Politicising project bonds

Infrastructure is back in the headlines, facing perhaps its biggest challenge yet: saving the European Union in general – and the Eurozone in particular – from its spiralling sovereign debt crisis and restoring growth to the stricken continent before riding off into the sunset.

It all started on Saturday, May 5, when European Commission (EC) vice-president Olli Rehn said in a speech at the Institute of European Studies in Brussels that Europe needed growth policies to complement the belt-tightening taking place across the continent, especially in the Eurozone’s troubled periphery.

“The Stability and Growth Pact,” as the belt-tightening is officially known, “is not stupid,” Rehn said, presumably with a straight face, pointing out that European authorities are aware that a surge in investment is needed to complement it. “More precisely, we need more European cross-border and community investment in infrastructure – energy, transport, innovation, research and communications,” Rehn elaborated.

“But we have to be innovative. Therefore the Commission last year proposed the creation of project bonds for infrastructure investment, which is a new tool to unlock private funding. We proposed to use the EU [European Union] budget and the EIB [European Investment Bank] for limited risk sharing with private investors. I expect that legislative procedures can be concluded in June, so that the first project can get on its way in a few months’ time,” he concluded.

Somehow, though, Rehn’s comments on project bonds and the EIB were hijacked to mean that the EU is actually preparing to launch a gigantic cross-border infrastructure programme – a sort of European Marshall Plan, if you will – underwritten by the EIB via a version of project bonds that reads like a first step towards the mutualised Eurobonds many are calling on the Eurozone to adopt.

For Guardian columnist Will Hutton, “there should be a €250 billion pan-European infrastructure programme underwritten by the EIB”.

UK Labour party hawks Ed Balls and Peter Mandelson agree, pointing out that “a serious capital lift for the EIB [is needed] to help to provide fresh sources of infrastructure investment, as are infrastructure bonds, which help to counter a failing private appetite for large-scale project finance”. Covering François Hollande’s inauguration this week, the Financial Times said the new French President supported the “creation of pan-European project bonds [and] an enhanced role for the EIB”.

In these alternate media versions, project bonds seem to have mutated from a credit-enhancement tool designed to stimulate private sector infrastructure investment into a form of joint European debt underwritten by the EIB. The latter would presumably do what the European Central Bank has been unable – and unwilling – to do and lay the foundations for pooled debt across the continent.

Needless to say, this is almost certainly not what Rehn had in mind when he made his speech at Brussels’ Institute of European Studies. But the turn the debate has taken is interesting for a number of reasons, chief among them the growing risk of an increasingly politicised EIB.

Independence

Last summer, EIB president Philippe Maystadt highlighted in an interview with Infrastructure Investor that investor appetite for its project bond initiative correlated directly with the EIB’s political independence. As Maystadt said at the time:

“What investors have told us, especially pension funds that do not have their own technical teams, is that they want to be sure the EIB is free to appraise projects autonomously and that we will not be forced to propose projects for investment if we are not absolutely sure of their quality.”

But what the media furore following Rehn’s speech indicates is that everyone – politicians, bureaucrats, pundits – seems to have an opinion on what project bonds should be and what the EIB should be doing.

That means the EIB may have to ward off considerable amounts of political pressure come this summer, when it’s conceivable that the first pilot projects using this mechanism will be primed for launch. This will be especially true if the EIB’s capital is indeed to be increased, as is being speculated.

Investors beware.