The Castor Project

A test case for the Europe 2020 Project Bond Initiative

Project Castor – photo by Ecologistas en Acción

Large infrastructure projects are at the core of the EU’s plan to drag the ‘old continent’ from one of the most profound periods of crises in modern Europe. According to the European Commission, in order to meet its Europe 2020 objectives on climate change, infrastructure investment needs in Europe could reach as much as EUR 2 trillion in the transport, energy and information and communication technology sectors.

In October 2011 the Commission communicated its plan to re-launch investments in large infrastructure through the Connecting Europe Facility (CEF) which will blend key investment decisions in areas that were previously separated. The initiative aims to finance the infrastructure that will build the ‘backbone of Europe’ and according to the Commission will make Europe “more green, reduce energy dependency and complete the construction of the internal market”. The CEF has a budget of EUR 29.3 billion[1].

The new EU energy infrastructure law, also called the Projects of Common Interest (PCI) regulation, published in April 2013, creates an innovative and streamlined regime for defining and developing those projects for the “interconnection and interoperability” of national energy networks as described by the Commission, despite the fact they mainly cover gas, electricity and carbon capture and storage projects[2]. The list of projects includes gas pipelines and storage facilities, regassification plants and cross-sea electricity interconnectors linking hydropower facilities in the Balkans with Italy as well as coal and nuclear power plants to northern Europe.

This infrastructure will lock the European economy into an old fossil fuel based economic model of production and trade for decades to come, a model that is neither green nor transformative[3].

The European project bonds and the big European infrastructure explosion

Beyond CEF financing for these EU ‘priority projects’, but also in tandem with it, in October 2011, the Commission presented its ‘Europe 2020 Project Bond’ initiative as one of the ‘risk sharing’ instruments to support the CEF in mobilising private capital for infrastructure investment. Further, in June 2012, the EIB launched the Europe 2020 Project Bond pilot project, with a budget of EUR 230 million from the EU budget in order to mobilise up to EUR 4.6 billion through the sale of project bonds on capital markets to private and institutional investors.

To summarise the Commission and the EIB, the Project Bond Initiative is the EIB and Commission’s response to attract institutional investors (such as pension funds and investment funds) into large infrastructure financing through ‘credit enhancement’ of the constructing consortium and ‘improving the rating of bonds’ directly linked to the infrastructure financed.

The Commission and the EIB have chosen to incentivise the expansion of financial markets and to use public funds – derived from European taxpayers money – to transform infrastructure into an asset class[4]. Public funds will be used to improve the solvency of both companies and projects by allowing constructors to improve their access to credit for the financing of planned or proposed projects. Institutional investors like pension funds and investment funds as well as municipalities, companies and private banks would all channel their funds into such projects. The Project Bond Initiative defines a framework where public intervention allows for the separation of the debt of the project company or consortium into senior and subordinated tranches. The EIB then “provides a subordinated tranche, or facility, to enhance the credit quality of the Senior bonds, and therefore increase their credit rating[5]”.

This intervention is instrumental in making infrastructure functional to the expansion of financial markets and is not being done in the interest of citizens even though the latter will pay the bill in case anything goes wrong[6]. Paradoxically this public intervention might likely limit the future economic and social freedom of citizens. Indeed if public-private partnership (PPPs) infrastructure does not repay itself – for instance when the financial plan may have been based on an incorrect calculation of the project’s capacity to repay itself or on an inaccurate projection of costs and benefits – a debt is generated that falls back on the public in the future.

We will now turn to the 1st of those projects which has been supported under the initiative, the Castor Project in Spain. This chapter will provide a short case study of the project – where it stands currently, who has benefited, and who is losing.

The CASTOR Project: an unexpected bang

It was not supposed to be like this. In July of 2013 year, the European Investment Bank and the European Commission hailed the first project to be financed under the Europe 2020 Project Bond Initiative. The honour of being the first such pioneering investment fell to the €1.7 billion Castor underground gas storage plant off Spain’s Mediterranean coast.

Welcoming the deal, European Commission vice-president Olli Rehn noted that “The project bond initiative is an innovative way to unlock private investment in infrastructure and a key element in helping to boost growth and jobs.”[7]

Work at the EUR 1.7 billion Castor underground gas storage plant off the coast of Valencia commenced in summer 2013.  But by mid-September the Spanish government was forced to halt work at the plant after 220 mini earthquakes in the area had been detected in less than a month. Local residents reported the tremors following injections of natural gas to prepare Castor for use.

Work at the site has not since restarted and will most likely be halted for good. 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 € 1.4 billion bonds that were used to finance the Castor project.

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 € 1.4 billion would count against the already high public deficit at a time of austerity measures in Spain (the amount may increase to €1.7 billion if financial costs and interests are included). The banks refinancing the debt would be compensated through future revenues from Enagas.

What was supposed to be a driver for growth turned out to be a driver for debt. In the end the cost of this financial fiasco will be borne by the Spanish citizens through their gas bills.

 lessons to be drawn

The Castor project, on the planners’ table for some years now, was simply not an affordable investment for Spain due to the acute economic problems it faced as a result of the economic crisis. The Project Bonds Initiative was thus deemed to be an investment ‘solution’ for Castor, another form of supposedly beneficial financial engineering.

Even now the Project Bond ‘solution’ risks becoming a ‘burden’ if the mechanism is not put into question. The EIB has been quick to stress this point to campaigners – the pilot phase of the initiative will continue, the EIB insists.

However, as disaster has struck the Castor project, the negative consequences – and risks to the public purse – of the project bonds mechanism may become increasingly apparent[8]. If Castor is anything to go by, however, the project bonds approach could simply end up exacerbating member states’ troubled finances, and see huge project costs being dumped onto unsuspecting European taxpayers.

Major projects can, and often do, go wrong and pose a huge threat to the environment and people’s lives, for a variety of reasons. Indeed, the EIB’s due diligence for Castor remains a curiosity, though doubtless the bank would repeat its standard refrain that it operates at the cutting edge of environmental expertise.

Environmentally and financially, then, these type of projects present major risks, and thus, as commissioner Öttinger has made plain, they need public backing. The public, though, should not be having to contend with financial and real earthquakes in return. Will the project bonds approach be able to insulate unsuspecting Spanish and European taxpayers from picking up the bill for a possibly ill-conceived and badly executed piece of fossil fuel infrastructure?

 

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[2] Regulation 347/2013 of 17 April 2013 on guidelines for trans-European energy infrastructure, http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2013:115:0039:0075:EN:PDF

[4] The Corner House, September 2012. “More than Bricks and Mortar. Infrastructure as asset class: A critical look at Private Equity Infrastructure Funds”. http://www.thecornerhouse.org.uk/resource/more-bricks-and-mortar

[5] http://www.eib.europa.eu/products/project-bonds/index.htm

[7] europa.eu/rapid/press-release_BEI-13-117_en.doc

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