Investors wanted for local infrastructure

Romania needs to invest around EUR 50 billion through to 2030 to modernize and expand its transport infrastructure, according to the Master Plan published this month by the Ministry of Transport. Experts say that European financiers have an appetite for infrastructure and that Public Private Partnerships (PPP) could help Romania meet its infrastructure goals.

The plan was drawn up by US engineering firm AECOM at a cost of EUR 2 million, fully financed from EU money.

“The Master Plan is a mandatory instrument for obtaining EU financing in the transport sector – given the repeated requests of the European Commission (EC), but also because this is an ex-ante condition for accessing structural and European investments,” Nicolae Ursu, senior coordinating lawyer at law firm bpv Grigorescu Stefanica, told BR.

He added that the Master Plan is a preliminary step for the approval of the Large Infrastructure Operational Program (POIM) by the EC, the executive arm of the EU. Romania’s Ministry of EU Funds has proposed funding of EUR 9.4 billion for the program in the current seven-year EU budget that runs through to 2020.

More plans before building sites opens

Read more about

East European Coffee Culture Festival: brewing excitement this weekend

read more

The Master Plan maps investments in all segments of infrastructure (road, naval, rail, air), including key strategic projects such as the Trans-European Transport Networks (TEN-T).

“But the Master Plan could (and definitely could) be changed, because the actions it includes are not mandatory. It would, however, be recommendable for the Master Plan to become a draft bill, so as to offer more credibility to potential financiers and constructors, although it is not the law itself that can provide credibility (Romania being known for its legal instability), but, actually, the axis of the future POIM – as once this program were approved it would be impossible to change it without the approval of the EU,” said Ursu.

The lawyer commented that the plan seems to play more of a procedural role because it mentions that the projects ready to be financed and the public authorities that will manage them will be included in a separate strategy report containing the implementation plan. This will include the cost-benefit assessment of the investments, the feasibility studies, the results of the environmental assessment and a more realistic implementation calendar.

According to Ruxandra Chirita, director of advisory services at PwC Romania, the professional services firm, the Transport Master Plan “justifies the prioritizations of projects given the limited financial resources available to the country, irrespective of the source of funds.”

Chirita told BR, “Transport infrastructure projects are capital intensive, need a long time to reach completion, have to be operational for a long time (25 plus years, thereby being a constant source of expenditure) and involve a significant number of risks (not all of them easily identifiable and quantifiable in the feasibility/design stage), hence a thorough planning of resources is the only way to get such projects completed.”

Growth potential down the line for rail freight

Discussions regarding the development of transport infrastructure have in recent years focused primarily on the development of motorways, while investments in rail have been overlooked, according to commentators.

Stefan Roseanu, market research analyst at Club Feroviar, a consultancy working as a communication platform in the transport field, points out that Romania has “huge potential” in freight transport, but it all depends on how the country is able to manage its resources.

Romania is sixth in the EU by the share of freight transported by rail, according to 2011 data from Eurostat, the EU statistics office.

“Constanta Port could become one of the most important freight access gates to Central Europe if we learn how to develop rail transport infrastructure. Let’s not forget that we have landlocked neighbors (Hungary, Serbia, Slovakia, Czech Republic and Austria) that are complementary markets to Romania for the demand for transport,” Roseanu told BR.

He added that transit routes from the Balkans that provide links to Asia, through Turkey and Greek ports, are also important.

“None of these routes will be able to develop properly in the absence of quality rail infrastructure, given the limitations of truck transport from the perspective of transport capacity and commercial speed of freight from producers to shop shelves,” argued Roseanu.

He pointed out that Romania needs to invest over EUR 20 billion to finish the railway linking Constanta to the western border with Ukraine, which is half done, and to overhaul other key domestic routes.

Roseanu said that at present national and European financing in the rail sector is limited to a maximum of EUR 400 million annually.

Road builders hit by insolvencies

The laborious construction of roads has also been exacerbated by the insolvency of some construction firms, which has led to the enforcement of amendments to the founding law of the national road administration agency, the CNADNR.

“According to the new provisions, the sub-contractors of the general contractor within the framework of a public acquisitions contract for road works will benefit from the security mortgage right over the sums owed by the CNADNR to the general contractor. This security mortgage was enforced to guarantee the fulfillment of payment obligations assumed by the general contractor as opposed to sub-contractors based on the respective public acquisitions contract,” said Ursu.

He added that other provisions in the amended law offer greater guarantees to sub-contractors so that they will not seek the insolvency of the general contractor, but if this happens they will have privileged receivables over other creditors.

“The important thing for the CNADNR seems to have been the need to offer subcontractors certain protection so that they do not abandon the building works as soon as the general entrepreneur has difficulties in payment, a situation that is sometimes caused by the public authorities,” said Ursu.

Romanian construction group Romstrade and Austrian firm Alpine have been the biggest road builders to have filed for insolvency, while the owner of Tehnologica Radion, another company that lays roads, is being prosecuted in a tax evasion case.

“It is unfortunate that it has come to this, especially because insolvency may cause significant execution delays. However, the market regulates itself and there are new firms filling in,” said Chirita of PwC Romania.

How to finance and build infrastructure

The pipeline of local infrastructure projects can be financed either by institutional lenders or by the EC, according to experts.

“The financing methods for public investments that involve large capital expenditure have become more sophisticated in recent years, as new categories of investors have emerged, such as pension funds and insurance companies, looking for long-term investments at a reasonable profit rate and which could counterbalance their short-term investment portfolio and the placements in state treasury bonds,” said Chirita of PwC Romania.

“Also, specialized investment funds have become more active, seeking to become shareholders in project companies, assuming the construction risk along with strategic investors and thereby increasing the confidence level of commercial lenders,” she added.

Some of the motorway projects included in the Master Plan seem quite attractive judging by their Economic Internal Rate of Return (EIRR). For instance, the Sibiu-Brasov motorway, which requires an investment of EUR 690 million (VAT excluded), has an EIRR of 17.3 percent, while the Comarnic-Brasov motorway, which has a cost of EUR 1.1 billion (VAT excluded) has an EIRR of 8.8 percent.

Specialists suggested that an efficient Public Private Partnerships (PPP) law could accelerate the construction of new motorways.

“Following the financial and debt crisis that began in 2008, in Europe at least, it has become clear that large infrastructure projects can no longer be financed purely publicly or privately but rather through a well-balanced combination of the two sources, as the public sector is under increased pressure to monitor its spending while the private sector is less inclined to fully assume the construction risk in its entirety,” explained the PwC Romania manager.

She added that Europe still relies to a large extent on banking finance for its infrastructure projects as opposed to other financing mechanisms such as project bonds, with a few exceptions (the UK, Germany, France and Benelux).

Romania has a new PPP draft bill, which is currently awaiting final approval in Parliament after the Constitutional Court rejected it. The bill has been amended and should replace the current law, which specialists say is defective.

Roseanu of Club Feroviar pointed out that the identification of projects eligible for PPP could tempt private investors to the rail sector.

“Lines that provide connections with airports and the reconstruction of neighborhoods around stations are examples of projects that can bring profit both for the state and the private investor,” stated Roseanu.

Ovidiu Posirca

Road infrastructure at end 2013
Motorways 644 km
Express roads 0 km
National roads 16,466 km
County roads 35,587 km
Communal roads 32,190 km
Total 84,887 km
Source: National Statistics Institute (INS)

Cost of prospective road projects in Transport Master Plan
Motorways 479 km EUR 5 billion (VAT excluded)
Express roads 2,403km EUR 18.7 billion (VAT excluded)
EUR 14 billion – proposed investments in the rail sector for the modernization of routes and replacement of rolling stock
EUR 2.2 billion – proposed investments in the naval sector for expanding routes and modernizing ports
EUR 599 million – proposed investments in the air sector for modernizing 13 airports