agreed period to the supplier of the infrastructure and associated 
services for their availability subject to specific conditions. Such payments can also be combined 
with user charges if charging the full cost would lead to too large of a burden on users. PPP and 
other privately funded projects are typically financed with equity from sponsors or other investors 
and bank loans. 

The  step  change  in  total  projected  investment  volumes  to  meet  the  Europe  2020  objectives  is 
beyond  the  total  financing  available,  especially  given  that  existing  sources  may  stagnate  or  even 
decrease as Annex III explains15. This alone requires a reconsideration of funding generally and EU 
funding in particular.  

In  addition,  the  financing  of  cross-border  projects  poses  a  particular  challenge  due  to  the 
implication of several governments and their regulatory/legal systems  and current  incentives of 
individual Member States and/or private investors may not suffice to realise such projects. 

Of course, there are still projects that are not financially viable, but which nonetheless has great 
value to society. These will continue to be financed with grants.  

Finally,  infrastructure  projects  typically  require  very  long-term  financing,  something  that  is  not 
widely  on  offer  presently.  Infrastructure  generally  has  high  costs  of  capital  coupled  with  low 
operating costs. However, its usually stable and predictable cash flows make long-term financing 
particularly attractive. The infrastructure debt generally has low default rates and higher recovery 
rates  in  case  of  default  than  comparable  corporate  debt.  In  addition,  it  shows  a  low  correlation 
with other assets16, which is fundamental to the reduction of risk in a diversified portfolio and as 
such is sought after by asset managers.  

2.2.2.  Funding: Drivers and underlying causes  

During the financial crisis, due to the liquidity and risk challenges, banks in the EU reacted by 
shortening  of  maturities,  increased  pricing  and  collateral  requirements.  This  led  to  a  smaller 

13 
14 

15 
16 

Ranging from ½ to 2% depending on the Member State. 
Utilities  and  telecom  providers  are  generally  private  sector  entities,  thus  public  sector  investment  is 
minimal. 
See also the impact assessment accompanying the Connecting Europe Facility proposal. 
Moody's  Special  Comment  on  Default  and  Recovery  Rates  for  Project  Finance  Loans  1983-2008,  20 
October 2010 and P. Davies, MBIA 

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number of lending operations and smaller volume of operations per bank. In addition, there are a 
large  number  of  loans  to  existing  projects  that  were  granted  in  2006  and  2007  at  high  interest 
margins on a short term basis that are now coming up and requiring new financing arrangements, 
often  with  higher  financing  cost.  This  will  place  an  additional  strain  on  the  amount  of  debt 
available to finance the construction of new infrastructure.  

"Although the US has traditionally dominated the world’s bond markets, bonds issued in the US 
now account for less than half –about 44% of the global bond market volume. In Europe, bonds 
are  about  2/3  of  the  total  amount  of  securities  outstanding  in  bonds  and  shares;  in  the  US,  the 
bond  market  is  about  the  same  size  as  the  stock  market.  Historically  fragmented,  the  bond 
markets  of  the  world  comprise  a  great  variety  of  bond  products  with  complex  and  different 
characteristics.  About  60%  of  the  European  bond  market  is  government  bond  debt,  29%  is 
corporate, and 11% is asset-backed; in the US, the proportion of bonds issued by the corporate 
sector  is  much  larger.17"  This  illustrates  the  fact  that  the  European  bond  markets  still  play  a 
relatively  minor  role  for  the  financing  of  European  companies,  and  by  extension  of  projects, 
which are still predominantly financed via bank loans. Research suggests that because most direct 
investment in bonds has traditionally been in the government bond markets, there is a need for 
investors  in  the  EU  to  increase  their  understanding  of  corporate  and  project  bond  related  risks, 
which are generally more complex.  

Prior to 2008 a very limited number of EU infrastructure projects accessed the bond markets via 
privately guaranteed bonds. Essentially, insurance companies known as "monolines" guaranteed 
the timely payment of 100% of the interest and principal, so the rating of the bond depended on 
the credit quality of the monoline insurance company and not on that of the project18. In 2009-
2010, however, the infrastructure bond markets in the EU have shown de facto no activity.  

Multilateral development banks did step up their lending volumes as a crisis response. However, 
this trend may not become permanent and due to capital constraints the lending volumes need to 
be scaled down. 

As the Monti Report recognised, the full potential of the single market can only be delivered with 
the  provision  of  the  appropriate  physical  infrastructure  and  the  creation  of  a  single  digital 
market19"Major public infrastructure in Europe, such as the TENs, is transnational, unfit for the 
currently  fragmented  national  schemes,  and  their  funding  suffers  from  the  absence  of  a  liquid 
bond  market  for  very  long  maturities,  while  long-term  investors  such  as  pension  funds  cannot 
find a supply of bonds matching their investment needs."  

The Monti report suggests to "[...] explore all combinations between public and private funding 
[…]",  to  "[...]  improve  incentives  for  long  term  investors  […]  to  direct  their  resources  to  long 
term infrastructure projects"  by encouraging "[…] the development in Europe of a liquid bond 
market for very long maturities". 

17 

18 
19 

Source:  Association  for  Financial  Markets  in  Europe  (AFME):  Investing  in  bonds  in  Europe  on 
www.afme.eu. 
See also Annex III. 
M. Monti: A new strategy for the single market, at the service of Europe's economy and society, p.8 

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Most institutional investors in infrastructure have so far invested by taking in particular indirect 
equity stakes. Investing in infrastructure debt is less straight-forward, one of the rationales for the 
Project  Bond  Initiative.  A  more  detailed  review  of  public  and  private  infrastructure  financing; 
past, current and future provided in Annex III. 

2.3. 

Baseline scenario, assumptions and affected parties 

In the areas of transport, energy and telecommunications, the concept of TENs was enshrined in 
the  Maastricht  Treaty  in  1992  (now  Article  170  and  171  TFEU)  and  has  been  shaped  by 
successive  TEN-E,  TEN-T  and  eTEN  Guidelines  and  corresponding  financial  regulations  since 
1996 with EU financing being envisaged since 1995 according to Council Regulation 2236/95.  

Given the long-standing commitment to infrastructure, the natural baseline scenario would be for 
the EU to continue with grant funding, not to cease support for infrastructure projects altogether. 
During the pilot phase, the use of financial instruments in the area of transport such as the Loan 
Guarantee  Facility  for  TEN-T  (LGTT)  forms  part  of  the  baseline  scenario.  LGTT  aims  at 
attracting long-term bank lending to certain types of transport projects. 

The LGTT20 applies only to transport projects that face revenue risk due to variations in traffic, 
i.e. through user charges that are directly dependent on actual use, in the early operational phase 
of  a  project.  As  Member  States  have  been  using  availability  payments  as  a  basis  for  most 
transport projects rather than real tolls, most projects have not met the LGTT eligibility criteria. 
The assumptions underlying the baseline scenario, based on the drivers mentioned in point 2.2.2 
and discussed more in detail in Annex III, are as follows: 

• 

• 

• 

• 

Public  sector  finances  will  continue  to  be  under  pressure  for  most  of  the  next  Multi-
annual Financial Framework. 
While the impact of Basel III on liquidity in terms of categorisation of financial assets 
based  on  infrastructure  is  being  kept  neutral  in  this  assessment,  an  increase  in  lending 
prices  is  taken  into  account21.  Monoline  insurance  companies  will  not  re-enter  the 
markets.  
There will be sufficient number of potential projects to take advantage of this instrument 
that tie in with EU strategies of project pipeline development and building institutional 
capacity among the Member States.  
There will be investor demand for infrastructure bonds. 

Thus the stakeholders primarily affected by the absence or presence of infrastructure are:  

• 

20 
21 

Citizens in all Member States, who benefit from the infrastructure and ultimately fund it, 
either as consumers or tax payers.  

See footnote 9 on description of LGTT. 
The  impact  assessment  on  prudential  requirements  for  credit  institutions  and  investment  firms 
(SEC(2010)949)  concludes  in  point  5.9  that  "the  proposals  are  expected  to  lead  to  a  higher  cost  of  bank 
credit across the entire spectrum of bank customers, which is compensated by social benefits." In addition, 
the  paper  of  the  Bank  for  International  Settlements  on  the  assessment  of  long-term  economic  impact  of 
stronger  capital  and  liquidity  requirements,  August  2010,  point  to  the  fact  that  projected  impacts  arise 
mainly from banks passing on higher costs to borrowers, which results in a slowdown in investment. 

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• 
• 

Tendering authorities which may not have competitive financing. 
Project  promoters  which  may  not  be  able  to  get financing for their projects at present. 
This affects their employees and those of subcontractors, including SMEs. 

2.4. 

Subsidiarity 

The right for the EU to act in the field of infrastructure financing is set out in Article 171 which 
provides that in order to achieve the relevant objectives the Union (…) may support projects of 
common interest supported by Member States. Furthermore, the EU's competence in the area of 
energy is also enshrined in TFEU, Article 194.  

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.  The  expected  multiplier  effect  in  terms  of  EU  budget  contribution  compared  to  the 
overall  financing  is  estimated  at  15-2022.  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. 

Individual  Member  States  have  recognised  there  is  a  funding  problem  and  have  put  in  place 
temporary schemes which provide loans or loan guarantees, but the schemes are about to expire.  

Whereas LGTT targets only loans to transport projects, the Europe 2020 Project Bond Initiative 
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, 
administrative  efficiency  and  resource  utilisation.  It  will  provide  a  coherent  EU  financial 
instrument  to  infrastructure  stakeholders  such  as  financiers,  public  authorities,  construction 
companies and operators.  

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 
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. 

22 

The exact multiplier depends on the financing structure and the exact risk-sharing arrangements, which may 
have to be adapted to the budgetary availability in each policy area. 

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3. 

OBJECTIVES 

3.1. 

General policy objectives 

While  the  private  sector  is  expected  to  continue  to  play  a  significant  role  in  delivering  the 
required  economic  infrastructure,  some  key  infrastructure  investment  may  be  delayed  or 
cancelled due to the widening of the financing gap as described in Section 2 and Annex III. Thus, 
additional sources of financing are needed in order to secure future infrastructure investment and 
the  long-term  bond  market  is  the  obvious  solution  at  a  time  when  long-term  bank  lending  is 
difficult to access and competitive options are required. Financial instruments align the economic 
incentives of market actors, thereby facilitating such bond issues. Through appropriate pricing of 
the financial support and its limited nature, the EU will seek to avoid distorting competition. In 
fact,  the  objective  is  to  facilitate  projects'  access  to  finance  through  alternative  debt  financing 
sources , i.e. project bonds. 

The general objectives of the Project Bond Initiative are therefore two-fold: 

(1) 

(2) 

Stimulating investment in infrastructure in the area of transport, energy and ICT. 

Establishing  debt  capital  markets  as  a  new  source  of  financing  in  the  area  of 
infrastructure. 

3.2. 

Operational objectives 

During  the  pilot  phase  of  the  initiative,  the  EIB  will  provide  guarantees  or  loans  to  eligible 
projects.  This  would  allow  the  senior  debt  to  reach  a  credit  quality  necessary  to  attract  private 
investors  and  thus  permit  its  financing  via  a  bond  issue.  The  Initiative  is  intended  to  act  as  a 
catalyst to create an infrastructure bond market, which does not rely on 100% guarantees.  

The Europe 2020 Project Bond Initiative would aim to reach the following measurable targets: 

• 

• 

• 

Considering  the  budget  allocations  available  during  the  pilot  phase,  which  need  to  be 
committed in the respective sectors, it is expected that until 31 December 2014 up to 6 
TEN-T projects can be included in the EIB portfolio, up to 1 TEN-E project and up to 3 
telecommunication  projects.  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  allocation  of  EUR  230  million  is  expected  to  attract  15-20  times  of 
additional investment, ie the multiplier effect is expected to be between 15 and 20.  

The  number  of  public  and  private  sector  initiatives  launched  to  facilitate  project  bond 
financing and the performance of these initiatives.  

Market demand and supply will determine the uptake of the scheme; it is not mandatory to use it.  

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3.3. 

Link with EU Strategies 

Europe’s economic future requires smart, sustainable and fully interconnected transport, energy 
and digital networks. They are indeed a necessary condition for the completion of the European 
single market, sustainable growth and stability and the achievement of the objectives outlined in 
the Europe 2020 strategy as well as the ambitious energy and climate policy goals: the "20-20-
20" objectives23. 

The Initiative is an important building block for the CEF proposed for the transport, energy and 
ICT sectors in the Multi-annual Financial Framework (MFF) 2014-2020.  

One key aim of the MFF, and therefore the CEF, is to use a greater proportion of budget funds in 
a  more  efficient  way  by  increasing  the  share  of  financial  instruments.  The  notion  of  smart 
funding was a key element of the Budget Review COM(2010)700 with the project bond initiative 
cited as an example of using EU funds to leverage private sector capital investment. According to 
a study requested by the European Parliament's Committee on Budgets "The implications of EIB 
and  EBRD  co-financing  for  the  EU  budget"  (2011),  co-financing  has  been  undertaken  in  areas 
which  have  seen  considerable  success  in  delivering  EU  policy  priorities,  such  as  innovation, 
research  and  competitiveness  –  all  of  which  are  fundamental  strategic  objectives  of  the  EU  – 
despite some concerns that co-financing may be best suited to those markets which are relatively 
developed. 

However,  the  Commission  sees  a  need  to  standardise  and  simplify  the  use  of  and  reporting  on 
financial  instruments.  The  Europe  2020  Project  Bond  Initiative  is  the  first  EU  financial 
instrument covering several sectors with similar financing needs. The Initiative will support the 
development of the CEF financial instruments for the post-2013 period, but may also be extended 
to  other  sectors  that  fulfill  the  financial  criteria.  Since  a  key  aim  is  to  attract  private  sector 
financing, the increased transparency of such a simplification will be helpful in this respect and 
encourage the use of PPP structures, which is also a stated goal24 of the EU. 

4. 

IDENTIFICATION OF POSSIBLE EU OPTIONS IN THE PILOT PHASE 

4.1. 

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 debt financing.  

In this Multi-annual Financial Framework, under TEN-T, an amount of EUR 8 billion is available 
to support transport projects. Out of this EUR 580 million is dedicated to financial instruments, 
i.e.  the  LGTT  (EUR  500  million)  and  participation  in  the  Marguerite  equity  fund  (EUR  80 
million).  

23 

24 

20%  reduction  in  greenhouse  gas  emissions,  20%  share  of  renewable  energy  in  EU  final  energy 
consumption and 20% improvement in energy efficiency by 2020 
PPP Communication COM(2009) 615 

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As  banks  face  balance  sheet  and  maturity  constraints  for  a  number  of  reasons  including  higher 
funding costs, higher capital requirements and a continuing need to provision for losses, it cannot 
be assumed that long-term bank lending will continue at their previous level, let alone rise to the 
higher levels needed to implement the Europe 2020 strategy. This also applies, albeit to a lesser 
extent, to the multilateral development banks, such as the EIB. 

4.2. 

Option  2:  Regulatory  incentives  to  increase  infrastructure  financing,  no  financial 
instrument 

The EU as a whole does not have, nor has it had, 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. This contrasts with the situation 
in  e.g.  the  US,  where  banking  has  been  fragmented  along  state  lines  with  the  bond  market 
providing the better financing terms and liquidity. 

As a result of the banks' better knowledge of their customer and ability to analyse infrastructure 
financing  proposals,  European  deals  have  generally  been  structured  to  reach  a  lower  credit 
quality than e.g. in Canada, where bond solutions are common. Where bonds were issued, they 
were guaranteed by monoline insurance companies. 

This  might  suggest  that  one  way  of  addressing  the  infrastructure  financing  problem,  short  of 
stopping the banks from lending to the sector, would be to take regulatory steps to improve the 
incentives  for  infrastructure  funding.  This  could  take  the  form  of  requiring  better  security 
packages from sponsors or more advantageous treatment of investment in infrastructure in terms 
of capital required, taxation etc  

4.3. 

Option  3:  The  use  of  a  financial  instrument  to  attract  additional  infrastructure 
financing  

The main proposal is to introduce a financial market solution to address market imperfections.  

As instruments to support of bank lending (LGTT) and equity (Marguerite) already exist, the new 
instrument would aim at facilitating project bond finance. The financial instrument would take a 
form  of  an  EIB  guarantee  or  an  EIB  loan.  The  Initiative  would  cover  pre-identified  transport, 
energy and ICT priority infrastructures in 2012-2013. Under CEF 2014-2020, it could be opened 
to other financial institutions, to other sectors that wish to avail themselves of project bonds, if 
considered appropriate from the EU policy perspective.  

The  Initiative  will  complement,  rather  than  replace,  the  existing  sources  of  project  financing 
through bank loans. The aim is to expand the investor base for private debt funding of projects to 
bond investors. 

Added value 

Considering the stage of development of project bond markets in the EU, the fiscal situation of 
the Member States and the significant investment needs in the three core sectors, only the EU and 
the EIB have the credibility and can make the long-term commitment required. There have been a 

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14 

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few temporary national crisis responses aiming at supporting infrastructure investments, but these 
schemes are coming to an end.  

Bond  financing  clearly  has  potential  in  infrastructure  financing,  but  enabling  bond  financing  is 
not  targeted  by  any  other  EU  financial  instrument.  The  Loan  Guarantee  Facility  for  TEN-
Transport, LGTT, targets infrastructure loans, but only in the transport sector, for very narrowly 
defined  risks  and  only  during  the  early  operational  phase  of  projects,  thus  the  project  bond 
initiative would be a complement as regards type of financing, sectors and project phases.  

Marguerite, is an equity fund, thus also not focused on bond markets. Finally, project bonds will 
help redress existing distortions in markets as for the time being infrastructure projects can draw 
only on bank lending as a financing source. 

The expected multiplier effect is between 15 and 20 depending on the size on the subordinated 
debt of a project and the precise risk-sharing arrangement. There is no risk to the budget beyond 
the determined contribution as remaining potential losses are covered by the EIB. 

Financial design: basic principle 

Infrastructure  projects  generally  benefit  from  relatively  stable  revenues.  Therefore  they  are 
normally  structured  on  a  stand-alone  basis  by  one  or  more  sponsors  of  a  project,  which  are 
corporate  entities,  setting  up  a  dedicated  project  company  with  the  sole  purpose  of  financing, 
building  operating  and  maintaining  the  project  in  question.  In  return  the  project  company  will 
receive all revenue accruing to the project. The project will be financed with a mix of equity from 
the sponsors and other investors and debt.  

The  essential  principle  of  the  project  bond  initiative  is  to  split  the  debt  into  two  so-called 
tranches: a senior, or high-ranking, tranche and a subordinated, or lower-ranking, tranche using 
standard structuring techniques. The subordinated tranche will be provided by EIB, either in the 
form of a loan or a contingent credit line (partial guarantee) and may be up to 20% of the senior 
debt. Since the subordinated tranche is repaid after the senior debt, it can help the project absorb 
several years of revenue shortfalls and still ensure repayment of the senior debt. This raises the 
credit quality and attractiveness of the senior debt to a level, i.e. investment grade as illustrated in 
the chart on page 16, where it can be issued in the form of project bonds. An example and more 
details are contained in Annexes V and VI. 

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S&P
AAA
AA+
AA
AA-
A+
A
A-
BBB+
BBB
BBB-
BB+
BB
BB-
B+
B
B-
CCC+
CCC
CCC-
CC
SD
D

Moody's Fitch
Aaa
Aa1
Aa2
Aa3
A1
A2
A3
Baa1
Baa2
Baa3
Ba1
Ba2
Ba3
B1
B2
B3
Caa1
Caa2
Caa3
Ca
C

AAA
AA+
AA
AA-
A+
A
A-
BBB+
BBB
BBB-
BB+
BB
BB-
B+
B
B-
CCC
CC
C
DDD
DD
D

Investment grade. 
Many investors can only 
buy such bonds 

Non-investment grade 
or high yield bonds 

Most infrastructure deals in Europe are structured to have a rating that is just above or just below 
investment grade (see chart above). Many investors, on the other hand, can only buy investment-
grade  bonds  and  want  to  be  sure  that  a  single  downgrade  does  not  force  them  to  sell,  but  they 
may not feel able to evaluate the risks properly. This asymmetry between sponsors and investors 
would not occur in perfectly free and efficient capital markets, but in the real world it is possible 
to find solutions that lets an intermediary price the risk correctly and still yields benefits to both 
sides25. 

In addition, infrastructure projects may face numerous risks due the possibilities of construction 
delays, payment delays etc. Investors react to risk and uncertainty by not undertaking or investing 
in  a  project,  by  requiring  a  higher  rate  of  return  or  by  using  insurance.  At  present,  only  a  few 
specialised investors are prepared to do the necessary analytical work.  

Thus, the project bond initiative addresses the credit quality issue generally, as well as the issue 
of project specific risks. As mentioned, it has to be possible to split the debt into several tranches 
in order to issue a project bond. The other crucial factor for the detailed design outlined in Annex 
V  is  whether  it  is  feasible  to  ring-fence  the  revenues  of  a  project.  Ring-fencing  allows  the 
earmarking of revenue to service project debt, the typical basis for project finance.  

Finally, as for LGTT, pricing would be set according to EIB standard pricing grid, which reflects 
risk  of  projects  and  includes  an  administrative  margin  for  the  EIB.  The  Commission  would  be 
remunerated for the portion of the risk it takes, thus the instrument would not entail any subsidy 
element.  

25 

SEF Alliance with UNEP: Publicly backed guarantees as policy instruments to promote clean energy (2010) 

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Role of the EU and EIB  

As  explained,  the  EU  would  work  with  the  EIB  to  implement  the  pilot  phase,  whereas  in  the 
operational  phase  the  EU  is  open  to  working  with  other  financial  partners  as  permitted  by  the 
Financial Regulation. 

The  EIB  and  the  Commission  already  have  extensive  experience  implementing  joint  financial 
instruments using the risk sharing concept, as for example LGTT and RSFF. As an EU institution 
with the mission to support EU policies, it has, within the EU, a unique long-standing experience 
in  the  financing  of  infrastructure  projects.  Its share  capital  is  held  by  the  27  member  states,  its 
role  is  long  term  financing  in  support  of  EU  policy  objectives  and  it  reports  to  all  relevant 
European Institutions; it is politically accountable to the European Parliament and subject to the 
control  of  the  Court  of  Auditors  where  it  is  responsible  for  spending  EU  Budgetary  resources. 
Therefore, it is natural that this Project bond initiative should build on the experience of EIB for 
structuring; the implementation and early marketing and risk management.  

The  eligibility  of  the  projects  is  determined  under  the  TEN-T,  TEN-E  and  eTEN  policy 
guidelines which are endorsed by Council and the European Parliament. The EIB would appraise 
individual projects, carry out the due diligence and financial analysis in the structuring phase and 
price  the  guarantee  or  loan.  Projects  would  need  to  provide  stable  and  strong  cash  flows  in 
addition  to  being  economically  and  technically  feasible.  They  would  also  need  to  demonstrate 
ability to run a funding competition and carry out a project successfully. 

If the project sponsor decides to use the facility, the project would be approved by the governing 
bodies  of  the  EIB  in  line  with  standard  procedures.  The  EIB  would  subsequently  monitor  the 
project  in  accordance  with  EIB‘s  standard  policies  and  procedures  including  its  Credit  Risk 
Policy Guidelines. 

The  EIB  and  the  EU  would  share  the  risk.  For  the  EU,  this  would  take  the  form  of  an  upfront 
budgetary contribution to cover its agreed share of the risk of the project, concretely a share of 
the  expected  and  the  unexpected  loss.  The  residual  loss  would  be  borne  by  the  EIB.  As  the 
intervention is at the subordinated debt level rather than at the senior level, where EIB normally 
lends, the activity is intrinsically riskier. However, the EIB's exposure would be limited to 20% 
of  the  value  of the  senior  debt, instead  of  up  to  50%  of  the  project  cost  in  its  normal  senior 
lending activity. 

4.4. 

Alternative financial options discarded at an early stage 

Direct senior lending by EU or EIB 

The EU cannot lend its budgetary funds and the raising of off-budget funds is limited to specific 
purposes such as assistance to EU Member States and countries outside the EU. 

The EIB, which is owned by the EU Member States, played an increasingly important role over 
the  past  three  years  in  addressing  Europe’s  financial  crisis  and  recession  by  keeping  credit 
flowing  to  businesses  and  financing  projects  that  promote  EU  integration  and  development.  It 
stepped up its lending capacity during the crisis, to the point where it now has to consolidate the 

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17 

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activity in order to safeguard its rating  and  capital base. EIB  lending  activity was scheduled to 
increase by EUR 15 billion above targets set for 2008 both in 2009 and 2010. In both years, the 
Bank even exceeded these targets. After total signatures amounting to EUR 76 billion in 2009, 
EIB signatures reached EUR 83.2 billion in 2010, of which EUR 72.8 billion in the EU and EUR 
10.4 billion outside the EU. This represented a 43% increase compared to the volume of lending 
achieved  in  2008  (EUR  58  billion).  Further  expansion  would  require  a  capital  increase  even 
though the last capital increase was rather recent, in 200926. 

In addition to  being difficult to implement,  direct lending is one of the least efficient means of 
supporting long-term infrastructure projects. It attracts additional funds only to the extent of the 
co-investment  requirement,  i.e.  if  EIB  can  lend  up  to  50%  of  project  costs,  the  other  50%  are 
from other sources. Finally, this option does not develop capital markets. 

Full debt service guarantee 

The EIB and/or EU could provide a full, 100%, debt service guarantee in respect of the payments 
due  on  a  bond  issued  by  a  project  company.  If  structured  in  the  same  manner  as  monoline 
guarantees,  timeliness  of  payments  would  certainly  be  assured,  but  it  creates  a  classic  moral 
hazard  issue,  as  investors  and  sponsors  would  not  face  the  consequences  of  excessively  risky 
projects and therefore would not limit risk-taking. 

On the financial side, if roll-out is required on a substantial scale, this option would also require 
an  EIB  capital  increase.  If  the  scheme  is  implemented  along  the  lines  of  the  subordinated 
instrument described, i.e. the EU provides a budgetary contribution towards the risk sharing, this 
contribution would have to be correspondingly large. Direct guarantees by the EU are not feasible 
as there is no room under the own resource ceiling. 

In addition, to being more expensive than a partial guarantee, fully guaranteed project debt would 
create products far too similar to the EIB's and/or EU's own bond issuance27. 

A loss reserve fund 

A  fund  would  be  created  by  the  Commission  to  provision  for  certain  losses  on  a  portfolio  of 
assets.  The  concept  is  similar  to  that  of  the  partial  debt  service  guarantee,  especially  from  the 
point  of  view  of  the  Commission,  but  it  would  entail  higher  direct  administrative  costs  as  the 
Commission would repeat the tasks carried out by its risk-sharing partners, such as the EIB.  

Creating a European Infrastructure Bank or Guarantee Agency 

This would require the set-up of an entirely new institution in both cases, which could fund itself 
on the capital markets. 

26 
27 

The EIB increased its subscribed capital by EUR 67 billion to an overall amount of EUR 232.4 billion. 
The Commission issues bonds in order to fund for example Balance of Payments (BoP) operations, such as 
loans granted to Hungary, Romania or Latvia, or under Macro-Financial Assistance (MFA) loans granted to 
third countries.  

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The  infrastructure  bank  would  essentially  be  a  more  focused  EIB,  while  the  guarantee  agency 
would have an even more specialised function. However, both would in a sense duplicate some 
functions  of  EIB  and  financial  institutions  such  as  Kreditanstalt  für  Wiederaufbau,  Nordic 
Investment Bank or Cassa Depositi e Prestiti.  

On  the  one  hand,  this  entails  significant  expenditure  to  set  up  the  institution  including 
capitalisation, which is outside the remit of teh EU budget, and develop the necessary expertise. 
On the other hand, the bonds issued by the institution would provide a new credit for investors to 
invest  in,  who  would  then  automatically  benefit  from  the  diversification  of  the  institution's 
balance sheet.  

5. 

ANALYSIS OF IMPACTS 

Since  the  objective  is  to  attract  additional  financing  to  infrastructure  projects,  the  following 
analysis considers the impacts of the financing, not the impacts of the projects themselves. 

5.1. 

Option 1: Grant funding, no financial instrument 

Economic impact 

Grant funding predominates in transport, energy and ICT at present (baseline scenario), thus there 
the  economic  impact  would  not  change  from  the  current  assumptions  in  this  Multiannual 
Financial Framework. It is likely that some efficiency gains could be made in the management of 
the calls for proposals and award of grant money, however, these will likely be small. 

It is clear that projects with cross-border elements and of wider European interest are particularly 
disadvantaged  by  national  funding  schemes.  Indeed,  the  recent  Commission  Staff  Working 
Document  accompanying  the  White  Paper  Roadmap  to  a  Single  European  Transport  Area28 
concluded that the EU already does not have sufficient financial leverage29 and EU funding has 
not focused sufficiently on the implementation of TEN-T projects.  

From  a  macro-economic  point  of  view,  the  EU  would  continue  its  under-investment  in 
infrastructure  to  the  detriment  of  the  long-term  growth  potential  and  competitiveness  of  the 
European economy (see Annex IV for further details on the economic benefits of infrastructure) 
and the infrastructure implemented would be built at a higher than necessary cost to society. In 
addition, even though marginal private sector efforts in the form of debt funds for example, are 
being set up, but this is unlikely to be sufficient to create a project bond market.  

Whilst  private  finance  will  continue  to  be  available  to  some  projects,  alternative  financing 
models,  which  will  replace  or  lessen  the  dependency  on  public  sector  grant  financing,  are 
required to sustain long-term capital investment for infrastructure. In particular, the EU priority 
projects  entail  features  and  risks  such  as  greenfield  development,  uncertain  business  case  as 
regards future revenue flows, regional aspects including the influence of the sovereign crisis and 

28 
29 

SEC(2011)391 
Page 108: "The TEN-T Programme budget is limited in size and [provides] relatively low co-funding rates" 

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cross-border impacts, such projects continue to be less attractive for private sector financiers and 
investors.  

In addition, in case of private sector financing, depending on the sector, the project, the economic 
situation  in  the  country  or  region  as  well  as  national  regulations  and  the  maturity  of  the 
financial/capital markets there can be a greater need for either debt or equity support. As the risk-
return  profile  of  infrastructure  projects  change  during  the  project  lifecycle  (preparation  and 
planning, construction and ramp-up operations and the subsequent operational period with more 
predictable  revenue  flow)  different  types  of  investors  and  financiers  are  needed.  Both  debt  and 
equity  instruments  are  needed  in  order  to  be  able  to  promptly  respond  to  cyclical  adjustment 
needs. 

Project finance has been proven to be extremely resilient despite all the challenges during the last 
few  years.  Moodys  and  Fitch  have  concluded  that  project  finance  credits  have  same  default 
frequency and lower loss given defaults than like rated corporates30. 

Under this option, LGTT would continue to be implemented by the EIB without the possibility of 
proposing alternative financing structures for the TEN-transport projects currently in the pipeline. 
In  addition,  the  Commission  would  continue  providing  grant  support.  As  regards  TEN-E  and 
INFSO, projects would continue to benefit only from grant support without having the possibility 
to  attract  additional  financing  to  the  eligible  projects  and  without  having  the  possibility  to 
multiply the effect of the EU budget. 

Social impact 

While the continuation of grant funding has no social impact per se, it is likely that grant funding 
would  also  go  to  projects  that  could  have  been  financed  in  the  market  with  the  support  of 
financial instruments. This could lead to lack of grants for weaker projects not deemed worthy of 
support to the detriment of disadvantaged regions. 

Since  there  is  no  structural  shift  in  the  distribution  of  spending  between  the  national  and  EU 
level,  there  is  a  risk  that  key  EU  infrastructure  would  be  sacrificed  for  national  priorities.  This 
would penalise cross-border projects disproportionately, to the detriment of cohesion in the EU. 

Environmental impact 

The environmental impact would remain neutral as the status quo of the use of EU funding would 
not change.  

5.2. 

Option 2: Regulatory incentives 

Economic impact 

Under certain conditions, incentives may serve either as an additional enhancement in an already 
attractive  enabling  environment  for  investment  or  as  a  compensation  for  market  imperfections 

30 

The Need For Innovation, Mubadala. 

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20 

   EN 

 
                                                 
that cannot be otherwise addressed. Improving regulatory incentives for infrastructure financing 
might lead to more bond financing. This could take several forms: 

a) Requiring project sponsors to put up more capital to increase the rating of the project.  

b) Lower capital charges for infrastructure investors through the creation of a separate asset class 
for infrastructure bonds 

Both  of  these  solutions  would  depart  from  the  Commission's  principle  of  having  a  regulatory 
structure that is as neutral as possible to investment decisions. By their very nature, they would 
distort the decision making of sponsors (due to increased costs of financing, they 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) or investors (investors, who would 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  and  cause  potentially  as  many 
problems as they solve. 

In the case of (a), putting up more capital would be costly for sponsors and limit the number and 
volume of projects due to balance sheet contraints of sponsors. They would therefore likely resist 
it  at  first  and  thereafter  pass  on  the  costs  to  tendering  authorities  and  thereby  ultimately  to  tax 
payers. Thus, the net result would be more costly infrastructure, likely leading to less being built. 

On  a  more  differentiated  level,  such  a  rule  would  apply  to  all  sponsors  and  impose  costs  of 
compliance regardless of whether the sponsor wishes to use capital market financing. There are 
two problems with this: 

• 

• 

The  requirement  would  apply  to  different  sectors,  some  regulated,  perhaps  in  different 
ways,  some  unregulated,  while  other  sectors  would  not  face  these  requirements.  Not 
only  would  this  cause  problems  across  the  three  initial  sectors,  it  would  also  create  a 
barrier to extending the initiative to further sectors. 
Compliance  costs  are  likely  to  be  disproportionately  large  for  SMEs,  which  would 
therefore be penalised. 

The  assessment  of  the  relevance  of  the  incentives,  their  appropriateness  and  economic  benefits 
against  their  budgetary  and  other  costs,  including  long-term  impacts  on  domestic  allocative 
efficiency  are  very  demanding.  Significant  improvements  of  the  enabling  environment  for 
investment (e.g. the removal of undue impediments and improvement of regulatory frameworks) 
can often be achieved at a low budgetary cost. Nevertheless, unless the incentives go some way 
toward correcting the concrete shortcomings, their impact on investors is uncertain. 

Finally, it would be very challenging if not impossible, to establish new regulatory measures at 
the EU level which would have an impact on the availability of bond financing within the period 
2012-2013. 

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Social impact 

There  are  no  particular  social  impacts  of  this  option.  To  the  extent  that  costs  for  sponsors  are 
higher, they will look for the projects with the highest return. As under Option 1, this may lead to 
the non-implementation of weaker projects. 

Environmental impact 

The use of different financing options has no particular environmental impact. To the extent that 
financing  costs  increase,  less  infrastructure  would  be  built  ceteris  paribus,  meaning  that  the 
(positive or negative) impacts of whatever infrastructure would be reduced. 

5.3. 

Option 3: Use of a financial instrument 

Economic impact 

Increased  capital  financing  availability  would  stimulate  and  ease  the  implementation  of  large 
infrastructure  projects  with  significant  national  and  cross-border  benefits.  Thus  the  direct 
beneficiaries  of  the  Project  Bond  Initiative  would  be  mostly  tendering  authorities,  which  could 
get more competitive financing offers, and infrastructure project promoters, which would be able 
to  attract  the  necessary  financing  to  their  projects.  However,  the  number  of  projects  benefiting 
from  grant  funding  from  TEN-E  and  CIP  budget  lines  would  be  reduced.  The  TEN-T  projects 
would  benefit  from  two  alternative  debt  financing  sources;  the  possibility  to  draw  on  bank 
lending under LGTT and on bonds under the project bond initiative.  

EU financial instruments target specific financing gaps. In infrastructure, projects with low risk at 
high investment grade will continue to be financed without EU support and with rather attractive 
pricing. The EU will target projects for which banks would price the risk rather expensively thus 
making  access  to  long-term  debt  finance  difficult  for  these  projects.  The  EIB  financing  will 
reduce the risk for investors, thereby improving the credit rating of the underlying bonds and thus 
reducing the cost of the bonds to be issued.  

Although  less  direct  than  grants,  this  option  is  not  less  powerful  in  terms  of  overcoming  the 
different risk perceptions of market participants and aligning their interests. 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. This type of intervention is recognised31 as being 
one of the lowest-cost ways of facilitating transactions32 and being particularly valuable in times 
of tight credit and market uncertainty33 such as the present.  

The Initiative aims to avoid unnecessary multiplication of instruments of a similar nature or with 
similar target beneficiaries, financing and project structures. This will maximise the visibility of 

31 

32 
33 

Including  by  the  World  Bank,  see  for  instance  Matsukawa  and  Habeck:  "Review  of  Risk  Mitigation 
Instruments for Infrastructure Financing and Recent Trends and Developments (World Bank, PPIAF) 
Depending on the pricing of the credit line or loan 
UNEP-SEF, Publicly backed guarantees as policy instruments to promote clean energy, 2010. 

EN 

22 

   EN 

 
                                                 
such  instruments,  reduce  the  administrative  burden  on  beneficiaries  and  intermediaries  and 
results in simplification also from the viewpoint of the Commission and also the EIB. Both EU 
individuals  and  business  entities  are  expected  to  indirectly  benefit  from  this  Initiative  as  they 
would be the final users of the infrastructure provided at a reasonable price. In addition, it would 
also  give  users  access  to  the  infrastructure  and  services,  which  were  not  available  before,  thus 
enhancing the competitiveness of the EU generally.  

Instruments  which  are  not  fully  commercial  can  distort  a  market,  and  crowd  out  the  private 
sector, if not properly targeted at revealed market imperfections, and can restrain the long term 
development  of  private  sector  investments  in  infrastructure.  On  the  other  hand,  financial 
instruments  may  stimulate  the  growth  of  particular  markets  and  create  opportunities  for  the 
private  sector  in  the  future,  as  well  as  helping  the  infrastructure  projects  through  difficult 
economic  times.  The  Europe  2020  Project  Bond  Initiative  will  be  priced  according  to  EIB's 
pricing methodology whereby the Commission will be remunerated for the risk it is taking. Thus, 
there is no subsidy element to the beneficiaries. 

No  negative  impact  or  supplementary  costs  can  be  identified  to  micro,  small,  medium  or  large 
enterprises in particular. Due to the complexity and resource requirements of key infrastructure 
projects,  large  companies  and  consortiums  generally  have  more  possibilities  to  participate  in 
infrastructure projects. However, SMEs could also be positively affected due to sub-contracting.  

However,  this  option  requires  that  tendering  authorities  do  not  preclude  the  option  of  bond 
financing in their procurement procedures. Without a greater acceptance of bond financing as a 
potential long-term cost-efficient financing source, the intiative will have difficulties taking off.  

In addition, project development capacity, experience and know how by the local, regional and 
national authorities is key. In particular at regional level the authorities often lack resources and 
expertise to develop and implement complex infrastructure projects which require well organised 
procurement  including  technical  and  financial  specifications  and  negotiations  with  a  range  of 
stakeholders, also outside of the country borders.  

Finally,  financial  instruments  need  to  be  adequately  promoted  in  order  to  be  recognised  by  the 
stakeholders already at an early stage and in order to allow an efficient take up. 

Social impact 

The  option  considered  in  this  impact  assessment  will  benefit  institutional  investors  such  as 
pension  and  insurance  funds,  and  therefore  indirectly  policy  holders.  It  can  be  anticipated  that 
expected greater market integrity will lead to higher investor confidence and greater participation 
in  financial  markets,  thereby  making  it  easier  for  economic  entities  to  raise  capital,  provide 
necessary infrastructure, stimulate growth and create more jobs.  

Environmental impact 

The  project  bond  proposal  only  relates  to  the  financing  of  projects,  which  are  the  entities  that 
might have environmental impacts. In extremis, to the extent the scheme accelerates financing or 
enables  it  for  projects  that  would  not  otherwise  have  taken  place,  it  can  be  said  to  have  an 

EN 

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environmental  impact.  This  impact  is,  however,  not  separable  from  the  projects.  In  general 
implementation of the Europe 2020 strategy to make Europe a smart, sustainable  and inclusive 
economy,  which  delivers  high  levels  of  employment,  productivity  and  social  cohesion  in  a 
sustainable manner, should result in an overall positive impact. Finally, environmental and social 
sustainability  are  a  condition  for  projects  to  receive  financing  from  the  EIB,  which  would  be 
managing the pilot phase of the project bond initiative. Environmental and social assessment is 
therefore an integral part of the EIB's appraisal and monitoring process. 

5.4. 

Budgetary impact 

In  the  pilot  phase,  Options  1  and  2  corresponds  to  the  status  quo,  while  Option  2  cannot  be 
implemented due to the time consuming decisions required. Option 3 will be financed through a 
redeployment from the TEN-T, TEN-E and CIP budget lines totalling EUR 230 million.  

In the operating phase, Option 2, being regulatory, would have no direct budgetary impact and 
Options 1 and 3 would both be contained within the current budgetary envelopes with the amount 
and  allocation  eventually  agreed.  The  project bond  initiative  would,  however,  attract  additional 
private financing for projects and thus constitute "smarter funding" in the sense of the next MFF. 

Normally, a guarantee would establish a contingent claim on budgets34, but here the EU benefits 
from working with the EIB or other risk-sharing partners. This means that the EU can limit the 
risk to the budget at a specified amount, while the financial partner takes the residual risk, which 
it is much better equipped to evaluate35. In other words, the EU budget contributions would be 
strictly capped and not create contingent liabilities of the EU budget.  

All of the co-financed instruments in use at present involve allocations to programmes which are 
capped in size and so none of these instruments pose a risk to the budget beyond that which is 
initially committed under the budget lines. 

However, unlike the case of grants, there may be a reflow of funds to the EU budget from fees 
that are not re-used for new projects or other purposes within the programming period.  

5.5. 

Administrative burden 

Options 1 and 3 discussed are not expected to cause administrative burden to entities due to legal 
obligations. Option 3, the launch of the Europe 2020 Project Bond Initiative would be managed 
in the same manner as current grant schemes under option 1. The main difference would be that 
applications  and  approval  procedures  would  be  managed  by  the  EIB,  thus  the  costs  for 
applications by the stakeholders would remain similar to those under grant programmes managed 
by the Commission.  

In  the  past,  stakeholders  have  complained  about  the  complexity  generated  by  overlapping 
financing schemes, different rules for EU support across the sectors or by lack of coordination at 

34 
35 

UNEP-SEF 
The  implications  of  EIB  and  EBRD  co-financing  for  the  EU  budget  (2011),  a  study  requested  by  the 
European Parliament's Committee on Budgets 

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24 

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strategic level. This is reportedly confusing and translates into obstacles to effective access and 
correct  implementation.  Therefore,  implementation  of  a  single  financial  instrument  for  several 
sectors  is  a  positive  in  itself  and  likely  to  result  in  a  reduction  in  the  administrative  cost  and 
administrative burden for financial institutions, sponsors and public authorities is strengthened by 
the one-stop shop approach to the relevant stakeholders with one programme managing partner 
and contact point, the EIB.  

As regards option 2, regulatory incentives and legal requirements in terms of increased levels of 
equity could lead to sub-optimal investment decisions by stakeholders thus potentially increasing 
cost  of  capital  and  investment  costs  and  having  a  negative  impact  on  long-term  planning  of 
investment programmes by Member States, utilities and operators. A second disadvantage of this 
option is the cost of compliance and administrative burden on investors as well as authorities who 
would have to monitor compliance. Lower capital charges for investors would potentially reduce 
the  overall  investment  cost,  but  would  also  lead  to  misallocation  of  funds  in  case  investment 
decisions are not based on the quality of the project but on the impact on capital charges. A trade-
off would have to be sought between regulatory aspects and long-term economic effects.  

5.6. 

Risk analysis/uncertainties of policy choices  

This  is  a  market-driven  instrument,  thus  its  ultimate  success  depends  on  its  use  by  project 
sponsors  and  its  acceptability  to  investors  and  tendering  authorities.  Some  flexibility  would  be 
needed in the design of the instrument to make sure that it is not side-lined by changes in capital 
markets or other changes to the assumptions. Member States would have to respond in a flexible 
manner  to  not  preclude  bond  financing  in  their  tendering  criteria  and  stimulating  an  enabling 
environment conducive for long-term investment. 

The trade-off between the advantages and disadvantages of bank versus bond financing will have 
significant influence on the take-up. For example, under bond financing the amount available can 
normally not be drawn in instalments based on the completion of the various construction phases, 
while  this  is  possible  in  bank  financing.  Bond  financing  can  easily  be  arranged  with  long-term 
maturities,  in  contrast  long-term  bank  financing  is  not  readily  available.  Bonds  can  be  traded 
easily,  loans  cannot.  Bond  financing  may  induce  additional  costs  due  to  ratings  required  for 
ratings or listings at the stock exchange. This may be offset by the value of long-term committed 
financing and the lack of refinancing risk which would persist with bank lending. 

Finally,  should  the  instrument  not  be  continued  under  CEF,  the  stimulus  for  enhanced  capital 
market debt financing would be left entirely on the shoulders of Member States and the private 
sector which might not have the capacity or the interest in doing so at EU level for the benefit of 
EU priorities. The Initiative is likely to act as a catalyst for private sector initiatives . 

However,  as  the  EIB  covers  the  remaining  risks  there  is  a  theoretical  possibility  that  due  to 
external events all projects under the initiative would default. However, this worst case scenario 
is  addressed  by  EIB's  risk  management  and  monitoring  systems  starting  at  the  stage  of  project 
appraisal and due dilligence until the termination of the EIB financing. In addition, EIB's lending 
ceilings, annually and per sector, provide further comfort. 

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6. 

COMPARISON OF OPTIONS AND CHOICE OF PREFERRED ACTION 

6.1. 

Comparison of impacts of different options 

The  table  below  summarises  major  impacts  of  the  options  identified  in  section  4.1  in  terms  of 
positive  and  negative  effects,  achieved  dual  objective,  potential  market  distortion,  costs  and 
administrative burden on different kinds of stakeholders.  Thorough quantititative  assessment of 
the options is difficult due to the complexity of the enabling environment and the general nature 
of the options.  

Option 

Option 1: 
Grants 

Option 2: 
Regulatory incentives 

Option 3: 
Financial instrument  

Criteria 
Main positive impact 

Main negative impact 

Achieved objectives 
TENs 
Capital markets 
Costs 
- project sponsors 
- users 
- Member States' 
authorities (down to 
municipalities) 
- investors 
Market distortion 

Projects would 
continue to benefit 
from grant funding. 
Transport projects 
from two existing 
instruments 
No possibility to 
attract investors 

No direct cost to 
budget 

Impact on investors 
uncertain, potential 
unintended negative 
effects on other areas

Attracts private sector 
funding, positive 
multiplier effect and 
thus lower costs 

Investor education 
required  

Partly 
No 

As now 
As now 
As now 

Partly 
Maybe 

Higher 
Higher 
Higher 

Yes 
Yes 

Lower 
Lower 
Lower 

As now 
As now, potential 
crowding out of 
private investment by 
EU budget  

Higher 
Punishes companies in 
chosen sectors 

Lower 
Not if appropriate 
pricing and risk-taking 
including appropriate 
size of the instrument 

Administrative burden 
- project sponsors 
- users 
- Member States' 
authorities  
- investors 

Low (as now) 
N/a 
Low 

Neutral 

Low 
N/a 
Medium 

Medium 

Low 
N/a 
Medium 

High 

The following summary table sets out the advantages and disadvantages of the different options, 
related to 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.  Impacts  on  relevant 
stakeholders are also considered.  

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26 

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Each scenario is rated between "---" (very negative), 0 (neutral) and "+++" (very positive). The 
assessment highlights the option which is best placed to reach the related general and operational 
one.
and 
objectives 

preferred 

therefore 

outlined 

section 

the 

in 

is 

3 

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27 

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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 

Option 2: 
Regulatory incentives 

Option 3: 
Financial instrument  

(---) 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 

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

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

(+++) stimulates new 
sources of financing and 
(++) possibly creates 
new asset class 
(+++) attracts most of 

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

EN 

28 

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for a novel EU 
instrument  

funding 
(--) factors such as 
controlling or 
monitoring creditor 
requires multiple 
approaches 

Although option 2 is the least costly from an EU perspective, it may impose costs on all project 
sponsors, small and large, without a clearly demonstrated 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 a rather negative impact on stakeholders as well as perform poorly in 
terms  of  effectiveness  and  efficiency  compared  to  other  options.  This  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  preferred 
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 

Monitoring of implementing financial partner and markets 

The  Commission  may  work  through  one  or  several financial institutions with  a public mission, 
which will 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 of the Intiative will be managed by the EIB. However, the possibility to extend it to other 
risk-sharing partners will be explored. 

EIB Financing Operations will be managed by the EIB in accordance with the EIB's own rules 
and procedures, including appropriate audit, control and monitoring measures. As foreseen in the 
EIB  Statute,  the  Audit  Committee  of  the  EIB,  which  is  supported  by  external  auditors,  is 
responsible for verifying the regularity of the EIB operations and accounts. The EIB accounts are 
approved annually by its Board of Governors. 

Furthermore, the EIB Board of Directors, where the Commission is represented by a Director and 
an  alternate  Director,  approves  each  EIB  Financing  Operation  and  monitors  that  the  EIB  is 
managed in accordance with its Statute and with the general directives laid down by the Board of 
Governors. 

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Furthermore, the EIB shall provide the Commission with statistical, financial and accounting data 
on each of the EIB Financing Operations as necessary to fulfil its reporting duties or requests by 
the European Court of Auditors as well as an auditor’s certificate on the outstanding amounts of 
the EIB Financing Operations. 

Monitoring by the Commision in accordance with sound financial management shall include the 
drawing  up  of  regular  reports  on  progress  made  in  implementing  the  initiative  by  means  of 
financial implementation, results and impact indicators. The Commission already collects data on 
the EU bond market. Provided issues are public and sufficiently large, they should be captured by 
this  reporting.  However,  the  Commission  may  consider  requesting  information  from  the  banks 
that place the project bonds. The detailed contents would have to be specified together with the 
issuers. One key objective would be to monitor whether unsupported issuance emerges. 

Monitoring of performance and evaluation 

Based on all of the above sources of information, the Commission should have all the elements 
necessary  for  a  review  of  the  pilot  phase  by  end  2013  in  order  to  draw  conclusions  for  the 
implementation of the risk-sharing instruments under CEF. Key elements to consider will be  

• 
• 
• 
• 
• 

• 

the uptake and why it is high/low 
in particular how the cost of financing compares with other sources of debt financing 
whether some of the alternative solutions have been implemented in national context 
whether unsupported bond issuance has emerged 
whether the risk-sharing methodology can be applied to other relevant IFIs or whether 
modifications are needed 
whether other IFIs have the resources to implement and participate in a similar initiative 
under CEF and whether their legal structure allows a participation. 

Based  thereon,  the  Commission  should  be  able  to  assess  whether  the  scheme  (still)  adds  value 
and therefore should be continued. Information on the financial features of the instruments such 
as risk-sharing modalities, portion of credit enhancement required by projects, pricing, etc will be 
collected  during  the  implementation  phase  by  both  the  EIB  and  the  Commission  thus  feeding 
directly in the preparation of the implementation under CEF in 2014. The following performance 
indicators will be included in the assessment: 

• 

• 

• 

The  number  of  TEN-T,  TEN-E  and  telecommunication  projects  having  received  EIB 
financing under the initiative and the terms of the transactions. 
The achieved multiplier effect, cumulative and per sector. The expected multiplier effect 
is  expected  to  be  around  15-20  in  terms  of  EU  budget  support  compared  to  the  total 
investment raised for the projects supported under the initiative. 
Volume of capital market debt financing being raised for these projects, cumulative and 
per sector. 

The  monitoring  of  the  results  will  be  based  on  the  reporting  by  the  EIB  and  market  research. 
Finally,  under  CEF,  a  mid-term  evaluation  should be carried out on the Project Bond Initiative 
together with the evaluation of other financial instruments planned under CEF. 

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30 

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Extension to other financial partners 

As stated, the pilot phase of the Initiative will be implemented with EIB. The intention is to allow 
other  financing  partners  to  participate  in  the  2014-2020  phase  if  they  wish  to  and  have  the 
statutory flexibility to do so. These financing partners will typically be as international financial 
institutions  (IFIs)  and/or  Member  States'  banks  with  a  public  mission,  with  experience  in  the 
financing  of  EU  infrastructure  projects  and  the  willingness  to  share  the  associated  risks  in 
partnership with the EU or any national or regional bodies if applicable. These financial partners 
must also have the absorption capacity and resources to implement the instruments.  

This participation could take several forms: 

• 

• 

Cooperation  with  EIB  on  the  Europe  2020  initiative.  The  practice  of  collaboration 
with between IFIs and other banks has already proven successful both inside and outside 
the  EU.  For  example,  IFIs  and  others  may  share  aspects  of  the  due  diligence  when 
looking  at  a  joint  project.  This  would  also  be  feasible  in  the  context  of  this  initiative, 
bearing  in  mind  of  course  the  limitations  of  each  institution  in  terms  of  geographical 
focus  and  statute.  In  addition,  they  could  perhaps  contribute  with  senior  loans  if 
required. It is more difficult to envisaged a pooling of risks between multiple IFIs. 

Replication  The  Initiative  is  expected  to  be  a  model  for  other  similar  credit 
enhancement  schemes,  where  other  institutions  will  be  required  to  contribute  both 
funding  and  expertise.  EU  and  EIB  could  provide  advice  on  setting  up  national  or 
regional schemes. 

A decision on whether to extend the Initiative to other financial partners is likely to depend on the 
success  of  the  pilot  phase  and  tailoring  to  the  needs  and  capabilities  of  the  relevant  financial 
institution and would be subject to the guidelines laid down in the new Financial Regulation, its 
Implementing Rules and any other relevant guidance on the delivery of financial instruments. 

Exit strategies 

During 2013 the performance of the pilot phase will be known as well as the parameters needing 
adjustment  in  order  to  properly  address  project  financing  needs.  As  regards  CEF  instruments, 
based on the mid-term evaluation, the Commission and EIB would assess whether there is still a 
market  requirement  to  continue  the  scheme  after  2020  (subject  to  political  agreement). 
Alternatively, given that ther initiative is market driven, the price of the support mechanism could 
simply be raised until the point when project companies choose to obtain an unsupported bond. 
Any exit strategy would also need to make clear under what provisions the foreseen budget could 
be re-allocated to other financial instruments within the CEF. 

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Annex I: Public consultation 

The  consultation  paper  was  launched  on  28  February  2011  at  a  press  conference  by 
Commissioner Rehn and President Maystadt and subsequently made available on the website of 
the DG for Economic and Financial Affairs. In addition, it was sent out to numerous stakeholders 
directly  and  a  mid-term  conference  took  place  in  April.  It  thus  benefited  from  the  maximum 
publicity possible. The consultation phase ended on 2 May 2011. 

The  paper  posed  seven  questions,  to  which  stakeholder  reactions  will  be  described  first. 
Additional stakeholder concerns will be discussed thereafter. 

Questions 

Question 1: Is the chosen mechanism likely to attract private sector institutional investors to the 
sectors of transport, energy and ICT in particular? If you are an investor, would you be prepared 
to buy project bonds of TEN-T and TEN-E priority projects? 

Most stakeholders were of the view that the scheme would help attract private sector investment 
to  the  three  sectors  mentioned,  although  some  stakeholders  saw  less  potential  for  broadband 
investment. This appears to be mainly due to the past low volume of project finance in this sector. 
However, PPP deals are currently been put together with the debt component financed via bank 
loans. 

Commission remark: 

This is a very positive verdict overall. In some cases, it may be necessary to introduce new ways 
of  thinking  about  financing  investment,  which  has  traditionally  been  financed  on  a  corporate 
balance sheet. However, this is an educational process, the success of which can be evaluated in 
terms of projects financed. 

Question 2: Are there other sectors that should be included? 

Numerous  stakeholders,  among  them  investors,  sponsors  and  financial  institutions,  suggested 
including more sectors in the initiative in particular  

– 

– 

– 

low carbon generation capacity with renewables being mentioned more frequently than 
nuclear capacity  

the water sector (supply and treatment) 

social infrastructure 

Some  others  considered  renewables  too  immature  generally,  although  this  judgment  must  be 
refined to distinguish between established and less proven technologies.  

Few stakeholders involved in financing infrastructure were in favour of the narrow sector focus 
suggested by the Commission, although it was felt to be helpful in terms of investor and sponsor 

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focus. One policy think tank strongly advocated an even narrower focus in order to ensure that 
investment would not be redirected away from the completion of core networks and compliance 
with subsidiarity concerns. 

Commission remark: 

The Project Bond Initiative will initially focus on the core networks of the transport, energy and 
ICT  sectors,  where  the  EU-wide  impact  is  most  clearly  seen  and  EU  value-added  most  clearly 
defined. 

However, it will leave open the possibility of adding the water sector and low carbon generation 
which will facilitate the adaptation and mitigation of climate change and is thus in line with the 
goal  of  creating  a  sustainable  European  economy,  while  meeting  the  greenhouse  gas  emission 
reduction goals. 

It should also be borne in mind that project bonds will not be the only EU-supported means of 
financing in the area of infrastructure. Indeed, the Initiative is intended to complement traditional 
instruments  using  grants  or  supporting  equity  and  risk  sharing  mechanisms  for  loans.  These 
instruments  will  be  covered  under  a  general  instrument  for  infrastructure  investment  currently 
under preparation by MOVE, ENER and INFSO. 

Furthermore, there will be a comprehensive network in addition to the core network. This will be 
defined  with  the  input  of  the  European  Commission  and  which  will,  where  appropriate,  be 
financed by national funds and structural funds and which will be able to use a similar range of 
instruments. 

Question 3: Would the guarantee facilitate/accelerate the conclusion of financing packages? 

Here it is actually necessary to distinguish between facilitating and accelerating. 

Most  stakeholders  were  of  the  view  that  financing  would  be  facilitated  due  to  the  more  solid 
structuring of the project. The verdict on acceleration was more mixed as some thought the solid 
structuring would also help here, while others speculated that the inclusion of at least one more 
actor, in the form of EIB, and possibly more, in the form of one or more rating agencies, in the 
process would lengthen the time needed to conclude a financing package. 

Commission remark: 

The EIB will do its utmost not to be the cause of a delay. As for other actors, this is not for the 
Commission  to  comment.  However,  it  is  of  course  conceivable  that,  once  the  facility  and  its 
conditions  are  well-established  and  -known,  certain  standards  develop  which  will  accelerate 
processes. 

Question 4: Is a credit enhancement of 20% of outstanding senior bonds sufficient to cover the 
construction and operational period?  

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Only one sponsor felt that 20% of credit enhancement might be on the low side (coincidentally 
this sponsor also suggested riskier projects for inclusion in the initiative), while all others deemed 
the degree of credit enhancement likely to be sufficient although it would clearly depend on the 
project. 

Tranching, i.e. the 20% must be subordinated, is seen as crucial to have the necessary effect on 
ratings. 

Commission remark: 

The EIB has based its assessment of the 20% on extensive modelling as well experience gained 
operating the LGTT. The three major rating agencies have all issued special reports or comments, 
saying  that  they  expect  a  subordinated  tranche  of  this  size  to  improve  the  credit  quality  of  a 
project sufficiently given the right conditions. 

Question 5: Is the targeted minimum rating of the bonds of A- in your opinion sufficient to attract 
investors or are there other factors influencing the investment decisions? 

A rating of BBB or BBB+ was widely regarded as sufficient, but as was repeatedly pointed out, a 
rating around A gives access to a broader investor universe, depending on jurisdiction.  

It  was  felt  that  this  rating  would  be  achievable,  although  the  usual  practice  of  some  rating 
agencies to use the sovereign rating as a ceiling for all ratings in a given jurisdiction may cause 
problems. Two ratings were seen as preferable, but one would suffice. 

Several  investors  stressed  that  they  do  not  merely  look  at  ratings,  but  also  at  the  general  legal 
framework  of  the  jurisdiction  of  the  project,  the  exact  contractual  arrangements  as  well  as  the 
quality of the financial package. 

Commission remark 

Considering factors other than ratings are clearly vital in forming a clear opinion of a project. The 
Initiative, by seeking to create a new asset class, intends to make it worthwhile for investors to 
conduct such analysis and developing the necessary expertise. 

Question 6: Which impact would the Initiative have on financing costs and on maturities? 

It  is  generally  expected  that  the  initiative  will  reduce  the  overall  cost  of  capital  or  at  worst  be 
neutral, while resulting in a lengthening of maturities offered to projects, so they are more aligned 
with the terms of the concession or contract.  

Nevertheless,  sponsors  are  worried  about  negative  carry  as  the  full  financing  amount  is 
drawdown  at  the  outset  rather  than  in  phases  as  for  a  bank  loan.  Some  also  feared  that  bond 
financing would prove less flexible. Investors, of course, favour less flexibility, so they can plan 
reinvestments  appropriately  and  will  already  have  to  became  more  familiar  with  amortising 
maturity structures, where repayment is not at one future date, but spread over several dates. The 
encouraging message was that they are generally prepared to be more flexible than is normally 

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assumed:  they  can  handle  or  will  learn  to  handle  amortisation  structures  and  they  will  put 
together the teams necessary to analyse a new investment class, if they are convinced of its long-
term existence and viability. 

Some investors saw the possibility of inflation-linked bonds as an advantage and some sponsors 
do indeed have projects with inflation-linked revenue profiles. 

Commission remark: 

Clearly the  Initiative  will  have to produce funding that is at  once competitive with bank loans, 
while offering investors a return sufficient to compensate them for the structure of the bond.  

At the same time, it should open up possibilities in terms of maturities and repayment options that 
have their own intrinsic value. 

Question 7: Is it essential that a single entity acts as controlling creditor? 

Most stakeholders saw one controlling creditor as essential, especially during the conclusion of 
the financial package and the construction phase, where speed is of the essence. Investors seemed 
open  to which  entity should  perform such tasks, as long as the entity has the appropriate skills 
and experience and interests are appropriately aligned with that of investors. 

The need for transparency in the form regular reporting to investors, ideally on a quarterly basis, 
was also felt to be crucial. 

Commission remark: 

The Commission keeps an open mind on this issue. 

Further feedback 

There was general support for any reasonable solution, and the project bond initiative was felt to 
be  one,  to  support  capital  market  financing  of  infrastructure  as  this  was  seen  as  crucial  to  the 
development of Europe's economy. It was also felt that the initiative could act as a catalyst for 
other solutions, whether on the market or to be developed, which would easily co-exist in view of 
the vastness of the market with no risks of crowding out of one by the other as approaches are 
sufficiently diverse to suit the diverse requirements of investors. 

Views on which size of project is appropriate for bond funding varied widely with quoted ticket 
sizes per investor varying from EUR 20 million to EUR 100 million, which would translate into 
deal sizes ranging from EUR 50 to EUR 250 million, assuming a minimum of two investors.  

Commission remark: 

Investor rules differ widely, so it is conceivable that there is a market for all ticket sizes  

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Funded versus unfunded facility 

There  was  a  general  preference  for  the  unfunded  facility,  which  was  widely  seen  to  be  more 
efficient and more flexible in terms of being able to reduce the facility post-construction.  

A  minority  preferred  the  funded  solution  as  more  pedagogical  in  terms  of  forcing  investors  to 
analyse deals as well as simpler and more transparent. Others advocated flexibility, even allowing 
funded and unfunded facilities to be used in the same project. 

Pricing 

It was suggested by one stakeholder that pricing for the facility should be composed of an upfront 
and a running component with a view to not discouraging the use of the instrument. However, it 
should also be made sure that the guarantee would continue even if the running fee were not paid. 

Another stakeholder suggested that the price should be proportionate with the cost saving to the 
company in order not to distort competition. 

Commission remark: 

Ad 1) Having a substantial running fee, while demanding coverage if it is not paid would seem 
incompatible. A 100% upfront fee will therefore be considered. 

Ad 2) The intention is that pricing should reflect the risk of a project. Unless financial markets 
are deliberately distorted, this should normally mean that pricing is related to the cost saving. 

Refinancing 

Using the scheme for refinancing was supported by some banks, which saw it as a simpler way of 
introducing  project  bonds  to  investors  as  well  as  potentially  providing  financing  on  reasonable 
terms  to  projects  that  will  otherwise  be  facing  step-ups  on  current  loans  or  refinancing  of  their 
bank loan at current high rates. The latter concern was also cited by some legal firms. Others felt 
this would complicate the message of the scheme and perhaps become the default option.  

Commission remark: 

Form an EU-EIB perspective, offering bond solutions at the refinancing stage would accelerate 
the building up of a portfolio. Nonetheless projects need financing from the outset and this should 
be the initiative's priority. 

Procurement  

Practically all stakeholders confirmed that the procurement process and its obstacles in terms of 
requiring  fully  funded  and  committed  fixed  price  offers  to  a  tight  timeline  generally  does  not 
favour or even allow bond solutions. Naturally, the process differs across Member States, but in 
general  the  demand  was  that  the  procurement  process  should  be  more  flexible  to  allow  bond 
solutions with their different benchmark, volatility of spread and timing requirements. 

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Commission remark 

As discussed in the impact assessment, there seems to be a number of ways in which to address 
this problem, which therefore does not seem insurmountable. 

Other regulatory issues: Solvency II, CRD 

Most investors cited Solvency II as a main obstacle to investing in longer-term, lower-rated assets 
as such bonds would attract higher capital charges, although some actors are of the view that the 
regulation  favours  the  longest-term  assets,  since  capital  charges  increase  no  further  beyond  a 
certain point. 

Insurers  are  at  different  stages  of  advancement  regarding  implementation  of  the  Solvency  II 
directive. Few players have a clear idea of whether the increased capital in this area will be more 
or less offset by the capital relief from better asset-liability matching or more diversification of 
assets, both of which could benefit infrastructure. It is to be hoped that more information will be 
available  as  insurers  get  closer  to  implementation,  but  it  is  unlikely  as  this  could  lead  to  the 
disclosure  of  commercially  sensitive  information.  The  matter  is  further  complicated  by  the  fact 
that insurers may be permitted to use their own models. 

As a result, there are no pertinent studies with sufficient detail from insurers' associations nor has 
the Commission itself conducted one. 

Some conference participants also advocated lower capital requirements for infrastructure assets, 
in view of the lower default rates and higher recovery rates documented by several studies by the 
rating agencies. 

A few banks were worried that project bonds could fall under the ABS regulation of the CRD, 
indeed many investors would cover infrastructure from the ABS desk directive  

Commission remark: 

See section 6.3 of the impact assessment. 

Statistical treatment 

The need for clarification of the EUROSTAT statistical treatment of projects benefiting from a 
support facility was emphasised by several actors. This is of course of particular importance in 
countries with a high deficit. 

Commission remark: 

This shows how much the market needs reassurance. It should be clear that an EU-EIB guarantee 
of  20%  will  not  be  classified  as  the  public  sector  debt  of  any  country  and  the  rest  of  the 
classification process does not change, i.e. it looks at the allocation of risks between the national 
public  sector  and  the  private  sector.  However,  availability  based  projects  may  still  be 
consolidated if there is insufficient transfer of risk. 

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Other ideas:  

Stakeholders  also  made  several  practical  proposals  for  additional  ways  to  support  the  project 
bond market  including the  creation of appropriate benchmarks  for investors,  market making by 
banks and development of trading platforms. These are questions that can best be addressed in a 
more  mature  phase  of  the  Initiative,  when  several  bonds  have  been  issued.  Other  suggestions 
involve EIB guaranteeing the price of a bond in one way or the other, which would potentially be 
highly distortionary of markets. Finally, some proposals such as tax incentives for infrastructure 
investment are the remit of individual Member States.  

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Annex II: Past EU experience with financial instruments 

The initiative builds on the techniques employed by the two successful risk-sharing instruments, 
Risk-Sharing  Finance  Facility  (RSFF)  and  Loan  Guarantee  for  TEN-Transport  (LGTT)  during 
2007-2013 and the lessons learned from their implementation. The RSFF, in particular, is seen as 
having  dramatically  expanded  finance  in  the  area  of  research,  while  the  LGTT  has  helped 
infrastructure  deals,  which  would  otherwise  have  been  abandoned,  reach  financial  close  during 
the crisis. 

The mid-term reports are attached as Annex IIa and Annex IIb. 

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Annex III: Past and future infrastructure financing  

(1) 

Public sector financing in the past 

In  recognition  of  this,  most  infrastructure  projects  were  financed  from  public  budgets  until  the 
1980s.  However,  from  then  onwards  privatisation  was  increasingly  seen  as  a  way  to  ensure 
efficient implementation of projects in terms of both time and costs. Transport operators, utilities 
and  telecommunications  companies  were  sold  off  to  varying  extent  in  different  countries  and 
decided on new investment.  

As the complete transfer of all rights, responsibilities and risk to the private sector was found to 
have  unintended  consequences  in  some  cases,  the  hybrid  model  of  public-private  partnership 
(PPP) developed in addition to existing public or private regulated models. 

This  shift  from  public  to  private  financing  partly  explains  the  drop  in  public  sector  investment 
seen in the past. However, . in the main impact assessment text, public sector financing remains 
important. 

Finally,  the  European  Regional  Development  Fund  has  made  a  major  contribution  to  the 
development  of  infrastructure.  For  example  in  2000-2006,  EUR  34  billion  or  28%  of  the  total 
budget was allocated to transport. 

(2) 

Public sector financing – current and future trends 

In  the  context  of  the  economic  and  financial  crisis,  governments  have  enacted  substantial 
stimulus packages in addition to injecting capital into the banks worst affected by the financial 
crisis. This has brought deficits and debt to unprecedented levels and public budgets will remain 
constrained as consolidation follows crisis as illustrated in Figure 1. 

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Figure 1 – Fiscal adjustment required until 2020 to reach a 60% public debt/GDP ratio by 2030 
(as a percentage of GDP) 

Cumulated budgetary effort required until 2020 to reach a 60 debt/GDP ratio by 2030

(% of GDP)
20.0

15.0

10.0

5.0

0.0

-5.0

IE

EL

UK

MT

SI

ES

FR

IT

NL

HU

EU27

AT

BE

DE

2010 baseline

2012 scenario (COM forecast) Programme scenario (SCPs until end programme)

Cumulated budgetary effort required until 2020 to reach a 60 debt/GDP ratio by 2030

(% of GDP)

6.0

SK

RO

CY

LT

PL

CZ

LV

LU

EE

FI

DK

SE

BG

PT

4.0

2.0

0.0

-2.0

-4.0

-6.0

-8.0

-10.0

2010 baseline

2012 scenario (COM forecast)

Programme scenario (SCPs until end programme)

Source: Commission services.  

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(3) 

EIB financing volumes 

As  a  response  to  the  financial  crisis,  similar  to  other  multilateral  development  banks,  the  EIB 
increased its lending volumes. The table below shows a breakdown of the EIB lending volumes 
per year and per sector since 2007: 

2007

2008

2009

2010 2011 (to 08/2011)

EIB lending volumes  
(EUR bn) 

Transport 

Energy 

Broadband 
Total 
Transport/Energy/Broadband 

11,5

6,5

1,5
19,5

14,9

9,2

1,4
25,5

17,5

11,1

2,3
30,9

14,5

14,6

1,3
30,4

9,2

5

NA
14,2

33

Total EIB lending (all sectors) 

47,5

57,8

74,8

72

The table below shows a forecast based on the corporate operational plan of the EIB: 

EIB lending targets (EUR bn) 

2011  

2012  

2013  

TENs (transport+Energy) 

Energy 

9,8

10,8

8,6

9,5

8,5 

10,8 

Telecommunications 

TBC

TBC

TBC 

Total 
Transport/Energy/Telecom 

TBC

TBC

TBC 

Total EIB lending (all sectors) 

57,6

50,6

49,6 

(4) 

Private sector financing – why PPP? 

Under a PPP arrangement, the public sector authority moves from being the owner and operator 
of  infrastructure  to  being  a  purchaser  and  regulator.  The  private  sector  finances,  supplies  and 
manages  the  assets  and/or  services36  usually  through  a  dedicated  project  company.  Most 
definitions  point  to  the  following  key  characteristics:  private  execution  and  financing  of  public 
investment,  service  provision  by  the  private  sector  and  risk  transfer  from  the  public  sector 
authority to the private sector. The private sector keeps the revenue from user charges (i.e. toll 
roads) or "availability payments", payments from some level of government that depends on the 
availability of the service.However, delivering infrastructure services through PPPs is not without 
risks.  The  benefits  of  private  sector  participation  and  PPP  depend  on  several  factors,  ranging 

36 

Inderst, OECD 

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42 

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from  correct  identification  of  the  most  efficient  bidder  to  appropriate  risk  sharing  and  the 
contractual  relationship  established  with  a  private  partner.  Furthermore,  when  PPPs  are 
inappropriately  used  to  circumvent  budgetary  constraints,  they  present  risks  to  government 
budgets  by  creating  contingent  liabilities.  It  also  has  to  be  emphasized  that  success  of  a  PPP 
project  depends  strongly  on  the  structure  of  the  contract  and  project  itself.  Thus  technical  and 
economic feasibility of the projects is highly important in order to ensure that existing resources 
are targeted to where they are most effective and needed. 

The discussion about which risks to transfer has been a constant accompaniment, both because of 
the private and public sectors arguing over which is better equipped to manage certain types of 
risks, but also, in the EU, due to Eurostat rules on the classification of PPPs for the purposes of 
public sector debt and deficit figures. 

The  advantages  are  seen  in  terms  of  greater  discipline  in  ensuring  that  only  viable  projects  go 
ahead  and  in  terms  of  efficiency  gains  from  private  sector  management  and  innovation.  These 
efficiency  gains  must  outweigh  the  additional  cost  of  capital  of  the  private  sector  and  the 
complexity of the PPP contracts37.  

(5) 

Private sector financing in the past 

With  some  variations  between  Member  States,  the  financial  market  model  of  the  EU  has  been 
dominated by banks rather than by capital markets as in the US.  

Bank lending has been the traditional route of PPP financing in Europe for several reasons: 

– 

– 

Banks' willingness to lend long-dated on attractive terms, 

Banks' ability to assess the risk of the project often coupled with detailed knowledge of 
the project sponsor 

In the 1990s, a form of capital market financing developed. However, it depended on specialist 
insurers,  the  so-called  monoline  insurers38,  which  guaranteed  the  timely  payment  of  100%  of 
interest and principal of the infrastructure bonds. The resulting "wrapped bonds" had a rating of 
AAA, reflecting the rating of the monoline and allowing investors to ignore the characteristics of 
the underlying project. In addition, the monolines monitored the underlying project on behalf of 
investors. This provided competition in the funding market with banks and monolines competing 
on terms.  

As a result of the crisis and associated losses on their subprime business, most of the monolines 
were downgraded to varying degrees and since their business model depended on “lending” their 
rating to the bonds they wrapped, this in most cases undermined their business model. Only two 
monoline insurers are still active in the market, but for much smaller amounts (see next section). 
Although the infrastructure bonds they had wrapped remained sound, this has at least temporarily 
spelled the end for new large scale infrastructure bond issuance. The few bond issues since 2008 

37 
38 

Indeed this is one reason why the UK has limited the minimum size of PPPs to GBP 21 million  
Because they had only one line of business: financial insurance. 

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have  been  unguaranteed,  generally  small  (less  than  EUR  100  million  usually)  and  generally 
refinancings, i.e. done to replace initial bank loans once the operational phase is reached. 

(6) 

Private sector financing – current and future trends39 

While  pre-crisis  institutional  financing  was  invested  through  project  bonds  directly  into 
infrastructure projects with monoline credit enhancement, market participants will continue to try 
to create multi-investor debt or credit enhancement funds or find structured products that can de-
risk senior debt. However, this activity is only a niche market.  

Insurance solutions 

One monoline insurer still underwrites new business, including infrastructure as it has only been 
downgraded  one-two  notches  by  the  major  rating  agencies.  The  basic  product  remains  a  100% 
guarantee,  i.e.  a  full  "wrap"  with  the  attached  monitoring  services,  although  some  of  the 
provisions pertaining to information flow have been modified to respond to investor demands for 
more  transparency.  Nonetheless,  as  the  company  has  become  more  cautious  and  the  business 
environment more challenging, deal sizes are smaller than before the crisis.  

Monitoring solutions 

Another  active  monoline  insurer  is  focusing  on  offering  a  monitoring  service,  which  has  been 
created in response to investor demand and after extenisive market analysis. The tasks range from 
providing  advice  and  due  diligence  during  structuring  as  well  as  monitoring,  reporting  and 
decision-making  after  financial  close  of  a  transaction.  The  service  would  be  available  to 
investment  grade  bonds  from  pre-construction  to  completion.  If  required  to  align  interest,  the 
company will provide a partial guarantee of 10% maximum. 

39 

See also the impact assessment on Connecting Europe Facility, Annex 4. 

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Asset  managers  have  approached  the  same  problem  differently:  they  offer  a  package  of 
investment  in  and  day-to-day  management  of  corporate  debt  structures.  The  management 
includes  detailed  analysis  and  monitoring,  represents  investors  on  steering  committees  and  has 
the  expertise  to  restructure  investments.  This  relieves  clients  of  the  often  complex  and  time-
consuming decision-making.  

Rating support solutions 

While the insurance solution clearly improves the rating of the underlying debt, the monitoring 
solutions do not. Hybrid solutions, where a subordinated tranche is used to improve the rating of 
the  remaining  debt  are  also  being  set  up,  however  getting  the  structuring  right  is  challenging. 
While  such  packaging  can  be  done  on  a  project-by-project  basis,  several  projects  can  also  be 
bundled into a fund. The fund can then offer one or several classes of shares to investors, each 
reflecting a different part of the debt structure and sell other tranches in the market, potentially in 
the form of bonds. 

Such  solutions  share  some  of  the  issues  of  project  bonds.  For  example,  as  structuring  entails 
additional fees, it is likely to be more efficient for larger projects or companies.  

Equity 

Despite  the  financial  crisis,  infrastructure  funds  have  successfully  continued  their  fund  raising. 
The funds have succeeded in raising 16 new funds in 2010 in EU with a total target size of EUR 
6 billion. This brings the cumulative number of infrastructure equity funds actively raising capital 
to  47  with  an  overall  investment  capacity  of  around  EUR  23  billion40.  In  fact,  many  project 
sponsors  have  started  setting  up  funds,  to  which  they  sell  their  mature,  stable  assets.  However, 
greenfield  and  long-term  investment  in  infrastructure  sectors  remain  problematic  due  to  the 
additional risks during the construction phase and the  reluctance of equity funds to wait longer 
than five to seven years to see a proper return41. The availability of equity will not be discussed 
further in this Impact Assessment, but will be addressed in the context of the implementation of 
the Connecting Europe Facility.  

Debt funds 

A  few  debt  funds  have  been  created  recently  in  Europe  which  will  primarily  aim  to  provide 
subordinated  debt  for  infrastructure  projects  across  the  globe.  An  example  of  a  credit 
enhancement fund is Hadrian’s Wall with a target size of around EUR 1 billion, which will use a 
subordinated debt tranche to enhance the rating of the project debt  and sell it to capital market 
investors. As with all subordinated debt, the fund acts as a first loss component of a transaction, 
and this helps to enhance the credit rating of the project by shielding the senior debt and equity 
from a certain amount of revenue risk.  

40 
41 

$33 billion, exchange rate of June 2011, Preqin data. 
A  notable  exception  is  Meridiam,  which  has  a  25-year  horizon,  and  the  Marguerite  fund,  in  which  the 
European  Commission  has  invested  EUR  80  million  alongside  EIB,  Caisse  des  Depots,  Cassa  Depositi  e 
Prestitii and PKO Bank. 

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Outlook 

All  of  these  abovementioned  designs  contribute  to  the  financing  of  the  TENs  infrastructure. 
However,  so  far  they  do  not  have  the  scale  to  address  the  enormous  investment  needs  in  the 
coming  decade  and  do  not  remedy  the  underlying  market  imperfections.  Also,  greenfield 
structures,  in  particular,  have  always  required  more  support  from  public  sources  than  more 
straight-forward brownfield projects. 

As described, two monolines continue to provide to soma extent their previous services although 
for  reduced  nominal  amounts42  or  as  a  smaller  percentage  of  the  overall  debt  accompanying  a 
monitoring solution. 

The business model of the other monolines, as well as their ratings, depended to some extent on 
the regulatory structure in the State of New York, which permitted them to hold minimal capital. 
However,  New  York  has  changed  its  approach  and  it  is  therefore  unlikely  that  any  of  the 
monolines  that  have  effectively  exited  the  market  will  reappear  and  equally  unlikely  that  new 
players will appear in that same format. 

At the same time, bank lending, the dominant element in project finance, had already dropped in 
the context of the crisis. According to market participants the liquidity of the market at the long 
end  of  the  maturity  spectrum  (20  years  at  present)  is  barely  enough  for  a  single  large 
infrastructure deal or alternatively for competing bids on a medium-sized one and comes at a high 
price in terms of spread. In future, to face structural challenges are likely as banks re-assess risk 
and  match  their  assets  and  liabilities  more  closely.  The  effect  is  that  loans  will  be  scarcer, 
available for even shorter maturities and at higher spreads than before.  

In addition, unregulated utilities have, to quote Moody's43, "utilised a significant amount of their 
original  debt  capacity",  while  regulated  ones  typically  face  very  unattractive  incentives  for 
anything that goes beyond incremental investment.  

42 
43 

It must be noted that the infrastructure business of the monolines was not the cause of the downgrade. 
Moody's  Special  Comment  "Unregulated  European  Utilities:  Investment  &  political  risk  add  to  note  of 
caution, 29 July 2010. 

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Annex IV: The general economic and social case for infrastructure investment 

Infrastructure  has  long  been  regarded  as  a  key  enabling  factor  for  future  growth  and 
competitiveness  of  an  economy  as  it  links  economic  actors  together.  However,  such  indirect 
network-type benefits are more difficult, if not impossible, to capture in the form of monetary 
returns on investment compared with direct effects. Investment in infrastructure is therefore at 
a level that is sub-optimal from the point of view of the economy and society at large.  

Direct effects 

Infrastructure projects create jobs directly, especially during the construction phase, but also for 
maintenance and provision of linked services during the operational period. 

Indirect effects 

Infrastructure  is  characterised  by  positive  externalities  as  it  has  benefits  beyond  its  direct  use, 
which  accrues  to  beneficiaries  other  than  the  owners  of  the  asset.  Indeed  infrastructure  can  be 
considered an unpaid factor of production, an augmenting factor and an incentive for relocation44. 
At its simplest, connecting two points, that were not connected before, opens the possibilities of 
new ways of routing traffic, energy or information which are likely to have dynamic, follow-on 
effects.  

Several papers have found a clear positive effect of infrastructure investment45, while others have 
presented a more mixed picture, which nonetheless points to positive effects in the long run, even 
though they are perhaps smaller46. 

Thus, ceteris paribus, the more of the right kind of infrastructure, the better. 

In addition, infrastructure may help the EU meet its climate change goals: 

The  main  focus  in  the  area  of  transport  and  energy  will  be  on  TEN  projects  rather  than  local 
projects  in  order  to  remove  bottlenecks  and  waste  to  yield  more  efficient  transport  and  energy 
networks. This will support the move towards a resource-efficient and low-carbon economy by 
providing  the  networks  needed  to  accommodate  low-carbon  transport  modes  and  low-carbon 
power generation. Whereas small local projects will continue receiving financing from structural 
funds and other financial instruments dedicated for that purpose. 

Broadband is a genuinely transformational technology in that it supports the move to an e-driven 
economy where more transactions and work take place via the internet rather than in person. In 
that sense, the impact of communication technology on the mobility of goods and people and in 
creating  new  location  factors  as  sources  of  competitive  advantage  is  perhaps  not  yet  well 

44 
45 

46 

Crescenzi & Rogriguez, EIB Papers Volume 13, Volume 2 (2008) 
Aschauer (1989): The Impact of Road Infrastructure on Productivity and Growth: Some Preliminary Results 
for the German Manufacturing sector, CIG Working Papers 
EIB Papers, Volume 13.  

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understood47, but is likely to be significant. For instance, the Monti report48 put the cost of "non-
digital  Europe"  at  around  4%  of  GDP  or  almost  EUR  500  billion.  This  would  be  the  gain  of 
stimulating the fast development of the digital single market by 2020 and is similar to the impact 
of the 1992 internal market programme. 

Greenfield projects show the highest deviations between initial forecasts and actual  operational 
performance  as  it  is  harder  to  forecast  their  use  than  e.g.  that  of  the  extension  of  an  existing 
project, for which historical data exists. 

Bearing in mind the indirect effects and the imperative of the transition to a low-carbon economy, 
it is in the general public interest to move towards the optimal allocation of resources in this new 
economic equilibrium as quickly as possible and at the least cost to the economy and tax payers 
at large. The acceleration of financing would assist this, but is not independent of the projects. 

47 
48 

Crescenzi & Rogriguez, EIB Papers Volume 13, Volume 2 (2008) 
Monti report p.44 

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Annex V: An illustrative project example 

The  following  is  an  illustrative  and  simplified  example  of  how  the  Europe  2020  Project  Bond 
initiative could function at the level of the project and capital market investors. It should be borne 
in  mind  that  the  intention  is  to  support  capital  market  financing  of  projects  as  an alternative to 
loan financing, not to replace other sources of financing, such as grants, nor to affect stages prior 
to financing, such as feasibility studies, assessments or procurement, where grants are also widely 
used.  

A transport project, such as a section of railway, is planned by a group of companies (sponsors) 
and tendered by public authorities. The sponsors create a project company to raise the financing, 
construct  and  operate  the  railway  for  a  period  agreed  with  the  public  authorities.  The  sponsors 
provide  own  funds  to  the  project  company  in  the  form  of  equity  and  shareholder  loans.  The 
remaining financing is raised by the project company in the form of debt, traditionally in the form 
of a bank loan.  

Project financing model

Sponsor(s)

S
p
e
ci
al
e
nt
i
t
y

Loans

Bank(s)

Equity

Instead  of  financing  debt  using  traditional  bank  lending,  the  project  company  could  raise  the 
senior debt through project bond issues with long maturities. Capital market investors would buy 
the bonds if an investment grade credit rating, preferably at least A-, could be achieved. 

Under the Europe 2020 Project Bond initiative, the EIB would provide a loan or guarantee (EIB 
facility) to the project company in order to raise the likelihood of a timely repayment of principal 
and interest to bond holders during the lifetime of the bonds. The EU would enable the EIB to 
provide such a facility by sharing the risks with the EIB. In other words, the EU would use EU 
budget to pay capital contributions to the EIB to cover a portion of the risk the EIB incurs.  

The facility could cover all project-related risks affecting the cash flow generation from the start 
of the operating period, as well as any funding shortfall during the construction period. It would 
be  sized  project  by  project  as  a  percentage  of  total  bond  funding  subject  to  a  cap,  for  instance 
20% of the overall senior debt and could take for example the form of a credit line which could 

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be drawn upon either to service senior bonds or to meet funding shortfalls during the construction 
phase.  

Project bond initiative

Company 1

Company 2

Company 3

S
P
V

Senior
debt
in form of
PROJECT
BONDS

Subordinated debt

Equity

Investors 
buy or underwrite

Project Bond
Guarantee Facility

EIB

Risk 
sharing

EU

Once drawn upon, the EIB facility would take the form of subordinated debt. This debt would be 
reimbursed by the project company over time from the cash resources available after senior debt 
service,  but  prior  to  payments  to  equity  and  related  financing  (shareholder  loans,  other 
subordinated  loans).  As  the  EIB  facility  is  revolving  and  available  during  the  lifetime  of  the 
bonds, it may be drawn upon and repaid, and later drawn upon and repaid again. It is foreseen 
that the available amounts will amortise according to the amortisation schedule of the bonds. 

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Annex VI: Detailed design and risk-sharing 

1. General principle 

As illustrated in the the example in Annex V, projects are financed using equity and debt.  

The sponsors provide equity of typically 10-20% of the project value. The project bond initiative 
employs  standard  structuring  techniques  to  divide  the  project  debt  into  a  senior  tranche  and  a 
subordinated tranche49, 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. Once drawn upon, the credit line becomes a subordinated tranche. The key to the use 
of project bonds is that the revenue of a project can be sufficiently ring-fenced. 

The funded version has the advantage of requiring less senior debt; the unfunded solution has the 
advantage  of  being  more  flexible,  i.e.  if  there  is  no  need  to  draw  the  project  has  no  additional 
obligations  beyond  paying  the  fee  for  having  the  guarantee  available.  A  mix  of  a  funded  and 
unfunded  tranche  could  also  be  envisaged.  The  precise  support  would  depend  on  the 
characteristics of the project. 

In either case, the presence of a (contingent) subordinated tranche, which has a lesser claim on 
the  project's  resources  than  the  senior  debt,  improves  the  risk  profile  of  the  senior  debt. 
Concretely  speaking,  the  probability  of  default  and  the  loss  given  default  both  decline.  This 
increases  the  attractiveness  of  the  senior  debt  to  investors,  as  expressed  e.g.  by  a  credit  rating, 
allowing the senior tranche to be issued as a bond. Note that it is not intended to allow the project 
sponsors to reduce their equity stake. 

2. Degree of credit enhancement 

The desired credit quality can be generally described as one reaching a rating of BBB+ or above. 
Larger projects are likely to need a higher rating of e.g. single A, while smaller ones may not. In 
additional,  the  required  credit  quality  may  also  depend  on  the  identity  of  the  sponsor(s),  the 
source of revenues and other factors.  

Achieving this is likely to require a subordinated tranche of up to 20% of the senior debt of the 
project.  This  figure  is  based  on  Monte  Carlo  simulations50  of  the  project  under  a  variety  of 
revenue scenarios. In addition, it is largely in line with LGTT experience. 

49 

50 

The senior debt has priority rights to the revenue of the project company during normal operations and to its 
assets  in  the  event  of  bankruptcy,  while  subordinated  investors  are  paid  off  afterwards,  but  before  equity 
holders. 
Monte Carlo simulation is a method for iteratively evaluating a deterministic model using sets of random 
numbers as inputs. This method is often used when the model is complex, nonlinear, or involves more than 
just a couple of uncertain parameters. Simulation is based on probabilities of certain events. 

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3. Pricing of subordinated tranche 

A price for the support is justified as it produces a gain to the borrower in the form of the project 
company.  Indeed,  the  absence  of  a  price  would  represent  a  subsidy  and  would  distort  markets 
heavily in favour of a few project sponsors, while not ensuring alignment of interests between the 
EU, the financial intermediary and the project company. On the other hand, the price should not 
be so excessive as to discourage use of the scheme.  

Pricing  below  costs  can  only  really  be  justified  due  to  wider  societal  benefits  and  increased 
expected  uptake,  however,  even  in  that  case  the  fee  should  reflect  the  risk  of  the  individual 
project. In order to avoid any element of subsidy, the price should also cover costs in addition to 
reflecting the risk of the project, the proposed financing package and the sponsor(s) even though 
this will entail that the support may not be offered to all players at the same price. The EU will 
ensure that any financial partners have an appropriate pricing methodology, which may be based 
on  historical  data  or  option  prices  if  available,  on  the  expected  cost  plus  a  margin51  or  other 
appropriate data. 

In the case of the unfunded option, it is likely to be a combination of an upfront fee plus annual 
payments thereafter, while in the case of the funded option the price would be expressed as the 
interest rate margin applied to the loan. 

4. Issues associated with the managing/controlling creditor role 

By  their  very  nature,  large  complex  infrastructure  projects  rarely  progress  exactly  according  to 
plan.  

This  requires  investors  to  make  numerous  decisions  (waiver  requests,  changes  to  technical 
specifications) on a daily basis, especially in the construction phase. Since most investors do not 
have the experience or the capacity to handle the  volume  of  requests  in  a  timely  manner,  most 
investors  choose  to  delegate  this  function  to  a  third  party.  This  "managing  creditor"  monitors 
general  financial  and  construction  performance  and  may  make  routine  day-to-day  decisions 
linked  thereto,  which  also  has  the  virtue  of  simplifying  the  communication  with  sponsors  and 
authorities.  

If a project goes badly, a decision on acceleration of the debt or termination of the project may 
have  to  be  made.  Investors  may  choose  to  make  these  decisions  themselves  or  to  delegate  the 
function to one or more "controlling creditors".  

The exact responsibilities are dealt with in appropriately formulated "inter-creditor agreements" 
as they may be different from deal to deal. 

While the EIB will certainly have to monitor a project and represent its and the EU's interests, the 
Commission  encourages  creditors  to  find  mutually  suitable  arrangements  to  accommodate  all 
parties  requirements.  This  may  or  may  not  include  appointing  EIB  or  third  parties  to  carry  out 

51 

UNEP-SIF 

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some functions on behalf of all creditors, but in no case does it free those creditors entirely of the 
need to do their own due diligence analysis to satisfy themselves that the project is sound. 

5. Risk-sharing between financial partners and the EU 

To  ensure  rapid  implementation,  the  pilot  phase  would  be  entrusted  to  EIB,  the  EU  bank  and 
therefore  this  section  is  drafted  with  reference  to  established  arrangements  with  EIB.  In  the 
operational  phase  post-2013,  the  initiative  would  also  be  open  to  other  financial  partners, 
although  the  exact  implementation  would  naturally  have  to  be  discussed  in  the  context  of  the 
mission and remit of these financial partners.  

Lending  or  contingent  lending  at  the  subordinated  level  in  order  to  support  and  leverage  the 
senior debt is riskier than a standard senior loan. To some extent this is mitigated by the fact that 
the financial partner's exposure to the capital structure is smaller, maximum 20% instead of the 
usual  50%.  Nonetheless,  if  the  EU  wants  to  achieve  its  objectives  of  increasing  infrastructure 
financing and developing capital markets it would seem reasonable to compensate the financial 
partner for some of the extra risk taken. 

Conceptually there are two main ways in which this could be done 

• 

• 

on a pro-rata basis (vertical risk sharing) 

on a first-loss, second-loss etc. basis (horizontal risk sharing) 

Under  pro-rata risk-sharing all losses are shared project by project on a fixed  percentage basis. 
Horisontal risk-sharing on the contrary attributes specific loss events to the risk-sharing partners.  

A  first  loss  approach  would  involve  the  EU  absorbing  the  first  losses  (i.e.  from  0%)  up  to  a 
certain  pre-agreed  percentage  and  maximum  amount  on  a  portfolio.  The  percentage  would 
typically  be  set  at  just  above the  historical  average  loss,  which  can  be  modelled  from  previous 
lending  of  the  financial  partner  in  the  sectors  and  should  thus  be  fairly  reliable.  A  second  loss 
guarantee  would  have  to  cover  all  losses  exceeding  a  certain  percentage  of  the  portfolio  up  to 
another fixed percentage.  

Simply put the “first losses” are more likely to occur than losses above a specified level, therefore 
carving  out  these  for  support  would  optimise  the  multiplier  effect  of  EU  budgetary  funds  as  it 
provides the most efficient guarantee in terms of total guarantee liability versus size of portfolio. 
Therefore it yields the maximum benefit to sponsors and ultimately tendering authorities and tax 
payers with the least amount of funds. 

The pilot phase would initially apply either on vertical or horisontalrisk sharing. The Commisison 
will agree the appropriate risk-sharing method with the EIB. 

However, with a larger number of projects, portfolio  diversification  comes  into  play.  This  may 
make  it  advantageous  to  use  the  risk-sharing  arrangement  as  fist-loss  type  risk-sharing, 
particularly  in  the  fully  operational  phase  from  2014  or  if  and  when  robust  demand  for  the 
scheme calls for a wider roll-out. The maximum risk-sharing percentage can be revised based on 

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53 

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the properties of the portfolio which will have been built up at that stage. The financial partner 
would in any case retain a 5% share of the first loss piece as well as covering the residual risk 
beyond  the  first  loss.  This  will  ensure  alignment  of  interest  between  the  EU  and  its  financial 
partner(s). 

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Annex VII: Other issues potentially affecting the success of the project bond initiative 

Although the objective of the project bond initiative is to remove specific financial barriers, it is 
clearly  desirable  to  ensure  an  overall  regulatory  framework  that  is  conducive  to  investment  in 
infrastructure.  A  number  of  issues  related  thereto  are  covered  below.  Options  to  address  these 
issues, if necessary, will be assessed in the light of experienced gained in the pilot phase. 

Solvency II 

Solvency  II  aims  to  harmonise  the  treatment  of  market  consistent  balance  sheets,  risk-based 
capital,  own  risk  and  solvency  assessment  (ORSA),  senior  management  accountability  and 
supervisory  assessment.  The  new  regime  will  apply  to  all  insurance  firms  with  gross  premium 
income exceeding EUR 5 million or gross technical provisions in excess of EUR 25 million.  

Solvency II follows the "Lamfalussy" approach, whereby the EU prudential framework is divided 
into  three  hierarchical  levels  :  the  first  pillar  contains  the  quantitative  capital  requirements,  the 
second  pillar  contains  qualitative  requirements  on  undertakings  such  as  risk  management  and 
supervisory activities, while the third pillar covers supervisory reporting and disclosure.  

Solvency  II  will  move  insurance  companies  to  a  risk-based  solvency  regime.  Market  risk  on 
different asset categories will be reflected in capital requirements depending on their risk. Market 
risk is not explicitly included in the capital requirements under the present regime. However, as 
the  proposal  also  operates  with  a  correlation  matrix  between  asset  classes  and  a  higher  capital 
requirement  for  mismatches  between  assets  and  liabilities,  there  are  benefits  to  insurers  which 
diversify their investments and which match their assets and liabilities more closely. Since these 
benefits might off-set the increased risk-weightings for longer-maturity, lower-rated bonds is not 
possible to say unambiguously that project bonds will be penalised as an asset class generally. It 
depends on the insurance company's business. 

Capital requirements 

The CRRI package52 is a comprehensive review of EU banking prudential rules and supervisory 
arrangements,  currently  provided  for  in  Directives  2006/48/EC  (the  Capital  Requirements 
Directive) and 2006/49/EC  

The overarching goal is to ensure that the effectiveness of institution capital regulation in the EU 
is strengthened and its adverse impacts on depositor protection and pro-cyclicality of the financial 
system  are  contained  while  maintaining  the  competitive  position  of  the  EU  banking  industry. 
CRRI  lays  down  rules  for  when  a  bond  is  a  securitisation.  The  specific  guidelines  at  EU  level 
would most likely not encompass project bonds. The definition of securitisation is the same as in 
Solvency  II  (so-called  cross-consistency).  Future  proposals  for  the  regulation  of  pension  funds 
would  also  be  likely  to  follow  a  risk-based  approach.  This  would  also  be  cross-consistent  by 
design although it will not be identical to the regulation of banks and insurance companies. 

52 

Adopted on 20th July 2011. 

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Procurement 

In  order  for  a  contracting  authority/entity  to  assess  the  tenders  in  compliance  with  EU 
procurement rules, all aspects of an tender which are subject to its assessmentmust be fixed and 
comparable  at  the  submission  of  the  final  offer.  This  normally  includes  financing  and  here  the 
main issue is to which degree of detail the financing offer is known at this stage. 

In bond markets, as in loan markets, financial terms are usually quoted as a spread (interest rate 
differentials) over a benchmark interest rate, which is LIBOR or EURIBOR in the case of loans 
and a suitable government bond or swap rate in case of bonds.  

Although the spread of a bond financing may be known with reasonable certainty, in most cases 
the price is only known when it has been fully subscribed by investors. Therefore its cost is not 
definitively known at the time of closing, but it may be either above or below the projected cost.  

There  are  some  potential  solutions  to  address  this  uncertainty.  Solutions  include  accepting  that 
the interest rate will not be known, developing appropriate benchmarks which will allow the least 
fluctuation of the spread53 or addressing it either through other financial instruments (a bridging 
loan, or a derivative product to cover the risk). These solutions may be entirely at the expenses of 
the bidding company(ies) or include various degrees of risk-sharing for the tendering authority.  

In  each  case,  the  specific  solution  adopted  should  be  assessed  from  the  point  of  view  of  its 
compatibility  with  public  procurement  rules,  notably  with  the  principle  of  equal  treatment.  In 
particular, changes in the price may not lead to alteration of the ranking of the bids (e.g. if the 
winner's final higher price had been known at the moment of the award, it would have been less 
advantageous  than  another  tenderer's  price  or  wouldn't  have  compensated  another  tenderer's 
quality advantage etc). 

ESA95 classification 

Market participants questioned whether the use of the project bond facility would automatically 
tip the project into the general government sector for national accounts purposes. 
However,  EU  risk-sharing  does  not  change  the  Eurostat  assessment  of  whether  the  project 
belongs on the balance sheet of the national general government sector or the private sector. In 
order words, if the EU takes up to 20% of the risk, the test would simply apply to the remaining 
80%  of  the  project.  Since  the  intention  is  to  attract  private  funding  for  these  80%,  the  project 
should normally be classified as private. However, if the government provides a guarantee higher 
than  the  part  financed  by  the  private  sector,  partner,  this  will  trigger  a  classification  into  the 
general  government  sector.  These  guarantees  should  include  guarantees  for  a  loan  from  an 
international  financial  institution  (IFI).  In  addition,  if  a  national  government  unit  provides 
minimum  revenue  guarantees  and  minimum  demand  guarantees,  such  that  government  would 

53 

One option could be to use a basket of comparable bonds as a benchmark. Their comparability would have 
to  be  such  in  terms  of  credit  characteristics  that  the  project  bond  would  fluctuate  less  against  this  basket 
than  e.g.  a  government  bond  benchmark.  This  will  be  easier  once  a  project  bond  market  has  been 
established. 

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bear  a  majority  of  the  risks  in  the  project,  the  debt  would  be  classified  as  general  government 
debt.  

Capital market development 

The  use  of  the  project  bond  facility  presupposes  a  reasonably  well-functioning  capital  market. 
Member  States'  financial  markets  are  different  in  terms  of  size,  liquidity,  achievable  maturities 
etc., but are progressively getting more integrated , but the initiative would contribute further to 
the development of an integrated capital market in the EU.  

In  addition  to  the  new  instruments,  it  is  important  to  assist  market  players  to  achieve  multiple 
goals including:  

– 

– 

– 
– 

– 

Sponsors  accecpting  public  disclosure  of  project  financials  in  order  to  issue  project 
bonds; 
Investors developing their understanding of project dynamics, making asset allocation to 
infrastructure and managing e.g. the amortising structure of these bonds 
Tendering authorities allowing more flexibility e.g. with different benchmarks ; 
Rating agencies benchmarking their project finance rating processes in a transparent and 
consistent manner; 
Bond  issuers  and  lead  managers  increasing  dialogue  with  investors  to  enhance  their 
understanding of project bonds. 

Crowding out of other players 

As discussed in Section 6.2.3.2, the support for project bonds should be appropriately priced so as 
to avoid distortions of competition and so as to not constitute subsidies. For this reason and due 
to  the  vastness  of  the  infrastructure  financing  market  (EUR  100  billion  and  growing)  in 
comparison with the volume supported initially (EUR 2-3 billion), it is highly unlikely that the 
Europe  2020  Project  Bond  Initiative  will  crowd  out  other  players  in  the  market.  However,  the 
Commission will closely monitor the effects on other players in the market (see secti expressed 
on 7). 

It  is  the  hope  that  the  EU  scheme  would  act  as  a  catalyst  for  private  schemes  currently  under 
development or in their early stages, a view that has also been expreseed by the private sector. 
The emergence of privately supported or unsupported infrastructure bond finance would be a sign 
for the EU to exit the market as described in Section 7.  

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