10 Project bonds
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(33336)
16626/11
+ ADDs 1-2
COM(11) 660
(b)
(33337)
16627/11
+ ADDs 1-2
COM(11) 659
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Commission Communication: A pilot for the Europe 2020 project bond initiative
Draft Regulation 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
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| Legal base | (a) —
(b) Articles 172 and 173(3) TFEU; co-decision; QMV
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| Documents originated | 19 October 2011
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| Deposited in Parliament | 14 November 2011
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| Department | HM Treasury
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| Basis of consideration | EM of 1 December 2011
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| Previous Committee Report | None
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| Discussion in Council | Not known
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| Committee's assessment | Politically important
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| Committee's decision | Not cleared; further information requested
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Background
10.1 In presenting its proposals for the Multiannual Financial
Framework for 2014-2020 the Commission suggested the use of "EU
project bonds" for major EU infrastructure projects.[61]
The Commission's draft Regulation for the Connecting Europe Facility
proposal for financing Trans-European Networks (TENs) for the
2014-2020 includes provision for the use of project bonds and
in presenting the proposal it announced its intention of proposing
a pilot use of Europe 2020 Project Bonds.[62]
And in its Communication "A framework for the next generation
of innovative financial instruments — the EU equity and
platforms" the Commission discusses these bonds further.[63]
The documents
10.2 In its Communication, document (a), the Commission advocates
and describes the foreshadowed pilot scheme for the Euro 2020
Project Bond, saying that:
- the main objective of the EU's innovative financial instruments,
such as a project bond instrument, is to attract and facilitate
private sector finance of projects;
- project bonds are issued neither by the EU nor
by Member State governments — rather they are private debt,
issued by the project company;
- the Europe 2020 Project Bond instrument would
enhance the credit standing of private entities that need to raise
private funds for the infrastructure projects they promote;
- the EU Budget contribution would be capped ex
ante;
- the principal mechanism to provide such enhancement
of the credit standing of projects would be to separate the debt
of the project company into slices — a senior and a subordinated
(junior) tranche;
- insertion of the subordinated tranche would increase
the credit quality of the senior tranche to a level where most
institutional investors would be comfortable holding the bonds
for a long period;
- the subordinated tranche could take the form
of a loan, which would be given to the project company from the
outset, or a contingent credit line, which could be drawn upon
to service the senior debt in case of need, or a combination of
the two;
- the support would be available during the lifetime
of the project, including during the construction phase, which
is usually the riskiest part of a project, but would not exceed
20% of the senior debt of the project;
- the European Investment Bank (EIB) would accept
and monitor the project in accordance with the EIB's standard
policies and procedures including its Credit Risk Policy Guidelines
in a manner already agreed in the context of joint EU/EIB instruments
such as the Loans Guarantee Instrument for the Trans-European
Transport Network (LGTT) or the Risk Sharing Financial Facility
(RSFF) for research, development and innovation; and
- a pilot phase would allow clarification of a
number of issues arising in the design and use of project bonds.
10.3 The Commission proposes to base the pilot phase
on amendment, through its draft Regulation, document (b), of the
TENs Regulation and the Competitiveness and Innovation (CIP) Decision,
so as to draw on the budget lines of these programmes up to a
total of €230 million (£201 million). €200 million
(£175 million) could be drawn from the Trans-European Transport
Network budget line, specifically from the LGTT, €10 million
(£9 million) from the Trans-European Energy Network budget
line, initially intended to be used exclusively for grants, and
€20 million (£17 million) from the CIP budget line.
The Commission's intention is that:
- it would work with the EIB
during the short pilot phase in order to refine the parameters
for the post-2013 phase as rapidly as possible;
- thereafter, the Commission would look into the
possibility of involving other public financial institutions;
- only a limited number of projects could be supported
in the pilot phase, as the budgetary resources available would
be limited and the remaining time horizon for implementation would
be very short;
- therefore, the project selection would be made
with the aim of enhancing up to ten projects, concentrating on
those that are at a relatively developed stage of the bidding
and financing process or that require refinancing after the construction
phase, in one or more of the three targeted sectors;
- the EIB would base pricing on its standard pricing
methodology and would therefore reflect the risk of the project,
the proposed financing package and the quality of the sponsor(s);
- as lending or contingent lending at the subordinated
level is riskier than a standard senior loan, the EIB and the
EU would share the risks involved;
- for the EU, this would take the form of an upfront
budgetary contribution to cover its agreed share of the potential
losses on the projects supported — the residual loss would
be borne by the EIB; and
- the EU budget contributions would be strictly
capped and would not create contingent liabilities — all
the co-financed instruments which are based on risk-sharing involve
allocations to programmes which are capped in size and so none
of these instruments pose a risk to the budget beyond the amounts
initially committed under those budget lines.
10.4 The two documents are accompanied by the Commission's
impact assessment and an executive summary of that assessment.
The Government's view
10.5 The Financial Secretary to the Treasury (Mr
Mark Hoban), noting that the EU Budget is a matter of exclusive
EU competence and that energy policy and development of the Trans-European
Transport Network are not, comments that the Government has, in
relation to both transport and energy, questions concerning implications
of the Connecting Europe Facility and the relevant draft Regulations
on possible extension EU competence, as explained to us in connection
with those proposals.[64]
10.6 The Minister then reminds us that, as we heard
in connection with the Commission's Communication on innovative
financial instruments:
- the Government is willing to
explore the greater use of innovative financial instruments in
general, particularly in richer regions, to replace grants with
loans or project bonds; and
- its support for this is, however, conditional
upon using innovative financial instruments to reduce, rather
than supplement, overall budget size.[65]
10.7 Turning to the Europe 2020 Project Bonds in
particular, the Minister says
- the Government believes Europe
2020 Project Bonds could represent a partial solution to the problem
of maintaining high levels of investment in public infrastructure
at times of severe fiscal restraint and the absence of private
sector risk takers;
- nevertheless, as a type of innovative financial
instrument, Government support for such bonds is conditional upon
using them to reduce, rather than supplement, overall budget size;
and
- the Government is currently considering the Commission's
request to establish this pilot exercise to test the viability
of Europe 2020 Project Bonds, against the backdrop of the current
the current sovereign debt crisis in the eurozone and turbulence
this is causing in the financial markets.
On the financial implications the Minister adds that:
- projects located in the UK
would be potential beneficiaries of investments backed by the
pilot scheme; and
- the size, design and distribution of innovative
financial instruments across programmes would have an impact on
the UK's contribution to the Multiannual Financial Framework and
on the size of the UK's abatement — for 2011, the estimated
UK contribution to the EU Budget is 12% of the total, after taking
into account the abatement.
Conclusion
10.8 We note that the Government is still considering
its position in relation to establishing the pilot programme.
So before considering the matter further we wish to hear about
the position the Government decides to adopt. Meanwhile the documents
remain under scrutiny.
61 (32944) 12475/11 + ADDs 1-3: see HC 428-xxxv (2010-12),
chapter 1 (7 September 2011) and HC Debs, 8 November 2011,
cols 170-195. Back
62
(33275) 15629/11 + ADDs 1-2 (33276) 15813/11 + ADDs 1-2 (33292)
16006/11 + ADDs 1-2 (33302) 16176/11 + ADDs 1-2 (33325) 16499/11:
see HC 428-xliii (2010-12), chapter 2 (7 December 2011). Back
63
(33300) 16301/11: see HC 428-xliii (2010-12), chapter 3 (7 December
2011). Back
64
See footnote 62. Back
65
See footnote 63. Back
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