A boost for bonds

There has been a lot of talk recently, especially at a political level, on how to create conditions for the capital markets to again play a major role in infrastructure financing.

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Discussions have specifically centred on how to make institutional investors comfortable with providing long-term debt for infrastructure public-private partnerships. In the UK, trade and investment minister Mervyn Davies has been touting the possibility of the government guaranteeing the construction portion of these projects, to improve their credit profiles and make pensions comfortable investing in them.

Another voice has now joined the debate. Dario Scannapieco, a vice-president at the European Investment Bank (EIB) and governor of the European Bank for Reconstruction and Development, has suggested the EIB could guarantee bonds issued by project companies, improving the underlying ratings of the projects they sponsor and opening the door for institutional investors to hold long-term infrastructure debt.

Scannapieco first outlined his views in late February in an opinion article in Italy’s Il Sole 24 Ore, a financial newspaper. Catching up with him a few weeks later, he was keen to stress that there isn’t, as yet, any official EIB decision to implement what he calls the “project bond”.

“The revitalisation of the project bond market was the result of a work group set-up in 2009 by the vice-president of the European Commission and the EIB. And one of the possibilities that came out of that work group was for the EIB to guarantee bonds linked to privately or publicly funded infrastructure projects,” Scannapieco says.

Building a broad TEN-T
Such a mechanism, as Scannapieco details in his opinion article, could see the EIB throw its weight behind bonds issued by infrastructure companies to fund specific projects that form part of the trans-European transport network (TEN-T), a programme that aims to improve connectivity between the European Union’s 27 member states. However, he says the guarantee could easily be applied to other types of project as well.

If shareholders want it, the EIB can intervene, increasing the range of financial instruments to finance crucial works

The EIB would effectively step in for the defunct monoline insurers in order to raise these bonds to investment grade so that pension funds or life insurers would feel comfortable investing in them. “The appetite [for infrastructure bonds] is still there with certain categories of institutional investors,” Scannapieco insists.

And so is the opportunity: the amount to be spent on TEN-T projects between 1996 and 2020 is expected to hit €1 trillion. Of that total, about €300 billion should be spent between 2007 and 2013, at a time when many governments are suffering severe capital constraints.

Because of their role in increasing connectivity and GDP growth across the EU, the construction of TEN-T projects is unlikely to slow down. This provides an opportunity for the private sector to take a more active role in funding it.

Scannapieco declines to offer many details on how the guarantee could be implemented. In his article, he suggests the bond guarantee mechanism could be offered in tandem with an equity investment from the EIB, provided that a project could secure at least 50 percent of the funding it requires from other sources.

“The discussion is now open and if shareholders want it, the EIB can intervene, increasing the range of financial instruments to finance crucial works to increase European competitiveness,” Scannapieco wrote in his article.

It’s commonly said that when there is a will there is a way. In this case, there is a will – and the way may just have been identified.