Friday, April 20, 2012

Europe 2020 Project Bond Initiative






 On October 19, 2011, the European Commission has published its „Europe 2020 Project Bond Initiative”.





At the heart the Commission's initiative are 2 straightforward findings:

  • From the project sponsor's perspective, trans-European infrastructure projects will need considerable funding in the coming years. Bank and public financing are scarce and will remain scarce in the near future. Hence, there is a need for stimulating private funding.
  • From the private long-term investor's (pension funds, insurances, etc.) perspective, there is a strong demand for long-term investment opportunities. However, the European bond market for very long maturities is underdeveloped. Hence, there is a need for stimulating such long-term bond market.

The main advantages of infrastructure debt are its low default rates, high discovery rates in case of default, and low correlation with other assets. To encourage private funding for European infrastructure projects, the Commission plans to further enhance the credit rating of European infrastructure projects. The project bond initiative provides for the following support instruments:



The road map for the Europe 2020 Project Bond Initiative is divided into 2 phases:

  • 1st phase: Pilot implementation phase including a 20 MEUR EU budget from 2012 to 2013 (dates probably to be updated) and supporting up to 10 infrastructure projects with commercial potential in the transport, energy, and information and communications technology sector.
  • 2nd phase: Implementation of the initiative through the European Investment Bank (EIB) from 2013 on, supporting projects even in other sectors.

As regards the institutional relationship between the EIB and the EU, the initiative provides for a risk sharing mechanism between these institutions. The risk sharing mechanism can be vertical, e.g. involving a sharing of fixed loss percentages on a project by project basis, or horizontal, e.g. involving a first loss piece covered by the EU and the EIB covering the remaining part of the project bond support.

The multiplier effect between EU budget spending and private sector financing is meant to be around 15-20. This multiplier effect is based on 2 assumptions: For each EU budget Euro, EIB will mobilize 2 additional Euro and the EIB risk sharing instrument will cover 15-20 % of the project debt.





The Commission’s project bond initiate is currently under review by the Council of Ministers and the European Parliament; the adoption is planned for summer 2012.






Resources:

  • European Commission Communication dated October 19, 2011
  • European Commission Proposal dated October 19, 2011 for a Regulation amending Decision 1639/2006 and Regulation 680/2007