At the end of October, the European Investment Bank and the European Commission have authorised the cooperation agreement on the Pilot Phase of the “Bond Initiative”, through which the infrastructure projects will be financed until 2020. This concept aims at revitalising and extending the capital markets for financing the major European projects in the transport, the energy and information technology sector, especially since the EU objectives for 2020, on the execution of the transport, IT and energy networks require investments amounting to EUR 2 Trillion.
The scope of the pilot phase initiated in the summer of 2012 is to test the project bond concept during the remaining period of the current financial framework 2007-2013, before the next financial framework and the implementation of the “Connecting Europe Facility”. The pilot is implemented by EIB, by means of two purposes related to the stimulation of EU’s strategic infrastructure investments and to the debt establishment for the capital markets as an additional source of financing. Thus, the testing phase will be funded by means of re-deployment of unused EUR 230 Million (out of which EUR 210 Million for the transport and energy networks). This budget should enable the EIB to provide financing to infrastructure projects worth more than EUR 4 Billion (across the concerned sectors). “We are providing solutions to support long-term investment and to put the EU back on the road to sustainable growth. The project bond initiative is a key element in the Compact for Growth. It is an innovative means of unlocking private investment in infrastructure, enhancing competitiveness and helping to boost growth and job creation. Every Euro channelled from the EU budget into the Project Bond Initiative could generate about 20 Euros of infrastructure investment”, said European Commission Vice President Olli Rehn.
In practice, this project aims at attracting institutional investors with stable financial potential, the objective being to support the allocation of funds for projects, as financing form for the credit completion, not to replace other financing sources (such as subsidies), and not to intervene in the previous financing phases (such as feasibility studies), evaluation or procurement, where subsidies are used on a large scale. The viable infrastructure projects which are eligible for financing by the TEN-T policies may benefit from this initiative.
For instance, an infrastructure project, such as the rehabilitation/modernisation of a railway line, is planned by a group of companies (sponsors) and tendered by public authorities. The sponsors create a project company to raise the financing, construct and operate the railway network for a period agreed with the public authorities. The sponsors also provide own funds to the project company in the form of equity and shareholder loans. The remaining financing is raised by the project company in the form of debt, traditionally in the form of a bank loan. Instead of using traditional bank lending, it could raise the senior debt through project bond issues. Thus, the investors would buy the bonds if an investment grade credit rating could be achieved.
The initiative is elaborated to allow infrastructure project promoters to attract private additional financing through institutional investors, insurance companies and other funds. Bonds will be issued by project companies, not by EIB or member states. But, the EIB would provide a loan or guarantee (EIB facility) to the project company in order to raise the likelihood of timely repayment of principal and interest to bond holders and will establish the construction, financing and operation of the infrastructure project. The facility will cover all project-related risks, as well as any other financing deficit from the construction period. This concept on infrastructure project financing will determine the increase of the financing availability allocated by the private sector.
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