EU member states approve €4.5bn project bond infrastructure funding trial

The bonds, which will raise the credit profile of a project and so make it easier for sponsor companies to attract private financing, will be issued on transport, energy and information technology infrastructure projects. If the 2012-13 'pilot phase' is successful, the initiative will run until 2020 under the EU's "Connecting Europe" banner.

Last week the European Parliament overwhelmingly backed the allocation of €230 million in guarantees for the bonds, which will be entirely financed by redeploying funds within existing programmes under the EU Budget. Up to €200m will be allocated for transport projects, €10m for energy and €20m for ICT and broadband projects during the pilot phase.

Project bonds are private debt issued by a project sponsor, usually a private company or a special purpose vehicle (SPV) created by one or more companies to control a specific project. When raising financing through a project bond, the company or SPV issues two 'tranches' of debt – 'subordinated', which bears the first losses, and 'senior' debt. Under the initiative the European Investment Bank (EIB) will take on the subordinated debt with EU funds used to cover part of its losses in the event of project failure.

This has the effect of reducing the credit risk attached to the 'senior' debt, as these investors will be repaid first in the event of failure. The European Parliament said last week that this would make project investment more attractive to capital market investors such as pension and insurance funds.

President of the European Commission José Manuel Barroso said that the new project bonds were "concrete instruments to boost our economy and invest in our future". The Commission has, he said, proposed to extend the pilot phase if successful to €50bn in guarantees by 2020.

"Project bonds are a concrete demonstration of how the European Union can deliver for its citizens," added Olli Rehn, Vice-President for Economic and Monetary Affairs and the Euro. "They show how scarce public resources can be used to unlock private investment and thereby mobilise projects of European importance that would otherwise not be launched because of current uncertainties."

The EIB has already identified suitable projects within the eligible sectors that show "reasonable perspectives [sic] of successful closing" within the pilot period, according to its project bond initiative webpage. It said it was also working alongside tendering authorities to identify projects that will not be ready during the pilot phase for future investment if the pilot scheme is successful.