The main reason for the Commission to offer financial engineering instruments for PPP projects is to support the provision of important infrastructure and the need to bridge certain market gaps, which are not yet addressed by other parties. The funds for financial engineering are targeted at the private sector and are of potential interest to public sector authorities involved in the procurement of PPPs. They apply where a PPP project encounters difficulties in establishing an acceptable financing scheme. In this case, certain clearly-defined project risks associated with PPP projects are assumed by EU Funds from different EU programmes. An example is the Loan Guarantee for TEN-T projects (LGTT), which is a loan guarantee product specifically designed and administered by the EIB for TEN-Ts. The Commission and the EIB jointly fund it. It mitigates the traffic risk in the early stage of a transportation project when user-generated revenues experience significant fluctuations that can hamper access to competitively-priced private funding. By removing one of the major obstacles to the financing of such project, the EU Funds help to bridge a financing gap and thus facilitate the execution of a project. Project examples include the A5 motorway in Germany, the C25 in Spain and the EP4 in Portugal.
In addition to such project risks, the EU has identified the lack of sufficient equity for large infrastructure projects as another bottleneck for the realisation of PPPs. This is why the Marguerite Fund has received the active support of the Commission, who has also contributed to the Fund's seed capital, as part of the European Economic Recovery Plan. The Marguerite Fund is a pan-European equity fund which aims to act as a catalyst for infrastructure investments implementing key EU policies in the areas of climate change, energy security, and trans-European networks. Marguerite is also the first joint initiative of Europe's leading public financial institutions, including the EIB.
Furthermore, through the support offered by the Structural Funds programmes, JESSICA, another joint venture between the EIB and the Commission, can provide financing in the form of loans, equity and guarantees, which can include offering mezzanine financing to municipal PPPs in order to reduce the credit risk for senior lenders. In an environment where relatively small projects attract small private sector companies, which are strong on experience but short on equity, JESSICA funds can provide an (additional) layer of subordinated funding ranking between equity and bank debt and thus increase the attractiveness of the senior debt to banks. The first examples of this are currently being prepared as part of the Lithuanian and the Greek PPP programmes.
EU-funded financial engineering instruments are mostly revolving facilities, i.e. they do not reach the final beneficiaries as grants, but have to be reimbursed so that they can afterwards be reemployed by the public authorities.