EU seeks to launch 'project bond' scheme
With public money becoming a scarce resource, the EU is looking to launch its ‘project bond’ scheme, that it hopes will boost long-term private investment to infrastructure, and bring demand to the capital debt markets.
The bond scheme was agreed upon at the recent leaders summit that took place in Brussels between the 1-2 March, after being strongly supported by Commission President José Manuel Barroso.
It was agreed as part of a heads of government statement that "Given the need to stimulate the private financing of key infrastructure projects, work on the pilot phase of the Europe 2020 project bond initiative should be stepped up with a view to reaching agreement by June."
Currently the focus is on the pilot schemes in place for the bonds which are being examined by the EU Council and in the European Parliament. The Danish presidency team is confident that a first reading agreement can be achieved between both institutions by the summer, leading to the EU regulation being approved and the pilot proposals being launched.
The purpose of the pilot scheme is to ensure that the bond project will be fully integrated into the 2014-2020 financial framework, it is also hope that the scheme can launch a new type of securities on to the market, with the pilot scheme facilitating that entrance into the market.
The Commission is proposing to begin the pilot scheme in 2012-13 within the current financial framework, and will be based on the Trans-European Networks (TEN) Regulation, and the Competitiveness and Innovation Framework Programme (CIP). A total of EUR 230 million has been allocated for the pilot phase to go ahead.
Only projects that are deemed to be technically and economically viable will be approved, after being evaluated by the European Investment Bank(EIB). The EIB’s share capital is held by all 27 member states, and is treaty bound to support EU policies.
Financing the initiative once it is up and running will come from the EIB and the Commission on a risk sharing basis, using for example the Loan Guarantee instrument for TEN-Transport projects, that are noted for needing time before becoming a fully operational financial method.
It’s insisted that when the project bond scheme gains access on to the market they will not replace grants for initiatives that are part of the public interest, and grants could even be combined with project bonds in the future.
Also stressed is that the aim of the project bonds is to stimulate the credit rating of private entities that need to raise funds for infrastructure projects they favour, unlike ‘Eurobonds’ that provide spending for member state governments.
Infrastructural parts of the economy such as energy, transport and the digital market are the sectors being targeted by the bond project as the flagship of the Europe 2020 vision. Infrastructure is viewed favourably due to its long term physical structures, and possessing a public value that will receive support.
Any analysis of the value of investments in infrastructure represents a challenging risk, as projects often are a short term gamble at the construction stage, even if they are viewed as viable in the medium and short term.
The EU is looking to attract institutional investors such as insurance and pension funds that have a long term liability structure, selling the project bonds as a long-haul perfect match.
“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.” Remarked an EU spokesperson on competitive matters.
“Currently, infrastructure projects in the EU have 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 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.”
Deloitte’s infrastructure corporate finance team are confident that the bond scheme would represent good value.
Team Director Kevin Magner said: “The issue of bonds at project level for new build infrastructure is one of the most prized goals in infrastructure finance. The European Investment Bank has a very good reputation in the market, so is a good party to bring forward this initiative.”
“We would expect insurance companies to be interested and possibly pension funds to a more limited degree. There is a strong case for refining Solvency II to make the structure of its credit rating and size of holding limits better suited to infrastructure projects, while still meeting the financial stability requirements of the directive.”
“Transport and energy will be of strong interest, although the potential level of demand risk in certain types of transport projects may make them more challenging.”
The EU argues that public money is necessary for the bond project due to the post recession crushing of the monolisers market, that used to provide insurance for financial products increasing credit ratings. Due to regulations after the financial crash the EU thinks its unlikely the monolisers will re-enter the market.
“The monoline insurers have been developing their products in the light of new market conditions. Their new products and the EIB project bond initiative can both play useful roles in the market. The acid test for both is acceptance by bond investors in new project issues,” Deloitte’s Kevin Magner added.
ABOUT THE AUTHOR
Peter Taberner has previously written for Financial News, Investment and Pensions Europe, Utility Week, EGOV Monitor, European Pensions, Suite101.com, PPP Bulletin, Global Pensions Weekly, Tobacco Journal International, IPS and Seeurope.net.
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