Any and all opportunities – like the European congress of toll motorway operators in Turin, Italy, on 27-30 May – should be seized to promote growth bonds in the European Union, better known as ‘project bonds’ in the new EU jargon, to stimulate investment in three sectors: transport (TEN-T), energy (TEN-E) and broadband telecommunications (ICT) infrastructures.

Thomas Barrett, director for finance and advisory activities at the European Investment Bank (EIB), was reassuring to the European Association of Tolled Motorways, Bridges and Tunnels (ASECAP), whose concern is to come up with the financing needed to maintain the motorway network (ASECAP network: 44,000 km in 2011) or to build increasingly rare new motorway sections.

Project bonds are being discussed more and more often at EU summits and MEPs have just approved the agreement worked out between the European Commission and the member states, on 22 May, for a modest start: the creation of a fund of €230 million from the EU budget to guarantee debt issue by private companies specialised in infrastructures. The idea was raised by European Commission President José Manuel Barroso in his 2010 ‘State of the Union’ address and his ‘Europe 2020 project bonds’ initiative provides for the organisation, by July 2012, of a pilot phase for 2012-2013, ahead of the EU’s multiannual financial framework 2014-2020 and implementation of the Connecting Europe Facility.

PPP PRECEDENT

The EIB, the Union’s ‘AAA’-rated financial institution, is naturally collaborating on setting up projects. Barrett, its representative at the 40th ASECAP study days in Turin, traces the origin of the initiative to public-private partnerships (PPPs): “The terminology – ‘project bonds’ – is new and might make some feel uncomfortable, but it is important to know that this instrument has a very solid background. We have 15 to 20 years of experience with PPPs. The French could even take it as far back as Colbert. The PPP market recently reached a value of €30 billion a year, but we have to keep in mind that the form of our financial markets has evolved a great deal. There is no doubt that banks are no longer capable today of providing financing under the same conditions as five years ago”. The sovereign debt crisis and pressure from the Basel III requirements on banks’ balance sheets have restricted sources of financing for infrastructures.

NEW SYSTEM

Other systems therefore have to be considered. The EIB gives priority to one in particular. The mechanism consists of improving the credit quality of a project by separating the operator’s debt into tranches of senior debt and subordinated debt. The contribution of the subordinated debt increases the credit quality of the senior debt, which reaches a level where it will not be a problem for most institutional investors to conserve the bond for a long period. In short, according to Barrett, “we will improve the flow of privileged claims thanks to the system of subordinated support: this means that there is a capacity for reimbursing senior debt. This may be new for the market, new even for the European Union, but it has been used by the EIB for decades. What is proposed is systematic deployment of this financing mechanism between the European Union and the EIB for certain types of transport, energy and broadband infrastructures. There is basically a consensus for these three areas and things are expected to be confirmed in the coming months. The goal of the 2020 initiative is to rekindle private financing of infrastructure projects without increasing direct public financing and without adding to public debt. “Our aim,” explained Barrett, “is to increase private sector financing through financial institutions like pension funds, insurance companies and others. This is not about replacing banks but about adding additional sources.”

WARNING

Barrett also put out a warning: a solid legal and regulatory framework is needed. Without it, investors will not come forward and banks will not be willing to provide finance: “Financial certainty depends on the quality of regulation. […] If public services have such a regulatory framework, they will be considered virtually as government activities, even if the management and profits are essentially private. This regulation is therefore important not only in terms of the cost of money, but first for the availability of money for concessions, for example”. The EIB representative briefed participants on a study by Moody’s that assessed different projects over the period 1983-2008. The study showed that the projects with lower failure rates and lower financing costs were well-structured projects with solid contracting frameworks. Barrett concluded: “Simplicity and clarity make the difference and projects with these characteristics have a materially lower financing cost. Banks are going to have to explain their conduct in terms of results achieved.”

The objective is to rekindle private financing without adding to public debt