Source: EURLEX
Language: en
Format: md

EUROPEAN COMMISSION

Brussels, 19.10.2011
SEC(2011) 1239 final

**COMMISSION STAFF WORKING PAPER**

**EXECUTIVE SUMMARY OF THE IMPACT ASSESSMENT**

_**Accompanying the document**_

**COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN**

**PARLIAMENT, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL**
**COMMITTEE AND THE COMMITTEE OF THE REGIONS**

**A pilot for the Europe 2020 Project Bond Initiative**

**Proposal for a**

**REGULATION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL**

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

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

**1.** **I** **NTRODUCTION**

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

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

In order to fulfill the ambitious goals of the Europe 2020 strategy significant investment is
required. Despite the financial support of the Community budget through grants from the
TEN-budget line, the Structural Funds and Cohesion Fund, the Competitiveness and
Innovation programme as well as the European Investment Bank loans, many TENs and other
infrastructure projects remain incomplete for various reasons. The Commission has identified
the lack of investment as a significant obstacle to the implementation of the goals [1] .

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

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

**2.** **P** **ROBLEM DEFINITION**

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

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

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

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

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

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

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

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

**3.** **A** **NALYSIS OF SUBSIDIARITY**

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

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

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

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

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

**4.** **O** **BJECTIVES OF THE** **EU** **INITIATIVE**

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

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

**5.** **P** **OLICY OPTIONS**

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

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

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

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

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

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

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

**6.** **A** **SSESSMENT OF IMPACTS**

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

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

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

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

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|Option<br>Criteria|Option 1:<br>Grant funding|Option 2:<br>Regulatory incentive|Option 3:<br>Financial instrument +<br>possibly regulation of the<br>capital markets|
|---|---|---|---|
|**Achieved objectives**|**Achieved objectives**|**Achieved objectives**|**Achieved objectives**|
|**TENs**|Partly|Partly|Yes|
|**Capital markets**|No|Maybe|Yes|
|**Impacts of the options**|**Impacts of the options**|**Impacts of the options**|**Impacts of the options**|
|**Economics**<br>**impacts**|- Only small<br>efficiency gains<br>possible<br>- Continuing lack of<br>financing<br>- Relative decrease of<br>the long-term EU<br>growth potential and<br>competitiveness<br>- Higher than<br>necessary<br>infrastructure cost to<br>society|- No cost on budget<br>- Distortion of the decision<br>making leading to the mis-<br>allocation of funds2 <br>- More costly for sponsors,<br>tendering authorities and<br>tax payers, thus<br>less infrastructure being<br>built<br>- Less potential of<br>extension due to barriers of<br>different regulation<br>- Disproportionately large<br>compliance costs for<br>SMEs|- Most final funding attracted<br>at lower cost<br>- Stimulated implementation<br>of large infrastructure projects<br>with national and cross-border<br>benefits<br>- More access to the<br>infrastructure provided at a<br>reasonable price<br>- More diverse financing<br>possibilities created<br>- Positive effect on growth<br>and competitiveness of the EU<br>- Market-driven|
|**Social impacts**|- Grant funding to<br>projects that could be<br>financed in the market<br>- Potential lack of<br>funding for weaker<br>projects<br>- Key EU<br>infrastructure<br>subordinated to<br>national priorities<br>- Disproportionality of<br>cross-border projects<br>reducing cohesion in<br>EU|- Sponsors looking for the<br>highest return projects due<br>to higher costs<br>- Non-implementation of<br>weaker projects<br>- Increasing<br>disproportionality cross-<br>borders and lower<br>cohesion in EU|- Pension and insurance funds<br>securing a higher rate of<br>return for pension policy<br>holders, i.e. citizens<br>- Greater market integrity<br>leading to better services,<br>higher investor confidence<br>and greater participation in<br>financial markets<br>- More jobs created by<br>stimulating new infrastructure<br>and economic growth|
|**Environmental**<br>**impacts**|- No particular<br>environmental impact|- Higher costs leading to<br>less infrastructure built<br>with reduced potential<br>(positive and negative)<br>effects|- Acceleration or enabling of<br>financing for projects with<br>environmental impacts that<br>would not otherwise take<br>place<br>- Implementation of the<br>Europe 2020 strategy with<br>positive environmental impact|

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

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The table above shows that:

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

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

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

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

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|Criteria<br>Option|Impact on<br>stakeholders|Effectiveness|Efficiency|
|---|---|---|---|
|**Objective 1: Stimulating investment in infrastructure, especially TEN-related**|**Objective 1: Stimulating investment in infrastructure, especially TEN-related**|**Objective 1: Stimulating investment in infrastructure, especially TEN-related**|**Objective 1: Stimulating investment in infrastructure, especially TEN-related**|
|**Option 1:**<br>**Grants**|0|0|0|
|**Option 2:**<br>**Regulatory incentives**|(--) some<br>administrative<br>burden for both<br>companies and<br>investors, but <br>(0) unchanged for<br>Member States in<br>case no additional<br>monitoring<br>required|(+) partially enables<br>implementation of some<br>TENs <br>(--) could create<br>conflicts between<br>regulation in each sector<br>and requirement for<br>more capital|(0) does not increase cost<br>on budget <br>(---) increases cost to<br>almost all types of<br>stakeholders<br>(--) would affect all<br>projects and financiers, not<br>only those using bonds|
|**Option 3:**<br>**Financial instrument**|(-) Lower<br>administrative<br>burden for<br>companies and<br>Member States, but<br>(---) higher for<br>investors<br>(--)requires<br>investor education|(++) facilitates the<br>implementation of TENs <br>(++) encourages single<br>market<br>(+++) stimulates<br>competition between<br>bank and bond markets<br>(---)depends on other<br>conditions such as<br>market acceptance,<br>procurement practicies,<br>regulatory framework<br>and perceived<br>uncertainties by<br>investors|(+) budget contributions<br>will be strictly capped <br>(+++) lower infrastructure<br>investment cost expected<br>over the project lifetime|
|**Objective 2: Establishing debt capital markets as a new source of financing**|**Objective 2: Establishing debt capital markets as a new source of financing**|**Objective 2: Establishing debt capital markets as a new source of financing**|**Objective 2: Establishing debt capital markets as a new source of financing**|
|**Option 1:**<br>**Grants**|(---) no incentive<br>available for<br>investors and<br>projects|(---)|(---) <br>|
|**Option 2:**<br>**Regulatory incentives**|(0) does not create<br>new investment<br>tool<br>(+) some private<br>initiatives as a<br>niche activity<br>might evolve|(+) may establish debt<br>capital markets as<br>financing source <br>(+) may attract some<br>funding|(---) higher financing costs <br>(---) unclear wether it will<br>attract additional funding,<br>in which case the<br>additional cost would have<br>been unnecessary|
|**Option 3:**<br>**Financial instrument**|(++) widens choice<br>of financing<br>instruments<br>(--) promotion and<br>education required<br>for a novel EU<br>instrument|(+++) stimulates new<br>sources of financing and<br>(++) possibly creates<br>new asset class <br>(+++) attracts most of<br>funding<br>(--) factors such as<br>controlling or<br>monitoring creditor|(++) lower financing cost<br>expected<br>(-) uncertainties remain as<br>regards additional costs<br>such as rating or listing|

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

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

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

**7.** **M** **ONITORING AND EVALUATION**

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

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

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

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