Explanatory Memorandum to COM(2011)659 - Amendment of 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 - Main contents
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This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2011)659 - Amendment of Decision No 1639/2006/EC establishing a Competitiveness and Innovation Framework Programme (2007-2013) and ... |
|---|---|
| source | COM(2011)659  |
| date | 19-10-2011 |
At a time of fiscal constraint, innovative solutions are urgently required to mobilise a greater share of private savings and to improve the range of financial instruments available for infrastructure projects, especially in the energy, transport and ICT sectors. Reduced possibilities to access finance by infrastructure projects calls for alternative sources of debt financing. The norm for infrastructure projects with commercial potential should be to combine EU funds in partnerships with the capital market and banking sectors, particularly via the European Investment Bank (EIB) as the EU financial body established by the Treaty.
(a) Europe 2020 Project Bond Initiative in the framework of the Connecting Europe Facility (2014-2020)
On 29 June 2011, the European Commission adopted its proposal for the multi-annual financial framework (MFF) for the period 2014-2020. One of the key decisions was to bring the granting of financial aid for transport, energy and ICT infrastructure into a common legislative framework, the Connecting Europe Facility:
"The Commission has decided to propose the creation of a Connecting Europe Facility to accelerate the infrastructure development that the EU needs. (…) The Connecting Europe Facility will fund pre-identified transport, energy and ICT priority infrastructures of EU interest, and both physical and information technology infrastructures, consistent with sustainable development criteria."
Following this decision, the Commission will make a proposal for a new Regulation to establish the Connecting Europe Facility. The Europe 2020 Project Bond Initiative will become part of the array of debt instruments upon which the facility may draw in addition to equity instruments and grants.
The Facility will provide the longer-term framework ensuring that projects in energy, transport and telecommunications are developed and implemented in a timely and effective manner. A comprehensive strategy of prioritised opportunities of infrastructure projects, has significant potential to attract more private sector financing and at the same time help to complete the internal market.
Financial instruments are needed to reduce specific barriers that prevent the flow of debt and equity finance. Their main objective is to attract and facilitate private sector finance of projects. At the same time, increased investment activity in infrastructure projects stimulates the global development of post-crisis financial markets, enhances the pace of economic recovery and promotes growth. The Europe 2020 Project Bond Initiative will become an integral part of the risk-sharing instruments of the Connecting Europe Facility for the period 2014-2020. The financial instruments under the Facility may be extended to other sectors such as social infrastructure, renewable energy or certain space projects, provided they fulfil the appropriate economic and financial criteria and the Commission will seek to invite a range of partners, including international financial institutions or Member States' financial institutions with a public mission, to participate in the implementation of the post-2013 financial instruments.
(b) Europe 2020 Project Bond Initiative pilot phase 2012-2013
The main objective of the pilot phase in 2012-2013 is to prepare the operational phase of the initiative under the Connecting Europe Facility for the period 2014-2020 and to provide immediate support for infrastructure projects.
Due to fiscal austerity in the Member States, there is a danger that infrastructure projects of EU interest are not carried out at the pace required to achieve Europe 2020 objectives thereby compromising the EU's economic recovery and growth.
In addition, due to the liquidity and risk challenges arising during the financial crisis, banks reacted with a shortening of loan maturities, combined with increased pricing and collateral requirements for infrastructure projects. Even though the bank debt markets show signs of recovery, infrastructure projects continue to have great difficulties in accessing long-term debt finance. Therefore, the potential importance of bond markets as a source of finance has increased. However as there are no existing public credit enhancement measures, no project bonds in the field of TEN-T, TEN-E or broadband have been issued in the last few years. As long as infrastructure projects entail features and risks such as greenfield development, uncertain business case as regards future revenue flows, regional aspects including the influence of the sovereign crisis and cross-border impact, making the project preparation and implementation demanding and time consuming, such projects continue to be unattractive for capital market investors.
In view of this and to contribute to the completion of the Single Market, it is proposed to launch a pilot phase of the Europe 2020 Project Bond Initiative in the area of transport, energy and ICT. This initiative seeks to mobilise investment in areas that will stimulate growth and create jobs. The large and urgent infrastructure investment needs, combined with the long lead times for project preparation, call for immediate action to address the scarcity of funding and also to build on the momentum generated by the public consultation, and hence bolster investor confidence.
The Europe 2020 Project Bond Initiative aims to provide the credit enhancement required to attract capital market investors and would facilitate the creation of a new asset class in terms of infrastructure project bonds. In the context of economic recovery and support actions stimulating growth, it is necessary to launch the initiative during a period when capital market investors have started looking for alternative long-term investment opportunities with stable revenues. In order to allow a more efficient implementation of the financial instruments under the Connecting Europe Facility, the launch of a pilot phase is required, both to allow the optimisation of the design and stimulate investor appetite for the post-2013 period.
Even though the pilot phase would be limited in terms of scope, budget availability and the number of projects that can be supported, it is expected to stimulate market behaviour towards an increased acceptance of capital market debt financing for infrastructure projects in general and thus lay the ground for a fully-fledged implementation for the period 2014-2020.
This initiative provides EU added value due to its ability to transcend the market fragmentation issues that such an initiative would be faced with at Member State level. The initiative will complement, rather than replace bank lending and thus provide an alternative and competitive source of long-term debt finance to infrastructure projects. Mobilising private sector finance through EU financial instruments will preserve scarce grant funding for projects attracting insufficient private capital.
In the pilot phase, the Commission would work in particular with the EIB to optimise the design of the initiative for optimal implementation from 2014 onwards. Experience gained through the pilot phase would allow investors and project sponsors alike to familiarise themselves with the structure of project bonds and would be taken into account as required for any further initiatives. To have the maximum impact, the initiative could also be applied to projects at an advanced stage of the bidding process for the purposes of refinancing during or shortly after the end of the construction period. Even though, in the pilot phase, the initiative would be implemented with the EIB, for the implementation of the post-2013 phase a broader range of implementing partners would be sought.
Under the current Multi-annual Financial Framework, the EU has already implemented a risk-sharing instrument together with the EIB called the Loan Guarantee instrument for TEN-T projects (LGTT). The risk-sharing techniques and working methods of the initiative will be aligned to those of LGTT, whereby the scope would be extended to energy and telecommunications. Similar to LGTT, EU’s contribution would thus be used to share risks with the EIB. Therefore, due to the similarity, a multiplier effect of around 15-20 is expected for the Project Bond Initiative.
Given the short time available, the Commission invites the Parliament and the Council to adopt the proposal for a pilot phase as speedily as possible.
Contents
- RESULTS OF CONSULTATIONS WITH THE INTERESTED PARTIES AND IMPACT ASSESSMENTS
- BUDGETARY IMPLICATION
- 3. LEGAL ELEMENTS OF THE PROPOSAL 3.1. Legal basis
- 3.2. Subsidiarity and proportionality
- 3.3. Detailed explanation of the proposal
- 06 03 03 TEN Transport up to EUR 200 million in 2012-2013
- 32 03 02 TEN Energy up to EUR 10 million in 2012-2013 for TEN-E projects
- 09 03 01 CIP up to EUR 20 million in 2013 for ICT and broadband projects
A public consultation was launched on 28 February 2011 on the basic principles of the initiative. In addition, a conference on 11 April 2011 debated the advantages and disadvantages of the planned initiative. At the end of the consultation period, over 100 responses had been received from a range of sectors.
Stakeholders have welcomed the Project Bond Initiative. Feedback on the initiative's objectives was positive with stakeholders feeling that it would increase and facilitate financing of infrastructure by opening up the bond markets as a source of debt capital in a form that is of interest to institutional investors. The suggested mechanism and the targeted credit rating of A/A- were seen as appropriate.
The impact of the initiative on financing costs and maturities is felt to be rather favourable, i.e. costs were seen to decline and maturities to be extended, with only 2% or respondents believing that it would not lower financing costs and the remainder believing that the impact would be at worst neutral and at best positive.
Regarding the degree of credit enhancement, the majority of stakeholders who responded to this question expressed the view that credit enhancement instruments of 20% of the senior debt amount is sufficient, some narrowing it to 10-20% for the sectors considered, namely TEN-T, TEN-E and ICT. Almost all stakeholders believe these three sectors should represent the core projects to be financed. In addition, 1/4 of the stakeholders think that social infrastructure should be included and 1/5 of respondents believe that renewables should also be eligible. However, such projects do not fall within the remit of TEN-T, TEN-E and ICT and will be considered at a later stage.
Opinions were divided on the issue of having a single controlling creditor. The Commission will therefore not be prescriptive on this point, but encourage investors, project sponsors and other players to decide on mutually acceptable arrangements.
The overall positive feedback confirms that the Commission and the EIB have identified a significant market need in the area of project finance, ensuring that the initiative, if designed correctly, will be a success.
The impact assessment has highlighted some potential regulatory obstacles in the areas of procurement and capital markets regulations. The Commission will continue to address these issues going forward with the aim of finding appropriate solutions if required. However, it is felt that these issues would not jeopardise the implementation of the pilot phase, although they may slow it down. Considering the de facto non-existent project bond market activity in Europe, stakeholders stressed the need to launch the initiative as soon as possible.
Considering that a project bond, cross-sectoral type financial instrument for infrastructure does not yet exist at European level, the pilot phase in 2012-2013 would allow the testing of its design and market acceptance in order to improve its effectiveness under the CEF for the 2014-2020 period. In the pilot phase, the focus would be on projects at a relatively advanced stage to accelerate the implementation and facilitate the creation of a project portfolio. In order to gather relevant experience to ensure rapid take-up post-2013, the EIB is willing to work on concrete operations in parallel with the legislative process (i.e. prior to the formal political decision) in order to have first transactions executed in 2012.
Following the hearing with the Impact Assessment Board on 31 August 2011, the Board sent its opinion on 2 September 2011. Based on the recommendations received, the report has been redrafted along the following main lines:
The impact assessment reviews the current market situation with a link to the impact assessment accompanying the proposal for the CEF which includes more background on the potential CEF instruments, financing gaps and market imperfections affecting current levels of investment in infrastructure. The first option assessed relates to the status quo, i.e. continuing with current grant programmes for energy and transport and the current grant programmes and financial instruments for transport. The second option relates to regulatory incentives and the third one to the proposal to implement the Project Bond Initiative. In this context, the potential risks hindering the implementation of the Intiative have been reviewed and a quantifiable expected impact revealed in terms of a multiplier effect. The assessment also signals issues related to the regulatory enabling framework for long-term investment such as procurement, Solvency II or capital requirements.
As the scope of the proposal focuses on European networks in the field of transport, energy and telecommunications and amends notably Regulation (EC) No 680/2007, it is based on the legal bases thereof, that is Articles 172, and 173 of the Treaty of the Functioning of the EU.
The proposal complies with the subsidiarity principle as the choice of the EU Regulation for financing trans-European networks projects with project bonds is best suited in order to provide an efficient means in terms of administrative burden to attract high levels of private sector financing, the expected multiplier effect in terms of EU budget contribution compared to the overall financing being estimated at around 15-20. By focusing on optimising the use of EU funds, the initiative will aim to improve the effectiveness of both EU and Member States action.
The proposal is also in conformity with the proportionality principle, as the draft Regulation does not go beyond what is necessary in order to achieve its objectives.
Whereas LGTT targets only transport projects, the Europe 2020 Project Bond Initiative will be the first EU financial instrument benefiting infrastructure projects across several sectors with similar financing needs and will produce higher benefits in terms of market impact, administrative efficiency and resource utilisation. It will provide a coherent EU financial instrument to infrastructure stakeholders such as financiers, public authorities, construction companies and operators.
To allow the launch of the pilot phase during the current Multiannual Financial Framework, Decision No 1639/2006/EC of the European Parliament and of the Council establishing the Competitiveness and Innovation Framework Programme (2007-2013) and Regulation (EC) No 680/2007 of the European Parliament and of the Council on the granting of Union financial aid in the field of the trans-European transport and energy networks require the following modifications:
Decision No 1639/2006/EC of the European Parliament and of the Council establishes a Competitiveness and Innovation Framework Programme, which encompasses ICT. It needs to be amended in order to permit the launch of the Europe 2020 Project Bond Initiative in the area of ICT and, in particular, high-speed broadband.
Article 1 of this proposal adds the word 'broadband' to the existing Article 26(2)(b) of the CIP Decision. As the infrastructure projects under the CIP decision are expected to focus on the development of high-speed broadband projects, it is deemed necessary to emphasise this.
Article 1 replaces article 31 of the CIP Decision. It aims to add a definition of the risk-sharing instrument for project bonds. This will enable ICT projects to benefit from the initiative in its pilot phase. The instrument should be available until 31 December 2014. The EU budget liability will be strictly limited to the budget appropriations, the residual risk being borne by the EIB.
Article 1 will also allow a transfer of up to EUR 20 million from the ICT budget for the benefit of the Europe 2020 project Bond Initiative.
In addition, Regulation (EC) No 680/2007of the European Parliament and of the Council lays down the general rules for the granting of Union financial aid in the field of the trans-European transport and energy networks and creates also the risk-sharing instrument Loan Guarantee instrument for TEN-Transport projects (LGTT). Similarly, Regulation No 680/2007 needs to be amended in order to allow the EU to modify the scope of the existing risk-sharing partnership with the EIB under LGTT and allow the EIB to support bond financing under the initiative.
Thus, Article 2 of this proposal amending Article 2 of the Regulation (EC) No 680/2007 aims to add a definition of the risk-sharing instrument and of the credit enhancement for project bonds. This will enable transport and TEN-E projects to benefit from the initiative in its pilot phase.
Article 2 of this proposal amends Article 4 of Regulation (EC) No 680/2007 and foresees that applications for risk-sharing instrument for project bonds are made to the EIB, as currently is the case under LGTT.
Article 2 of the proposal will allow a transfer of up to a total of EUR 200 million from the Loan-Guarantee instrument for TEN-Transport projects (LGTT) and EUR 10 million from the TEN-E budget for the benefit of the Europe 2020 Project Bond Initiative. The EU budget liability will be strictly limited to the budget appropriations, the residual risk being borne by the EIB.
In order to allow a prompt implementation, Article 3 of the proposal specifies that the proposed Regulation should enter into force on the day following its publication.
The initiative will be entirely financed by redeployment within the envelopes of existing programmes in 2012 and 2013.
An amount of EUR 500 million is already determined by the Regulation (EC) No 680/2007 for LGTT, of which up to EUR 200 million may be redeployed for the use of project bonds during the pilot phase in the transport area as follows:
EUR 10 million and EUR 20 million respectively may be redeployed from the TEN-E and CIP budget lines as follows:
These budgetary reallocations are set out in the financial statement accompanying the proposal. There would not be any contingent liabilities for the EU budget as the EU contribution would be capped to the amount to be committed for this purpose under the budget lines.