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
Date: 2011-10-19
Institutions: European Commission
Subjects: EIB loan, financing method, financing plan, private investment, project of common interest, trans-European network

EUROPEAN COMMISSION 

Brussels, 19.10.2011 
COM(2011) 660 final 

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  

{SEC(2011) 1237} 
{SEC(2011) 1239} 

 
 
 
 
  
  
 
TABLE OF CONTENTS 

1. 

1.1. 

1.2. 

1.3. 

2. 

3. 

3.1. 

3.2. 

3.3. 

3.4. 

3.5. 

4. 

5. 

Project bonds – an idea whose time has come ............................................................. 2 

EU infrastructure policy: from grants to project bonds ............................................... 2 

Large future investment needs: where will the money come from? ............................ 3 

The value added of the Europe 2020 Project Bond Initiative ...................................... 4 

Making Project Bonds operational............................................................................... 5 

How will the pilot phase work? ................................................................................... 6 

Implementation through EIB........................................................................................ 7 

Project eligibility and monitoring ................................................................................ 7 

Pricing .......................................................................................................................... 8 

Risk sharing.................................................................................................................. 8 

Known maximum budgetary impact............................................................................ 9 

How will the pilot phase relate to the Connecting Europe Facility?............................ 9 

Conclusions ................................................................................................................ 10 

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1. 

PROJECT BONDS – AN IDEA WHOSE TIME HAS COME 

1.1. 

EU infrastructure policy: from grants to project bonds 

Despite long-standing EU policy and grant spending on Trans-European Networks (TENs) in 
the  area  of  transport,  energy  and  telecommunications,  the  Commission  has  found  that  the 
completion  of  key  infrastructure  projects  is  delayed  with  one  of  the  principal  reasons  being 
lack of investment.  

The  2010  Monti  Report  "A  new  strategy  for  the  single  market"1  diagnosed  the  problem  as 
"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"2.  

Therefore, one of the key decisions in the proposed multi-annual financial framework (MFF) 
for the period 2014-2020, adopted by the Commission on 29 June 2011, was to re-unite the 
granting  of  financial  aid  for  transport,  energy  and  ICT  infrastructure  under  a  common 
legislative framework, the Connecting Europe Facility (CEF)3: 

"The  Commission  has  decided  to  propose  the  creation  of  a  Connecting  Europe  Facility  to 
accelerate  the  infrastructure  development  that  the  EU  needs.  (…)  The  Connecting  Europe 
Facility  will  fund  pre-identified  transport,  energy  and  ICT  priority  infrastructures  of  EU 
interest,  and  both  physical  and  information  technology  infrastructures,  consistent  with 
sustainable development criteria"4. 

The  Commission  will  make  a  proposal  for  a  new  Regulation  to  establish  the  Connecting 
Europe Facility (CEF), which will use both grants and financial instruments, in recognition of 
their  respective  strengths.  The  instruments  will  comprise  both  equity  and  risk-sharing 
instruments. The Europe 2020 Project Bond Initiative will be one of a number of risk-sharing 
instruments upon which the facility may draw in order to attract private finance to projects. 

In other words, from 2014 onwards, CEF will put European funding for transport, energy and 
telecommunications  infrastructure  on  a  solid  and  coherent  basis  for  the  longer  term.  In 
addition, the financial instruments under the Facility may be extended to other sectors such as 
social  infrastructure,  renewable  energy  or  certain  space  projects,  provided  they  fulfil  the 
appropriate economic and financial criteria as laid out in Section 3. However, infrastructure 
projects in Europe are facing financing problems already now. Government spending is being 
reduced,  with  investment  programmes  frequently  reduced  first,  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 20115. Thus, at a point in time where infrastructure 

1 

2 
3 
4 
5 

M.  Monti:  A  new  strategy  for  the  single  market,  at  the  service  of  Europe's  economy  and  society, 
9.5.2010, p. 62. 
Monti report p. 62. 
COM(2011)662 
COM(2011) 500 final. 
Source Infrastructure Journal (IJ) database Western Europe declined from EUR 33 billion to 26 billion, 
half of which is transport and energy (IJ's data for Eastern Europe are distorted by Russia and Turkey, 
hence not included). 

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projects  could  contribute  most  to  aid  the  European  recovery,  the  financing  is  more 
challenging than it need be6.  

It will also be beneficial for the European economy as a whole due to the direct and indirect 
benefits  of  investing  in  infrastructure  while  supporting  the  urgent  shift  towards  a  resource 
efficient and low carbon economy, in line with the Europe 2020 strategy. 

The Commission is therefore proposing to launch a pilot phase in the period 2012-2013, still 
within the current financial framework. The recent consultation7 showed widespread support 
from  stakeholders  to  open  up  debt  capital  markets  for  infrastructure  financing  as  soon  as 
possible.  In  addition,  such  a  pilot  phase  would  facilitate  the  market  introduction  of  EU-
supported  project  bonds,  which  will  be  a  new  type  of  asset  and  testing  of  the  design  and 
parameters of the initiative in order to make changes, if required, before 2014. 

1.2. 

Large future investment needs: where will the money come from?  

Europe  faces  higher  infrastructure  investment  needs  than  in  the  recent  past  in  transport, 
energy  and  ICT  networks  in  this  decade,  totalling  several  trillion  euros,  to  meet  the  policy 
goals of the Europe 2020 strategy and to maintain or upgrade existing infrastructure. 

The Commission has recently refined its estimates as follows: 

• 

• 

The  Digital  Agenda  objectives  to  ensure  that  every  European  has  access  to  basic 
broadband  by  2013  and  to  fast  or  ultrafast  broadband  by  20208  are  estimated  to 
require investments of EUR 181-273 billion.  

The  Resource-efficient  Europe  flagship  objectives  are  expected  to  require  transport 
and  energy  infrastructure  investments  of  around  EUR  700  billion  for  the  highest 
priority projects. 

These figures do not constitute a funding gap, but represent the total investment requirements, 
whether publicly or privately financed or addressed by policy in these sectors.  

While  EU  governments  spend  on  average  1%  of  GDP  on  infrastructure  investments9,  they 
have increasingly encouraged the private sector to finance infrastructure investment, either on 
a  purely  private  sector  basis  through  privatisation,  through  concessions  or,  more  recently, 
using the public-private partnership (PPP) model as a basis. Such projects are financed with 
equity and bank loans. 

However, during the financial crisis, banks in the EU reacted to liquidity and risk challenges 
by shortening maturities, increased pricing and collateral requirements. This led to a smaller 
number  of  lending  operations  and  smaller  volume  of  operations  per  bank  as  well  as  an 
increasing mismatch with the long-term financing requirements of projects. In addition, there 

6 

7 
8 

9 

See  also  the  Impact  Assessment  on  the  Connecting  Europe  Facility  and  the  Impact  Assessment 
accompanying the legislative proposals for the ERDF and Cohesion Fund. 
http://ec.europa.eu/economy_finance/consultation/index_en.htm 
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. 
Between  ½  and  2%,  see  Alegre  et  al,  EIB  Papers  Volume  13/1  (2008).  The  main  bias  affecting  the 
estimate is the classification of the investment of commercially operating companies as private even if 
they are owned by the public sector. 

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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. This will place an additional strain on the amount of debt available to finance 
the  construction  of  new  infrastructure,  while  banks  are  likely  to  continue  to  reduce  risk 
generally10.  

The bond markets in Europe, which could offer long-term financing, are in fact not used for 
the financing of infrastructure projects. Although infrastructure projects generally have high 
costs  of  capital  coupled  with  low  operating  costs,  their  usually  stable  and  predictable  cash 
flows  should  make  long-term  bond  financing  particularly  attractive.  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  assets11,  which  is 
fundamental to the reduction of risk in a diversified portfolio.  

1.3. 

The value added of the Europe 2020 Project Bond Initiative  

The Europe 2020 Strategy12 envisaged the mobilisation of financial instruments as part of a 
consistent funding strategy that pulls together EU and national public and private funding to 
pursue  the  Strategy’s  objectives  most  efficiently.  EU  budget  expenditure  through  financial 
instruments  is  not  a  new  feature,  as  the  first  use  of  EU  budget  to  support  such  instruments 
dates back more than ten years13. However, the Commission is proposing to standardise and 
harmonise  their  design,  governance  and  other  important  aspects  as  explained  in  the 
Communication "A framework for the next generation of financial instruments"14. While this 
will allow an increased use of financial instruments in certain areas, their share of the overall 
EU budget will remain small compared to grants. 

The main objective of financial instruments, such as the project bond instrument, is to attract 
and facilitate private sector finance of projects. They are particularly valuable when policies 
require a high speed of implementation, but uncertainties for projects are above average, as in 
the  current  environment  of  financial  and  sovereign  crisis.  They  can  reduce  specific  barriers 
that prevent the flow of debt and equity finance. Nonetheless, they let the private sector make 
the investment decisions.  

The  Europe  2020  Project  Bond  instrument  is  not  intended  to  replace  existing  sources  of 
project  financing  through  bank  loans  or  public  sector  grant  programmes  but  rather 
complement these as a further means of closing the infrastructure financing gap. They serve to 
expand  the  investor  base  for  private  debt  funding  of  projects  from  loan  providers  to  bond 
investors.  Moreover,  projects  with  low  or  no  revenue  that  are  nonetheless  of  great  public 
interest will continue to need grants in all stages of their life. Thus grants will continue to play 
an important role and could potentially even be combined with project bonds if a project can 
be appropriately structured. 

10 

11 

12 
13 
14 

Bank for International Settlements on the assessment of long-term economic impact of stronger capital 
and liquidity requirements, August 2010. See also Commission staff working paper SEC(2011) 949 on 
prudential requirements for credit institutions and investment firms. 
Moody's  Special  Comment  on  Default  and  Recovery  Rates  for  Project  Finance  Loans  1983-2008, 
20.10.2010  
COM(2010) 2020. 
Initially guarantees and venture capital for SMEs 
COM(2011)662 

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The project bond initiative thus builds on the exhortation of the Monti report 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". 

As  there  is  no  real  project  bond  market  in  Europe  at  present,  project  bonds  would  allow 
matching  the  requirements  of  institutional  investors,  such  as  pension  funds  and  insurance 
companies,  which  need  long-term  assets  to  match  their  long-term  liabilities,  with  the  long-
term financing needs of the projects. 

However,  infrastructure  projects  are  very  complex,  requiring  significant  analysis  upfront  as 
well  as  continous  follow-up  during  the  life  of  the  projects.  A  few  institutional  investors  are 
ready  to  make  the  commitment  in  terms  of  resources  to  carry  out  the  necessary  analytical 
work,  but  the  vast  majority  of  investors  will  require  some  support  before  considering 
infrastructure project bonds. 

Public  funds  from  the  EU,  coupled  with  the  participation  of  financial  intermediaries, 
especially  public  development  banks,  can  bring  together  the  demand  for  long-term  finance 
with private investors with long-term orientation but low appetite for risk. The idea is to use 
appropriations from the EU budget to support projects to the extent required to enhance their 
credit  rating,  and  thereby  attract  financing  from  other  sources,  including  private  capital 
market  investors.  The  instrument  builds  on  proven  financial  techniques  in  the  area  of  risk 
sharing,  but  with  an  extended  scope.  It  will  build  on  the  experiences  gained  with  Loan 
Guarantee Facility for TEN Transport (LGTT)15. 

The long-term aim is to promote the integration of European capital markets and their further 
development  as  well  as  creating  a  new  asset  class  of  European  project  bonds  by  seeking  to 
standardise their terms. This will also allow private sector initiatives to enter the market more 
easily. 

2. 

MAKING PROJECT BONDS OPERATIONAL 

Project Bonds are issued neither by the European Union nor by Member State governments. 
They  are  private  debt,  issued  by  the  project  company.  The  Europe  2020  Project  Bond 
instrument  would  enhance  the  credit  standing  of  private  entities  that  need  to  raise  private 
funds for the infrastructure projects they promote. By addressing capital market investors, the 
Project Bond Initiative opens up a further avenue for project sponsors to attract funds. The EU 
Budget contribution will be capped ex ante. 

The principal mechanism to provide such enhancement of the credit standing of projects is to 
separate the debt of the project company into slices, a senior16 and a subordinated17 tranche. 
The insertion of the subordinated tranche increases the credit quality of the senior tranche to a 
level where most institutional investors are comfortable holding the bonds for a long period18.  

15 
16 
17 
18 

Established in Regulation (EC) No 680/2007. 
In this context: The highest level in a company's debt structure with most certainty of repayment. 
In this context: The debt below the senior debt, which is, however, senior to equity. 
The consultation on the Project Bond Initiative broadly endorsed the principle of using a subordinated 
tranche as well as its magnitude. 

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The subordinated tranche can take the form of a loan, which is given to the project company 
from the outset, or a contingent credit line19, which can be drawn upon to service the senior 
debt in case of need, or a combination of the two. The support would be available during the 
lifetime of the project, including during the construction phase, which is usually the riskiest 
part of a project, but  would not exceed 20% of the senior debt of the project. This percentage 
is  based  on  LGTT  experience  and  modelling  results  and  would  provide  a  generous,  but  not 
excessive, liquidity cushion for most projects that fulfill the necessary financial criteria.  

The  consultation  on  the  Project  Bond  Initiative  broadly  endorsed  the  principle  of  using  a 
subordinated  tranche  as  well  as  its  magnitude.  In  terms  of  credit  quality20,  a  lower  credit 
quality  (rating  of  BBB+  or  equivalent)  appears  to  be  acceptable  for  smaller,  less  complex 
projects  than  initially  envisaged  by  the  consultation  paper.  However,  for  larger  projects  the 
target  credit  quality  (single  A  range  or  equivalent)  was  broadly  endorsed.  On  these  terms, 
market  participants  regard  it  likely  that  the  initiative  could  reduce  financing  costs,  while 
lengthening maturities. 

While  from  2014  onwards  the  Project  Bond  instrument  would  be  firmly  rooted  in  the 
Connecting  Europe  Facility,  the  Commission  has  seen  from  the  experience  with  other 
financial  instruments,  most  pertinently  the  LGTT,  that  they  often  require  a  significant  lead 
time even when extensive prior consultation of stakeholders has taken place, simply because 
there  is  a  difference  between  considering  a  hypothetical  proposal  and  working  through  a 
concrete  transaction.  This  is  valid  in  particular  for  complex  infrastructure  projects  which 
consist  of  a  large  number  of  financial  and  legal  interacting  aspects.  Stakeholders  need  to 
familiarise  themselves  with  all  issues  of  the  structuring  of  a  transaction  in  order  to  satisfy 
themselves that it is sound, the parameters of the financial instrument or the tendering process 
may  need  to  be  changed  slightly  and,  most  notably,  the  economic  and  financial  market 
environment may change. A pilot phase will help to clarify a number of these issues. 

Therefore the Commission is proposing to advance such pilot phase to 2012-2013 instead of it 
taking place during the first two years of the Connecting Europe Facility. 

3. 

HOW WILL THE PILOT PHASE WORK? 

The  Commission  proposes  to  base  the  pilot  phase  on  an  amendment  of  the  Trans-European 
Networks (TEN) Regulation and the Competitiveness and Innovation (CIP) Decision21, so as 
to draw on the budget lines of these programmes up to a total of EUR 230 million. EUR 200 
million  can  be  drawn  from  the  TEN-T  budget  line,  specifically  from  LGTT  and  EUR  10 
million from the TEN-E budget line, initially intended to be used exclusively for grants. From 
the CIP ICT line, up to EUR 20 million can be drawn to support project bonds.  

19 
20 

21 

The use of the credit line is dependent or conditional on defined events. 
The  classification  of  a  borrower's  credit  quality  made  by  specialised  agencies  such  as  Standard  and 
Poors,  Moody's  or  Fitch.  Of  particular  interest  is  the  investment-grade  segment  above  BBB-
/Baa3/BBB- respectively. A “good” investment grade rating is A/A2/A. 
Regulation (EC) No 680/2007 of the European Parliament and of the Council of 20 June 2007 laying 
down  general  rules  for  the  granting  of  Community  financial  aid  in  the  field  of  the  trans-European 
transport and energy networks and Decision No 1639/2006/EC of the European Parliament and of the 
Council  of  24  October  2006  establishing  a  Competitiveness  and  Innovation  Framework  Programme 
(2007 to 2013), respectively. 

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3.1. 

Implementation through EIB 

As the initiative has been developed on the basis of the risk sharing concepts employed and 
the  experience  gained  from  the  LGTT  model,  the  Commission  intends  to  continue  working 
with the European Investment Bank (EIB) during the short pilot phase in order to refine the 
parameters  for  the  post-2013  phase  as  rapidly  as  possible.  Thereafter,  the  Commission  will 
look into the possibility of involving other public financial institutions at that stage. 

The EIB, as an EU organisation with the mission to support EU policies, has a unique long-
standing experience in the financing of infrastructure projects in the EU. 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  when  it  is 
responsible for spending EU budgetary resources. However, the Commission also intends to 
draw on the pools of knowledge of other financial institutions and also examine their interest 
and possibilities in becoming risk-sharing partners.  

3.2. 

Project eligibility and monitoring 

During  the  pilot  phase,  general  project  eligibility  would  be  determined  according  to  the 
relevant TEN (TEN-T and TEN-E) and CIP policy guidelines as proposed by the Commission 
and approved by the co-legislators.  

The EIB and the Commission would work on developing a pipeline of projects thus eligible. 
Once a project moves from the drawing board and closer to implementation, the EIB would 
use  its  specialist  expertise  to  appraise  the  project,  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. Project sponsors 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 have to be approved by the EIB in line with standard procedures. The detailed 
selection and structuring tasks could only take place once the project reached an appropriate 
stage  of  maturity  and  projects  would  be  evaluated  in  the  order  that  they  achieve  this  stage. 
The  application  and  implementation  would  have  to  be  compatible  with  EU  policies  and 
comply with all applicable EU law, including in the area of state aid. 

To conclude, the EIB would subsequently accept and monitor the project in accordance with 
the  EIB‘s  standard  policies  and  procedures  including  its  Credit  Risk  Policy  Guidelines  in  a 
manner already agreed in the context of joint EU/EIB instruments such as LGTT or the Risk 
Sharing Financial Facility (RSFF).  

Finally,  the  Commission  would  report  on  the  implementation  of  the  initiative  annually 
following the request laid down in Article 49 of the Interinstitutional Agreement of 17 May 
200622. 

It is clear that only a limited number of projects can be supported in the pilot phase, as the 
budgetary resources available are limited and the remaining time horizon for implementation 
is very short. Therefore, the project selection would be made with the aim of enhancing up to 
10 projects, concentrating on those that are at a relatively developed stage of the bidding and 

22 

OJ C 139, 14.6.2006. 

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financing process or that require refinancing after the construction phase, in one or more of 
the three targeted sectors. In this manner, the experience gained would be maximised, while 
specific projects facing difficulties renewing their short maturity bank loans may be helped.  

From  2014  onwards,  the  Europe  2020  Project  Bond  instrument,  like  other  financial 
instruments targeting infrastructure projects, may be used in all infrastructure policy sectors 
with the appropriate financial characteristics of projects, provided the EU is in a position to 
allocate budgetary funds for this purpose. 

3.3. 

Pricing 

As  part  of  the  due  diligence,  the  EIB  carries  out  analysis  and  provides  advice  on  how  to 
incorporate  the  project  bond  support  into  the  proposed  financial  structure.  This  enables  the 
project  company  to  issue  a  bond  rather  than  rely  on  bank  lending.  The  advantage  or 
disadvantage of one or the other type of financing would depend on interest rates and fees for 
either solution at the time. Normally, a bond would only be used if the financing were cheaper 
than a loan. However, it is conceivable that having financing with the appropriate maturity or 
other aspects of a bond also have an implied value. These real or implied benefits have to be 
priced in order to avoid market distortions through a quasi-subsidy.  

In  practice,  the  EIB  would  base  pricing  on  its  standard  pricing  methodology  and  would 
therefore reflect the risk of the project, the proposed financing package and the quality of the 
sponsor(s). In other words, this may mean that the support may not be offered to all players at 
the  same  price.  However,  it  would  be  made  available  to  all  projects  on  the  same  consistent 
methodological  basis.  Appropriate  pricing  will  ensure  that  the  interests  of  all  actors  are 
appropriately aligned and is fundamental to the success of the scheme. 

Revenue  from  pricing  may  be  earned  upfront,  i.e.  upon  conclusion  of  a  financing,  or  on  an 
annual basis or a combination of the two. It would be used to benefit new projects.  

3.4. 

Risk sharing 

As  lending  or  contingent  lending  at  the  subordinated  level  is  riskier  than  a  standard  senior 
loan, the EIB and the EU would share the risks involved. For the EU, this would take the form 
of  an  upfront  budgetary  contribution  to  cover  its  agreed  share of  the  potential  losses  on  the 
projects supported. The residual loss would be borne by the EIB. 

Current joint EU-EIB instruments use pro-rata risk-sharing where all losses are shared by EU 
and  EIB  on  a  project-by-project  basis  according  to  fixed  percentages.  This  is  also  called 
vertical risk-sharing. A first loss portfolio approach would involve the EU absorbing the first 
losses  up  to  a  certain  pre-agreed  percentage  and  maximum  amount  on  a  portfolio  with  EIB 
absorbing losses thereafter. This is also called horisontal risk-sharing. The project bond pilot 
may  use  either  risk-sharing  without  affecting  the  agreed  budgetary  impact.  The  appropriate 
scheme will depend on how soon a suitable portfolio of projects can be set up. This depends 
in part on the project pipeline and on the conditions of use of three separate budget lines from 
a  Commission  perspective.  For  example,  under  vertical  risk-sharing  the  percentage  of  risk 
assumed by either partner may have to vary to reflect the separate nature of the budget lines 
on  which  the  initiative  may  draw  and  the  different  project  sizes.  The  detailed  terms  and 
conditions  will  therefore  be  agreed  with  EIB  and  laid  down  in  a  cooperation  agreement 
between the two institutions. The Commission and the EIB may review the appropriateness of 
the agreed risk-sharing scheme and percentage and propose changes if necessary. Once again, 

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the budget impact will not change as explained in Section 3.6. However, the multiplier effect 
of the EU contribution will depend on the risk-sharing scheme and percentage chosen. 

It should be noted that 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 assessment 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  50%  the  part  financed  by  the  private  sector 
partner, this will trigger a classification into the general government sector in the cases where 
a  contract  foresees  a  transfer  of  the  infrastructure  to  the  government  in  the  future.  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 bear a majority of the risks in the 
project, the debt would be classed as general government debt.  

3.5. 

Known maximum budgetary impact 

The EU budget contributions would be strictly capped and not create contingent liabilities. All 
the  co-fincanced  instruments  which  are  based  on  risk-sharing  involve  allocations  to 
programmes  which  are  capped  in  size  and  so  none  of  these  instruments  pose  a  risk  to  the 
budget  beyond  the  amounts  initially  committed  under  those  budget  lines.  In  addition,  and 
unlike  for  grants,  there  will  eventually  be  a  reflow  of  funds  to  the  EU  budget  from  fees 
charged to the beneficiary that are not re-used for new projects or other purposes within the 
programming period. 

As the amount available to launch the pilot phase is limited, only a limited number of at most 
10  EU-based  projects  can  be  supported.  In  addition,  the  pilot  phase  is  limited  in  scope  to 
TEN-T,  TEN-E  and  telecommunication  projects,  while  the  post-2013  instrument  could  be 
open  to  infrastructure  financing  in  other  areas  such  as  for  example  social  infrastructure, 
renewables and certain space projects.  

4. 

HOW WILL THE PILOT PHASE RELATE TO THE CONNECTING EUROPE FACILITY? 

The lessons drawn from the pilot phase will serve to optimise the design of the initiative for 
the post-2013 period, when the Project Bond instrument will become an integral part of the 
Connecting Europe Facility.  

For example, there are multiple views on which entities can best monitor the performance of 
the project in terms of technical and financial progress and contractual compliance throughout 
its lifetime and take the small or large decisions required to keep the project on track, while 
ensuring  appropriate  voting  rights  for  investors  when  it  comes  to  the  most  important 
decisions. The pilot phase will also have as a goal to see how this aspect of a project can be 
structured in practice to the satisfaction of all investors and project sponsors. 

In  addition,  it  may  be  necessary  to  adjust  legal  and  financial  structures  depending  on  the 
jurisdiction of a project company or bond, which can only be discovered in practice, since it is 
not  practical  to  go  through  the  theoretical  obstacles  of  27  Member  States.  Other  EU 
regulations are also likely to come into force in the area of capital markets, which may have 
unintended consequences in the area of infrastructure financing. 

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At  the  same  time,  the  transactions  concluded  during  the  pilot  phase  may  form  part  of  the 
future portfolio of the operational phase from 2014.  

Furthermore, the Commission will conduct an independent evaluation of the LGTT in 2012 to 
complement  the  current  internal  review  and  will  also  carry  out  an  in-depth  study  of  the 
financing  models  used  for  different  sectors  and  sub-sectors  if  applicable.  The  review  of  the 
pilot for the project bond instrument is also foreseen in the second half of 2013.  

Finally,  it  is  already  foreseen  that  for  the  post-2013  financial  instruments  supporting  the 
implementation  of  the  Connecting  Europe  Facility,  a  range  of  financial  institutions  will  be 
invited to participate in the instruments as permitted by the Financial Regulation. 

5. 

CONCLUSIONS 

Major efforts are needed to facilitate infrastructure projects' access to private finance and to 
develop alternative ways of debt financing for them. Privately financed infrastructure projects 
in  Europe  rely  heavily  on  bank  lending,  which  is  not  readily  available  at  maturities  which 
would reflect the long-term life-cycle of an infrastructure project. 

In  order  to  improve  projects'  access  to  financing  and  develop  a  vibrant  infrastructure  bond 
market, where private initiatives have made little progress so far, the EU intends to cooperate 
with the EIB in order to create a facility to support the private issuance of project bonds, the 
Europe 2020 Project Bond Initiative. 

Past  experience  has  shown  that  a  pilot  phase  is  needed  for  stakeholders  to  familiarise 
themselves with the novel financing structures and for final changes to optimise the design. 
Even  though  the  scale  and  scope  of  the  pilot  phase  would  be  limited,  it  is  expected  to 
stimulate market behaviour towards an increased acceptance of capital market debt financing 
and thus lay the ground to improve the initiative and implement it as a fully-flegdged proposal 
in  the  next  multiannual  financial  framework.  Therefore  the  Commission  is  proposing  to 
advance this pilot phase to 2012-2013 instead of it taking place during the first two years of 
the Connecting Europe Facility. 

Given  the  short  time  available,  the  Commission  invites  the  Parliament  and  the  Council  to 
adopt the proposal for a pilot phase as speedily as possible.  

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