REPORT FROM THE COMMISSION INTERIM REPORT ON THE PILOT PHASE OF THE EUROPE 2020 PROJECT BOND INITIATIVE
Date: 2013-12-19
Institutions: European Commission
Subjects: EIB loan, energy grid, financing method, issue of securities, private investment, telecommunications industry, trans-European network, transport network

EUROPEAN 
COMMISSION 

Brussels, 19.12.2013  
COM(2013) 929 final 

REPORT FROM THE COMMISSION 

INTERIM REPORT ON THE PILOT PHASE OF THE EUROPE 2020 PROJECT 
BOND INITIATIVE 

EN 

   EN 

 
 
 
 
  
 
INTERIM REPORT ON THE PILOT PHASE OF THE EUROPE 2020 PROJECT 
BOND INITIATIVE 

1.  BACKGROUND 

This  Interim  Report  (hereafter  "the  report")  to  the  European  Parliament  and  the  Council  is 
required by Regulation (EU) N° 670/2012 to  evaluate the  progress  of  the  pilot  phase  of the 
Europe 2020 Project Bond Initiative (PBI). 

The  PBI  is  a  risk-sharing  instrument  created  by  the  European  Commission  (EC)  and  the 
European  Investment  Bank  (EIB).  The  aim  is  to  enable  project  companies  to  issue  project 
bonds  that  are  attractive  to  debt  capital  market  investors  in  the  sectors  of  trans-European 
networks  in  transport  (TEN-T)  and  energy  (TEN-E)  as  well  as  telecommunication  and 
broadband networks. 

Due to the significant lead time needed to launch an innovative instrument of such scale and 
to  prepare,  procure  and  close  new  infrastructure  projects,  the  PBI  pilot  was  set  up  with  EU 
budget  of  EUR  230  million1  to  allow  stakeholders  to  familiarise  themselves  with  the  new 
instrument  on  the  basis  of  concrete  transactions  during  an  initial  pilot  phase.  In  the  pilot 
phase2,  which  started  on  7  November  2012,  projects  may  be  approved  by  the  EIB  until  31 
December  2014  and  must  reach  financial  close  by  31  December  2016.  The  full  roll-out  is 
foreseen within the Connecting Europe Facility (CEF) forming part of the 2014-2020 Multi-
annual Financial Framework (MFF). 

This  report,  prepared  in  cooperation  with  the  EIB,  covers  the  first  12  month  period  from 
November  2012  to  November  2013  and  shows  the  progress  made  on  project  approval  and 
financing.  The  report  analyses  lessons  learnt  during  the  pilot  phase  and  highlights  possible 
synergies  and  economies  of  scale  that  could  be  achieved  within  the  framework  of  the  CEF. 
The  CEF  role  could  be  maximized  by  creating  synergies  through  the  combination  of  grants 
and financial instruments, such as the PBI, Loan Guarantee for TEN-Transport (LGTT) and 
programme support actions. 

The report is supported by the draft results of an independent external assessment, which aims 
to  evaluate  the  achievements  of  the  PBI  in  relation  to  policy  objectives  and  capital  market 
financing  in  a  broader  context  and  which  will be  completed  in  Q1  2014.  The  pilot  phase  is 
also subject to an independent evaluation in 2015, which will provide a fuller picture on the 
effectiveness and efficiency of the use of EU funds. 

2.  POLICY CONTEXT 

The  importance  of  infrastructure  investment  for  future  growth  potential  and  job  creation 
remains unchallenged. Economically and financially viable infrastructure projects can have a 
significant  countercyclical  effect,  improve  productivity  and  are  conducive  to  creating 

1 TEN-T EUR 200 million, TEN-E EUR 10 million, ICT EUR 20 million 
2 Regulation 670/2012 OJ L 204/1 of 31/07/2012 

2 

 
 
                                                            
employment.  At  the  same  time,  infrastructure  aimed  at  improving  market  access,  underpins 
Europe's competitiveness.  

To meet the challenges of implementing the Europe 2020 strategy, Europe needs substantial 
infrastructure  investment  volume  and  diversity  of  funding  models.  Based  on  the  assessed 
investment needs of Member States, the EC estimated that EUR 1 trillion would be required 
in the sectors of TEN-T, TEN-E and ICT from 2011 until 2020. 

The  consolidation  of  EU  Member  States'  budgets  has  continued  in  recent  years  and  public 
infrastructure investment and project pipeline preparation have been affected. The EU budget 
under the CEF will help to finance the missing links to connect energy and transport networks 
and  the  roll  out  of  high  speed  broadband  infrastructure  across  the  EU3.  However,  private 
sector participation in the long term financing of such projects remains paramount. 

The PBI is only one of the policy actions taken by EC to tackle the above challenges. A wider 
impact is expected by the follow up to the Green Paper on the Long-Term Financing of the 
European Economy planned for Q1 2014, the reforms of financial market regulation, as well 
as the overall macroeconomic environment and regulatory stability at sector level. 

In this context, the PBI has been successful in playing a catalytic role in re-invigorating the 
infrastructure  investment  market.  In  2013,  a  number  of  project  bond  financing  solutions  re-
emerged on the market, without support of the EU budget. The initiative also fits well with 
the international debate at G20 and OECD level to make infrastructure a separate asset class 
and  with  the  high-level  expert  group  established  by  the  Council  that  finalised  a  report  on 
SMEs and infrastructure financing in November 2013. 

3.  MARKET DEVELOPMENTS SINCE 2011 

Infrastructure investment in Europe has declined since 2007 due to a decrease in public and 
private sector investment in this area. In the public sector this has been driven by budgetary 
constraints  which  entailed  revisions  of  future  spending  priorities  and  infrastructure  plans. 
Whereas the private sector was expected to complement public sector investment, economic 
and financial uncertainty has actually led project promoters to put projects on hold in sectors 
such  as  energy  and  ICT/broadband,  where  investment  needs  are  large  in  order  to  upgrade 
networks and where private sector financing dominates.  

As  shown  in  figure  1,  private  sector  financing  of  infrastructure  in  the  EU,  using  project 
finance for PPP projects as a proxy, has not yet recovered to pre-crisis levels of EUR 25-30 
billion  which  was  still  insufficient  for  EU  infrastructure  needs.  This  is  partly  due  to  the 
reduction  of  activity  of  monoline  insurers.  After  a  partial  recovery  in  2010  and  2011,  the 
value  of  PPP  transactions  reaching  financial  close  in  Europe  in  2012  totalled  EUR  11.7 
billion,  a  35%  drop  compared  to  2011  (EUR  17.9  billion)  and  the  lowest  value  since  2003. 

3 In the case of projects of economic nature supported via State Aid, Member States are under the obligation to ensure that 
aid plans are either notified in advance or are eligible under the General Block Exemption regulation. 

3 

 
 
                                                            
This  decline  in  PPP  projects  and  project  financing  volumes  reflects  firstly  a  limited  project 
pipeline  and  project  preparation,  and  secondly  the  lack  of  long  term  financing  in  certain 
sectors and countries affected by the financial crisis. 

Source:  EPEC 

Looking at the broader market by CEF sector, infrastructure financing saw a decline to EUR 
18  billion  in  2012  from  EUR  28  billion  in  2011  and  fewer  transactions.  EUR 14.1  billion 
worth of projects were from the transport sector versus EUR 3.3bn for energy networks and 
EUR 0.5 billion from the telecom sector. 

Graph 2 

Project finance volumes and number of transactions in the 
EU28, by CEF sector, all types of projects, ('07-'12)

In EURbn

59

42.1

7.2
3.5

31.3

65

20.6
0.1
2.5

17.9

32

15.2
0.2

0.2

14.8

49

25.0
2.6
4.5

17.9

39

28.0
0.5
9.8

17.7

31

18.0
0.5
3.3

14.1

2007

2008

2009

2010

2011

Transport

Energy networks

Telecom

2012
Nb of projects

Source: Infrastructure Journal database, converted to EUR using average FX rate

4 

 
 
 
 
In  the  first  half  of  2013,  the  activity  in  the  EU28  in  the  CEF  sectors  increased  by  +33%  in 
terms  of  volume,  from  EUR  9.2  billion  in  H1  2012  to  EUR  12.2  billion  in  H1  2013.  The 
number of transactions slightly decreased (12 versus 15) and  the average transaction size in 
2013, EUR 1.0bn, was 66% higher than the EUR 0.6bn registered in 2012. This is mainly due 
to several large refinancing transactions occurring in 2013 (Open Grid Europe, Brebemi Toll 
Road).  

Banks continue to review their business models. Some are willing to lend to projects again, 
albeit at shorter maturities than before the crisis, others are developing capacities to originate 
and place project finance deals, in response to the increased role anticipated to be played by 
institutional investors. These developments are interpreted by some as a sign of the recovery 
of bank financing. However our estimates are that banks will not deliver the volume of debt to 
meet EU infrastructure needs. 

There is a real risk that post financial crisis infrastructure spending as a means of delivering 
future  growth  and  jobs  will  be  constrained,  unless  alternative  sources  of  funding  can  be 
developed. In this regard a number of insurance companies and infrastructure debt funds have 
emerged  that  are  able  to  invest  in  senior  or  subordinated  debt  in  primary  and  secondary 
transactions.  Some  insurance  companies  have  set  up  in-house  teams  dedicated  to 
infrastructure  financing  to  strengthen  their  presence  in  the  market  while  others  act  through 
managed  accounts.  Several  have  closed  first  transactions,  although  the  majority  have  been 
modestly sized in relatively straight-forward UK social infrastructure projects (e.g. university 
accommodation)  and  have  been  mainly  private  placements  rather  than  public  bonds.  While 
several  smaller  transactions  at  local  level  are  greenfield  investments,  larger  operations  at 
national level are often re-financings and brownfield investments. 

In conclusion, while traditional bank financing will continue to be important, there is potential 
for  these  and  other  new  market  actors  to  promote  private  sector  financing  of  infrastructure 
projects via debt capital markets. This is a key objective of the PBI. 

4.  OBJECTIVES OF THE PROJECT BOND INITIATIVE 

The PBI aims to provide a concrete tool to contribute to the post-crisis economic recovery. Its 
main objectives are two-fold:  

- 

- 

to  stimulate  investment  in  projects  of  European  interest  in  the  trans-European 
transport, energy and broadband sectors with a clear EU added value, thereby helping 
investment to grow to pre-crisis levels, and 

to facilitate greater involvement of institutional investors in the long-term debt capital 
market financing of economically viable projects in these sectors.  

The PBI intends to complement existing sources of project financing and to provide a credible 
alternative through other sources of debt funding (bank and emerging debt funds). This would 
not  only  broaden  available  financing  sources,  but  also  address  sub-optimal  investment 

5 

 
 
situations and improve the conditions of financing. The ultimate aim of the PBI is to broaden 
the appeal of infrastructure to private sector investors. 

The Project Bond Credit Enhancement (PBCE) provided by the EIB through the PBI aims to 
bridge  the  gap  between  the  typically  low  investment  grade  ratings  of  privately  financed 
infrastructure  projects  and  the  higher  target  ratings  of  investors  .  This  would  broaden 
financing sources and should help support the tenor and reduce costs of financing. The PBCE 
can be provided in the form of: 

-  a funded facility, which is a subordinated debt tranche (i.e. a direct loan to the project 

that would be repaid only after the senior bonds have been serviced), or  

-  an unfunded facility, which is a contingent credit line that, once claimed, converts into 

a subordinated loan.   

The  PBCE  targets  bonds  of  single  A-  investment  grade  quality  so  that  most  institutional 
investors could purchase them. Whereas a few institutional investors are now ready to absorb 
more risk through the acquisition of mezzanine bond tranches, the objectives of PBI to bring a 
critical  mass  of  investors  in  the  market,  to  increase  standardisation  and  to  contribute  to  the 
development of a more mature market are still valid. 

The  PBCE  addresses  the  specific  risks  of  projects  during  the  construction  and  operating 
phases,  providing  additional  liquidity  to  improve  the  financial  profile  in  response  to 
unforeseen  events.  As  the  PBCE  claim  is  senior  to  equity  investors,  but  junior  to  debt 
investors, it improves the bonds' credit rating.  

The  EU  contribution  to  the  PB  Instrument  serves  to  partly  absorb  the  EIB's  additional  risk 
from engaging in riskier-than-normal transactions by covering the first losses on the portfolio 
of  projects  up  to  a  maximum.  This  enables  EIB  to  support  more  operations  than  otherwise 
possible.  Projects  must  comply  with  the  Union  guidelines  establishing  eligibility  criteria  in 
each  of  the  three  sectors,  must  generate  stable  and  sufficiently  high  cash-flows,  and  be 
economically sound and technologically feasible.   

5.  ACHIEVEMENTS 

The PBI pilot phase commenced 12 months ago and allows project approval by the EIB Board 
until the end of 2014 and financial close until the end of 2016.  

To  date,  eight  energy  and  transport  projects  eligible  for  PBCE  within  several  EU  Member 
States  have  been  approved  by  the  EIB  Board.  Furthermore,  the  EIB  has  demonstrated  the 
feasibility of Project Bonds by providing credit enhancement to bonds in respect of two of the 
approved  projects  (only  one  of  which  was  supported  by  the  EU  due  to  budget  constraints), 
with an additional one expected to be signed soon.   

6 

 
 
5.1.  Approved projects by the EIB 

The projects range from motorways in several Member States, to grid connections to offshore 
wind  farms  in  Germany  and  the  UK  and  gas  storage  facilities  in  Italy  and  Spain.  In 
broadband, the EIB is proactively working on an executable project pipeline. 

Table 1: 
Policy 

Project 

TEN-T 
TEN-T 
TEN-T 
TEN-E 

TEN-E 
TEN-E 
TEN-T 
TEN-E 

Motorway 
Motorway 
Motorway 
Grid  connections 
offshore wind farms 
Gas Storage 
Gas Storage (1) 
Motorway 
Grid  connections 
offshore wind farms 

to  several 

to  several 

Total Approved 

(1) subject to EU funding being available 

Country 

Belgium 
Germany 
UK 
UK 

Spain 
Italy 
Slovakia 
Germany 

Expected  size  of  credit 
facility 
enhancement 
(EUR million) 

150 
120 
200 
150 

200 
200 
200 
170 

1,390 

Further projects approved by the EIB Board by the end of 2014 may also be added to the list.  

The pilot phase can provide credit enhancement facilities of approximately three times the EU 
budget contribution of EUR 230 million, i.e. around EUR 700 million, ultimately supporting 
senior debt volumes of 15-20 times the EU budget contribution. 

The  subordinated  facilities  for  the  eight  approved  projects  exceed  EUR  700  million,  but  a 
lower use will likely result as a project bond with PBCE is typically one of several financing 
options,  which  the  project  company  and/or  granting  authority  can  choose.  For  example,  the 
motorways in the UK and in Slovakia will be financed without PBCE as, for project specific 
reasons, the rating of the projects was sufficient to raise funds in the bond market without the 
higher  ratings  provided  by  PBCE.  Nonetheless,  the  existence  of  PBCE  as  another  funding 
option is seen to have helped maintain pricing tension on these two projects, ensuring that the 
final outcome represents value for money for the respective procuring authority.   

5.2.  Project Bonds supported by the EIB 

The EIB has supported the issue of a EUR 1.4 billion bond for the Castor gas storage facility4 
without the use of EU budget, as the amount required for the EC contribution exceeded the 
available budget.   

4 The project was subject to an Environmental Impact Assessment approved by the Spanish competent authority in 2009. 
Following seismic activity in the region in September 2013, the Spanish Authorities decided to perform additional technical 
studies on the impact of the project. 

7 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                            
The first project bond  
The  first  EUR  1.4  billion  project  bond  due  December  2034  was  launched  in  July  2013  with  a  coupon  of  5.756  at  a 
spread of 100 basis points over Spanish government bonds. The bonds financed the construction and operation of an 
underground  gas  storage  and  associated  facilities  off  the  northern  Spanish  Mediterranean  coast.  Standard  &  Poor's 
issued a 'BBB' rating to the bonds. 

There were 30 investors in the bond with insurers and pension funds taking over 60% of the issue, the remainder being 
agencies, fund managers and banks (only 4%). The investors were geographically diversified with approximately equal 
shares going to Germany, France, Spain, Italy, UK and Luxembourg. 

The bond was issued by Watercraft Capital, an SPV based in Luxembourg, which on-lends the proceeds to the project 
company to re-finance its outstanding shorter-dated loans which financed the construction of the gas storage facility. 
The project company will thus have financing more suited to its 30-year concession.   

The PBI also supported the issue of a GBP305 million bond for the Greater Gabbard OFTO 
project  in  the  UK,  which  involves  the  electricity  transmission  assets  linking  500MW  of 
offshore  wind  farms  to  the  UK  onshore  grid.  The  project  is  the  first  OFTO  project  to  be 
funded through the capital markets. The bond benefitted from an unfunded PBCE of around 
GBP46  million  and  as  a  result  received  a  rating  of  A3  from  the  Moodys,  pricing  at  a  very 
competitive 125 bps over gilts.  The PBCE was provided with the benefit of EU budget and 
fully  utilised  the  EUR  10  million  EU  budget  available  for  energy  projects  during  the  Pilot 
Phase. 

Greater Gabbard OFTO reaches financial close 

The 504MW Greater Gabbard offshore transmission project (OFTO) reached financial close on 27 November 2013. The 
OFTO Licence, granted by Ofgem, the UK regulator of electricity and gas markets, entitles the project company to own 
and operate the assets for a period of 20 years and in return receive availability-based revenues. The value of the fully 
operational asset is roughly GBP 350 million to be financed by the project company in part through the issue of a project 
bond. 

A GBP 305m public bond, which pays a fixed coupon of 4.137% and matures on 29 November 2032, has been issued to 
support the financing of the deal.  

Moody’s assigned a provisional A3 rating to the issuance, with a stable outlook. The agency said that the rating reflected 
the credit enhancement provided by the PBI. A total of GBP 46m of equity has been provided by the project’s sponsors. 

This is the first round 1 OFTO of sufficient size to have attracted the interest of the capital markets. Such funding has 
long-been  viewed  as  a  good  fit  for  the  OFTO  sector  as  the  tariff  paid  to  the  operator  is  RPI-linked  and  90%  of  the 
revenue is guaranteed.  

These two transactions are expected to be followed by the A11 motorway project in Belgium 
by year-end 2013 or early 2014.  This transaction will also be supported by the EU budget and 
will provide a further benchmark in terms of investor potential and pricing levels. 

The A11 Brugge PPP is a new motorway linking the harbour of Zeebrugge with the E40 to 
Ghent and the E34 to Antwerp, which will improve the connection of the port to the city of 
Brugge and tourist connections to the Belgian coast, in particular Knokke and Blankenberge. 
Currently, the A11 financing structure is being finalised with a targeted closing end of 2013 
or  early  2014  with  signature  contingent  on  finalisation  of  negotiations  and  approval  by  the 
contracting authorities. The A11 project would be the first transport TEN-T project under the 
PBI  and  the  first  ‘greenfield’  transaction.  It  is  expected,  that  the  EUR  575  million  bonds 

8 

 
 
 
 
 
 
 
 
 
would be supported by around EUR 114 m of unfunded PBCE in the form of a subordinated 
letter of credit issued by the EIB.  

5.3.  Other issuance of infrastructure bonds 

The increased focus on and support for capital market financing of infrastructure projects has 
also led to a significant increase in other infrastructure bond issues compared to 2007 - 2012. 
However  between  2007  and  2013,  in  terms  of  volumes,  more  than  90%  of  bonds  issued  in 
sectors  covered  by  the  CEF  were  re-financings,  6%  greenfield  investments  and  3% 
acquisitions. 

Graph 3 

Bond as % of  project debt financing, in CEF sectors in the EU28
('00-'13*)

25%

11%

8%

22%

4%

4%

1%

1%

1%

1%

0%

0%

4%

4%

'01

'00
Source: Dealogic ProjectWare  database, Note: * Eight months from Jan to Aug 2013

'04

'05

'02

'03

'07

'08

'10

'06

'09

'11

'12

'13*

4%

'00-'12
avg

In addition to the EUR 1.4 billion Castor bond, enhanced by EIB, 2013 saw the completion of 
a number of significant refinancing deals in the bond market including: 

•  The  refinancing  of  High  Speed  1,  the  UK  high  speed  rail  project  with  a  GBP  760 
million 25-year bond, as part of a GBP 1.55 billion senior debt package. It attained an 
A- rating with the UK Government effectively underwriting availability payments to 
High Speed 1 through a  domestic underpinning agreement; 

• 

• 

 Open Grid successfully refinanced EUR 2.7  billion  of  debt  with  EUR  1.2  billion  of 
loan facilities and EUR 1.5 billion of A- rated bonds with tenors of seven, 10 and 12 
years.   

In  Slovakia,  the  refinancing  of  approximately  EUR  1.2  bn  of  debt  with  long  dated 
bonds rated BBB+ and a maturity in 2039. 

These  transactions  do  demonstrate  the  depth  and  appetite  of  European  capital  markets  for 
straightforward refinancing of infrastructure projects.    

In addition, 2013 has seen a number of innovative debt capital market solutions, which have 
sought to provide funding for greenfield projects from institutional investors in various ways. 
The majority are in the social infrastructure sectors, e.g. student accommodation, where 
projects are smaller and less risky. 

9 

 
 
 
 
Project 
L2/A507 ring road 

Rating 
Baa3 

Tenor 
28  years  and  30 
years  for  tranche  I 
and 
II, 
tranche 
respectively 

Nominal (million) 
EUR 79 (tranche I) 
EUR 86 (tranche II) 

student 

Holyrood 
accommodation, UK 
Pendleton 
Housing 

Together 

AA-/A2 

n/a 

35  years  fixed  & 
index-linked 
29 years 

GBP 63  

GBP 71.7 (A tranche) 
GBP 10.9 ( B tranche) 

Zaanstad prison 

n/a 

28 years 

EUR72 

Features 
Over 65% of financing provided by 
the  French  Government, 
the 
remaining  EUR 
165  million 
purchased  by  an  insurance  group 
with tranche II benefitting from the 
Dailly  (i.e.  a  guarantee  from  the 
French State) 
Underlying  bond  rated  BBB/Baa3 
and enhanced by Assured Guaranty 
Partial wrap bond financing (senior 
class  A  bond  benefits  from  credit 
enhancement from the subordinated 
class B tranche) 
The 
credit 
enhanced  by  the  subordinated  B 
loan tranche   

senior  notes 

are 

A- 

multiple-site 

ULiving  Hertfordshire, 
UK 
UPP, 
student 
accommodation, UK 
Sustainable 
Communities for Leeds 
Sources: Infrastructure Journal, Standard & Poors 

AA-/A2 

A- 

19 years 

years 

index-

41 
linked 
27  yrs  fixed,  34  yrs 
index-linked 

GBP 144  

GBP 382 

GBP 102 

income 

Rental 
from  multiple 
universities with risk-reducing cash 
pooling 
 Underlying  bond  enhanced  by 
Assured Guaranty 

It  is  noteworthy  that  the  L2,  Holyrood,  Pendleton,  Zaanstad,  and  Leeds  projects  all  employ 
some form of credit enhancement. Two transactions mark the return to the market of a bond 
insurer  for  these  medium-size  transactions.  The  largest  transaction  overall,  the  UPP  student 
accommodation,  is  for  GBP  382  million  and  is  based  on  a  portfolio  of  projects.  In  several 
cases a single institutional investor bought a large share of the transaction. 

All  but  two  of  these  transactions  were  in  the  UK  where  capital  markets  financing  of  PPP 
using  monoline  guarantees  was  common.  Across  continental  Europe,  appetite  for  bond-
financed  solutions  is  just  emerging  and  procuring  authorities  are  adapting  slowly  to  new 
financing  possibilities.  Procurement  practices  for  committed  finance  at  bid  stage  are  still 
common,  which  limits  bond  solutions  to  private  placements  and  largely  precludes  publicly 
issued bonds where increased volume and improved pricing could otherwise be available. 

5.4.  Summary of achievements 

In the first year of operation, eight projects have been approved by the EIB Board as potential 
beneficiaries of PBCE and further projects are being advanced. Two projects have been credit 
enhanced  by  EIB  and  an  additional  project  is  expected  to  be  signed  by  early  2014.  One  of 
these three projects was closed without support from the EU budget. 

The active promotion by the EC and the EIB of Project Bonds for infrastructure financing has 
been recognised and  appreciated by  the market and has supported the development of other 
market solutions through the catalytic effect envisaged. It confirms that Europe is making real 
progress towards creating a project bond market. In particular, the PBI has provided a wider 
range  of  investors  with  access  to  infrastructure  assets  as  evidenced  by  the  transactions 
completed already. Even where PBI has not ultimately been selected as the preferred funding 
10 

 
 
 
 
 
option, it has provided competitive pressure reducing overall financing costs for a number of 
projects. 

However,  the  market  has  so  far  focused  on  smaller  sized  local  infrastructure  projects  in  the 
UK  with  limited  activity  in  support  of  larger  projects  at  national  level.  In  particular,  the 
conditions for TEN greenfield projects remain difficult. Member States should speed up the 
identification and preparation of infrastructure projects in order to bring them to the market. 

6.  REQUIRED IMPROVEMENTS FOR THE PBI 

6.1.  Need for stronger and more mature project pipeline  

The demand for infrastructure investment in Europe is evident. However, there is a growing 
concern that the current projects in terms of number and maturity are not sufficient to meet 
such demand5. 

For  projects  and  sectors  which  crucially  rely  on  public  sector  involvement,  governments 
across  Europe  have  an  important  role  to  play  in  committing  to  unlock  new  infrastructure 
investment and in addressing uncertainty over the future supply or pipeline of infrastructure 
projects.  Without  a  proper  pipeline  of  (suitable)  deals,  long  term  investment  cannot  be 
increased. Building investor confidence in transaction flow, so that investors remain  willing 
to  both  commit  their  funds  and  invest  in  building  the  new  capabilities  required  to  analyse 
finance for infrastructure projects necessitates a greater degree of transparency in the pipeline 
of  projects  at  the  national  and  supranational  levels,  as  well  as  long-term  planning  and 
commitment on the part of tendering authorities. 

In this context, sudden changes in the regulatory approach for specific sectors still represent a 
major  challenge  for  the  effective  implementation  of  project  pipelines.  Across  sectors  in 
general, factors such as lack of standardisation, lack of certainty in pricing of capital market 
issues as well as the perceived novelty of such deals in the market at the moment, are seen as 
challenges  being  faced  by  bond  solutions.  Here  the  PBI  can  also  demonstrate  its  beneficial 
role. 

6.2.  Use of the EU budget 

In light of the risk-sharing mechanism set up between the Commission and EIB, as described 
in  Section  4,  the  use  of  the  EU  budget  would  become  more  effective  if  the  first  loss 
provisioning provided by the EU budget were shared among all projects in the three sectors 
covered by the PBI. There are clear limits to risk diversification and hence leverage with three 
separate first loss provisions underpinning three sectoral portfolios, as it is currently the case. 
Moreover, the limited leverage on smaller portfolios necessitates finding projects of the right 
size for the given amount of budget available. For example EIB funded the Castor project on 
its own balance sheet as the contribution from the TEN-E budget was insufficient to cover the 
EU contribution required. 

5 Source: Infrastructure Journal, 17/11/2013 

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Essentially,  the  EU  budget  and  risk-sharing  instruments  can  achieve  more  leverage  through 
diversification.  Diversification  increases  with  the  number  of  projects  in  the  portfolio  while 
sectoral  diversity  of  projects  decreases  their  correlation.  Consequently,  a  larger  portfolio 
which also spans across different sectors yields greater diversification benefits. On the other 
hand, the management of risks within a portfolio of projects presenting different risk profiles 
may increase complexity whilst still being manageable by the EIB. In order to maximise the 
benefits  from  diversification,  the  CEF  could  only  have  a  single  portfolio  of  projects  in  full 
compliance with the CEF Regulation and the Financial Regulation on EU spending. This will 
facilitate the financing of projects regardless of size or timing.  

This  same  mechanism  can  be  extended  to  the  existing  LGTT  and  PBI  portfolios,  thereby 
reaping  the  full  benefit  of  economies  of  scale.  By  merging  these  portfolios  with  the  CEF 
portfolio, a seed portfolio would be created which could reduce the relative contributions of 
the EU budget to new projects sooner than would otherwise be the case. The external study 
commissioned  by  the  EC  referred  to  in  the  introduction  is  expected  to  point  towards  this 
conclusion. 

7.  CONCLUSIONS 

As  evidenced  by  the  issuance  of  2  project  bonds  with  credit  enhancement  after  only  12 
months, the initiative is fulfilling expectations and is a success in terms of providing financing 
to projects.  

Market  interest  in  and  feedback  on  the  initiative  have  been  positive  and  this  has  been 
instrumental in terms of focusing investors on bond solutions. In terms of developing project 
bonds,  more  work  is  needed  to  develop  an  active  bond  market,  including  the  issuance  of 
further bonds so that a sufficient stock is outstanding and benchmarks for future issuance can 
more  easily  be  defined.  This  will  make  it  easier  for  investors  and  procuring  authorities  to 
assess likely funding levels and make the pricing of bond solutions more predictable, perhaps 
enabling  procuring  authorities  to  move  away  from  requiring  fully  committed  funding. 
Furthermore, a liquid project bond market requires better prepared and more mature projects. 
Governments  should  thus  commit  to  long  term  planning  so  as  to  ensure  a  more  stable  and 
transparent  pipeline  of  infrastructure  projects.  In  this  respect,  CEF  foresees  technical 
assistance  at  institutional  and  project  level  to  help  prepare  future  pipelines  of  project  of 
common interest in order to support Member States and the private sector. There is also scope 
to  expand  the  PBI  to  other  policy  areas  where  the  financing  of  smaller  local  infrastructure 
projects could be pooled at national or regional level. 

The CEF role could potentially be maximized if a merger of the three sector portfolios (i.e. 
transport, energy and broadband), as referred to in Article 14(3) of the upcoming Regulation 
establishing the CEF, were carried out. With a view to increasing the efficiency and leverage 
effect  of  EU  budget  spending,  this  opportunity  could  be  used  to  create  a  shared  first  loss 
provisioning system to benefit from the inherent diversification of the three sectors wherein 
the pre-existing instruments could be used as a seed portfolio. 

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