The Europe 2020 Project Bond Initiative - Innovative infrastructure financing
The Project Bond initiative is a joint initiative by the European Commission and the EIB.
Its objective is to stimulate capital market financing for large-scale infrastructure projects in the sectors of transport (TEN-T), energy (TEN-E) and information and communication technology (ICT). According to the Commission, the European Union’s infrastructure investment needs to meet the Europe 2020 objectives in these sectors could reach as much as EUR 2 trillion.
The Project Bond initiative is designed to enable eligible infrastructure projects promoters, usually public private partnerships (PPP), to attract additional private finance from institutional investors such as insurance companies and pension funds.
Improving credit quality
This will be achieved by providing credit enhancement to those promoters, whose debt will effectively be divided into two tranches: senior and subordinated.
The subordinated debt, or Project Bond Credit Enhancement (PBCE) can take the form of a loan from the Bank, with the support of the European Commission and is given to the promoter at the outset. It may also take the form of a contingent credit line which can be drawn upon if the revenues generated by the project are not sufficient to ensure senior debt service.
The PBCE underlies the senior debt and therefore improves its credit quality, offering peace of mind to institutional investors.
The bonds themselves will be issued by the promoters not by the Bank or the Member State in question. The support will be available during the lifetime of the project, including the construction phase.
A pilot phase is ongoing to test the project bond concept during the remaining period of the current multi-annual financial framework 2007-2013, before the next multi-annual financial framework 2014-2020. Suitable projects will need to reach financial close between now and end of 2016.
This testing phase is funded by EUR 230 million of EU budgetary resources from unused budget lines for existing programmes. This should enable the EIB to provide financing to infrastructure projects worth more than EUR 4 billion across the three sectors.
The Bank selects and appraises projects according to its own standards, structures and prices the credit enhancement instrument for the selected project, and carries out the monitoring, although it will not act as a credit controller. Subsequent decision-making for projects will be formulated on a case by case basis by the parties involved.
So far, the EIB Board of Directors has approved nine projects in six different Member States. The first transaction under the Project Bond Credit Enhancement initiative successfully took place in July 2013 in Spain for the Castor underground gas storage project, that will provide storage for 30% of Spain’s daily gas consumption.
Based on a positive interim evaluation in 2013 and subject to the final evaluation of the pilot phase in 2015, the Project Bond Initiative is expected to be fully rolled-out within the Connecting Europe Facility (CEF) forming part of the 2014-2020 Multiannual Financial Framework (MFF).
The interim evaluation report on the pilot phase of the Project Bond Initiative can be found on EUR-Lex.
More information on the pilot phase of the Europe 2020 Project Bond Initiative can be found on Europa website.