An enormous quantum of capital is required to fund infrastructure investment in Europe over the short- to medium-term.
Aside from stabilising our economies and helping stimulate economic growth, it is necessary if we are to maintain our competitive advantage over emerging economies. The European Commission says €2trn will need to be funded over the next decade. Until recently that seemed unachievable, but new money is in town.
Historically, funding infrastructure and projects investment has taken a well-trodden path. First, bank financing and sponsor equity is put in for the expected life of the project. This funds it through the initial construction phase, and then it may be refinanced into public bond markets, with a financial guarantee procured from a ‘mono line’ insurance company.
Very few projects have gone into the capital markets without such guarantees. But in 2008 that model fell out of favour, as the wheels came off the markets. Regulated utility financing has been handled differently, with capital markets continuing to buy corporate bonds for that type of project throughout the crisis. Bank balance sheet degearing and the impact of Basel III has largely derailed long-dated bank-funded project finance appetite – largely but not completely. When funding for these programmes is most desperately needed, traditional funding is not there.
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