Financing and Procurement of EU Infrastructure Thomas C. Barrett, Director European Investment Bank Irish Centre for European Law Dublin, 28 June 2012

European Investment Bank EIB/EC as European Partners to Public and Private sectors Europe 2020 Strategy Infrastructure Investment needs of EUR 1.5-2.0 trillion until 2020 EIB/Commission collaboration on: Joint financial instruments to leverage public and private finance Promoting grant/loan blending PPP and energy efficiency Private finance and broadband The EU2020 Project Bonds initiative Financial and technical assistance JASPERS JESSICA EPEC smart growth inclusive sustainable New sources of finance & smarter use of public resources European Investment Bank 2

European Investment Bank Group Priorities for the EIB – The EU bank LENDING BLENDING ADVISING Loans But also: Guarantees Equity participation Combining EIB loans and EU grants Leveraging EU and Member States budget resources Strong in-house expertise Technical and financial advice Technical assistance initiatives Attracting FUNDING for long-term growth European Investment Bank Group 3

EIB support for EU Policy EIB selects and prioritises projects in various sectors to maximise its impact on the real economy in line with EU priorities for growth, employment, cohesion, climate change and economic sustainability EIB supports EU strategies, including “Europe 2020”, through direct lending as well as through technical and financial assistance by undertaking joint initiatives with the European Commission (and other IFIs) 4 Core Priorities Innovation and Skills including financing of research and development as well as the modernisation of educational and vocational training systems SME and MIDCAP Access to Finance by the provision of debt, venture capital and guarantee through the banking system and through Funds, both directly and on a risk sharing basis Resource Sustainability by supporting the development of clean and renewable energy; sustainable transport; climate action and energy efficiency Strategic EU Infrastructure: finance for development of modern broadband networks (Digital Agenda) as well as transport and energy networks to complete missing links; improve competitiveness; expand services and reduce congestion.

EIB signatures and disbursements continue to increase as a countercyclical response to weak investment

Overview of EIB lending in Ireland Total signatures: 2009: EUR 1,020m 2010: EUR 256m 2011: EUR 475m Sectors and priorities: SMEs through banks (Bank of Ireland, Allied Irish Banks, Ulster Bank) Knowledge Economy through universities (University College Dublin, Trinity College Dublin) and the Irish School Programme Infrastructures with PPP financing of Irish roads and motorways (M7, M50, N6) Transmission and distribution networks (ESB, Eirgrid, Bord Gais) On-shore wind farms (ESB renewable programme) 6

Regulatory and Procurement impact on Infrastructure Investment Legal framework Procurement Systems Political support Sound Pipeline Regulatory Framework Local players & Competitive Market counterparts Creditworthy SPV’s Coherent regulatory, procurement and legal rules necessary for sustained investment Need to improve sector performance to meet economic and social priorities Imperative of a sustainable fiscal framework Utilise reliability of regulatory, procurement and legal structures to minimise credit and institutional risks Figure 1 shows the different contractual agreements available to the public administration to procure goods and services and link them to the risks borne by either the public or the private part. The left-hand side shows simple O&M services provided by the private sector where the ownership of the facilities remains to the public sector. Lease of public goods by private counterparties is a possible alternative. The only risk shifted to the private party is the operational risk, being the construction/investment and commercial risks retained by the public sector. The second column of figure 1 is occupied by concession agreements with public ownership of the facilities. Here, the private counterparties can: 1) rehabilitate an existing facility, manage and transfer it. At least part of the construction risk is limited by the fact that the facility already exists or 2) design, build, operate and transfer (DBOT) the facility at no final indemnification for the public administration. In DBOT schemes, the public administration plays the role of the exclusive buyer of the services (commercial risk is absent or strongly limited by the purchase contract signed by the public administration). The third column of figure 1 shows contractual arrangements – often in the form of concession agreements – where the private sector becomes the owner of the facility . Furthermore, here we include concessions where the public sector is not the direct buyer of the services and the private sector bears part or full commercial/market risk (like in the case of power and energy merchant plants). In the fourth column of figure 1, the private sector gains full control of the assets and is in charge of all the risks involved in the deal as a consequence of the full exit of the public sector from the management of businesses through asset sales/divestitures or privatization processes. European Investment Bank 7 7 7 7

Some information from EC public consultations on Concessions 41% of respondents declared existence of entry barriers to the market due to the fragmented national frameworks on concessions 37,3% of the respondents are aware of concession contracts being awarded without any publication or transparency 44% of the business community declared being aware of direct awards of concession contracts 32,4% of the respondents considered that diverging rules and practices regarding concessions constituted an obstacle to the cross-border award of the contracts 61,6% of the respondents considered that publication of the concessions notice in OJEU would increase transparency Lack of legal certainty (with regard to the definition and award of concessions) Existence of entry barriers (stemming from the disparity of national rules and unlawful practices of contracting authorities/entities) Insufficient legal protection of tenderers (not available for services concessioners)

European Investment Bank Conditions for Growth in Infrastructure Productivity Infrastructure planning: Effective management of existing infrastructure Fundamental review to replace incremental planning Prioritisation to be based on contribution to long term growth Infrastructure finance: Greater share of Public sector capital to be deployed as risk based financial instruments rather than purely as grant finance Should result in significant change in public / private funding mix and increased private share Government role is a variable mix of planner; economic catalyst; regulator and investor depending on country and project requirements Markets/ Banks: Real challenges arise from reduction in longer term bank financing; reduction in market capacity and bank deleveraging Policy challenge: Achievement of long term strategic growth despite short and medium term capital constraints European Investment Bank 9

European Investment Bank Blending of Budget and non-Budget resources; Blending can contribute to investment; improves financial impact; curtails the risks borne by public authorities; and offset the requirements on the banking sector Need to grow the volume of Innovative Instruments across the EU & candidate countries. The investment requirements of the transport; energy climate change and digital broadband sectors are approximately EUR 2 trillion over the next decade. Financing needs for major transport infrastructure investments go well beyond the means of national budgets PPPs currently finance an important but minority share of EU infrastructure investments Investment needs are so significant that they will require smarter use of public finance Innovative and blended financial instruments can expend the role of private finance and leverage public grant funding of projects Greater co-financing of infrastructure by EU capital markets, currently a significantly under-utilised source of finance for large economic infrastructure required to compensate for the lesser role of banks. European Investment Bank 10

European Investment Bank EIB Financing Instruments for infrastructure EIB has at its disposal an extensive range of instruments to finance public and private sectors EIB lending instrument for Investment Grade operations Structured Finance Facility For low and sub investment Grade operations Project Finance Direct Loans Project SPV Project finance with direct project risk LGTT (Mezzanine) Equity through Funds Intermediated Loans Banks Innovative financing: the A5 Autobahn, Germany Widening of an existing motorway between Baden-Baden and Offenburg to six lanes drawing on EIB senior, mezzanine and equity finance. Public Sector Financing European Investment Bank 11

European Investment Bank The European PPP Market in 2011 - Global Overview Key figures: Value EUR 17.9 billion in 2011 EUR 18.4 billion in 2010 Deals 84 in 2011 112 in 2010 Average deal value EUR 213 million in 2011 EUR 163 million in 2010 Large deals (>EUR 500 million) 7 in 2011 10 in 2010 Source: EPEC PPP database Successively, the UK (2009), Spanish (2010) and French (2011) markets accounted for the largest share of EU PPP markets in those years. In value terms, the 2011 market was in line with that of 2010, but it shrunk significantly in terms of the number of transactions. The EUR 5.4 billion Tours-Bordeaux HSR project was the largest PPP in the Rail sector in recent years. European Investment Bank 12

EIB lending volume to PPP transactions by year – EUR billion EIB PPP Financing EIB lending volume to PPP transactions by year – EUR billion EIB has provided substantial policy support and organisational capacity to foster the development of PPP markets and investments since the 1990s. EIB lending has been a key source of medium and long term debt for the European PPP market since 2007 Population = 535 000 (266 000 premises incl. 25 000 businesses) Source: EPEC PPP database EIB Annual signatures averaged above EUR 2.5 billion since 2000, reaching EUR 3.8 billion in 2010 with EUR 2.6 billion in the transport sector. In 2011 signatures reached EUR 3.6 billion of which EUR 2.7 billion in the transport sector. The Bank is now one of the major funders of projects in Europe with a portfolio of about 140 projects and investment of around EUR 30 billion. 13

Growth & jobs: Building Europe’s infrastructure EUR 9bn for EU transport networks Favouring rail over roads Almost a third of financing achieved through private public partnerships - PPPs European Investment Bank Group 14 14

Total investments of more than European Investment Bank Track record of Structured Credit Enhancement ……. through EIB/EC Blended Loan Guarantee for TEN-T (LGTT) List of Transactions IP4 Amarante – Vila Real (PT) First LGTT to close (2008) EUR 20 million LGTT 30-year DBFO Baixo – Alentejo (PT) 344 km motorway EUR 25 million LGTT Autobahn A5 (DE) Range of EIB instruments applied EUR 25 million Successful closing in the middle of the financial crisis C-25 Eix Transversal (ES) One of few demand-risk PPPs in Spain EUR 70 million LGTT Autobahn A8 (DE) Both shortlisted bidders submitted offers with LGTT EUR 60 million LGTT LGV SEA (FR) First rail project to include LGTT Largest HSR PPP in France EUR 200 million LGTT, largest to date London Gateway (UK) First port project to include LGTT LGTT protects container throughput GBP 100 million LGTT Total investments of more than EUR 12bn enhanced by LGTT European Investment Bank

European Investment Bank EC/EIB; New Project Bond Initiative Objective To increase the debt financing availability for large scale infrastructure projects Target Sectors Transport Energy Broadband How? EU/EIB joint support to project companies issuing bonds and raising loans to finance infrastructure projects Form of support Funded/unfunded subordinated credit enhancement by EIB to ensure investment grade rating of the senior debt Result More private sector financing attracted from the capital markets to finance key infrastructure Potential investors Long-term institutional investors and financial institutions. European Investment Bank

European Investment Bank EIB Equity Funds The EIB invests in, advises and manages equity funds to provide a full range of financial products in support of European priority objectives Infrastructure and Environmental Funds: Within the EU and in the Mediterranean Partner Countries (FEMIP) the Bank is an active investor in infrastructure and environmental equity and debt funds. It supports both traditional and innovative fund concepts. 20 Funds with total equity of Eur 3.6 billion. Carbon Funds: The EIB is a major sponsor of carbon funds with a view to extend market capacity and complement rather than substitute for private sector participants and intermediaries. 5 Funds with total equity of Eur 500 million JESSICA Urban Funds (Joint European Support for Sustainable Investment in City Areas): The EC/EIB/CEB is active in the promotion of urban development funds as part of the JESSICA initiative. 15 Funds with total equity of Eur 2 billion European Investment Bank

European Investment Bank Group Climate Action: EIB Equity and Debt Favouring renewables and energy efficiency Financing the installation of over 4000 mega watts of wind and solar plants, to power over 2 million households EUR 7bn for renewables and energy efficiency European Investment Bank Group 18 18

Examples: London Green Fund (Holding Fund) The London Green Fund (a JESSICA Holding Fund) established in late 2009 to invest in carbon reduction projects in line with the Climate Change component of the London Plan Focused on energy efficiency, waste and decentralised energy as the “3 biggest carbon reduction opportunities for London” Governed by representatives from the Greater London Authority, the Environmental Agency and the London Waste and Recycling Board. London Development Agency London Waste & Recycling Board ERDF £ 18 m £32m £ 50 m London Green Fund £100m* Managed by EIB £35m £50m Waste Urban Development Fund Energy Efficiency Urban Development Fund Private finance Private finance Equity type investment Loan type investment Min £35m Min £50m Low risk High risk Urban Projects Urban Projects * The remaining £15m may, as an option, be invested in one or both UDFs in due course Aiming to deliver outputs/impacts on job creation, tons of carbon saved, and minimum energy usage savings

EIB Advisory programmes in partnership with EC and EDFIs Enhancing infrastructure investment in Europe through technical and financial advisory programmes EPEC - European PPP Expertise Centre Strengthen the ability of the public sector to engage in Public Private Partnership (PPP) transactions by building up Members organisational capacity and sharing experience and expertise, analysis and good practice JESSICA – Joint European Support for Sustainable Investment in City Areas Advisory services on the structuring and management of Jessica Funds, an Innovative financing instrument for integrated urban development, launched by EU Commission (DG Regio), EIB and CEB. Higher productivity of EU / public funds – uses Financial Leverage Effect and Expertise JESSICA JASPERS - Joint Assistance to Support Projects in European Regions Technical assistance between DG REGIO, EIB, EBRD, and KfW to prepare major projects in cohesion countries Increases the capacity of the beneficiary countries to abort EU funding in support of priority investment 09/11/2011 European Investment Bank 20

European Investment Bank Contacts at EIB Simon Barnes Western Europe Director barnes@eib.org Chris Blades EPEC Head of Division blades@eib.org Gianni Carbonaro Municipal and Regional Head of Unit G.Carbonaro@eib.org Jacobs Peter Western Europe Head of Division Project Finance p.jacobs@eib.org Stefan Kerpen Technical Assistance Management Head of Unit S.Kerpen@eib.org Bernard Gordon Western Europe Head of Division – Public sector gordon@eib.org http://www.eib.org European Investment Bank