Bonds designed to attract new funds for EU infrastructure

When banks do not lend and governments do not spend, an alternative could be issuing bonds. Companies involved with long–term European infrastructure projects can struggle to find the necessary funds. To help them, the EU plans to back up bonds issued by them with guarantees and loans to make them more attractive to investors such as pension funds. MEPs are discussing a launch of first project bonds to see how they work and how the market reacts.

According to the European Commission, €1,500-2,000 billion will be needed to modernise EU infrastructure by 2020. The market provides for €60-80 billion a year in the form of equity and bank loans, but more money is still needed  Due to the crisis this is proving difficult. Governments have cut or frozen their spending, banks that need extra capital themselves have cut lending, and investors have become more hesitant to take risks.

This is why the Commission has proposed EU project bonds. These are bonds issued by private companies to finance European infrastructure projects, such as roads, railways, broadband and gas pipelines. They are especially used for projects that are not commercially viable but strategically important. These project bonds are not to be confused with  stability bonds - also known as Eurobonds - which are issued by the EU to finance budget deficits.

How it would work is that the European Investment Bank (EIB) would provide loans and guarantees for projects to offset part of the risk of private investment, which would result in making them more attractive to institutional investors such as insurance companies and pension funds.

The Parliament is now being asked to approve a pilot scheme for bond projects before a permanent system becomes fully operational from 2014 onwards. The budget committee, which is responsible for drafting a recommendation to MEPs, is expected to vote on the proposal in April, while it will still have to be approved by the full plenary in the months after that. If all goes well, the pilot scheme could still start this summer.

Swedish Social-Democrat Göran Färm, who is responsible for steering the proposal through Parliament, said: "We need to find other ways to mobilise investment capital – one of them is project bonds. EU funding will minimise investors' risk of losing money." Mr Färm, a member of the budget committee, also pointed to the multiplier effect EU support could have: "€1 from EU budget could mobilise €15–20 from pension funds and other private investors."

The EU will contribute €230 million to the pilot scheme to cover part of the risk the EIB is taking to finance five to ten eligible projects in transport, energy and broadband. This is expected to attract additional investment of up to €4.6 billion. Mr Färm said: "We want to make absolutely clear that €230 million is the maximum cost for EU budget. If all projects fail that is the maximum we could lose. But if projects are successful we would have income. We also need very good reporting (from EC and EIB) during this pilot phase before we take the final decision."

Although most MEPS have in the past supported the idea of project bonds, they are still scrutinising the proposal carefully. British Liberal Democrat Sharon Bowles, chair of the economic affairs committee, said the EU project bonds would not remove all of the risk. "There will be in essence be a limited EU guarantee for the first loss."

Czech MEP Ivo Strejček, whose political group European Conservatives and Reformists Group opposes the idea, warned that project bonds are using EU funds to lever even more debts for national governments, and encouraging investments that would need to be underwritten by taxpayers’ money.