First EU project bonds fail and will cost Spain EUR 1,4 billion

  • First EU project bonds pilot project fails
  • Cost will fall on Spanish citizens as government goes for most expensive option
  • EU responsibility in increasing Spanish debt is overwhelming
Photo by Chris, CC licensed (BY, NC, ND)

Photo by Chris, CC licensed (BY, NC, ND)

The pilot phase of the European Project Bond Initiative was launched by the European Commission and the European Investment Bank (EIB) in 2012 as an instrument to attract private investments for infrastructure projects to boost growth across Europe. Ironically, its first test case failed tremendously and will cost Spanish citizens at least EUR 1,4 billion.

Castor, an offshore gas storage facility on the Spanish coast, had the dubious honor to be picked as the first project to be financed through EU project bonds. After gas injections caused a series of hundreds of earthquakes in the region, the project had to be abandoned. According to a clause in the project’s contract, the Spanish government was forced to take responsibility away from the project’s developer for the repayment of the EUR 1,4 bn bonds that were used to finance the Castor project.

“What was supposed to be a driver for growth turned out to be a driver for debt”, says Xavier Sol, Counter Balance director. “The responsibility of the EU is overwhelming. Socialising risk and privatising profits is what dragged us into this crisis. The Castor failure proves again that a mechanism such as the Project Bonds Initiative cannot be a solution.”

According to Reuters the Spanish government appointed gas grid operator Enagas to reach an agreement with a group of banks to repay concession-holder Escal UGS. This is an attempt to avoid that the EUR 1,4 bn would count against the already high public deficit at a time of austerity measures in Spain (the amount may increase to EUR 1.7 bn if financial costs and interests are included). The banks refinancing the debt would be compensated through future revenues from Enagas.

“The result remains the same. Whether through taxes or through increased gas bills, in the end it will be Spanish citizens paying for a failed project. The government is about to choose the worst option on the table”, says Monica Guiteras from Counter Balance/ODG in Spain.

Among those options were the creation of a “bad bank” to manage the stranded assets and a nationalisation of the facility. In both cases ACS, the private promoter of the project, would at least carry part of the debt repayment. Civil society organisations regret that the government now seems to choose for the most costly option which would be carried entirely by the people of Spain.

Civil society organisations proposed an appeal in court to cancel the compensation requirements. Alternatively also a moratorium on debt repayments while the case is being settled could be an option. Guiteras regrets that within the government “the political will is to be lacking to pursue these options”.

 

Notes to editors

  • Project bonds function as a kind of public private partnership. Public institutions (the EIB, backed by the European Commission in this case) take on the risk to improve the credit rating of the bonds and convince investors. If everything goes as planned large-scale infrastructure projects can be built with private money. If it goes wrong the losses are carried by the public. In the case of Castor a clause in the contract obliged the Spanish government to take over the EUR 1,4 bn project from the developer while the EIB acts as a subordinated debtor. If at all, it will be the last one to see its money back.
  • The 2020 Project Bond Initiative was launched by the European Commission and the EIB in 2012. It is currently in its pilot phase until the end of 2014. The initiative will undergo an evaluation by EU institutions prior to being rolled-out until 2020. Other projects include 3 motorways in Belgium, Germany and Slovakia, a wind farm in the UK and a digital infrastructure project in France.

 

Contact

Monica Guiteras // +34 646 415 272 // monica.guiteras@odg.cat

Xavier Sol // +32 2 893 08 62 // xavier.sol@counter-balance.org

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