In order to meet targets laid down in the Climate Change Package, the Europe Union and/or Member States need to commit and source large sums for infrastructure and energy investment. Conversely given the fiscal/austerity restraints being imposed in European countries the European Commission has signalled a recognition that innovative large scale funding solutions are required to facilitate the investment requirements.

In 2010 the European Investment Bank (the "EIB") increased its total lending by nearly 40% to €79 billion, of which €26 billion was for major energy and transport projects. This level of funding in the area is still not sufficient to cater for the EU's infrastructure needs Jose Manuel Barroso, President of the European Commission, unveiled new plans to establish EU "project bonds" and raise sources of finance to fund infrastructure projects in his "State of the Union" address to the European Parliament on 7 September 2010.

Such EU "project bonds", on the basis of available information, appear likely to be issued in conjunction with the European Investment Bank. According to President Barroso, the project bonds would be issued by private entities for large infrastructure project financing. EU funds could then be used to support private project funding and attract investment from the EIB, capital market investors and other financial institutions. The creation and wider application of such project bonds could have large implications for project financing of new greenfield (off-shore wind) and traditional projects.

The President of the EIB, Mr. Philippe Maystadt, subsequently clarified that the "project bonds" would not be issued by a sovereign or EU entity, and are best described as a mechanism for enhancing the credit rating of bonds issued by project companies themselves. Mr. Maystadt was at pains to point out that the EU "project bonds" initiative was different from previous efforts to institute a form of "Euro-bond". These included a proposal by President Jacques Delors in 1993 that the EU use the backing of its own budget to borrow money for large infrastructure projects by issuing bonds on capital markets.

Although there is a need for detail on the exact structure and mechanics, the re-opening or accessing of the debt capital markets can only be a positive outcome. Possible structures include the EIB providing higher-risk subordinated debt (by doing so, the EIB would buy the riskiest bonds: those with the highest possibility of not being reimbursed if the project fails), or that it may come to some risk sharing agreement using EU budget funds, similar to the existing Loan Guarantee Instrument for trans-European transport network projects (LGTT). In relation to timing, it remains unclear whether the proposed EU project bonds will be included before the start of the next budget period (2011 – 2014).

A spokesman for the EIB has signalled that they are in discussion with the Commission and that the use of EU project bonds may provide a partial solution to the problem segments of the markets. The EIB believe that project bonds could be a useful add-on to projects that have some kind of rationale on their own economically, but are facing hurdles and are not getting the finance they need. These "hurdles" may be as a result of the bank's poor liquidity due to the economic downturn, or may be as a result of the massive capital requirements that stem from infrastructure projects.

Regardless of the hurdles facing project financiers, EU project bonds could help match the needs of those project financiers with the EU's own infrastructure needs.

This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.